September 18th, 2008

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The results of a conscious and willful SEC decision...

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

How SEC Regulatory Exemptions Helped Lead to Collapse

И опять же цитата из An Austrian Theory of Business Cycles

Austrian analysis asserts that in a world of hard money and free banking, the inflationary forces of credit expansion due to fractional reserve banking would not exist. If banks were warehouses of commodity money -- gold, for example -- then currency would consist of bank notes representing claims on the gold held by a bank.
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According to Austrian Economists, fractional reserve banking only became possible through the outlawing of private money and the creation of central (ie, government-controlled) banks -- which allowed governments to control money supply and bank credit expansion.
А такжеCollapse )
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Hard money

During the 19th century, when most of the world was on a gold standard, prices typically fell by a small amount each year except in times of war when governments used inflated money to finance their military.
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In the year 1900 most goods in the United States were cheaper than they had been in the year 1800. In the 25 years following 1872 the cost of milk, rice, mutton, butter, tea and many other commodities had dropped about 50%. Contrast this gold-standard period with the era of government-controlled money: in 1997 a US dollar was worth only 14 cents (14%) of a 1947 dollar. Some people have argued that the supply of gold is inadequate to serve as a medium of exchange in the modern world. But market conditions cause supply to match demand at a clearing price for any commodity, including money. The price of gold would rise to meet the demand and/or other commodity-monies would enter the market to fulfill the demand for money.
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The Democratic Party of Thomas Jefferson stood as the defender of hard money for most of the 19th century. The Second Bank of the United States was a weak attempt at a central bank (it lacked a monopoly on banknotes), but its central banking powers were nullified by Democratic President Andrew Jackson in the 1830s. Hard-money Democrats were able to restore the gold standard in the United States in 1879. But the National Banking Acts enacted during the Civil War had destroyed the issuance of bank notes by state chartered banks and monopolized the issuance of bank notes for a few federally-chartered national banks. In 1913 (with strong backing from the Rockefeller & Morgan banking interests) the Federal Reserve Act brought a central banking system to the United States.
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In August 1971 US President Richard Nixon imposed wage & price controls while suspending gold convertibility so as "to defend the dollar against speculators". Legalization of gold ownership for American citizens was probably less motivated by a libertarian spirit, than by a desire to see the market increase the value of government gold reserves. Many Keynesians believed that the demonetization of gold had finally been completed. US Federal Reserve Notes replaced the words "Payable to the Bearer on Demand" with "In God We Trust".
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China has had a long history of autocratic empires and emperors, so it is not surprising that money was backed by threats of violence rather than by commodity-value. Tokens made of brass or copper had square holes in the middle so they could be strung together. Printing, ink & papermaking originated in China. The world's first paper money was issued during the Tang Dynasty, reaching its peak during the Ming Dynasty. Kublai Khan issued a paper currency in 1273 backed by severe threats against any who refused to accept the bills as payment. The government confiscated gold & silver, giving paper money as replacement. Nonetheless, the abuses of fiat money finally led to it being abandoned at the end of the 14th century. Paper money was not readopted in China until the 20th century.

Monetary Systems and Managed Economies
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Inflation and deflation

Inflation is better described as an increase in quantity of money than as price increases. Price increases reflect future expectation of inflation. If the government begins expanding money supply following a long period of no such expansion, prices will take time to increase as the new money works its way through the unsuspecting economy. However, if the government has been expanding money supply on a regular basis, prices should continue to rise even after the government stops inflating because most people still have the expectation of future inflation. Apart from expectations, prices are also influenced by productivity. If a growing economy is increasing the total goods & services available and the government is increasing the amount of money, prices may remain unchanged -- masking the inflation.

In a recession, people may become worried and reduce their spending (being more defensive with their wealth). Prices may be stable or even drop (so-called "deflation") even as government is expanding money supply -- because money is not being earned & spent on goods (the new money may simply end-up in the purchase of debt instruments -- bonds & money market funds). Central bank increases in bank reserves will not even increase the money supply if recession significantly reduces the rate of borrowing (and increases the rate of loan defaults). Nominal prices may be unchanged in an inflationary recession, while the real prices fall. These examples illustrate that inflation should be described in terms of money supply rather than in terms of prices. Inflation is not caused by a "wage-price spiral" or "excessive economic growth".


Again Monetary Systems and Managed Economies
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Central banks

In a Crunch, the country runs very dry of money...

Everybody could tell, that June weekend in 1970, that a Crunch was on: it was difficult for borrowers to breathe, and their ribs hurt...

The liquidity crisis of that time didn't have much to do with the inability of buyers and sellers of stock to find each other and touch fingertips. Liquidity in this case meant usable funds, borrowable funds for American business...

By June of 1970 the sixth largest enterprise in the United States and the largest railroad in the country, the Penn Central, was busted...It was having trouble renewing, or rolling over, its maturing commercial paper...

Penn Central's lawyers began to draw up the bankruptcy papers...it did not have to pay its debts, except under reorganization...it would not pay the holders of its IOU's, its commercial paper. They could paper their bathrooms with all $200 million...

The worriers began to see the following script: the holders of the Penn Central's commercial paper would be busy papering the bathroom and calling their lawyers...investors would not exactly be reaching for more commercial paper. The commercial paper from other companies had short maturity: some would come up Monday, some Tuesday, and so on.

There was $40 billion of commercial paper outstanding...where would $40 billion come from as the notes matured, day by day?...

But there is a lender of last resort; that is why we have a Federal Reserve system...a Fed governor was to worry about Monday morning, and to treat the weekend as something special in history. The issuers of commercial paper would not be able to sell any more; they would go to their banks; the banks would say, sorry...the issuers would start to lay off people and cut back operations; everybody could stake out a corner for an apple stand, if the corner wasn't already occupied by a fried-chicken stand. The notes of a Fed official to a Fed meeting later that summer uses this language: "inability of the issuers to pay their paper at maturity would have dire consequences for issuers, the commercial paper market, other financial markets, and the banking system." Dire consequences is a phrase not used lightly...

[Acting President of the New York Fed William] Treiber got on the phone...He called the head of every major bank in New York at home...By Monday night, phone calls had gone out through the twelve Federal Reserve banks to every bank in the system--not just to big city banks, but to small-town banks all over the country. The Fed's index finger was beginning to bleed from all the dialing. The message was the same: if anybody comes into your bank and wants a loan, give it to him.
Econlog, "A Historical Anecdote", by Arnold Kling


The character of central banking was established early with the world's first central bank, the Riksbank in Sweden. Under the authority of the Parliament charter of 1668 banknotes from Riksbank were Sweden's only paper money, redeemable in precious metal. In exchange for this charter the bank agreed to loan money to the government. In 1720 when the government failed to repay a loan, panicked citizens tried to redeem their banknotes from the insufficient reserves held at Riksbank. To deal with the crisis, Parliament declared Riksbank notes to be legal tender that satisfies any claim to payment -- without the requirement to redeem in precious metal.

Again Monetary Systems and Managed Economies