Bailout Suggestions to Hanky Bernanke from a Banker

[davelj]

[quote=underdose]”The first thing to realize is that the single biggest issue in the financial system is confidence in the system itself. I think we can all agree on that. ”

Actually, no, we can’t all agree on that.

I think one of the biggest issues is that for too long we’ve had too much confidence in confidence. People we’re confident as hell that housing prices would go up forever. When people are confident in a fallacy, they can push markets into an imbalance, but only for so long. Ultimately, regardless of people’s perceptions, fundamentals win.

Which leads to the bigger issue, that the fundamentals are terrible, and have been for years. Any bailout plan might bouy people’s confidence temporarily, but the horrid fundamentals will win. And since bailouts actually serve to worsen the fundamentals, IMO confidence and perceptions be damned.[/quote]

Having “too much confidence in confidence” is what I’d call “misplaced confidence,” which is very different from generic confidence. 75% of all of the FDIC-insured lending institutions will survive without incident even if we have a deep, long recession in this country. These institutions deserve your confidence. Once folks no longer have confidence in prudent, healthy institutions, the system goes down. (I think we’ve all seen “A Wonderful Life”.) Confidence in these institutions is necessary. Now, perhaps you’d like a system with no fractional reserve lending. OK. So long as you don’t have a problem with 20% interest rates, that’ll serve you well.

[underdose]

My apologies to everyone. I fear I must have made my point poorly because there are two scathing responses about something that isn’t my stance at all.

I do want a fractional reserve banking system, and I do recognize that at the heart of any monetary system, whether backed by gold or fiat, it depends on confidence. My point is that the confidence must be legitimate, that is, it must be backed by strong fundamentals. The prevailing attitude in the markets for as long as I can remember has been that perceptions are more important than reality. Most “experts” pay more attention to “consumer confidence” than savings rate and how broke with credit card debt people are. They also care more about sentiments that the economy is OK than the $700-800 billion trade deficit. They cared more about the misplaced belief that houses would never go down in price rather than objective measures like price to income or price to rent. So my point is that attempts to repair people’s confidence cosmetically repeats the same mistakes and fails to address the real problem. I was just disagreeing that confidence is the biggest problem. The hard, cold, objective numbers that banks are broke because of poor management is the biggest problem. Improved confidence will not make those ugly facts go away.

And incidentally, according to the pre-1980 calculation method of CPI, inflation is closer to 14-15% than the tamer 5-6% being pushed by the government. So, actually, I would be THRILLED with 20% interest rates!! Not always, but in this environment, absolutely! The -10% real rates on treasuries strongly discourages saving, so I think it is a bad thing. Since I’m a saver instead of a borrower, I want as much rent on my money as possible…

[underdose]

My apologies to everyone. I fear I must have made my point poorly because there are two scathing responses about something that isn’t my stance at all.

I do want a fractional reserve banking system, and I do recognize that at the heart of any monetary system, whether backed by gold or fiat, it depends on confidence. My point is that the confidence must be legitimate, that is, it must be backed by strong fundamentals. The prevailing attitude in the markets for as long as I can remember has been that perceptions are more important than reality. Most “experts” pay more attention to “consumer confidence” than savings rate and how broke with credit card debt people are. They also care more about sentiments that the economy is OK than the $700-800 billion trade deficit. They cared more about the misplaced belief that houses would never go down in price rather than objective measures like price to income or price to rent. So my point is that attempts to repair people’s confidence cosmetically repeats the same mistakes and fails to address the real problem. I was just disagreeing that confidence is the biggest problem. The hard, cold, objective numbers that banks are broke because of poor management is the biggest problem. Improved confidence will not make those ugly facts go away.

And incidentally, according to the pre-1980 calculation method of CPI, inflation is closer to 14-15% than the tamer 5-6% being pushed by the government. So, actually, I would be THRILLED with 20% interest rates!! Not always, but in this environment, absolutely! The -10% real rates on treasuries strongly discourages saving, so I think it is a bad thing. Since I’m a saver instead of a borrower, I want as much rent on my money as possible…

[underdose]

My apologies to everyone. I fear I must have made my point poorly because there are two scathing responses about something that isn’t my stance at all.

I do want a fractional reserve banking system, and I do recognize that at the heart of any monetary system, whether backed by gold or fiat, it depends on confidence. My point is that the confidence must be legitimate, that is, it must be backed by strong fundamentals. The prevailing attitude in the markets for as long as I can remember has been that perceptions are more important than reality. Most “experts” pay more attention to “consumer confidence” than savings rate and how broke with credit card debt people are. They also care more about sentiments that the economy is OK than the $700-800 billion trade deficit. They cared more about the misplaced belief that houses would never go down in price rather than objective measures like price to income or price to rent. So my point is that attempts to repair people’s confidence cosmetically repeats the same mistakes and fails to address the real problem. I was just disagreeing that confidence is the biggest problem. The hard, cold, objective numbers that banks are broke because of poor management is the biggest problem. Improved confidence will not make those ugly facts go away.

And incidentally, according to the pre-1980 calculation method of CPI, inflation is closer to 14-15% than the tamer 5-6% being pushed by the government. So, actually, I would be THRILLED with 20% interest rates!! Not always, but in this environment, absolutely! The -10% real rates on treasuries strongly discourages saving, so I think it is a bad thing. Since I’m a saver instead of a borrower, I want as much rent on my money as possible…

[underdose]

My apologies to everyone. I fear I must have made my point poorly because there are two scathing responses about something that isn’t my stance at all.

I do want a fractional reserve banking system, and I do recognize that at the heart of any monetary system, whether backed by gold or fiat, it depends on confidence. My point is that the confidence must be legitimate, that is, it must be backed by strong fundamentals. The prevailing attitude in the markets for as long as I can remember has been that perceptions are more important than reality. Most “experts” pay more attention to “consumer confidence” than savings rate and how broke with credit card debt people are. They also care more about sentiments that the economy is OK than the $700-800 billion trade deficit. They cared more about the misplaced belief that houses would never go down in price rather than objective measures like price to income or price to rent. So my point is that attempts to repair people’s confidence cosmetically repeats the same mistakes and fails to address the real problem. I was just disagreeing that confidence is the biggest problem. The hard, cold, objective numbers that banks are broke because of poor management is the biggest problem. Improved confidence will not make those ugly facts go away.

And incidentally, according to the pre-1980 calculation method of CPI, inflation is closer to 14-15% than the tamer 5-6% being pushed by the government. So, actually, I would be THRILLED with 20% interest rates!! Not always, but in this environment, absolutely! The -10% real rates on treasuries strongly discourages saving, so I think it is a bad thing. Since I’m a saver instead of a borrower, I want as much rent on my money as possible…

[underdose]

My apologies to everyone. I fear I must have made my point poorly because there are two scathing responses about something that isn’t my stance at all.

I do want a fractional reserve banking system, and I do recognize that at the heart of any monetary system, whether backed by gold or fiat, it depends on confidence. My point is that the confidence must be legitimate, that is, it must be backed by strong fundamentals. The prevailing attitude in the markets for as long as I can remember has been that perceptions are more important than reality. Most “experts” pay more attention to “consumer confidence” than savings rate and how broke with credit card debt people are. They also care more about sentiments that the economy is OK than the $700-800 billion trade deficit. They cared more about the misplaced belief that houses would never go down in price rather than objective measures like price to income or price to rent. So my point is that attempts to repair people’s confidence cosmetically repeats the same mistakes and fails to address the real problem. I was just disagreeing that confidence is the biggest problem. The hard, cold, objective numbers that banks are broke because of poor management is the biggest problem. Improved confidence will not make those ugly facts go away.

And incidentally, according to the pre-1980 calculation method of CPI, inflation is closer to 14-15% than the tamer 5-6% being pushed by the government. So, actually, I would be THRILLED with 20% interest rates!! Not always, but in this environment, absolutely! The -10% real rates on treasuries strongly discourages saving, so I think it is a bad thing. Since I’m a saver instead of a borrower, I want as much rent on my money as possible…

[underdose]

davelj, I’ve given more thought to your comment, and I’d like to point out that I would LOVE to actually have a fractional reserve banking system. Maybe the 75% of banks that you say will pull through unscathed still operate under a fractional reserve model, in which case they deserve our confidence, but no actions by the federal government can help us differentiate those from the imprudent ones. But the overall lack of confidence stems from the fact that largely banks have been operating under a multiple reserve system.

With a true fractional reserve, banks can not lend out more than a fraction of deposits from savers. If the demand to borrow excedes the supply of savings, market forces push interest rates higher. Saving is encouraged, frivolous borrowers are squeezed out. Not so with our multiple reserve system, in which banks can lend out an unbounded multiple of deposits from savers. Demand to borrow excedes savings? No problem, the Fed will lend the bank any amount of money at 1 or 2% interest, well below the rate of inflation. The bank has too many risky loans on its books? No problem, Fannie or Freddie will buy those loans and provide fresh new capital with which the bank can write new loans. With the current system, interest rates are artificially low, saving is discouraged, and frivolous borrowing is rampant. That’s what causes this bubble/bust cycle that is wrecking our economy.

The system is broken. The system has to be restored to a true fractional reserve system, and prudent lending standards have to be (re-)adopted. Then, and only then, can confidence return. And then confidence will return of its own accord. Confidence can not be purchased by a bailout that facilitates a continuation of the broken system.

[underdose]

davelj, I’ve given more thought to your comment, and I’d like to point out that I would LOVE to actually have a fractional reserve banking system. Maybe the 75% of banks that you say will pull through unscathed still operate under a fractional reserve model, in which case they deserve our confidence, but no actions by the federal government can help us differentiate those from the imprudent ones. But the overall lack of confidence stems from the fact that largely banks have been operating under a multiple reserve system.

With a true fractional reserve, banks can not lend out more than a fraction of deposits from savers. If the demand to borrow excedes the supply of savings, market forces push interest rates higher. Saving is encouraged, frivolous borrowers are squeezed out. Not so with our multiple reserve system, in which banks can lend out an unbounded multiple of deposits from savers. Demand to borrow excedes savings? No problem, the Fed will lend the bank any amount of money at 1 or 2% interest, well below the rate of inflation. The bank has too many risky loans on its books? No problem, Fannie or Freddie will buy those loans and provide fresh new capital with which the bank can write new loans. With the current system, interest rates are artificially low, saving is discouraged, and frivolous borrowing is rampant. That’s what causes this bubble/bust cycle that is wrecking our economy.

The system is broken. The system has to be restored to a true fractional reserve system, and prudent lending standards have to be (re-)adopted. Then, and only then, can confidence return. And then confidence will return of its own accord. Confidence can not be purchased by a bailout that facilitates a continuation of the broken system.

[underdose]

davelj, I’ve given more thought to your comment, and I’d like to point out that I would LOVE to actually have a fractional reserve banking system. Maybe the 75% of banks that you say will pull through unscathed still operate under a fractional reserve model, in which case they deserve our confidence, but no actions by the federal government can help us differentiate those from the imprudent ones. But the overall lack of confidence stems from the fact that largely banks have been operating under a multiple reserve system.

With a true fractional reserve, banks can not lend out more than a fraction of deposits from savers. If the demand to borrow excedes the supply of savings, market forces push interest rates higher. Saving is encouraged, frivolous borrowers are squeezed out. Not so with our multiple reserve system, in which banks can lend out an unbounded multiple of deposits from savers. Demand to borrow excedes savings? No problem, the Fed will lend the bank any amount of money at 1 or 2% interest, well below the rate of inflation. The bank has too many risky loans on its books? No problem, Fannie or Freddie will buy those loans and provide fresh new capital with which the bank can write new loans. With the current system, interest rates are artificially low, saving is discouraged, and frivolous borrowing is rampant. That’s what causes this bubble/bust cycle that is wrecking our economy.

The system is broken. The system has to be restored to a true fractional reserve system, and prudent lending standards have to be (re-)adopted. Then, and only then, can confidence return. And then confidence will return of its own accord. Confidence can not be purchased by a bailout that facilitates a continuation of the broken system.

[underdose]

davelj, I’ve given more thought to your comment, and I’d like to point out that I would LOVE to actually have a fractional reserve banking system. Maybe the 75% of banks that you say will pull through unscathed still operate under a fractional reserve model, in which case they deserve our confidence, but no actions by the federal government can help us differentiate those from the imprudent ones. But the overall lack of confidence stems from the fact that largely banks have been operating under a multiple reserve system.

With a true fractional reserve, banks can not lend out more than a fraction of deposits from savers. If the demand to borrow excedes the supply of savings, market forces push interest rates higher. Saving is encouraged, frivolous borrowers are squeezed out. Not so with our multiple reserve system, in which banks can lend out an unbounded multiple of deposits from savers. Demand to borrow excedes savings? No problem, the Fed will lend the bank any amount of money at 1 or 2% interest, well below the rate of inflation. The bank has too many risky loans on its books? No problem, Fannie or Freddie will buy those loans and provide fresh new capital with which the bank can write new loans. With the current system, interest rates are artificially low, saving is discouraged, and frivolous borrowing is rampant. That’s what causes this bubble/bust cycle that is wrecking our economy.

The system is broken. The system has to be restored to a true fractional reserve system, and prudent lending standards have to be (re-)adopted. Then, and only then, can confidence return. And then confidence will return of its own accord. Confidence can not be purchased by a bailout that facilitates a continuation of the broken system.

[underdose]

davelj, I’ve given more thought to your comment, and I’d like to point out that I would LOVE to actually have a fractional reserve banking system. Maybe the 75% of banks that you say will pull through unscathed still operate under a fractional reserve model, in which case they deserve our confidence, but no actions by the federal government can help us differentiate those from the imprudent ones. But the overall lack of confidence stems from the fact that largely banks have been operating under a multiple reserve system.

With a true fractional reserve, banks can not lend out more than a fraction of deposits from savers. If the demand to borrow excedes the supply of savings, market forces push interest rates higher. Saving is encouraged, frivolous borrowers are squeezed out. Not so with our multiple reserve system, in which banks can lend out an unbounded multiple of deposits from savers. Demand to borrow excedes savings? No problem, the Fed will lend the bank any amount of money at 1 or 2% interest, well below the rate of inflation. The bank has too many risky loans on its books? No problem, Fannie or Freddie will buy those loans and provide fresh new capital with which the bank can write new loans. With the current system, interest rates are artificially low, saving is discouraged, and frivolous borrowing is rampant. That’s what causes this bubble/bust cycle that is wrecking our economy.

The system is broken. The system has to be restored to a true fractional reserve system, and prudent lending standards have to be (re-)adopted. Then, and only then, can confidence return. And then confidence will return of its own accord. Confidence can not be purchased by a bailout that facilitates a continuation of the broken system.

[patientrenter]

Thanks, Dave and others, for an intelligent conversation about the issue. I have one point to add: I think we should be moving as a country away from encouraging more investment in residential real estate. No more buyer incentive programs, no more deductibility of mortgage interest, no more govt guarantees for mortgage loans….

After a few years of shock, we will have an economy that is more productive, sustainable, and competitive. Any more gradual plan is, I’ve concluded, the alcholics plea for “just one more drink”.

[patientrenter]

Thanks, Dave and others, for an intelligent conversation about the issue. I have one point to add: I think we should be moving as a country away from encouraging more investment in residential real estate. No more buyer incentive programs, no more deductibility of mortgage interest, no more govt guarantees for mortgage loans….

After a few years of shock, we will have an economy that is more productive, sustainable, and competitive. Any more gradual plan is, I’ve concluded, the alcholics plea for “just one more drink”.

[patientrenter]

Thanks, Dave and others, for an intelligent conversation about the issue. I have one point to add: I think we should be moving as a country away from encouraging more investment in residential real estate. No more buyer incentive programs, no more deductibility of mortgage interest, no more govt guarantees for mortgage loans….

After a few years of shock, we will have an economy that is more productive, sustainable, and competitive. Any more gradual plan is, I’ve concluded, the alcholics plea for “just one more drink”.

[patientrenter]

Thanks, Dave and others, for an intelligent conversation about the issue. I have one point to add: I think we should be moving as a country away from encouraging more investment in residential real estate. No more buyer incentive programs, no more deductibility of mortgage interest, no more govt guarantees for mortgage loans….

After a few years of shock, we will have an economy that is more productive, sustainable, and competitive. Any more gradual plan is, I’ve concluded, the alcholics plea for “just one more drink”.

[Author]

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