Monday, February 04, 2008

Welfare Payments For Banks?

Karl Denniger seems to have uncovered something stinky in our banking system.

It looks like the Fed is pumping $50 billion a month into the banks to keep them afloat. The Fiat system has been erased and the banks are lending money based on their debts, not their reserves. In other words, the deeper into the red the banks go, the more money they can lend.

About six months ago, the Fed announced that they were loosening the Fiat standard. That is the standard by which the banks lend money. For every dollar that a bank has in deposits, they can create ten more dollars our of thin air for loans.

Now it looks like they can create ten dollars for every dollar they borrow.

This is pretty scary stuff! The faster the banks sink into the red, the faster they can increase their debt and create more money for bad loans.

They indicates that the banking disaster is beyond critical mass. There is no recovery from infinitely recursing debt.

We should all know by now that fiat system requires infinite growth in order to stay healthy. And so they must occasionally crash in a world that doesn't fill all of an infinite universe. Since our planet is a essentially a globe and of finite mass, there are limits to every every physical resource.

Quick update, as I'm writing this, I already got an email back from Karl that I misunderstand what this means.

This is my paraphrased response:
I believe I understand your point. Where did the money go? Where are the reserves that guarantee our deposits?

But about 6-8 months ago, Bernanke gave a banking speech announcing a suspension of the Fiat standard of 10/1. I never learned the details, so I don't know what this meant. It seems in retrospect that the banks can ignore the ratio altogether. the Fed will cover the difference.

In a more recent speech, Bernanke told the banks that there were taxpayer funded bailout vehicles available, and that banks should use them. This may be what you're seeing. Taxpayer subsidies, channeled through the Fed, to keep the illusion up, that the banks are solvent.

What we may learn later is that the Gov has guaranteed these loans to the banks and if they become insolvent, the taxpayer will cover their losses. In such a situation, there is no downside to the banks continuing to make matters worse. They'll profit from any bad decisions they make, at the taxpayers expense.


Overall, this pretty exciting stuff! It's like look over the edge of a cliff, as an avalanche bears down on you! What a way to get the heart racing.

Now, this has to get worse, but it is hard to imagine how!

4 Comments:

At 7:29 AM, Blogger pissed off patricia said...

I can't concentrate on this post because I want so bad for you to say the dogs have returned home. Have they?

 
At 7:47 AM, Blogger Weaseldog said...

No they haven't come back.

My wife just called. It was hard for her to talk through the tears. The city pound doesn't have them. Someone at the pound, told her that it was likely that they were abducted.

The Humane Society will be open on Wednesday. We'll be checking there.

 
At 7:48 AM, Blogger Weaseldog said...

And thank you Pop, for your concern. I appreciate it.

 
At 2:29 PM, Blogger Buzz Saw said...

Re: The banks. I have forever been saying that they would change the rules so that the banks would win no matter what happens. The banks own the system. That is why I choose to participate as little as possible. The classic heads I win, tails you lose scenario.

The cops need to set up a sting in your area and catch those dirty dog nappers. Peace to you and your wife.

 

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