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Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

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Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#341

Post by imtringued »

kamaal wrote: post #313
34679 wrote: post #145

Earlier quoted context omitted.

There is at least one other way to look at it. These loans will primarily, if not exclusively, go to large financial institutions. Due to the wonders of fractional reserve lending, those institutions will get to loan out several multiples of the original $1.5T. Another way to look at it is that they've probably "printed" closer to $15T.

How does this work? Like any government can just print their way to prosperity? I mean you just magically put $15T into circulation? Won't this lead to inflation?

It depends on what it is used for. If banks have enough deposits to lend out $15T they might not find enough borrowers and therefore only a partial sum will reach the economy. Why do banks have so much trouble getting borrowers if the interest rates are negative? Because banks add additional fees on top. The fee must high enough to cover defaulting loans and the bank's expenses.

If you have ever taken a loan from a bank you are aware that you must prove to the bank that you are able to repay the sum. Based on the information they receive they will calculate the default risk and increase the interest rate accordingly.

Warning. Extremely simplified for ease of demonstration.

If you have a 50% default risk then someone else has to cover your missed payments. For every $10k you want to borrow the bank has to ask for another $10k in additional interest to cover the default risk. If your loan lasts 8 years that means $833 additional interest per year or around 8%.

Now, if you are a young poor person with a bad credit score then you might end up paying 5% on top of the actual interest rate. Negative interest: 5% - 0.1% = 4.9%. Positive interest: 5% + 1% = 6%. I'm glossing over compounding interest but the picture is clear. Negative interest rates are not going to meaningfully change the cost of borrowing money for the average person unless they get a mortgage that is backed by the value of the house. Meanwhile for rich people and companies who can get rates as low as 1% lowering the interest rate to -0.1% is almost like a cheat code. At those rates the money might as well be free.

Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#342

Post by imtringued »

munk-a wrote: post #254
tomp wrote: post #242

Earlier quoted context omitted.

Why would you forgive student loans? That way you reward incompetence. Instead, you should give each young person $300k - some would repay their student loans, others (who were more prudent with their choice of education) would have down-payment for a house or something... Forgiving just the student loans would create massive perverse incentives.

Because those student loans were made in bad faith to people who were too young to realize how badly they were being exploited and how meaningless their education was - for clarification I've paid off all of mine, and I'm still happy to see zero benefit out of this expenditure because it'll be just and help the economy.

You didn't meaningfully address the parent which was talking about rewarding this exploitation. Imagine you are a college and instead of investing into high quality education you try to get as many students to enroll through concessions even if it means that they cannot repay their loans because of bad job prospects. If students know that their loans will be forgiven then they might go for the "expensive vacation" college instead of the "boring nerd" college with those super strict professors.

Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#343

Post by imtringued »

spopejoy wrote: post #276
tomp wrote: post #242

Earlier quoted context omitted.

Why would you forgive student loans? That way you reward incompetence. Instead, you should give each young person $300k - some would repay their student loans, others (who were more prudent with their choice of education) would have down-payment for a house or something... Forgiving just the student loans would create massive perverse incentives.

> Why would you forgive student loans? That way you reward incompetence It's the opposite: it's a step toward removing the moral hazard that allowed predatory loans to be offered to students in the first place. The logical end-point is to get back to free or affordable tuition. > Instead, you should give each young person $300k Admirable suggestion, but how does that _not_ create perverse incentives to e.g. blow it a…

They could also decide to buy stocks and then the entire idea becomes meaningless.

Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#344

Post by imtringued »

sg47 wrote: post #252
tomp wrote: post #242

Earlier quoted context omitted.

Why would you forgive student loans? That way you reward incompetence. Instead, you should give each young person $300k - some would repay their student loans, others (who were more prudent with their choice of education) would have down-payment for a house or something... Forgiving just the student loans would create massive perverse incentives.

Just like the bank bailout?

The bank bailout was purely about liquidity. Over the long term the banks are going to repay the loans. Student loans are a long term problem. The only way you could fix it is by sending students back to college and force them to get a profitable STEM degree.

Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#345

Post by imtringued »

aguyfromnb wrote: post #160
asickness231 wrote: post #35

"inject 1.5t" by that do they mean a 1.5t panic bailout for wall street? how can we find 1.5t in the budget but no money for universal healthcare, student loan forgiveness, ubi etc. The markets wouldn't be so important if there were a safety net.

> inject 1.5t" by that do they mean a 1.5t panic bailout for wall street? Banking clients are demanding more liquid assets (ie cash) than banks have access to, so they are swapping treasuries for cash from the Fed. It's not like this is banking profits; would you rather the bank fail and you or your business or your employer lose everything you had there? Because that is also an option.

People always forget that the bank bailout is ultimately about people protecting their own bank accounts. If you dislike the incompetent banks then take your business to a bank you trust.

Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#347

Post by lisper »

aliswe wrote: post #328
lisper wrote: post #19

Earlier quoted context omitted.

I think you may have some basic misunderstandings of how money works in today's world. All money is debt, which is to say, it's a ledger entry that gives the holder a claim on future productivity. Whether that ledger entry is purely electronic or rendered onto a physical artifact (a coin or a bank note) is irrelevant. At the end of the day it's all just bookkeeping. The national debt is the money supply. The key to n…

That may very well be. So correct me where I'm wrong here. The Fed prints (or issues) currency, lends it to "the state" at interest. The state eventually pays at least a part of that money back. All I'm assuming is that if that paid money doesn't vanish, then the Federal reserve will have a Federal reserve containing that money.

No, the Fed lends money to banks, not to the state. Banks then in turn lend that money to borrowers who hopefully use it to fund productive activities which produce a profit that allows the loan to be repaid. It is actually a pretty cool system and it generally works very well. Being able to control the money supply as a simple matter of policy rather than, say, relying on the laws of physics to do it for you, is a very powerful economic technology. (But, of course, like any technology, it can be abused.)

The state borrows money by issuing bonds which it sells to savers. That money, like all money in a central-bank-based monetary system, ultimately comes from the Fed, but only indirectly. The Fed could loan money to the government directly by buying government bonds directly, but it usually doesn't. Instead, it buys bonds from banks who buy them from the government.

See:

https://www.thebalance.com/how-is-the-fed-monetizing-debt-33...

also:

https://www.investopedia.com/articles/economics/08/monetary-...

Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#348

Post by OGWhales »

jonahbenton wrote: post #303
cryptica wrote: post #267

Earlier quoted context omitted.

I don't agree that bank loans add any value to our modern fiat-based economy. It's possible that loans may have added economic value when money was based on a limited resource such as gold, but that economy was an entirely different beast from what we have today. Fiat is not simply a switch that one can flick off and on without anticipating negative flow-on effects; and yet that's exactly how governments have treated…

No. There are all kinds of discontinuities in money but this narrative is just an exhibition of ignorance. Even when "money backed by gold" was a slightly less completely inaccurate fiction than it is now, what people "knew" to be money was many, many, many different things, depending on where they were and what they did for work. Stories like this are like religious narratives, and "money backed by gold" is like the…

What are you talking about? I’d love to see you actually expand on this and explain what you mean instead of just pooping on it and saying people believe in fairy tails.

Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#349

Post by OGWhales »

missedthecue wrote: post #278
sg47 wrote: post #251

Earlier quoted context omitted.

Yes, because banks are over-leveraged. Regulations that kept leverage in check have been overturned by the GOP.

Completely and utterly false. Banks are at their lowest leverage of the last 40 years. This is verifiable hard data.

Can you help me find this data?

Re: Fed to inject $1.5T to prevent ‘unusual disruptions’ in markets

#350

Post by OGWhales »

imtringued wrote: post #345
aguyfromnb wrote: post #160

Earlier quoted context omitted.

> inject 1.5t" by that do they mean a 1.5t panic bailout for wall street? Banking clients are demanding more liquid assets (ie cash) than banks have access to, so they are swapping treasuries for cash from the Fed. It's not like this is banking profits; would you rather the bank fail and you or your business or your employer lose everything you had there? Because that is also an option.

People always forget that the bank bailout is ultimately about people protecting their own bank accounts. If you dislike the incompetent banks then take your business to a bank you trust.

There aren’t any
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