Ah, actually only partly.

If you read into history you will see that it was the progressive left and Clinton who got together and devised a great idea to make property ownership more accessible to the masses.

http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html

The important point – this was government quasi-intervention into the market, lobbied by private entities for obvious gains. The Government had a chance to recognize the neo-liberalism at play, and stop it before…and i quote

“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s”

In part, your point is germane, the blame can be apportioned throughout society, for there can not be a valley without a hill. However, it is unassailable that the blame is very heavily biased towards the upper echelon.

It is the wealthy corporate elites that systematically lobbied for changes to statutes of law and to regulations that were in place to temper irrational forays of the past. It’s not as if we haven’t been here before. It is their ideology and their penchant support of neo-liberal voodoo gibberish that has created this disaster.

I would have something to say about the other points you have made, which I don’t agree with. I would prefer to provide a far more detailed synthesis of my position, unfortunately, at present, time does not permit.

http://www.news.com.au/business/story/0,27753,25567306-31037,00.html

“China is the largest single purchaser of US Treasury debt and already has shifted investment of some of its reserves to shorter-term maturities, a sign that it may fear the US will be forced to push interest rates up to control inflation when recovery begins.”

What recovery? Obviously there is no private debt problem there so they are very close to recovering after their banks passed the stress test. Back to normal?

The Chinese are aware I think that the US economy has to be put on a life support for at least several years. Since USD is not only the US domestic currency but also the international currency the US government will print money to buy oil and products overseas. They will also print money to buy back the bonds from China as they will be unable to roll them over. They will never be able to repay the debt by exporting more goods than they import as the real industries producing goods have been replaced by the FIRE industry. The deeper they sink into recession the more the productive industries (like car manufacturing) suffer. So if they stop printing now they will sink even deeper. This is the real catch 22 for them.

I would say there are 2 money circuits there – the national one (still suffering from deleveraging and depression) and the international one. I don’t think that there will be domestic pull inflation in the US for the reasons stated by Steve.

I do believe USD is being dumped as the international currency and US bonds as safe investment instrument. Nobody likes getting freshly “printed” USD not backed with any real goods.

The US will eventually recover but they have to eat the humble pie first.

Don’t take from my comments that I am taking sides in your debate with Icon. Half the time I can’t tell what your debate is about.

On your point about Tier 1 capital. You have some misinformation. I know that it is irrelevant to your debate, so let me correct you for arguments sake.

Tier 1 capital is purely to do with the amount of equity a bank has raised from selling its own stock. ie, IPO or capital raisings. On top of this, tier 1 capital can grow if a bank makes and retains profits. Tier one can fall if a bank makes losses or pay out a dividend. Tier 2 capital is largely explained by preferred stock. Which I think is crap. Because preferred stock is really a loan and should not be counted as capital. Anyway that’s the rules.

The whole system is meant to capture the health of banks. What a load of crap. I believe the health of a bank should be measured by its reserve ratio. Reserve ratio is a better measure because it reflects how much a depositor’s money is at risk. Reliance on a capital ratio assumes that in tough times a bank can simply sell assets (securitise loans) or raise capital (sell fresh stock) to “fill the gaps”. As Oct/Nov ’08 proved. In tough times a bank may not be able to do either of these things.

To a bank Government Bonds are an asset. That is, a loan to the government. They are considered to be a safe asset and as such are risk weighted zero (excluded) when measuring the capital ratio, but they are not capital. As a further example, a home loan is 50% risk weighted and a commercial loan is 100% risk weighted.

Government bonds are considered to be reserves, because they can quickly be sold, thus converted to cash and returned to depositors should they want some of their money back.

“Uh, if the money was conjured out of thin air and does not need to be paid back then that’s outright printing. Note, I said “if” as I’m not 100% sure you meant money out of thin air.”

There is nothing wrong with this process itself but under certain circumstances side efefcts may not be good.

Please read this:
http://bilbo.economicoutlook.net/blog/?p=2562

The distinction between the old commodity-based money system and the fiat money system is clearly described in that article.

You may or may not share some of the author’s views about what should be done but you should accept the facts described there. It is written in plain English.

Regarding your example I think it refers to fractional banking system where it is assumed that banks act as money multipliers. Which is how the neoclassical economists describe the reality – but they are wrong.

Please read this:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Uh, if the money was conjured out of thin air and does not need to be paid back then that’s outright printing. Note, I said “if” as I’m not 100% sure you meant money out of thin air.

One of the most fundamental and trivial points of how things work is being discussed and no one can explain it in plain and concise English. For the benefit of readers, here’s how I am certain it works. People please correct where you think it’s wrong.

If the gov sells bonds to person P and the gov then spends the proceeds then the amount of money in the system has not changed. However X amount of goods have been purchased that otherwise may not have been as person P may have chosen to leave it in the bank and the bank may not have been able to lend it out. This seems like a straight forward loan. Another point is that the bonds (AAA of course) can be used as collateral by person P and if person P is a bank then those bonds would be part of Tier 1 capital. Thus not only has X amount been spent by the gov but there exists X amount of capital. It all reverses at maturity of course when the gov pays back the loan. Thus deficits create credit inflation which like I have stated is inflation that exists over the period of the loan – ie. temporary inflation.

“That is the elite have skewed the system, via neo-liberal economic policies, to lay greater and greater claim to the output of the economic system, forcing the middle and low economic strata of society to be forced to take on further and further debt as an attempt to maintain their living standards.”

Define standard of living now days?

The elite you refer to are the banks and the “output” is the credit default swap/derivative market.

However, these people who have screwed the system would not have been able to had it not been for the market of middle and lower socioeconomic classes who went on a 5 yr rampage of sub-prime and easy credit. These people did the greedy thing and took anything they could “to get ahead”, or get closer to retirement.

Meanwhile the elite made huge gains on the output of the derivatives until people started losing there jobs and defaulting.

Yes, society has been forced to take on more and more debt, and i would argue did not manage to maintain there living standards (1/16th acre block anyone?). However, it’s just as much there own silly fault for being just as greedy as the wall st banker.

I think you need to analyze the role that society as a whole is responsible for there own demise – regardless of elite status.

This is a different story. The principle will be paid back to you.

I think that what he wrote about was that the government can for example buy work from my wife (who works for the public sector) by crediting our bank account and there is no need to borrow money for that by selling bonds or extract money from other people by collecting taxes.

In that case the spending will not be covered by borrowing / taxation and the amount of M1 will increase.

Now the key point:
Under certain circumstances this may lead to inflation but under other circumstances this will not lead to inflation.

Could Steve comment on this if I am wrong?