8 April 2008

Analogies to 1929 abound according to some

April 6, 2008

Elaine Meinel Supkis

Time to read old newspapers about the Great Depression. The mirror this holds up to us today is nearly exact. The Federal Reserve is lending money to Wall Street SPECULATORS, not just to bankers! The sums they are handing out like candy to a big fat baby has shot upwards and is now nearly $40 A DAY and I bet, will be $100 billion A DAY next week until these pirates unload all the useless paper they hold. And the Fed has stationed officers in these pirate coves to see if they will cheat us. HAHAHA. Gads, laugh to death, eh? The Fed's fools will be thwarted, of course. Break out the Champagne, everyone. Party time with Miz Risky!

Wall Street brokerages borrowing $38.1 billion a day from Federal Reserve
Big Wall Street investment companies are stepping up their borrowing a bit from the Federal Reserve’s unprecedented emergency lending program.

The Federal Reserve reports Thursday that those firms averaged $38.1 billion in daily borrowing over the past week from the new lending program. That compared with $32.9 billion in the previous week and $13.4 billion in the first week the lending facility opened.

The program, which began on March 17, is part of the Fed’s effort to aid the financial system.

The Fed, for the first time, agreed to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed’s lending authority since the 1930s.

Time to review history: the Great Crash of 1929. It always pays to read old newspapers. More than one person has noticed how we seem bent on repeating the Great Depression, chapter and verse. What is really grim is that we are running on exactly the same time schedule, too. Last winter we saw global hesitation in trade the last week of February and the first week of March. This was explained away, at the time. But I said it was due to a near ending of the Japanese carry trade. This is the ultimate source of most global inflationary processes as the Bank of Japan keeps interest rates so low compared to Japanese inflation, it is literally giving away money but ONLY to exporters and foreign borrowing.

Between this source of infinite liquidity which feeds off of US red ink overspending and the continuing need in the US for funny money churned out by this process, we saw the investing world creating many, many bubbles in their efforts to park this easy lending where it would make infinite profits, effortlessly. The Great Depression was preceded by a similar process. The US was the world's biggest creditor nation and like Japan, was churning out huge loans...overseas as well as at home. The money this created flowed back into the US as Europe concentrated on building up their industries for imperial expansions while needing lots of US farm products to feed increasing populations. So the US farmer produced heroic amounts of produce which was shipped post-haste, to Europe.

When Germany finally gave up paying war reparations since they were cut out of world markets by England and France who were anxious to have maximum trade for manufactured goods. The US had already cut off our markets to this flood of English and French goods. This was necessary or we would have been de-industrialized by 1940 instead, we had an extra 60 years of industrial might before self-destructing today.

So on this grim note, let's look at past headlines in the New York Times:

January 18, 1929: LOANS TO BROKERS RISE $71,000,000
Reserve Bank Reports Total of $5,384,000,000 for Week, Only $10,000,000 Below Record. $90,000,000 DROP FOR CITY The Out-of-Town Institutions and "Others" Responsible for Gain-- Decline in Bills Discounted.

An increase of $71,000,000 in brokers' loans for the week ended Wednesday, the result entirely of expanded operations by out-of-town banks and the miscellaneous group of lenders classed as "others," was ...

March 6, 1929: Advising Caution.
The Watchful "Pools." Banks Withdraw Loans. Bonds Dwindling Fast. Brokers' Loans Are Reduced. Stocks for Bonds.

Copper stocks were in the lead early yesterday in a day of mixed trading in which there was alternate strength and weakness. News of the proposed retirement by the Anaconda Copper Company of its bonds and a strong metal market gave a filip to the metal issues, and most of this ...

Note that metal prices were up. Not gold, of course, this was government-regulated by England, France and the US. Why did the banks withdraw the loans?

Tightening of Country's Credit Causes One of Broadest Drops in Exchange's History. 90 ISSUES AT YEAR'S LOW Expectation of Drastic Action by Reserve Board a Factor in Liquidation. 5,862,210 SHARES TRADED Radio and International T.& T. Go Up Against the Tide--Wall Street Expects a Rally. STORK PRICES BREAK AS MONEY SOARS $25,000,000 Call Money Withdrawn. Decline of Last Seven Days. Wall Street Looks for Rally. Recessions From 1929 Highs. Radio Common Up 4 . TIGHTEST CREDIT IN 9 YEARS. Call Rate Goes to 14 Per Cent as Banks Withdraw Funds. Seasonal Increases in Demand. PRICES BREAK ON CURB. Liquidation Extends to All Parts of the List. CALL HUNDREDS OF MARGINS Brokers Issue Demands by Wire-- Say Accounts Are Satisfactory. CHICAGO BORROWERS AIDED. Corporations and Individuals Lend to Banks and Brokers. COAST WITHDRAWING FUNDS. Bankers Say Movement Is to Meet Quarterly Dividends.

Tightening of the strings on the country's supply of credit, a development foreshadowed last week, but not considered seriously by speculators in the stock market, brought about yesterday one of the sharpest declines in securities that has ever taken place on the Exchange.

The rising use of Federal Reserve buying of Treasuries and then reselling bonds ended up feeding Wall Street speculators. The differentials between European, South American and US money values was used in virtually the same way it is being used today only the currency in trouble was not the dollar but the POUND. Britain's eternal imperialist wars was bankrupting the nation. No matter how much they exported goods, the cost of imperial overreach coupled with the tremendous debts from the Great War was finishing off the British economy. The Brits don't think about the 1929 Great Depression as this singular thing. This is because their Great Depression began in 1919! They were in a continuous Great Depression. One that ran all the way until the late 1950's. Indeed, the war production of WWII was the only ray of light in that long, dark tunnel as yet another world empire slid off the cliff and into the dark deeps of total economic ruin.

Let's go back to the headlines: The Federal Reserve began to tighten up the money supply by raising interest rates in order to stop first, the housing bubbles in Florida and California [hahaha]. But this brought in a flood of gold from England and pounds were pounded by the international traders. The high interest rates attracted money from overseas which poured in and this helped fuel our stock markets. The Fed was new at this game and didn't understand quite how they were digging a channel for more money to flood into the system rather than building dikes to keep out the flood of money seeking some way of gaining ground.

In Attack Over Radio, He Says It Wields Autocratic Power Over the Stock Market. PREDICTS FIGHT TO CURB IT Says of 500 Industrialists He Queried, 463 Replied and Only 12 Backed Its Policy. WANTS 3% BANK RATE And the Restoration of $700,000,000 Drawn From Market--Upholds Mitchell Action as Patriotic. Predicts Nation-wide Fight.

Suggests Three Steps Now. ASKS BOARD TO KEEP HANDS OFF BUSINESS Text of Mr. Durant's Speech. Submitted Question to Leaders. First Real Test in 1931 Called Money Terms Outrageous. Charges Creation of Panic. He Quotes Authorities. Wants 3 Per Cent Bank Rate. Sees Board Alone Responsible. Sees Move to Destroy Credit. Hails Foes of Board's Policy.

William C. Durant made an outspoken attack last night on the Federal Reserve Board for its efforts to curb speculation through restriction of brokers' loans.

As usual, the brokers wanted infinite money. Every time the Fed or the government tried to restrict endless lending in the new carry trade system that WWI created with the huge financial overspending by the three major European empires, this infuriated speculators. They LOVED to speculate using cheap money from this massive bubble of military overspending on wars! They needed more, not less, wild war money debts flowing like crazy though the banking systems of the world! As with today, any attempt to slow down or stop this madness causes great fury. President Carter is still remembered as a 'bad' President because he managed to slow down the financial collapse of our banking system due to too much red ink flowing. Reagan is regarded as a great President for resuming this monstrous super bubble system.

Reserve Bank Lends Indirectly on Security Collateral. PROFITS IN SUGAR. Suggestion That the Consumer Pay $134,000,000 More Is Not Well Taken. Improving the Parks.

Inflation redoubles because the financial speculators were rewarded with a resumption of free funny money. The stock market took off like a rocket. So did other systems in pretty much the same way as today. Gold was totally government controlled in price but NOT the pound! So speculators began to buy British gold at the government set price and then move it to the US where the dollar was stronger so the same gold at the same 'price' bought more. And they bought stocks.

Bank of America Declares Continued Inflow From LondonIs Undesirable.SHIFT IN AUTUMN FUNDSNew York Will Handle Most of the Seasonal Financing, BankReview Predicts.

Efforts of the Bank of England to stop the flow of gold from London, which movement, since mid-June, has amounted to about $150,000,000, and to improve the position of sterling exchange in foreign markets are likely to receive some support from...

Note that by the end of September, London had to take measures before the entire Treasury was emptied out. Indeed, their solution was the exact same one the US used in identical circumstances: they decoupled gold from the pound. The effort to strengthen the pound was similar to the US efforts: rising interest rates. Note that all stock market bubbles pop due to rising interest rates. The Dot Com bubble, for example, was popped this way. The present bubble was popped when rates rose from 1% to 6%. It is now being dropped like a proverbial rock, of course. In order to restart wild speculative buying.

October 6, 1929: Sharp Week-End Recovery in Stocks, Trading Large
Sterling Holds Strong. The recovery in prices, whose failure to appear during the earlier days of the week had caused some consternation in Wall Steet, came yesterday. The day's advance of active individual stocks ranged from 5 to 10 points, with even larger gains in a few closely held stocks.

Even though it was obvious that the entire banking system of Europe was under tremendous stress because the Germans could not pay their war indemnities, the status quo flow of funds was reasserted thanks to the US and England cooperating to strengthen the pound. Just like this last fall when the G7 worked very hard to keep the status quo running a little longer, so it was then. Too many people were sucking at the teats of the System for them to let it dry up. They wanted desperately for the British Empire to continue its rule of the world banking systems. It wanted to keep the System flowing effortlessly even if it meant taking buckets of red ink and hauling it uphill.

October 24, 1929: Where the Blow Was Hardest.
Margin Calls. Causes of the Day's Decline. Will the Market Be Supported? Back to Work. Railroad Shares Suffer. "It's An Ill Wind."

In the most sweeping and farreaching decline of the year, and one which was made on a tremendous volume of liquidation, the market crumbled yesterday afternoon, most stocks breaking through the "old low prices" of the October break and some to the year's minimum points

Just like this year: stocks fell in the Fall to the same point where they were before the big debt-fueled run up.

Great Drop in Brokers' Loans Expected as Result of Break in Stocks. FUNDS FREED FOR BUSINESS Economists Believe Large Supply of Cheaper Money May Stimulate Hesitant Industries.

With the collapse of the stock market last week, in the opinion of bankers, the chief factor of uncertainty in the credit outlook was removed. Attempts earlier in the year to obtain the release of some part of the billions of dollars tied up in speculative loans had been frustrated by the irresistible bull movement of securities.

Incredible, isn't it? The EXACT same solutions used back then are being used today! Exactly! How can anyone miss this? Note how they talk about 'irresistible bull...securities'. The demand for more and more and more loans drove up interest rates. The Fed decided to fix this mess by using every tool possible to make lending cheaper. But back then, this failed. Just like it will fail today.

I went to the biography of the Federal Reserve Chairman from the Great Depression, Mr. Eugene Black.

History of the Atlanta Federal Reserve Office:
The Sixth District economy was building up steam in 1928. Credit demand was strong, and rediscounts surged to $1.3 million that year, easily the most credit activity the Bank had seen since 1921. Interest rates moved up rapidly between February and July, as the discount rate was raised from 3.5 percent to 5 percent, and rates on commercial loans went as high as 6 percent. Rediscounts continued to rise in 1929.

Reining in stock speculation
Concern spread in 1929 about bank lending to stock speculators. A rush among investors to capitalize on rising stock prices was driving up interest rates and making it difficult to stop credit from flowing to Wall Street. The Board in Washington wanted member banks to restrict their lending to local businesses and not “export” money to New York, especially if they were rediscounting with the Fed. Even early in the year, the Fed wanted to avoid financing the stock speculation of 1929.

Chairman Oscar Newton, the Mississippi banker who had succeeded Joseph McCord in 1925, noted that Sixth District member bank loans to New York brokers and dealers dropped from $28 million to $22.5 million between October and December 1928. The Atlanta Bank evidently succeeded in persuading member banks to stop such lending because Black was able to report in August 1929 that only two member banks that were borrowing from the Fed were lending on call in New York, and then only a total of $334,000.

Jitters in Florida

As early as May of that year, Black was urging caution in extending credit to member banks and sounding rather unlike Wellborn: “We are giving close study to credit conditions in our territory and are endeavoring to protect the bank in all lendings to member banks. . . . In the case of any bank in a weakened or extended condition, we are protecting our bank by the requirement of additional collateral. In the case of some banks we are declining any rediscounts because of the impaired capital of such banks. . . .”

Florida remained particularly touchy. The failure in July of a bank in Tampa set off bank runs in Gainesville and St. Augustine and led the banks in St. Petersburg and Orlando to invoke their right to require 60-day notice for withdrawals from savings accounts. Black and his deputy rushed to the Tampa area with $6 million in cash to turn back runs on two member banks there in October.

Such activity would become all too common before the Depression hit bottom, but in 1929 it was novel and experimental. About the efforts to slow savings withdrawals, Black noted, “We are watching this drastic measure with these banks in an effort to learn whether such a step can be successful with a commercial bank.” There certainly was concern about what Black called “general unrest among the depositors in a large number of Florida banks,” but there was no reason to see the problem as anything other than local and temporary. After all, the trouble in Florida stemmed from the appearance that spring of the Mediterranean fruit fly. To fight the fruit fly, the Florida Citrus Exchange had slapped an embargo on fruit and vegetable shipments, which left many growers unable to repay loans.

Since helicopters didn't exist nor did computers, Black had to use the trains, He couldn't call on the phone and tell them to manufacture money on the spot by adding a bunch of numbers to their bottom line. Back then, the Fed was still paranoid about money being seen as non-existent. They had to show some paper, at least. And handle that with greatest care. The alterations they made a year earlier to the standard dollar bills was to eliminate much of the text on the bills that talked about the various laws and regulations concerning the manufacturing and handling of paper fiat bills. It was eliminated, in other words. And people noticed this. Suspicious people would look at the smaller, newer bills and think, 'Hell, there isn't any of that stuff about Section 23A by the OCC on this bill.' Heh. Actually, they did notice. And this was a worry for the Fed. When money began to vanish as all the loans to all the speculators vanished in a tsunami of bankruptcies beginning in the Fall of 1929, people clung to the paper bills since at least, they were REAL. Unlike loans that were totted up on some ledger. And they bought more and more goods as deflation spread its dark negative energy wings.

Here is a Wall Street Journal debate back when rising interest rates broke the crazy Dot Com Bubble markets:

April 10, 2000: Margin Calls: Should the Fed Step In?
Yes, It may Avert Disaster

By Robert Shiller

The stock market is in its most dramatic boom ever. Despite last week's declines in tech stocks, the Standard & Poor's composite price-earnings ratio (real prices divided by the 120-month average of trailing real earnings) stands at 46. Until the present boom, the highest it had ever been (the data go back to 1871) was 33, in September 1929 -- the month before the crash. The dividend yield on the Standard & Poor's index stands at 1.1%, the lowest ever. The previous low was 2.6% in January 1973, just before the 1973-74 crash. Margin debt is soaring; it has increased 87% in the past year.

In the midst of this record-breaking boom, the Federal Reserve Board remains silent about the speculative level of the market, neither commenting that the market is too high nor using its powers over margin requirements to dampen the markets. This inaction is unfortunate. Distortions of saving and investing behavior, driven by the public's illusion of stock-market wealth, are rampant, and the risks of economic dislocations and massive wealth redistribution are very serious if the market continues to soar and then crashes.

There are, of course, some who assert that the market is rationally high because of new technology that makes the outlook for future corporate profits very bright. But people have hailed "new eras" before -- in 1901, they cited the formation of giant corporations that would supposedly produce economics of scale; in 1929, it was electrification, chain stores and the spread of automobiles; in 1973, advancing productivity and technology. All of these "new eras" turned out not to be so revolutionary after all, and odds are today's market won't be any different.

This economist was begging Greenspan to intervene and stop the NASDAQ collapse. He is correct to note that margin debt was taking off. Once upon a time, our regulators forbade such margins because they correctly saw that it was going to cause another bubble/bust like the Great Depression. But discontent with this severity meant it was loosened greatly to the vanishing point and of course, instantly, we got a massive margin-fed bubble. Once the game of using debts to place bets at the Wall Street casino took off, it doubled every year, a classic sign of a bubble. Let's look at Mr. Bartlett's side of this debate:

April 10, 2000: No, Meddling Makes Things Worse

By Bruce Bartlett
Federal Reserve Chairman Alan Greenspan has expressed concern about the level of margin debt, which has rocketed upward since October. In February it hit $265.2 billion, up 45% in just four months. Anecdotal evidence suggests that much of this increase came from increased borrowing through online brokers and was channeled into the high-flying Nasdaq. As long as that market kept rising, it was a win-win situation for everyone. Investors achieved higher gains by leveraging their investments, while online brokers made much of their profit from margin loans.

Congress in 1934 gave the Fed power to control initial margin requirements, in the belief that margin calls had been largely responsible for making the 1929 stock market crash so severe. At that time margin debt equaled 30% of the market's value. Between 1934 and 1974 the margin requirement was changed 22 times. But for the past 26 years it has been fixed at 50%, meaning that investors may borrow no more than half the purchase price of equities directly front their broker. (The margin requirement has been as high as 100%, meaning no margin debt at all was allowed.}

This guy wanted no controls or requirements. As did many of the money bags handing out goodies to politicians. When the Dot Com bubble burst, they all went howling to Greenspan to save them. And Greenspan also wanted to reward Bush, a family buddy. So he waited in the wings until Bush took the oaf [sic] of office and then began to shower money down upon their heads. The interest rates on loans collapsed. Taxes on earnings in stocks nearly vanished. Money flowed into the system at a crazy rate. 9/11 simply was viewed as a great excuse to extend and deepen this rescue operation. Astute people such as a number of us online bloggers, warned that this would be very dangerous and would spawn many bubbles that would grow out of control.

As usual, we were right. So let's go back to today's news:

Federal Reserve staff move into offices of investment banks to monitor activities
The US Federal Reserve has sent staff into some of Wall Street’s biggest firms and its New York branch is gathering evidence on key traders’ activities as America’s central bank raises its scrutiny of risk to an unprecedented level.

Fed staff have set up shop in Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns to monitor their financial condition just days after Henry Paulson, the US Treasury Secretary, proposed that the Fed become the financial industry’s “risk czar”.

This is the first time in more than a decade that the Fed has put staff in securities firms and is a response, in part, to its decision to extend to investment banks the “discount window” of cheap loans traditionally offered only to the commercial banks. The Fed argues that if it is to act as lender of last resort to the securities firms, it should keep a closer eye on their activities.

HAHAHA. The simple action of dropping interest rates to Bank of Japan levels isn't enough! Now, the Fed itself is lending not to banks but directly...to the speculators!!!! AAARRRGHHH. This is pure, total insanity. They are parking agents in brokerages to insure what? That not ALL this loot is flowing directly into the greedy mouths of the pirates? No, it will take a pious round about route! HAHAHA. Gads! I think I will go mad. Grrrr. Note how pirate Henry Gollum Sachs Paulson suggests the Fed be a 'risk czar.' HAHAHA. Like in, 'YOU move OUR risks to the American People!'

As I keep saying, all these 'rescues' are not for you or me. They are to keep a flotilla of pirate ships afloat. I just learned that Hill and Bill Clinton used offshore pirate coves to enrich themselves and evade taxes. We had so many pirates running for President this year, we shouldn't have given them all American flag pins, we should have demanded they wear eye patches and a dead parrot!-

And how is Bernanke going to 'keep an eye' on these desperadoes? Eh? Note, he doesn't say. Do the agents sit in on phone calls? HAHAHA. HAHAHA. Laughing to death hurts. Are they sitting the meetings like vultures, Watchers, sitting there, behind the chairman, taking notes and glaring? HAHAHA. Right. I can picture that.

Nope. Otherwise, they would hire me. I could look into the books. I love doing that. And poke in the desks and play 'spy for the CIA' as I did as a child when I used to practice the dark art of becoming invisible and walking through walls. Actually, if a child is silent, it is easy to be invisible to adults. Except if you stare at them like a vulture. Then they jerk and look over. Heh.

Here is a recent speech from Mishkin of the Fed.

Governor Frederic S. Mishkin
At the Princeton University Center for Economic Policy Studies Dinner, New York, New York
Starting in the 1970s, the economics profession began to recognize that the evolution of economic activity and inflation--and hence the design of optimal monetary policy--depends crucially on how households, firms, and financial market investors form their expectations regarding the future course of policy.3 This recognition of the central role of expectations in macroeconomic outcomes led to the discovery of the time-inconsistency problem, a concept that sounds highfalutin but is actually quite intuitive.4

This problem arises whenever the possibility of short-run gains creates a temptation to renege on an existing plan, even though following that plan would produce a better outcome over the longer run. In essence, if a good long-run plan will not be followed consistently over time because the short-run gains of deviating from the plan are too tempting, then that plan is said to be time-inconsistent. In such a setting, the time-consistent policy is to reoptimize every period, whereas the preferable alternative would be to establish a firm commitment to the optimal long-run plan.

To take a common example that illustrates the time-inconsistency problem, someone may make a New Year’s resolution about starting a diet. At some point thereafter, however, it becomes hard to resist having a little bit of Rocky Road ice cream, and then a bit more, and pretty soon the weight begins to pile back on.

The time-inconsistency problem arises in the context of monetary policy, because there is a temptation to give a short-run boost to economic output and employment by pursuing a course of policy that is more expansionary than firms or workers had initially expected.5 Nevertheless, if the economy is already at full employment, then this boost is merely transitory: As economic activity rises above its sustainable level, wages and prices begin to rise, and the private sector's inflation expectations start to pick up. Of course, the central bank must eventually remove the policy stimulus to avoid a continuous upward spiral of inflation. At that point, economic activity drops back to a sustainable level. However, inflation settles in at a permanently higher rate because prospects of future monetary expansions become embedded in expectations, and hence in wage and price adjustments, and the higher average inflation rate generates undesirable economic distortions.6 Thus, failing to address the time-inconsistency problem poses the risk of ending up with a higher average inflation rate, with detrimental long-run consequences for economic efficiency and the general standard of living.

As my mother often told me when I was growing up, "The road to hell is paved with good intentions." Similarly, discretionary monetary policy, even though well intended, can lead to poor economic outcomes.

Well, he comes close to talking about the Outer Darkness. The easy road suddenly turns and becomes extremely painful, you know. This 'time-inconsistency problem' is funny as hell. Always, the politicians want the easy road. They want money to flow. They hate time which isn't on their side. They are anxious about the next election! They need lots of pirate loot. Note how this foolish Fed man worries that wages will rise. Since when? The unions are dead. Wages have been FALLING and falling for many years even with the fake inflation statistics used by the fake Federal Reservists.

The Fed has no 'long range plans.' If they did, they wouldn't be making one bubble after another or making the Super Bubble, would they? They would talk about the budget deficit AND the trade deficit AND the dollar's woes all the time, not nearly never. They NEVER connect ANY of the things we are doing wrong when discussing ANY plans for ANY future! They just refuse to do this. This is why they can't talk about inflation and how cheap prices is directly connected to free trade, not the Fed's interest rates. And how this is connected to the collapse in wages, not inflation in wages. Wages are falling through the floor in nearly all previously unionized industries. The dire effects are not yet felt due to the remaining union members who are rapidly being bought out. Their economic distress still isn't huge only because they are getting huge payouts. But in 10 years, there will be no workers in the US except at the lowest possible wages.

THAT is what is the cause of Great Depressions: workers can't buy anything and money is dear. And everyone is denied loans because of low wages, not the reverse. And this is our future, alas, thanks to our government working with PIRATES to destroy the American Dream. Thanks a trillion, guys.

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