The Weiner Component #116 – The U.S. & the Federal Reserve

In 1935, Cret designed the Seal of the Board o...

English: Janet Yellen being sworn in by Fed Ch...

English: Janet Yellen being sworn in by Fed Chair Ben Bernanke (Photo credit: Wikipedia)

By Friday January 9, 1915, the Federal Reserve had turned over $98.7 billion to the Treasury for the year 2014. In 2013 it was $79.6 billion and in 2012 it was $88.4 billion. All of this was the interest on the National Debt bonds, much of which the Federal Reserve had purchased since 2009.

In 2008, the last year of the Bush Administration, the country faced the explosion of the Real Estate Bubble that had been gradually building over the prior thirty years. The big banks had been going crazy with denial in 2007 with their abuses when the oncoming failure became obvious. In essence every dollar in circulation suddenly dropped in value to about a dime. The Obama Administration did two major things in 2009 and 2010. They were able to avoid through rapid action an economic crash potentially larger than the Great Depression of 1929 and they passed Affordable Health Care (Obamacare). In 2010 the country elected a Republican majority in the House of Representatives and thereafter nothing was done by the House to alleviate conditions caused by the Real Estate Bust. In fact Congress passed laws to exacerbate the negative conditions.

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It should be noted that the Federal Government has two major tools to deal with downturns in the economy. One, used by the Federal Reserve, is Monetary Policy and the other, used by Congress and the President, is Fiscal Policy. This is Macroeconomics.

Fiscal Policy has to do with Congress passing bills that add money to the economy. Keep in mind that all currency has nothing behind it other than the word of the National Government. All money is now a means of exchanging something of value for something else of value, goods and services for goods and services.

In 2011 or 2012 President Obama proposed a bill that would create jobs by updating the infrastructure of the United States. The electric grid across the U.S. is well over fifty years old, much of it predating World War II, and parts of it are in constant danger of breaking down. It has not dealt with the changes in demography or increases in population that have occurred over that period. The country has come close to power outages because of cold weather conditions or for other reasons. Many of the bridges throughout the nation are also well over fifty years old. A number have collapsed; many are still waiting to be refurbished.  Also many schools, some of which were built over one hundred years ago, also need refurbishing or replacement throughout the country. Many of the sewers in cities are well over one hundred years old; a few have collapsed in parts.

All of these and many other projects will have to be done at some point in the future. Maintenance is required to keep all aspects of society properly functioning. From 2011 on the House of Representatives with its Republican majority has tended to squeeze the society, downsizing government and adding to unemployment, in fact at one point it closed down the Federal Government by refusing to fund it. The present is an ideal time to do a lot of these fiscal projects as interest rates are at just barely above 0.

Monetary Policy is a tool of the Federal Reserve. It can be used to increase or decrease the amount of money in circulation. Ordinarily the Fed adjusts the money flow in the economy by increasing or decreasing the amount of money it borrows through the sale of bonds. What happens is decided by the rate or non-rate of inflation. The Fed is always cashing out and selling bonds. There are short term, medium term, and long term bonds, lasting from a few months to a number of years. The rate of sale is determined by the level in interest paid on these bonds. The higher the interest the greater the sale and the lower the interest the less the sale. These interest rates are determined by the level of inflation in the country. The higher the inflation the higher the interest. Here money is taken out of the national cash flow so that there is less available to be spent, thus gradually forcing down the rate of inflation. If the opposite is true then the Fed will sell less bonds than it cashes out and continually add currency to the national cash flow.

With no help from Congress during a period of recession or depression the Fed under the chairmanship of Ben Bernanke had to be quite innovative to pull the nation out of the Real Estate Debacle. This was done by the Fed buying $85 billion worth of bonds each month for well over two years: $45 billion in mortgage paper and $40 billion in government bonds. The effect of these two actions was to add well over a trillion dollars to the national cash flow per year; and also to essentially resolve the big banks activity in splitting up individual mortgages into well over one hundred parts. By my estimate it would have taken well over twenty years to straighten out the housing mess if the Fed had left it alone. The Fed did it in a relatively short time by buying most of the pieces. We again have new construction and older houses are being resold.

What is interesting to note here is that 40 billion was utilized on traditional monetary policy while 45 billion dollars was used to purchase mortgage paper from the assorted hedge funds which each owned fractional pieces of mortgages in each of their funds that had been very sloppily catalogued. For the Fed to collect or foreclose on any of these properties it would have to set up a table of all the homes on which it held mortgages within the 50 states and gradually build up its portfolio to the point where it owned over fifty percent of each particular mortgage. The cost of setting up this information bank would have been prohibitive even for the Federal government. The probability is that the Fed did nothing with this paper and a percentage of the population ended up living in their homes for nothing, in essence the government forgave these loans.

Of course the people living in these houses still had to pay property tax. If they did not the municipality would eventually foreclose on the property and sell it for back taxes. These people would suddenly have a lot of disposable income, which many of them spent freely, and they could not claim any home interest payments on their income taxes. This, in turn, added billions of dollars circulating in the National Cash Flow throughout the country.

The practice of adding money to the economy was ended in October of 2014. Janet Yellen, the new Fed chair left the ending of the policy tentative. It could be started up again if the need arose.

Interest rates had also been dropped to a fraction of one percent, practically giving the banks free money from all the savers and checking accounts which they could lend out at a decent rate of interest. Currently the Fed is considering when to raise interest rates. Meanwhile most of the larger banks have announced large profits for 2014.

What is interesting here is that the Federal Reserve used part of the National Debt as a means of positively controlling the amount within and the flow of national currency. They actually increased over time the flow of money by trillions of dollars and, in this way, diminished the effects of the Real Estate Debacle caused recession.

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What Bernanke did was to use part of the National Debt as a means of getting the country out of a serious recession. Since Congress would not act he used the Debt itself as the tool by which a large percentage of recovery was gradually brought about.

The National Debt is divided into two parts: public debt which the government owns and private debt which is held by private countries and by individuals. For example the two largest holders of U.S. debt are China which as of November 2014 held 1.25 trillion and Japan had 1.24 trillion.

All foreign holdings at that time were 6.11 trillion dollars. It should be noted that the National Debt currently is 18 plus trillion dollars. Who owns the balance? Private individuals and companies within the United States and elsewhere would hold at least another trillion dollars. The balance would then be held by the U.S. government and its agencies. For example Social Security has well over 2 1/2 trillion in government debt. All this means that the Federal Government holds well over 50 percent of its own debt and pays the interest on that debt to the U.S. Treasury.

It should be noted that Treasury securities are seen as one of the world’s safest investments. This has been the situation in the world and will, in all probability, remain so.

The 114 Congress, which recently met for the first time and has a Republican majority in both Houses, shows no indication that it is even slightly interested in fiscal policy. While unemployment is down to 5 plus percent for the first time in the nation since the 2008 Debacle it still could be a lot lower with fiscal policy.

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Another factor of importance here is population; it is always gradually increasing. According to the Census Bureau’s Population Clock: there is one birth every 8 seconds, one death every 12 seconds, and one international migration every 33 seconds. The result of all this is a net gain of one person every 16 seconds.

That is an increase in the population of the United States of 3.75 people per minute, 225 per hour, 5,400 persons per day, and 1,965,600 people per year, if we count each month as 30 days and do not allow for each leap year. The current overall number of people in the country is in excess of 350 million people.

Most of these new settlers will reside along either of the coastal areas. In order for standards of living to not decrease with this additional population the GDP (Gross Domestic Product) has to increase one or two points yearly. If it stays at exactly the same point or decreases slightly then the overall standard of living has dropped for the bulk of Americans.

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What will happen with this new Congress should be interesting and economically uninspiring. From now until July 2016 when the Republicans hold their Presidential Convention there will be a lot of jockeying for the lead position in the Republican Party. The major issues like immigration, fiscal policy, job creation, plus whatever else comes up will be largely ignored. They will try forms of blackmail with the President in order to achieve some of their goals. This will be done by attaching riders that he will not approve of to necessary bills. That means that President Obama will probably have to veto the necessary legislation causing all sorts of economic and other problems. The question there is who will take the blame for causing all these disasters?

The Republicans will certainly not be creating any new jobs. Janet Yellen, the current chair of the Federal Reserve may have to restart the program of buying bonds for economic recovery to continue since the Republicans will be doing their dandiest to constrict the economy and inadvertently increase unemployment. What will probably occur between the present and the next presidential election is two years that the future historians will in all likelihood essentially ignore.

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)

The Weiner Component #57A – The Rapacious Banks (Part 1 of 5)

Photo of Bank of America ATM Machine by Brian ...

Perhaps the most predatory group of institutions within the United States are the major banking houses.  They are rapacious, grasping, taking, plundering and in many cases outright dishonest.  These financial institutions place themselves between the general public and all the goods and services they need to live, using the money put into the banks by businesses and the general public to game the public and force up the prices of all the goods and services they need.  When caught in illegal acts by the government these banks pay large fines that represent a small percentage of what they have made from these activities.

We have in earlier articles discussed the Great Depression of 1929 and the Real Estate Debacle of 2008.  To review briefly prior to 1929 the banks created hundreds of billions of dollars through the use of ten percent margin stock purchases, that continually kept inflating the stock market over a period of many years, until through exaggerated excess it crashed and over a relatively short period of time the overall value of all stocks dropped from about 86 billion to about 19 billion dollars, and the entire economy collapsed, reaching about 25% unemployment.  (Keep in mind that gold, which was money at the time, was worth $16 an ounce in 1929.)

The major banks that had been bundling mortgages for decades also brought about the Real Estate Debacle of 2008, selling the bundles, and reinvesting the original funds into new mortgages, which were subsequently bundled and sold again.  This process continued infinitely creating multi-trillions of dollars in new revenue, a good percentage of which went to the banks as profits and fees.  The process continued until the bubble burst toward the end of 2008.  If not for government bailouts the entire economy would have collapsed.  With the bailouts unemployment hit about 12%.  Here in late 2013 we still have only partial recovery with both the Republicans in Congress and the Republican dominated states holding it back.  Unemployment is currently hovering at about 7%.

Since the bank bailouts these institutions have looked for and found innumerable other ways to up their profits and compensation packages.  None of these methods have had anything to do with serving the general public, whose insured money they use for their machinations.

As a footnote, consider that if the banks had been allowed to fail in 2008 the Federal Government through the Federal Insurance Deposit Corporation (FDIC) would have been responsible for paying all deposits in these banks up to $250,000, a quarter of a million dollars.  The money the government spent on the bailout was probably less than this amount would have been and it has since been paid back with interest.

Banking foreclosures from 2009 on, after the Real Estate Bubble burst, and housing prices dropping rapidly and significantly caused a large number of homeowners to be far underwater on the amount of money they owed on their property.  The banks had encouraged them to use their homes as bank accounts and continually refinance, even toward the end refinancing in many cases up to 125 percent of the appraised value of the property.

As we’ve seen the banks did not hold the mortgages on a large number of these properties.  The paper had been divided into fractional pieces and become part of innumerable hedge funds.  The banks had formerly issued and sold the paper but still serviced these loans.  Non-ownership of these mortgages did not stop many of the large banking houses from foreclosing on these properties they did not own.  Any money they made on the foreclosure was pure profit.

The banks computers generated the papers they needed for foreclosures and they used robo-signers to foreclose on these properties.  Interestingly for a while the courts considered the bank’s papers and efforts sacrosanct, even to the point of holding many attorneys, who represented homeowners, in contempt for questioning bank documents.  Eventually the evidence came out about the false documentation and the robo-signing of multi-thousands of these foreclosures.  At this point virtually all the major banking houses stopped foreclosing.  The banks were fined in the millions of dollars but these amounts were a fraction of what they had made from their illegal activities.  No one in the banking industry went to jail for any of the illegal activities they committed.  Eventually the Federal Government began buying up the mortgage paper.

Under the Obama Administration the main executives of the banks that accepted bailout money could not receive multi-million dollar compensation packages.  The CEO from the Bank of America complained about this and stated that the B of A would pay off its loan as quickly as possible so they could resume proper pay packages.

After the bailout the banks became very cautious with their funds.  It became difficult for ordinary consumers to receive loans.  In order to purchase a house they had to have a significant down payment.  Small business entrepreneurs found it impossible to borrow money for almost any purpose.  The banks had essentially stopped serving the public; they were looking for ways to make large profits.  One of the areas they moved into was the futures market.

Almost all commodities, be they necessary food items such as beef or wheat and corn, lumber, financial currencies, oil, or electricity, are sold on the Futures Exchange.  The futures market is a central financial exchange where banks or individuals can buy specific quantities of a commodity or financial instrumens at a specified price with delivery set at a specified time in the future.

Since the Real Estate Debacle of 2008 the large banks in the United States have gone into this in a large way.  J. P. Morgan Chase stated, when they were accused of lying to a U.S. Government investigative committee, that the eight or ten million dollars a month that they would lose from selling electricity in California was insignificant.  Someone from Goldman Sacs said about a year or so ago that they made forty-nine dollars from every barrel of oil sold in the United States.  And this does not include beef, pork, or any other products sold on the future markets.  Somehow I get a rather sick feeling when I think that the major banks are using the money we deposit in them to squeeze dollars out of us for all the products we need to live.

Toward the end of 2013 the city of Los Angeles accused banking giants Wells Fargo & Co, and Citigroup Inc. of a “continuous pattern and practice” of mortgage discrimination that led to a wave of foreclosures, reduced property tax revenue, and increased costs for city services.  The two lawsuits accused both banks of engaging in predatory lending and saddling minorities with loans they couldn’t afford and resulted in a high percentage of foreclosures, The suits cited reports for low income and minority neighborhoods that claimed the mortgage crisis resulted in more than 200,000 foreclosures in LA from 2008 through 2012 and depressed property values, leading to an estimated loss of 48 million dollars in tax revenue for the city.  The suit alleges that the banks predatory lending started in 2004 and still continues.  What will happen here should be very interesting.

Also a federal judge is currently considering a possible 165.8 million dollar penalty against Bank of America Corporation after a jury found its Countrywide Unit fold defective loans to Fannie Mae and Freddie Mac.  U.S. lawyers requested that the bank pay 863.8 million dollars, which is as much as the government agencies lost in the loans.

The banks do not serve us instead they use us, squeezing every possible dime they can out of the public and the Federal Government.

 

 

 

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The Weiner Component #54 – The History & Use of Money

Money cash

Over most of human history money, gold coins, have been an object of value that have been exchanged for either goods or services of equal value.  This changed in 1933 when money became essentially a paper note with symbolic intrinsic value, which was still used for the exchange of goods and services.  Finally in 1969 the last vestige of theoretical gold was removed from paper money and all coins became copper sandwiches where before they had contained silver.  Since that time there has been nothing behind the dollar except the word of the United States Government.

Economics exists on two levels: one, which affects everybody, is Microeconomics, and the other, which effects only the Federal Government, is Macroeconomics.  Microeconomics deals with individuals and family incomes and budgets; with any entity that lives on a fixed specific income, be it taxes, rents, dividends, or earnings.  Macroeconomics deals with the government adjusting and fine-tuning the entire economy of the nation.  It has to do with adjusting the money supply, interest rates, and the functioning of the nation.

Money, the amount of money one has or earns, determines where that individual fits in the general society.  If one has an adequate amount with which to live then it is not overly important; but if one never has quite enough, then its lack supplies an endless pressure on an individual and his family’s life.  Unfortunately the majority of the population does not ever have quite enough.

What is the problem with having enough money?  Better yet, what is money?  What is it really worth?  Why is money unequally distributed among the population?

Historically, during ancient times, precious metals like gold and silver were exchanged for goods.  This was done in addition to barter.  The metal would be weighed and the weight would determine the value.  Probably the Phoenicians, who traded along the Mediterranean Sea, began this practice well over two thousand years ago.  They traded value for value.

At some point in history, again probably by the Phoenicians, money was invented.  A set amount of gold or silver was stamped with some image, usually a ruler of some dominion.  The coins were uniform, always having the same weight, thus being of a constant value.  This eliminated using scales for the exchange of goods and services.  It made doing business easier.  The basic concept remained the same, trading something of value for a metal of equal value.

The invention of coins, as less valuable metals were gradually used, allowed over time for an end of barter and an extension of the exchange of goods and services for money, which could be traded at any times for other goods and services in virtually any region or state.

How long did it take for this system to become established throughout the ancient world?  Probably it took at least hundreds of years for it to become common practice.

What developed was a system of exchanging goods and or services for an equal value in metals (coins, money).  Once this was established business could occur anywhere.

Probably from its inception or shortly thereafter there were never enough coins to handle the amount of business possible.  This kept the value of the metal high and allowed for slow economic growth.

The Roman Emperor, Nero, from what we know, was the first or at least one of the first rulers to “water the money;” that is, to add a less expensive metal to the molten gold from which the coins were cast.  The process increased the amount of money the state could spend but I also resulted in a continuous inflation during his reign by lowering the value of the coins.

With the exception of the 16th Century, when Spain looted the New World and brought seemingly endless shiploads of gold to Europe that were immediately turned in currency (gold coins). This brought about a period of inflation that lasted about ninety years.  During this period wages stayed the same but the value of the money continually decreased.  It was a time of rapacious inflation

Outside of this period there has always been a shortage of gold in relationship to the amount of trade (business) that could be done.  Also By the 16th Century Letters of Credit were developed in Europe by banking houses, which made the transfer of money in large amounts fairly simple.  In fact, the Hanseatic League and the Renaissance banking houses created a form of checking.  In essence modern capitalism began here.

In order to stretch the needed money supply and increase their profits banking houses issued paper money that, presumably, could be turned into gold (coins) at any time.  Of course, if any negative rumor occurred, and all the depositors brought their paper money in to exchange it for gold there would be a run on the bank.  The bank would run out of gold, the balance of the paper would become worthless, and the bank would become bankrupt.  These periods brought about the business cycle, periods of prosperity and depression within the respective nations.  Modern capitalism thus came into existence.

The Great Depressions of 1929 and 2008 were results of this type of action.  The great banking houses of the United States brought them both about.  Prior to 1929 the banks lent endless amounts of money to people with which to buy stock.  The margin rate was 10%.  For every dime the citizen invested he could buy one dollar’s worth of stock.  This drove the price of stocks through the ceilings, creating multi-billions of dollars.  With the competition to get rich quickly stock prices continually rose until they reached a point in 1929 when this whole house of cards collapsed and the investors and the banks went bankrupt within a relatively short period of time.  The nation teetered on the point of economic collapse until 1933 when Roosevelt became president.  He was able to bring about partial recovery until 1939 when World War II broke out.  The war ended the Great Depression in 1939 in the United States since there were endless orders for war supplies and food production coming into the U.S.

What Roosevelt did in1933 was to double the money supply by collecting all gold coins and issuing paper in their place.  He also doubled the value of gold from $16 an ounce to $32 dollars an ounce, thereby doubling the money supply and giving the government the ability to spend billions in economic recovery.

But, if we go by the value of the Stock Market, it was not enough.  The value of the Stock Market went from 86 billion dollars to 16 billion dollars.  Roosevelt needed to increase the value of gold to 64 dollars an ounce to match the amount of money that existed in circulation before the 1929 Crash.  This he could not do.

With the Real Estate Debacle, which occurred late in 2008 the situation was similar.  The banks over a thirty-some year period had discovered that they could bundle mortgages into massive packages and sell them as hedge funds, supposedly as safe interest paying investments to innumerable investors.  What the banks did was to issue the mortgages, sell them off in bundles, get their original investments back, and then process the funds for fees on several levels.  In essence they controlled the mortgages without having any money invested in them.  This was continued until the banks were issuing loans based upon 125% of the appraised value of the real estate.  This process continued over three decades until the bubble burst and property values dropped like lead weights from tall buildings, leaving many of the homeowners underwater, owing more on the property than it was suddenly worth.  Both Presidents Bush and Obama pumped money into the banks, bailing them out before the entire financial structure of the United States collapsed.

In both the above cases the banks were motivated by intense greed, endless profits, exploiting the system to become super-rich.  In 2008 the bankers were earning in the multi-millions as their compensation packages, and those below them were not far behind them earning lesser million in fees.  The real estate industry was going berserk with the multitude of fees they were earning.  Many homeowners were happily using their real estate as bank accounts and industry was prospering.  It was a happy “twilight state” that lasted until the bubble burst and the economy tanked.  Then if not for the steps taken by the Obama Administration, the entire nation would have collapsed.

The major historic problem still exists, even though the government prints and issues money as needed, there is not enough money in circulation to allow for all the exchange of goods and services needed within the society.  Can this problem be rectified?  The answer is easily by the Federal Government using both fiscal and monetary Policy.

The major problem here as far as the overall population is concerned is that most people still think of money in terms of gold.  With Macroeconomics it is a tool that the government uses to enhance productivity.  In itself money has no real value except that assigned to it by the government as a token of exchange.  The Federal Government can issue as much as it feels is needed.  The only limitation on this is inflation.  If there is too much money in circulation, more money that goods and services needed then we could have a rabid inflation.  This and this only would limit the amount of currency that the government can circulate.  Money is not gold and should not be treated as such.  This behavior can limit productivity and bring about a continuing recession as it has since the end of 2008.

Unfortunately the Tea Party Republican controlled House of Representatives has not only not used fiscal policy but has also seriously restrained Federal spending, exacerbating the problem of unemployment.  We are still in a recession with a seven plus percent level of unemployment.  This could easily be rectified if the Federal Government could take proper action.

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