[ltokuda]

Josh, thanks for the great explaination on your views of inflation. I’m still trying to get my head around it but your posts have been a big help. There’s one part of your post that I’m a little unclear about:

“If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.”

“However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.”

When you use the term “inflationary” above, are you actually talking about prices going up (rather than money in the system)? That seems to make sense to me. Here’s my interpretation of it:

It seems like once you borrow money, then you’ve added to the amount of money in the system. That, in itself is inflation. But if you use that money to produce products, then you’ve added another source of competition for the consumer’s money. This added competition for the consumer’s money tends to balance out the additional money supply. So that’s why this type of inflation doesn’t tend to drive up prices?

If you borrow money and buy a house with it, you’re also adding money to the system. This is also inflation. But buying a house doesn’t produce any products that consumers want. There is no additional competition for the consumer’s money. This imbalance leads to prices going up?

Do I have it right?

Regards,
ltokuda

[ltokuda]

Josh, thanks for the great explaination on your views of inflation. I’m still trying to get my head around it but your posts have been a big help. There’s one part of your post that I’m a little unclear about:

“If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.”

“However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.”

When you use the term “inflationary” above, are you actually talking about prices going up (rather than money in the system)? That seems to make sense to me. Here’s my interpretation of it:

It seems like once you borrow money, then you’ve added to the amount of money in the system. That, in itself is inflation. But if you use that money to produce products, then you’ve added another source of competition for the consumer’s money. This added competition for the consumer’s money tends to balance out the additional money supply. So that’s why this type of inflation doesn’t tend to drive up prices?

If you borrow money and buy a house with it, you’re also adding money to the system. This is also inflation. But buying a house doesn’t produce any products that consumers want. There is no additional competition for the consumer’s money. This imbalance leads to prices going up?

Do I have it right?

Regards,
ltokuda

[ltokuda]

golfgal – thanks for the links. The WSJ article was especially informative and answered a lot of my questions.

In the article, a senior treasury official comments that a year ago, confidence in the financial market was high enough that the Fed probably would have let BSC fail. But given the lack of confidence in the market today, the Fed felt that BSC’s bankruptcy could lead to something catastrophic. So its not as if BSC is “too big to fail”. Its more about avoiding the psychological straw that will break the camel’s back.

These comments lead me to the following conclusion: The Fed’s move to bail out BSC was really a symbolic gesture to calm everyone’s fears. They’re sending the message that the investment banks will be kept safe and there’s no need to pull your money out of them. By making these assurances, they hope to avoid a market panic, leading to runs on all the investment banks.

[ltokuda]

golfgal – thanks for the links. The WSJ article was especially informative and answered a lot of my questions.

In the article, a senior treasury official comments that a year ago, confidence in the financial market was high enough that the Fed probably would have let BSC fail. But given the lack of confidence in the market today, the Fed felt that BSC’s bankruptcy could lead to something catastrophic. So its not as if BSC is “too big to fail”. Its more about avoiding the psychological straw that will break the camel’s back.

These comments lead me to the following conclusion: The Fed’s move to bail out BSC was really a symbolic gesture to calm everyone’s fears. They’re sending the message that the investment banks will be kept safe and there’s no need to pull your money out of them. By making these assurances, they hope to avoid a market panic, leading to runs on all the investment banks.

[ltokuda]

golfgal – thanks for the links. The WSJ article was especially informative and answered a lot of my questions.

In the article, a senior treasury official comments that a year ago, confidence in the financial market was high enough that the Fed probably would have let BSC fail. But given the lack of confidence in the market today, the Fed felt that BSC’s bankruptcy could lead to something catastrophic. So its not as if BSC is “too big to fail”. Its more about avoiding the psychological straw that will break the camel’s back.

These comments lead me to the following conclusion: The Fed’s move to bail out BSC was really a symbolic gesture to calm everyone’s fears. They’re sending the message that the investment banks will be kept safe and there’s no need to pull your money out of them. By making these assurances, they hope to avoid a market panic, leading to runs on all the investment banks.

[ltokuda]

golfgal – thanks for the links. The WSJ article was especially informative and answered a lot of my questions.

In the article, a senior treasury official comments that a year ago, confidence in the financial market was high enough that the Fed probably would have let BSC fail. But given the lack of confidence in the market today, the Fed felt that BSC’s bankruptcy could lead to something catastrophic. So its not as if BSC is “too big to fail”. Its more about avoiding the psychological straw that will break the camel’s back.

These comments lead me to the following conclusion: The Fed’s move to bail out BSC was really a symbolic gesture to calm everyone’s fears. They’re sending the message that the investment banks will be kept safe and there’s no need to pull your money out of them. By making these assurances, they hope to avoid a market panic, leading to runs on all the investment banks.

[ltokuda]

golfgal – thanks for the links. The WSJ article was especially informative and answered a lot of my questions.

In the article, a senior treasury official comments that a year ago, confidence in the financial market was high enough that the Fed probably would have let BSC fail. But given the lack of confidence in the market today, the Fed felt that BSC’s bankruptcy could lead to something catastrophic. So its not as if BSC is “too big to fail”. Its more about avoiding the psychological straw that will break the camel’s back.

These comments lead me to the following conclusion: The Fed’s move to bail out BSC was really a symbolic gesture to calm everyone’s fears. They’re sending the message that the investment banks will be kept safe and there’s no need to pull your money out of them. By making these assurances, they hope to avoid a market panic, leading to runs on all the investment banks.

[ltokuda]

golfgal, I read the link you provided. I realize that there are different types of banks. But in this thread, you were talking about how the demise of BSC could lead to a run on our banks and us waiting for the FDIC to pay out. The FDIC insures commercial banks, not investment banks.

The FDIC insures commercial banks on the condition that these banks are heavily regulated. The Federal Reserve is authorized to be the lender of last resort to these commercial banks.

On the other hand, investment banks are not insured by the FDIC and are not regulated by the Fed. Under normal circumstances, the Fed is not supposed to lend money to investment banks. The bail out of BSC required a special vote.

I still haven’t seen a decent analysis of how failures in the investment banking industry will lead to the failure of the commercial banks. I agree that there are many ways the financial system could fail. But you could use the same argument to justify bailing out anything or anyone.

[ltokuda]

golfgal, I read the link you provided. I realize that there are different types of banks. But in this thread, you were talking about how the demise of BSC could lead to a run on our banks and us waiting for the FDIC to pay out. The FDIC insures commercial banks, not investment banks.

The FDIC insures commercial banks on the condition that these banks are heavily regulated. The Federal Reserve is authorized to be the lender of last resort to these commercial banks.

On the other hand, investment banks are not insured by the FDIC and are not regulated by the Fed. Under normal circumstances, the Fed is not supposed to lend money to investment banks. The bail out of BSC required a special vote.

I still haven’t seen a decent analysis of how failures in the investment banking industry will lead to the failure of the commercial banks. I agree that there are many ways the financial system could fail. But you could use the same argument to justify bailing out anything or anyone.

[ltokuda]

golfgal, I read the link you provided. I realize that there are different types of banks. But in this thread, you were talking about how the demise of BSC could lead to a run on our banks and us waiting for the FDIC to pay out. The FDIC insures commercial banks, not investment banks.

The FDIC insures commercial banks on the condition that these banks are heavily regulated. The Federal Reserve is authorized to be the lender of last resort to these commercial banks.

On the other hand, investment banks are not insured by the FDIC and are not regulated by the Fed. Under normal circumstances, the Fed is not supposed to lend money to investment banks. The bail out of BSC required a special vote.

I still haven’t seen a decent analysis of how failures in the investment banking industry will lead to the failure of the commercial banks. I agree that there are many ways the financial system could fail. But you could use the same argument to justify bailing out anything or anyone.

[ltokuda]

golfgal, I read the link you provided. I realize that there are different types of banks. But in this thread, you were talking about how the demise of BSC could lead to a run on our banks and us waiting for the FDIC to pay out. The FDIC insures commercial banks, not investment banks.

The FDIC insures commercial banks on the condition that these banks are heavily regulated. The Federal Reserve is authorized to be the lender of last resort to these commercial banks.

On the other hand, investment banks are not insured by the FDIC and are not regulated by the Fed. Under normal circumstances, the Fed is not supposed to lend money to investment banks. The bail out of BSC required a special vote.

I still haven’t seen a decent analysis of how failures in the investment banking industry will lead to the failure of the commercial banks. I agree that there are many ways the financial system could fail. But you could use the same argument to justify bailing out anything or anyone.

[ltokuda]

golfgal, I read the link you provided. I realize that there are different types of banks. But in this thread, you were talking about how the demise of BSC could lead to a run on our banks and us waiting for the FDIC to pay out. The FDIC insures commercial banks, not investment banks.

The FDIC insures commercial banks on the condition that these banks are heavily regulated. The Federal Reserve is authorized to be the lender of last resort to these commercial banks.

On the other hand, investment banks are not insured by the FDIC and are not regulated by the Fed. Under normal circumstances, the Fed is not supposed to lend money to investment banks. The bail out of BSC required a special vote.

I still haven’t seen a decent analysis of how failures in the investment banking industry will lead to the failure of the commercial banks. I agree that there are many ways the financial system could fail. But you could use the same argument to justify bailing out anything or anyone.

[ltokuda]

golfgal, I’m still unclear on how a BSC bankruptcy could bring down the whole banking system. You seem knowledgeable in this area so maybe you can provide more details.

Here’s my confusion: BSC is not a bank. Its not regulated by the Fed and under normal circumstances, the Fed isn’t supposed to be lending money to BSC or JPM. Roubini refers to this as the shadow banking system. In any case, we’re not talking about a real bank that’s threatening to go under. This is really about an investment firm that’s being bailed out.

My question is, how does BSC going bankrupt lead to a run on a real bank, like say, Bank of America? Is there some direct link where BSC’s demise would immediately bring down Bank of America as well? Do those kinds of hard links really exist? Or is the cause and effect more foggy or just plain unpredictable? Is this about saving the real banks at all? Or maybe the Fed is afraid that there will be a run on all the investment banks … so this is a way of assuring everyone that investment banks are still “safe”?

[ltokuda]

golfgal, I’m still unclear on how a BSC bankruptcy could bring down the whole banking system. You seem knowledgeable in this area so maybe you can provide more details.

Here’s my confusion: BSC is not a bank. Its not regulated by the Fed and under normal circumstances, the Fed isn’t supposed to be lending money to BSC or JPM. Roubini refers to this as the shadow banking system. In any case, we’re not talking about a real bank that’s threatening to go under. This is really about an investment firm that’s being bailed out.

My question is, how does BSC going bankrupt lead to a run on a real bank, like say, Bank of America? Is there some direct link where BSC’s demise would immediately bring down Bank of America as well? Do those kinds of hard links really exist? Or is the cause and effect more foggy or just plain unpredictable? Is this about saving the real banks at all? Or maybe the Fed is afraid that there will be a run on all the investment banks … so this is a way of assuring everyone that investment banks are still “safe”?

[ltokuda]

golfgal, I’m still unclear on how a BSC bankruptcy could bring down the whole banking system. You seem knowledgeable in this area so maybe you can provide more details.

Here’s my confusion: BSC is not a bank. Its not regulated by the Fed and under normal circumstances, the Fed isn’t supposed to be lending money to BSC or JPM. Roubini refers to this as the shadow banking system. In any case, we’re not talking about a real bank that’s threatening to go under. This is really about an investment firm that’s being bailed out.

My question is, how does BSC going bankrupt lead to a run on a real bank, like say, Bank of America? Is there some direct link where BSC’s demise would immediately bring down Bank of America as well? Do those kinds of hard links really exist? Or is the cause and effect more foggy or just plain unpredictable? Is this about saving the real banks at all? Or maybe the Fed is afraid that there will be a run on all the investment banks … so this is a way of assuring everyone that investment banks are still “safe”?

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