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Federal Reserve Bank and the economy
Just_Bri_Thanks
Seething with ragefrom a handbasket.Registered User, ClubPA regular
Seething with ragefrom a handbasket.Registered User, ClubPA regular
My roomie and I were talking about the economy this afternoon, and I realized I don't really know what is going on here.
I showed him recovery.gov and the Fed's wikipedia article, but I don't have any real background in finance; so can anyone explain what recent actions the Fed has taken to help with the economy?
I find the whole thing a bit confusing, especially when discussing it with an ESL with a background in reinsurance.
I showed him recovery.gov and the Fed's wikipedia article, but I don't have any real background in finance; so can anyone explain what recent actions the Fed has taken to help with the economy?
I find the whole thing a bit confusing, especially when discussing it with an ESL with a background in reinsurance.
...and when you are done with that; take a folding
chair to Creation and then suplex the Void.
chair to Creation and then suplex the Void.
Just_Bri_Thanks on
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Don't look back.
By all means, please continue.
chair to Creation and then suplex the Void.
chair to Creation and then suplex the Void.
edit: From what I understand, they weren't honestly considering that. It was just proposed as a way for them to think "outside the box" and find SOMETHING they could do to help restart the economy.
The Federal Reserve is the U.S.'s central bank, tasked with a) keeping inflation low, and, b) ensuring employment is at a reasonable target. These two things are actually diametrically opposed, in economical terms, which is one of the reasons why the Fed is kinda wonky.
Regardless of that, however, the main weapon the Fed uses is its control over monetary policy - it can raise and lower the main interest rate that banks may borrow under. Raising or lowering this rate may raise or lower inflation, via the availability (or liquidity) of credit. At the moment, most central banks (such as the Bank of Canada), are either at 0% or just above it (0.25%), which means that the effect that monetary policy can have on the economy is now effectively nil.
This is why all governments are talking about fiscal stimulus.
My poli sci professor last semester told me that negative interest rates can work, but they're kind of screwy.
Over the past 50 years, "ownership" no longer has the traditional, proper definition. America feels that constantly paying for then constantly upgrading material non-owned possessions a preferable means of existence than paying off then owning said material possessions. American penis size grows to nearly 4 feet in length.
Banks come off a decade of unprecedented prosperity.
They reward the general populace with additional fees, eliminate or begin charging "niceties", and slowly begin to try to squeeze any more possible profit they possibly can out of customers due to Board of Directors demanding that heads will roll if the unprecedented wealth does not continue.
Greedy company execs minimize payroll, inventory, production, benefits, and do everything they can to avoid paying taxes while simultaneously breaking records over and over again on maximizing their own paychecks, perks, and benefits. Board of Directors also demand that profit stays at all time high or heads will roll.
Banks begin policy of lending out money (that belongs to the bank's customers) at a record pace, so the accounting books show unparalleled profit potential. Feasibility of loans not really in question. Exec and CEO positions change hands so rapidly nobody working in the corporate sector looks at the potential 10 years down the road.
The American dollar soars, despite only 8%-10% of money actually existing. Other 90% of "money" in the economy consists of dollars in computers which don't actually exist. Credit card debt soars.
People begin defaulting on their loans. A national average of $100,000 debt per living person in the USA seems to outpace earning potential.
Debtors start pulling their savings, investments, 401k, renegotiating their mortgages, etc. before finally declaring bankruptcy, defaulting on loans from the bank.
Banks, now owning bankruptcy debtor's debt, has less of their own customers' money to loan to others.
Repeat about 25 million times.
Greedy company execs and labor unions, having spent the last few years crippling their companies for their own selfish, short-term goals, are met with opposition by Board of Directors on why stock is starting to slide. They cripple company further by beginning an ongoing series of layoffs, new production schedules, and other changes which benefit the company's bottom line for a very short term. leaders then leave the company to start their own startup or another company looking for leadership with a resume showing the goals they met in such a short period of time.
Companies, now needing fresh cash to reinvigorate their company, go to the bank asking for a loan. Bank approves, despite there not being enough money to pay their own customers if the customers have the audacity to ask for their own money.
Companies go all out, investing in anything that could add another number to the bottom line profit margin, while simultaneously cutting every form of doing business possible while execs' pay soars. Morale, customer service, and products/services suffer. Layoffs continue, raising the total debt per living human while lowering the ability to pay it back.
About this time, Cleveland gets hit with about a 80% unemployment rate.
Companies need more money to keep bullshitting the accounting books and stay afloat by getting more loans, selling off more stock, merging, starting subsidiaries, etc. Banks, now facing bankruptcy, deny the large corporate loans.
Companies, now facing a steep, steep dive into debt without the ability to pay it off, continue with more layoffs, cut production, and begin a grand exodus to other countries, where every aspect of business is cheaper while simultaneously charging more for inferior goods and services.
Banks are now faced with an almost National Debt level of debt, since the unemployment rate has skyrocketed, companies are defaulting on loans, and people who are still unemployed are still having issues paying their debt down.
About this time, the American penis size shrinks down to the size of a Vienna sausage.
People panic, and they begin selling stock, pulling out savings, and start jumping out of windows.
The government decides that instead of paying each U.S. citizen $15,000 to get by until things get better, they'll spend the next couple years investing nearly 2 trillion dollars into the floundering companies to save a few hundred thousand jobs, rewarding the same people who began this predicament in the first place. Free money is traded for invisible debt, invisible money that does not exist, and invisible "potential profit", all of which is to be auctioned off to the highest bidder for a fraction of a penny on the dollar.
Companies decide that instead of buckling down and selling company Lamborghinis to pay off debt or to actually look at their company and see why they've driven themselves into a brick wall, they go to the government and beg for more money. Government hands out taxpayer money, which is then used for exec vacations, bonuses, and hookers.
Companies, ignoring the actual reasons their company is understaffed, have no tenured/experienced managers, generate inferior products due to increased production schedules with no manpower, all while using cheaper materials/manufacturing processes, go bankrupt anyway. Invested money becomes worthless, adding to banks' and the government's debt.
Banks use up remaining invisible money in their computers to buy/merge/sellout to other banks/companies, while creating new subsidiaries, so when companies go bankrupt, all assets/loans/others' debts will be paid to the new company, leaving the first company penniless when they go to tax court while having a new startup company with millions in credit to start anew while maintaining execs' high level of pay.
US government's loan application to world banks saying "Hey, we're America! We're good for it!" no longer acceptable. Government begins creating new invisible money that does not exist to give to banks and companies and pay FDIC guarantees to banks, who use invisible money that does not exist to liquidate themselves while they merge with other companies/get sold to "new" companies. Loans are given out less often than the frequency of dates I have with Tatyana Ali (we've never met).
Average Joe is officially now broke (he always has been), possibly unemployed, and realizes it, hoarding money like no tomorrow, quits spending money.
Companies across the board make less money than ever.
Repeat this process 300 million times.
Companies produce less inferior product.
All aspects of industry, from shipping to materials to processing, go downhill. The entire world feels the burn of America's inability to gorge themselves like the self-centered, sheltered slobs they are. World economy drops like a rock.
Amish people worldwide point and impersonate Nelson Muntz.
Government scrambles to find someone, somewhere, to get enough real money from to use as "flash cash" to prove that the US government, along with its economy, is worth investing in.
Which is where we're at now.
Essentially, the companies have been screwing Average Joe for decades while getting rich. While trying to get richer, they screw Average Joe even more. When they run out of ways to screw Average Joe, they go to the government, which gives them the tax money that Average Joe gave the government to run the country.
Average Joe decides that he needs to save his money since everyone else is being irresponsible with their money, which is a little late with his two mortgages, the $80,000 SUV payment, and nearly $40,000 in credit card debt.
There is no money to pay for the debt we've racked up. If Obama was to collect every dollar, pound, sheckle, lira, and dubloon in the entire world, we would still owe tens of trillions of dollars.
The sad thing is, that wall of text could easily swell up to 1000 times that size without adding much more detail and just explaining more "cause/effect" situations.
That's how bad the situation is.
It's very easy to induce negative interest rates: commit credibly to high inflation. Bang, real interest rates drop like a stone.
Remember, the Fed exercises explicit control over nominal interest rates (which are now close to zero). But we don't really care about nominal rates, what really matters is the real rate. Inflation reduces the real rate.
So, now we (collectively as a country and as the First-World) owe hundreds of trillions of dollars, much of it to China, who has been more than happy to print money and sell us cheaply produced shit in order to finance our laughing-gas huffing financial wizards' economic dreams of an empire built entirely on unicorns. So, to add to the hilarity of the above, we're basically counting on China to continue being its efficient, brutal self in order to keep the dream of the First-World alive. Because if the yuan tanked tomorrow, China would probably start calling its loans due, and everyone would be eating dog food well into the next century.
I agree, but I think it's important to mention the whole CDS or How I Learned To Stop Worrying And Mark Everyone's Debt A1 phenomenon.
Aside from the fact that your wall o' text has a ridiculous anti-business and anti-bank bias to it (There's a reason that most of the world's richest countries also have a well developed financial industry, you know- they provide an important service), it also has nothing to do with the federal reserve bank, which was the original thread topic.
No, savings and loan institutions provide an important service. Most financial industry companies' only service is fucking everyone in the world over in the name of pretend money and massive, irresponsible greed.
Read the subject and the OP again. The topic is broader than just the Fed.
chair to Creation and then suplex the Void.
Well, it is. It can't drag nominal interest rates below zero. It can push real interest rates below zero by cooperating with the Treasury. Real interest rates are part of monetary policy. What about it?
This significantly eases (but does not reverse) the housing slump, because it makes it really affordable to get a loan again, even though you can't do the crazy loans anymore.
That's what the fed is doing.
It's not that simple. China and the US have a murder-suicide pact or mutually assured economic destruction if either tries to do anything too drastic. We owe them boatloads of money, but it is boatloads of paper money (US dollars) that we have control over. The US has the power of the printing press, which it wouldn't if it owed China a bunch of gold or foreign currency, which would necessitate alchemy, counterfeiting, or defaulting on the debt if we couldn't pay. The last one, defaulting on foreign currency, happens more often than you would probably like, and Russia did it not too long ago.
Additionally, we are buying a bunch of China's cheap crap (in turn with our crappy paper money), and they are in trouble if we have to stop buying it since they are a highly export geared developing economy. That will require them to focus inwards or find other buyers, and quickly because they'll be a lot of lost jobs and political turmoil if they don't.
As for the Federal Reserve, no one seems to be talking about it much, but it is a bit of a long subject, and depends on how much you know about how our banking system works.
Oh, so this thread is now about anything that has to do with the economy? Can I post my own long rant about changes in the dollar/euro exchange rate, or how hard it is to find a job these days? That's also part of "the economy". I assumed we were gonna focus on the specific topic of what the Fed is doing with regard to the current economy.
Yeah, which addresses part of the demand issue with the credit market. The supply issue is still a problem because banks aren't able to value their assets accurately, don't know how much they need to keep on hand to cover their debts (because they couldn't possibly cover 100% of them...not even close), and are unwilling to lend any new money until they have a better idea of their own financial health.
Which is part of the reason for the recent stress-tests the federal government has been putting banks through, to try and help them accurately value their portfolios. But I think we're still a good 10-12 months out from any significant easing on the purse strings, especially in terms of consumer lending.
Well, I agree that it's kind of a murder-suicide pact, but only because America's got a far bigger market for cheaply-produced shit than the rest of the First World. China needs the US a lot less than the US needs China. We couldn't meet our paper-money obligations to China without turning inflation in the US in to a nightmare of Zimbabwean proportions.
All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
Yeah, I agree. I'm just trying to explain the ostensible point behind it.
Any stress-test that is going to look at JPMC's short-term derivatives position and not instantly have a Raiders-Ark face-meltdown is an utter farce anyway.
No, we decided to make up more money before we even started losing it.
It makes the government look good when homeownership is at an all time high.
I'm not aware of specific government meddling, but I DO know that the government could have seen some of this crisis coming, but did nothing about it, because it would have meant clamping down on loans to the disprivelaged, which would have looked bad, politically.
Enh, I wouldn't blame the government exclusively here. Private lending institutions have been aggressively courting the sub-prime markets for decades. And sub-prime is basically code for "These people don't deserve the loans you're offering..what are you, crazy? Enjoy your default, suckers!"
Was there ever a point where money actually existed?
Well, the huge push in the early 2000s for everyone to own a home (whether they could pay for it or not) basically paved the way for relaxed regulations on first-time home buyers, though a lot of commercial developers took advantage of the same relaxed atmosphere.
Paper money? It existed back when it was backed by gold in Ft. Knox.
It's kind of gotten fuzzier and fuzzier as people have stretched it and made balloon animals with it, though.
Yup.
We really need some level of mandatory economics classes in this country. Folks need to understand that bubbles do not last forever.
Please don't go all goldbug on us.