I don't buy Bakers nonsense. Banks can always get reserves if they have government bonds. This nonsense of taking interest bearing securities out of the private sector is because banks don't have any good paper to get reserves. So, they are letting depositors put the liquid cash into the banks, so the banks don't have to try to sell their crap onto the market and thus can continue to write hot checks. Reserves have absolutely nothing to do with lending other than allowing some to excessively lend. The crisis would have never happened if the banks weren't full of toilet paper and interbank loans based on the credit of the banks themselves. They blew the biggest credit bubble in history with very little in reserves. They invented their own ledger entries without the Fed. This is why when it blew up, it took so much Fed money to keep the whole game from turning over. The banks are liable for all of this money.

Paul wants to get rid of the Fed. If they lost their backing for their currency, they would be broke, because they are the issuer of the notes in circulation.

What I believe is the Fed has provided the means for the banks to buy bonds and t-bills, thus resecuring their balance sheets. I don't believe for one minute the Fed intends to pick up more than a couple hundred billion of this money. Baker needs to take an enema, because the Fed is concerned with the banks themselves and couldn't care less about the government, except to appease them enough to keep their charter. The Fed and Wall Street carry on a massive orgy while the rest of us miss out.

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Ron Paul is right on so many other issues, I can't imagine why he's blowing it on this one. He is 75, probably going senile.

He's never been any better than he is now.

He's a professional chair-warmer, the token member of the "loyal opposition" whose job it is to go to Washington and hold out hope to all you dumb sheep that there may still yet be hope in political solutions.

-- The entire problem with the Libertarian Party is that, in order to imagine that it would ever have a shred of a hope of political success, must sacrifice its principles (at which point it instantly ceases to be any semblance of small-"l" libertarian whatsoever).


You cannot vote your way out of this.

See sig.

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Well, since you ask, no Mr. Denninger, I will be neither man nor woman enough to admit such a thing. In our book, Carlos Lara and I had a similar proposal (namely for the shareholders of the Fed to just eat the capital write-down of the Treasury debt on the Fed’s balance sheet). Maybe we were horribly mistaken, but we sincerely thought it was a decent component of a strategy to restore sound money.
Denninger seems to think that a proponent of the gold standard and sound money–of all people!–ought to understand that we need some assets backing up our dollar bills, otherwise the Fed would have just been printing money. But what does Denninger think happened, say, in World War I, when the belligerents went off gold? Didn’t their central banks buy a lot of debt issued by their governments, to fund the war effort?
Or in the fall of 2008, is Denninger saying that it would have been inflationary and anathema to Ron Paul’s stated ideals, if Bernanke just literally handed over $1 trillion to investment bankers…but it would be OK if Bernanke instead handed over $1 trillion, in exchange for mortgage-backed securities that the market valued at the time at (say) $300 billion?
As with a lot of these things, the way to evaluate a non-optimal policy suggestion is to stack it up against a specified alternative. Yes, Ron Paul’s recent idea would be “inflationary” if the alternative would be a government running huge budget surpluses, so that the Fed could retire its holdings and shrink the monetary base over the next few years.
But that’s not at all what the likely alternative is. Rather, they are going to raise the debt ceiling, and Bernanke is going to print up another few hundred billion dollars out of thin air to absorb some of the new debt issued.
No worries though–those dollars will be backed up by IOUs that taxpayers will be forced to honor. Phew! I would hate for prices to go up on their own, without me being taxed too.

TNR's write up on Karl's blog.

genesis wrote..

Printing is just devaluation. Capital investment that returns more economic output than the debt costs is not bad, it's good. The problem comes when the debt provides no economic output increase as it is not investment, it's a handout or if you prefer "an entitlement."

I think I agree with this about 97%. I will add my 2 cents. First of all, all paper currency and as far as that goes, gold money, derives its monetary value in the satisfaction of contracts, namely the payment of debt. The Fed has only 1 bullet left and if it loses it, it becomes irrelevant. That bullet is that it can call the debts it has on its books from the banking system or the public at large. The entire banking system is a dual debt system. Simple math is that borrowers owe the banks more than are in the accounts, but the banks must keep enough money to satisfy their liabilities. Borrowers must provide the banks with enough payment to keep their property or their credit. The banks must derive enough out of that which is owed to them to stay afloat and meet the demands of their liabilities. I believe Gen agrees with this idea, which is the whole basis of the original complaint in this post.

Where I wish to bring out what KD quoted here is that a system of debt incomes does nothing for the capital base of an economy. True capitalism is taking your profit and putting it into productive assets, not stock market and real estate bubbles. The true capitalist is always broke, in that his bread is upon the water and his investments flow back to the workers in the economy through the capital goods industry and his own productive employees. What the capitalist doesn't spend himself, he employs.

This is not to say that debt it totally bad, but once an economy becomes financialized as the entire world has, money is used, not for capital investment, but for attempting to game the system for financial value. We are buying and selling what already exists. Financializing what already exists. The whole status quo is to keep the bubble game going, the leverage game and the debt game itself. No more is there real capital investment, only financial investment. The beat goes on for only one purpose, to count dollars and not to build economic welfare. We are stuck on an expressway with no exits. The whole game is debt.

"We are stuck on an expressway with no exits. The whole game is debt."

There are exits. But Govts will not take them until the people wise up. Politicians will take the path of least resistance and if its a choice of siding with the banks and bondholders or a clueless and disinterested public. Of course most will side with the banks and bondholders.

Even on this thread there is not a consensus (and in my view some nonsense posted). People for example criticise QE yet with high Govt expenditure it is a much better option than just financing the deficit with Treasury bonds.

The problem is high spending Govts and the people who vote for them not QE. But this is democracy. If people collectively decide to spend and finance with deficits then QE to indirectly finance the deficit is a much better option than no QE.

@ Mannfm11

"First of all, all paper currency and as far as that goes, gold money, derives its monetary value in the satisfaction of contracts, namely the payment of debt."

I'm unsure what this means. Paper currency surely derives its value only because it can purchase good and services. Either immediately or at a later date.

And isn't debt simply a means of transferring wealth. From the holders of the debt liability to the holders of debt assets.

And it would work well as a means of promoting an efficient economy if one group was not allowed to abuse their privileged position. As for example commercial banks do at times.

@ Bohemian

"Bernanke is going to print up another few hundred billion dollars out of thin air to absorb some of the new debt issued.
No worries though–those dollars will be backed up by IOUs that taxpayers will be forced to honor."

Barnanke is not printing dollars. Central bank credit is not printing dollars. If people on a site like this can even understand the difference between notes and coins and central bank credit there is little hope.

Govt deficits can be totally financed by commercial banks working together. This where the new money (credit) can come from ie commercial bank credit NOT central bank credit.

All QE does is reduces the interest burden on the taxpayer after the event.

And taxpayers will not be forced to honour these IOU's (as you call them). They will not be able to and do not ever need to. Taxpayer need to honour and pay interest on Treasury bonds though so converting this debt to Fed credit (now that the Fed profits are returned to the treasury) is a good not a bad thing.

As I posted earlier, this is simply a selective default on the Fed held bonds. It has little or no impact on liquidity, as this is effected by the assets repo'd from the commercial banks. The junk repo'd onto the Feds balance sheet will remain there, and the banks won't lend or leverage further, since there are no more ponzi schemes into which to lend, nor productive ventures for which to invest. The bad private debts are still to be flushed out.

This would only help the federal government continue its spending spree.

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Taxpayers need to honour and pay interest on Treasury bonds

Make me.

Brief Overview of Congressman Paul’s Record:

He has never voted to raise taxes.
He has never voted for an unbalanced budget.
He has never voted for a federal restriction on gun ownership.
He has never voted to raise congressional pay.
He has never taken a government-paid junket.
He has never voted to increase the power of the executive branch.

He voted against the Patriot Act.
He voted against regulating the Internet.
He voted against the Iraq war.

He does not participate in the lucrative congressional pension program.
He returns a portion of his annual congressional office budget to the U.S. treasury every year.


if you think ron paul isn't looking out for you, i don't know what to tell you.

Comedy Gold.

Why do we have to pay back money that was created out of thin air (which is akin to counterfeiting-- if we did it we would go to jail) by a private corporation who has never been audited or paid taxes?

that's the million dollar question.

@Kiwi

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Barnanke is not printing dollars. Central bank credit is not printing dollars.

I am very well aware of who is printing and who is telling the idiots to print.

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And taxpayers will not be forced to honour these IOU's (as you call them).

Yes they are. What do you think QE and TARP were about. Do you read anything here or is this your first post?

Floridasandy

Ron Paul voted to increase the deficit. It also sounds like you are blaming the Fed for money created by an act of congress. I call that misplacing the blame.

I like this RP proposal. I think it's a very good stepping stone to removing the Federal Reserve from the money creation process. Basically he is saying that taxpayers will not pay back interest to the bankers. This proposal DESTROYS DEBT.

Another new problem is that because of the "accounting change" at the Federal Reserve, the Federal Reserve can print money, buy things (like mortgages) from anyone (like friends in the finance industry) at full value (like the loan amount) and then take a loss on these assets and deduct the loss from the "profit" in the federal reserve that is supposed to be paid back to the treasury. This power effectively gives bankers the ability to steal right from the treasury to cover losses on stupid investments. The federal reserve enables socializing losses.

I think RP's goal here is start removing the assets from the federal reserve and get the printing power back where it belongs (congress).

Once congress has the power, then we taxpayers will be able to see who gets what from the printer (unlike now where we may never know).

This is also within the rule of law, is "easy" to implement and solves the "budget crisis" for the remainder of the Obama term.

We do not want Obama to pull an FDR confiscation type thing from the citizens. This is a confiscation of assets from the BANKERS effectively. A step in the right direction and I think a very good play from RP.

"We are stuck on an expressway with no exits. The whole game is debt."

There are exits. But Govts will not take them until the people wise up. Politicians will take the path of least resistance and if its a choice of siding with the banks and bondholders or a clueless and disinterested public. Of course most will side with the banks and bondholders.

----------------------

It is not until the people wise up, it is until the mass of people lose what they thought was theirs. Riots in Greece and still the Greek government refuses to default.

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This is also within the rule of law, is "easy" to implement and solves the "budget crisis" for the remainder of the Obama term.

And does absolutely nothing to address the spending issue while doing exactly what Karl said:

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Now you know why: He doesn't believe in stable prices and a stable and strong currency as he in fact is now suggesting intentional monetary inflation in an outrageous amount through this so-called "solution." This is exactly the sort of crap FDR ran in the 1930s - in fact, it's functionally identical to FDR's "executive order" gold devaluation!

@Wis/min. Sometimes you go for the Hail Mary game winning touchdown throw, sometimes you just just try for a first down and move the ball in the right direction.

"In a hyper simplified way, one can say that the hoax of the debt is a simple mathematical equation where two opposite factors cancel each other, just like |-10| = |+10|, whose result is 0."


Just like boom and bust cancel each other out. Just like a burst bubble cancels a bubble out.

Greenspan wrote that 1920's FED policy lead into the Great Depression. So the guy doubles down on the policy and doubles down on the 1930's financial crisis. The hoax was that Greenspan was The Maestro. He was The Charlatan.

The hoax was "growth leverage, growth leverage!" as Larry Kudow chortled during the housing bubble. It wasn't growth leverage, it was debt leverage. Ever the charlatan, Kudlow never mentioned the debt de-leverage that follows leveraging.
As Karl has mentioned, at 30 to 1 leverage, a 3% loss bankrupts you.

17% U-6 unemployment from "growth leverage", but Kudlow still has his job.

Catvation, Ron Paul's proposal creates money out of thin air. Printing backed money and then destroying that backing is the same as never having the backing in the first place. Wash, rinse repeat. Ron Paul could be the modern day John Law.

Catvation wrote..

I like this RP proposal. I think it's a very good stepping stone to removing the Federal Reserve from the money creation process.

Why would you like a proposal that advocates paying off the interest on non-existent debt created by big banks?

Bertdilbert, are you suggesting gold backed currency as the only solution? The options are:

1) Debt (to bankers) backed
2) Unbacked currency
3) Gold backed

You are right, this moves money from 1 to 2. 2 with congress in control is much better than 1. You can throw rocks at all of them I guess, that's fun, too.

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CNN Article wrote..

"We owe, like, $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay the interest to the Federal Reserve," Paul said. "We don't, I mean, they're nobody; why do we have to pay them off?"

Read that out loud until it sinks in.

Bohemian: this proposal destroys the debt to the bankers and does not pay it off.

To your second post: We DO have to pay it off. But if they willingly destroy the treasuries (what RP is suggesting) they are saying the debt is paid in full.

Catvation wrote..

Bertdilbert, are you suggesting gold backed currency as the only solution? The options are:

1) Debt (to bankers) backed
2) Unbacked currency
3) Gold backed

Or 4) ... Tell the Fed and BIS to***** off on everything. Eat it suckers. Iceland did. Gold backed is not the answer.

...5) The only solution globally is to (a.) Root out the bad banksters (b.) Exit the system.