patrick.net

Yep, propping up banks doesn't stop a collapse, delays recovery, and creates moral hazards for later.

We have a process for unwinding organizations that can't right themselves, it's called bankruptcy. It's functioned well for centuries. Smartly run banks pick up assets for cheap (and may have to eat some bad assets as part of the acquisition; just like guys who buy an abandoned storage locker have to deal with the underwear as well as the Rolex or expensive Paintings they find). Poorly run banks and their shareholders are punished, and shareholders in other banks are incentivized to properly control their management team.

Because the good banks are taking over the assets of bad banks at a discount, they are in a position to negotiate better terms with borderline loans about to default to keep the loan viable.

oh goodie, we are almost at another crash if that chart is right.

ChrisLA says

oh goodie, we are almost at another crash if that chart is right.

Yep. i think we are at a state in the market where it will react quite violently to the Bernank's remarks. There's an upcoming FOMC meeting on June 22 that will reveal the nature of QE3, whatever the Fed wants to call it. I don't think they will immediately commit to anything, which will make the market even more nervous.

Time to get very defensive on the stock market.

thunderlips11 says

We have a process for unwinding organizations that can’t right themselves, it’s called bankruptcy

So True, yet we are so far from reality right now.

austrian_man says

thunderlips11 says

We have a process for unwinding organizations that can’t right themselves, it’s called bankruptcy

So True, yet we are so far from reality right now.

That is true. Today that statement is a gimmick and purely conditional.
If one is in the Washington club they get bailed out. Otherwise they are allowed to be bought up by the Washington insider club.

This video says it all and says it well.

Didn't big Gold Owners like JP Morgan create the Federal Reserve out of a big meeting on Jekyll Island?

Wasn't that the end result of free banking? A handful of guys capturing so much of the wealth, that they could control the Congress through abundant bribes and promises of future lucrative employment after their 'retirement' from service?

The end game of Capitalism IS a rigged system.

This happened long before the New Deal or even the creation of the Federal Reserve.

thunderlips11 says

Okay, I was trying to say that rigged market capitalism can arise out of Free Banking and/or Gold Standard.

lol okay then we need to go back even further to understand why Federal Reserve was created. Here is a movie that does a good job at it.

There were bank runs prior to 1913 (panic of 1907), which were essentially the bankers' fault because they lent beyond what they held as reserves. This is always a problem. The justification for the creation of a centrally planning monetary authority was to stabilize banks and avoid bank runs. This was the pretext. but the real reason was to give the power to create money to the banks. Power to create money means power to control everything.

Bank failures were due to the banks themselves and not the public.

A-man, I'm in the know, bro.

JP Morgan got sick of having to prop up the banking system, Free Banks using Gold and Gold-backed paper still used fractional reserve, and so he and some buddies decided to put the responsibility for continually bailing out banks on the Public instead.

Making for a wonderful Public-Private partnership where the former pays for any losses, and the latter keeps all the profits. They disguised it as a government agency, when it is really a banking cartel with a pastiche of Federal Government Control. In reality, the short list for the Board of Governors come from Banksters and their lobbyists, and there is no chance - shy of a major reformation or insurrection - of any non-bankster friendly dude getting on the Board, much less a majority of them.

2008 wasn't the first time Citigroup and other big banksters needed a massive bailout. They got one in the 80s over South American Bonds, and one in the 90s over LTCM and the Asian Crisis. One might argue that the early 90s Mexican Peso bailout was primarily aimed at helped them avoid disaster as well. At least those are the ones I remember, there's probably more.

GM was also mostly a bank and less of a car maker, a fact that many gloss over. Our former Sec of Defense, the late McNamara, made his bones by getting GM management to appreciate that financing was more important than quality of the cars they made. A mentality that was to pay dividends in the 70s and 80s when US automakers lost heavy market share to the Japanese.

Man, banks are expensive.

PS, if you hate bank bailouts, don't use GMAC, or it's new name, ALLY.

Actually there is a historic precedent in the United States when money was free...meaning cannot be tampered by Government or private bankers.

Read "The Historical Precedent" in this short pamphlet.

Congress made the Greenback notes redeemable in gold in 1879, and the effect of this action can help us plan for a similar
action in the future. By the end of the Civil war, a Greenback dollar was worth
less than 50 cents in gold. But as it became obvious that Congress would redeem them in Constitutional money, gold, they became
worth more. The government also stopped inflating. By 1868 it only took $138 in Greenbacks to buy $100 in
gold, and by 1874, $111. Late in 1875, Congress passed a law saying that on January 1,
1879, Greenbacks would be redeemable in gold on a one-to-one basis. And the notes were to be retired gradually.
As the date approached, says Dr. Donald Kemmerer, "the price of $100 in gold in greenbacks declined from $111.50
in 1876 to $104.70 in 1877 and $101.10 in 1878. On December 17, 1878, two weeks before the official specie resumption day, the
price of $100 in gold reached $100 in Greenbacks.

thunderlips11 says

A-man, I’m in the know, bro.

awesome!

thunderlips11 says

Man, banks are expensive.

:) yes, the bill ends up with us, the taxpayers.

There is no such thing as "free", "freedom" or whatever.

xenogear3 says

There is no such thing as “free”, “freedom” or whatever.

This nation was founded on those values, the values were written in the Constitution. Those ideals have been eroded over the course of time, but there were times when they were upheld and people knew what it meant to be free. So don't be so pessimistic.

austrian_man says

We WILL not see the boom/bust cycles in the economy as we have been seeing if there was free market money

Once again, history directly refutes your statement. The time period you romantically recall as perfect was fraught with Boom/Bust cycles and Depressions

tatupu70 says

The time period you romantically recall as perfect was fraught with Boom/Bust cycles and Depressions

Not due to the free market gold standard...thats the difference...there could be other reasons completely unrelated...such as government going for a war, cheap energy in oil still unfound.

Funny, how you deviate from answering anything related to housing bubble and the Fed being responsible!

So, let's ask again. Do you have any examples of your economic theory actually working?

Not--it would have worked.
Not--it worked except the government screwed it up

I mean--IT WORKED. Statistics show it. History shows it.

This "wealth effect chart" is flawed.

You have to factor in population increasing, productivity increasing and globalization benefit.

Just like Chinese, American workers will eventually make $1 a hour. The $10+ saved will be pure profit.

You can't adjust the S&P 500 for inflation because the companies that make up the list are changed so there is no consistency.

OurBroker says

You can’t adjust the S&P 500 for inflation because the companies that make up the list are changed so there is no consistency.
Peter at OurBroker.com

Why does that matter? It's the earnings of the top 500 companies at the time.

It matters because you're not counting the companies that fail, drip out of favor or are combined. It's like the Dow -- the results would be very different if we still counted Studebaker and Remington Typewriter.

With the Dow, as a recent example, Kraft replaced AIG.

http://www.ourbroker.com/investing/do-we-need-a-dow-20/#axzz1PmSmtAUG

Not to mention the huge investment boost companies get (and lose) when they leave/enter the S&P500.

For example, every S&P500 Index Fund or ETF needs to rebalance, and many mutual funds and pension plans are limited to holding only S&P500 companies...

That means more Kraft brought and more AIG sold, which impacts the stock price.

OurBroker says

It matters because you’re not counting the companies that fail, drip out of favor or are combined. It’s like the Dow — the results would be very different if we still counted Studebaker and Remington Typewriter.
With the Dow, as a recent example, Kraft replaced AIG

But the companies get replaced AFTER they are no longer one of the top 500. Most of their losses take place while they are still in the index. (see AIG)

They get replaced by companies that have a different impact on the index. Imagine how much LOWER the Dow would be had AIG not been replaced with Kraft.

OurBroker says

They get replaced by companies that have a different impact on the index. Imagine how much LOWER the Dow would be had AIG not been replaced with Kraft.
Peter at OurBroker.com

Of course. The point of the S&P is to track the current top 500 companies. Not the top 500 companies from 1965.

The Dow did take the brunt of AIG's pain. It went from ~1400 to 60 while still on the Dow. AIG was basically even with the price of its delisting in January 2011. It's trended downward since then.

So actually the DOW wouldn't be much lower.

>>>Of course. The point of the S&P is to track the current top 500 companies. Not the top 500 companies from 1965.

Thank you. Then you understand that you cannot compare the 1965 index with the 2011 index because they each reflect the results of different companies and get rid of the failures, the companies that have been absorbed and the companies that do no perform sufficiently well. Thus, the definition of "top companies" does not reflect the market, it reflects an engineered result.

OurBroker says

Thank you. Then you understand that you cannot compare the 1965 index with the 2011 index because they each reflect the results of different companies and get rid of the failures, the companies that have been absorbed and the companies that do no perform sufficiently well. Thus, the definition of “top companies” does not reflect the market, it reflects an engineered result.

But you're still not getting it. The index DOES take into account failures. As I showed in the previous post. Pretty much ALL of AIG's decline was reflected in the DOW index. A company will never be removed from the index until AFTER it has tanked.

>>>The index DOES take into account failures. As I showed in the previous post. Pretty much ALL of AIG’s decline was reflected in the DOW index. A company will never be removed from the index until AFTER it has tanked.

If a company is removed the index cannot track it. It may be that the stock was removed before it hit bottom or before it rose in value. In any case, the index no longer reflects what happened to that stock.

Now, if you want to have an Index 1 and an Index 2 and understand that they are different because the companies involved are different then we can have consistent measures.

No. The issue is not inflation. The issue is accuracy and the consistency of what is being measured.

That the S&P would recover dramatically isn't exactly unusual. During the 30's depression Wall Street had a similar recovery. Besides- if you're invested in the market and have some of your investments tied to blue chips then you too will benefit from their profits.

OurBroker says

No. The issue is not inflation. The issue is accuracy and the consistency of what is being measured.

The chart is consistently and accurately measuring the top 500 companies at the time.

I can't tell if you are arguing that there is a surviviorship bias or just arguing that it's not the same 500 companies. I'll agree with the latter, but not the former.

The problem is this: Someone says look at how the S&P has changed since 2008 or whenever. However, the companies are different and the result is that the comparison is invalid. This is like measuring two bundles of apples. The bags may be the same size but the contents may be very different.

Yes and no. The individual companies have changed, but taking the S&P 500 as representative of the top 500 companies, one can make valid comparisons. Are the top companies earning more now than 50 year ago, etc.

I'm not sure that the top 500 companies are earning more now than 50 years ago. How do we value safer workplaces and better products?

OurBroker says

I’m not sure that the top 500 companies are earning more now than 50 years ago.

I'm not either. But I think it's an interesting comparison

OurBroker says

How do we value safer workplaces and better products?

Please tell me you aren't arguing that workplaces were safer 50 years ago. That's not even funny.

Nope. Not me. I think workplaces today are better -- when they're in the US and when our citizens are employed.

The fact that a company's profits increased because it sent jobs overseas does not impress me.

OurBroker says

Nope. Not me. I think workplaces today are better — when they’re in the US and when our citizens are employed.
The fact that a company’s profits increased because it sent jobs overseas does not impress me.
Peter at OurBroker.com

Ah--good points. Agreed.

tatupu70 says

Is Monopoly a “rigged market capatalistic” game or just a free market game?

No it is not. It is complete ignorance to think of free market capitalism as the game of monopoly because business is not conducted with roll of dice in real life. The consumer dictates the flow of capital towards the necessary goods to generate profit.

There is no consumer choice and no consumer sovereignty. This is not a small detail. The entire raison d’etre of the market is missing, and thus the real goal and the guide of all production in a market economy.

In the real world, however, consumers are rarely compelled to purchase goods from a seller—or if one seller exists it is because it has out-competed others over time. Even with one seller, consumers can always switch to substitutes or abstain from purchasing completely. That is not the case in Monopoly. Again, this is not a small matter. The game is wrong on the central point of economic decision making: who is in control of what is produced and how?

Full article at: http://mises.org/freemarket_detail.aspx?control=498

Can't free markets lead to rigged markets, if those who concentrated wealth in the free market era use it to usher in a rigged market environment?

Especially in a country where the courts have decided that money=political speech ?

Is Efficiency the ONLY goal we should be pursuing as a nation?

thunderlips11 says

Can’t free markets lead to rigged markets, if those who concentrated wealth in the free market era use it to usher in a rigged market environment?

Excellent Question. I think the answer is: yes it can, if the political leaders are corrupt. In a corrupt-free society, I see free markets flourishing much better than centrally planned, socialistic markets.

thunderlips11 says

Is Efficiency the ONLY goal we should be pursuing as a nation?

I think by letting efficiency work out the right way, it would be beneficial for the overall society. Take for example, the corn subsidies by the Federal Government for ethanol. It makes no economic sense from an EROEI (Energy Return on Energy Invested) perspective, so in a free market that's not meddled by the Government through favoring one solution, this corn for ethanol would have been rejected right away, the most economic solution has a higher likelihood of getting found.