wmartin@brl-tgr.ARPA (Will Martin ) (05/30/85)
I just watched the PBS "Frontline" program on the Continental Illinois Bank debacle and federal bail-out. (This was aired locally [St. Louis] on Tuesday, 28 May.) It was an interesting and informative program, but there was one aspect that was infuriating. Repeatedly, throughout the program, it was stated that Continental was saved by Federal intervention (and extraordinary measures taken to protect the depositors; more than was done for those at Penn Square Bank in OK, for example) in order to prevent a "World Banking Crisis". This phrase was repeated over and over. It was never defined. What, pray tell, would happen in a "World Banking Crisis"? What possible scenarios would occur? (I assume that more than one possible situation might evolve.) Just how would this affect the small depositor in the US, those covered by FDIC? (Yes, the FDIC can't handle a mass failure of many banks, but how many would actually "fail" versus just having to cut executive perks and turn off the fountain in the lobby?) Are we speaking here of a repetition of the '29 crash? Or would the stock market not be directly involved? (If a general bank failure would dry up credit sources, of course the stock market will drop like a rock, but that's an indirect effect...) I mean, does a "World Banking Crisis" mean mobs rioting in the streets and mass starvation, or does it mean that a few hundred people now earning $350,000/yr will lose their jobs? (In the latter case, I might be in favor of having one...:-) Will Martin USENET: seismo!brl-bmd!wmartin or ARPA/MILNET: wmartin@almsa-1.ARPA
jcp@brl-sem.ARPA (Joe Pistritto <jcp>) (05/30/85)
In article <11154@brl-tgr.ARPA> wmartin@brl-tgr.ARPA (Will Martin ) writes: >I just watched the PBS "Frontline" program on the Continental Illinois Bank >debacle and federal bail-out. (This was aired locally [St. Louis] on Tuesday, >28 May.) It was an interesting and informative program, but there was one >aspect that was infuriating. Repeatedly, throughout the program, it was >stated that Continental was saved by Federal intervention (and extraordinary >measures taken to protect the depositors; more than was done for those at >Penn Square Bank in OK, for example) in order to prevent a "World Banking >Crisis". This phrase was repeated over and over. It was never defined. > >Will Martin > The two main reasons that Continental was such a big deal was not its depositors (due to restrictive Illinois banking laws, it was limited to a small number of deposit holders), but the sheer size of its loan interactions with other money center banks. When it failed, Continental Illinois was (I believe) the nations 7th largest bank, (which would make it about 40th in size in the entire world!). It was the largest bank outside the money center catagory, and had huge commercial loan accounts with other banks, including such well knowns as Chemical Bank, Citibank of New York, and Chase Manhattan. At the time, the South American debt crisis was putting a good deal of pressure on these banks, declaring the Continental loans non-performing at the same time could have forced one of these other banks to the brink of insolvency. (Then the stock market crashes, and millions of people get laid off, etc., etc.). You really don't want to think about a failure by two or more of the top 10 banks... It was much cheaper to 'head the problem off at the pass', by reorganizing Continental, even spending some federal money to do so, (its lots cheaper than unemployment...). In most other countries, the central banks are either nationalized or government supported, so equivalent mechanisms exist there. All in all, I'd rather have the Feds keep an eye on things WITHOUT running the banks, unless things get too bad and start to fall over a cliff. On the other hand, my home state of Maryland just had a banking crisis with its Savings and Loan institutions, without federal intervention, by the state government. Mighty inconvenient for the depositors though, who were limited to withdrawing $1K/month for a while. Screwed up a lot of real estate closings, etc., and you STILL can't pass a check from a Savings and Loan here. Makes me glad I keep my money in real banks... -JCP-
dgh@sun.uucp (David Hough) (06/08/85)
In article <11154@brl-tgr.ARPA> wmartin@brl-tgr.ARPA (Will Martin ) writes: > >What, pray tell, would happen in a "World Banking Crisis"? I think when the administration speaks of a World Banking Crisis they really mean a domestic political crisis severe enough to change the party in power at the next election. Another Great Depression would certainly be sufficient but hardly necessary. Another expression of the same sentiment is "socialism for the rich, free enterprise for the poor", i. e., bailouts for Chrysler and Lockheed and New York City but not for numerous more deserving smaller organizations. David Hough
steiny@idsvax.UUCP (Don Steiny) (06/09/85)
> > In article <11154@brl-tgr.ARPA> wmartin@brl-tgr.ARPA (Will Martin ) writes: > > > >What, pray tell, would happen in a "World Banking Crisis"? > > I think when the administration speaks of a World Banking Crisis they really > mean a domestic political crisis severe enough to change the party in > power at the next election. Another Great Depression would certainly > be sufficient but hardly necessary. > > David Hough *** Maybe. I think that what recently happend in the Midwest where the governer had to declare a bank holiday show that there is a psychological aspect to banks too. A banking crisis would occur if people lost confidence in banks and tried to take all their money out. The "world" aspect of the whole thing can be explained by a hypothetical example. The non-hyphothetical part of the example is that Bank of America, the largest bank in California and therefore one of the larger in the world, has a substantial portion of its equity in loans to Mexico. Suppose that some internal situation in Mexico brought a government to power that says, "FO&D," to B of A? People who have their money in B of A might reason that since a substantial portion of B of A's money was gone forever, they would not be able to pay back all of the money that had been deposited, and the money would be allocated on a first-come first-served basis. Naturally, a person following this line of reasoning would want to get his or her money out immediately. B of A would not be the only bank affected. Sure the money is federally insured, but where is the Federal government going to get the money? Borrow it from B of A? I do not pretend to understand how the government can insure against hundreds of billions of dollars of defaults (a worst case, where several countries default). If the explaination is too complicated, I doubt many people will buy it. Money is information and banks are information transmitters and recievers. The system of exchanging money for goods and services and using capital to provide those goods and services is a vast network extending over the whole world. If the banking component of the system ceases to function, the whole system will cease to function, sort of like what happens if the power supply fails on a Vax. It could be like the depression, only worse because there are more people now. Note that the policies of the current administration are modern day brinksmanship. By keeping the interest rates high in the US, inflation has been subdued. It is pricy for the US, because it makes US goods and services more expensive than foreign goods and services and therefore discourage foreign countries from buying US goods and services and encourage US citizens to buy foreign goods and services. It is pricy for countries that owe the US money because the interest rates have increased on their loans. Kinda of sneaky when you think about it. Loan someone money and then increase the intrest. Such policies decrease standard of living of the debtor nation and decrease the stability. "When you ain't got nothing, you got nothing to loose." From one perspecitive it seems like the overall policies of the administration are slightly imperialistic. When they scream of communist takeover, they are afraid that someone will get into power that will default on the loans. The people of the country are in a position where they have to give most of their money to the US and they face the threat of military intervention if they do not. The intervention is disguised as "saving them from communists," of course, but to the people on the battleground, the difference is inconsequential. On the other hand, if interest rates came down dramatically, most economic models predict that inflation would rise. It seems that some pitfalls are built into the system. If I were given magical power to command everyone to do what I tell them to fix everything, I have little idea what I would do. The one thing I would look at first is increasing the prosperity of debtor nations. pesnta!idsvax!steiny Don Steiny - Computational Linguistics 109 Torrey Pine Terr. Santa Cruz, Calif. 95060 (408) 425-0832
brett@ucla-cs.UUCP (06/15/85)
> > B of A would not be the only bank affected. Sure the money > is federally insured, but where is the Federal government going > to get the money? Borrow it from B of A? I do not pretend > to understand how the government can insure against hundreds > of billions of dollars of defaults (a worst case, where several > countries default). If the explaination is too complicated, > I doubt many people will buy it. From my understanding of the matter, the Government's insurance means the bank must spread their investments around in certain fixed ways. Insurance comes with certain strings attached, its not just free. Presumably this spread decreases the domino effect. Insurance is just that, insurance. For the most part if insurance companies had to suddenly pay off on all policies they would be bankrupt. Acturaries weighs the costs and risks for insurance companies. > Note that the policies of the current administration > are modern day brinksmanship. By keeping the interest rates > high in the US, inflation has been subdued. Not correct. Banks are being cautious about lowering their rates too low. When the prime is lowered too low (and if at some later time it shoots up) the banks could get stuck with too many low interest non-profitable loans. Thus, the prime will come down slowly, as it has. > It is pricy for the US, because it makes US goods and services more > Expensive than foreign goods and services and therefore > discourage foreign countries from buying US goods and > services and encourage US citizens to buy foreign goods > and services. It is pricy for countries that owe the US > money because the interest rates have increased on their > loans. Kinda of sneaky when you think about it. Loan > someone money and then increase the intrest. > I dont really understand this. Anyone on the net want to explain this to me? > On the other hand, if interest rates came down dramatically, > most economic models predict that inflation would rise. How dramatically? I've heard of interest rates being affected by inflation, not the reverse. Which economic model? -- Brett Fleisch University of California Los Angeles 3804 Boelter Hall Los Angeles, CA 90024 Phone: (213) 825-2756, (213) 474-5317 brett@ucla-cs.ARPA or ...!{cepu, ihnp4, trwspp, ucbvax}!ucla-cs!brett -------------------------------------------------------------------------
steiny@idsvax.UUCP (Don Steiny) (06/22/85)
> > > Note that the policies of the current administration > > are modern day brinksmanship. By keeping the interest rates > > high in the US, inflation has been subdued. > > Not correct. > > Banks are being cautious about lowering their > rates too low. When the prime is lowered too low (and if at > some later time it shoots up) the banks could get stuck > with too many low interest non-profitable loans. Thus, > the prime will come down slowly, as it has. > The banks have to borrow their money from the Federal Reserve. The interest rates are under the control of the Federal Reserve, specifically Paul Volker, they have been for many years. > > > > On the other hand, if interest rates came down dramatically, > > most economic models predict that inflation would rise. > > How dramatically? I've heard of interest rates being > affected by inflation, not the reverse. > Which economic model? > > Brett Fleisch The model is called "Keynesian Economics" and its dirivitives. It is named after John Maynard Keynes, a British economist who influenced Roosevelt to institute the policy of deficit spending by the government to break up economic stagnation. Except for the more recently mediaized "Laffer Curve," I know of no other model that is as widely known and influential. Richard Nixon said "I am a Keynesian," the one thing he had in common with Roosevelt :-). If you read the business section of your local paper you will see an occasional report on the money supply, M1. This is the money in checking accounts and cash. Just this morning the San Francisco Chronicle reported that M1 was growing beyond the Federal Reserve's target. Supposedly, when M1 gets very large, inflation happens. It is the old "printing money to pay debts" thing. To prevent M1 from getting too large, the Federal Reserve *increases interest rates*. For that reason, when the business section reports a giant increase in M1, it usually causes a stock drop because that means that there will be an increase in interest rates. pesnta!idsvax!steiny Don Steiny - Computational Linguistics 109 Torrey Pine Terr. Santa Cruz, Calif. 95060 (408) 425-0832
brett@ucla-cs.UUCP (06/24/85)
> > The model is called "Keynesian Economics" and its dirivitives. > It is named after John Maynard Keynes, a British economist who > influenced Roosevelt to institute the policy of deficit spending > by the government to break up economic stagnation. Except for > the more recently mediaized "Laffer Curve," I know of no other > model that is as widely known and influential. Richard Nixon > said "I am a Keynesian," the one thing he had in common > with Roosevelt :-). Hmmmm. It's funny how quickly I forgot all the stuff I took freshman year in college! > > If you read the business section of your local paper > you will see an occasional report on the money supply, M1. > This is the money in checking accounts and cash. Just this > morning the San Francisco Chronicle reported that M1 was growing > beyond the Federal Reserve's target. Supposedly, when M1 gets > very large, inflation happens. It is the old "printing money > to pay debts" thing. To prevent M1 from getting too large, > the Federal Reserve *increases interest rates*. For that reason, * when the business section reports a giant increase in M1, it usually * causes a stock drop because that means that there will be * an increase in interest rates. * Hmmm, I suppose you are right. Of course, the Fed manages the "discount rate", which is the rate member banks are allowed to borrow money from the Fed at. Of course this effects interest rates, as you said. However, banks have been slow in dropping the prime. So, I would argue it is correct to say the government exercises policy which effects interest rates. The statement indicated with the '*'s does not always hold true, as you must well know though. When an increase in M1 is expected (and is on target with the Fed's growth rate) it in many cases does not trigger a DJIA drop. -- Brett Fleisch University of California Los Angeles 3804 Boelter Hall Los Angeles, CA 90024 Phone: (213) 825-2756, (213) 474-5317 brett@ucla-cs.ARPA or ...!{cepu, ihnp4, trwspp, ucbvax}!ucla-cs!brett -------------------------------------------------------------------------
sas@leadsv.UUCP (Scott Stewart) (06/27/85)
In article <173@idsvax.UUCP>, steiny@idsvax.UUCP (Don Steiny) writes: > > > > > Note that the policies of the current administration > > > are modern day brinksmanship. By keeping the interest rates > > > high in the US, inflation has been subdued. > > > > Not correct. > > > > Banks are being cautious about lowering their > > rates too low. When the prime is lowered too low (and if at > > some later time it shoots up) the banks could get stuck > > with too many low interest non-profitable loans. Thus, > > the prime will come down slowly, as it has. > > > The banks have to borrow their money from the Federal > Reserve. The interest rates are under the control of the Federal > Reserve, specifically Paul Volker, they have been for many years. Isn't the Federal Reserve seperate from any branch of the Federal Government. I thought Congress and the President may apoint members, but after that, they had little control of the policies. The administration (as mentioned above) I take to mean the Executive Branch or Reagan. I thought I remember him criticizing Volker and the Federal reserve for keeping interest rates higher than neccesary and thus keeping interst rates and unemployment up as well. Scott A. Stewart LMSC
steiny@idsvax.UUCP (Don Steiny) (06/28/85)
> > Isn't the Federal Reserve seperate from any branch of the Federal > Government. I thought Congress and the President may apoint members, > but after that, they had little control of the policies. The > administration (as mentioned above) I take to mean the Executive Branch > or Reagan. I thought I remember him criticizing Volker and the Federal > reserve for keeping interest rates higher than neccesary and thus keeping > interst rates and unemployment up as well. > Scott A. Stewart > LMSC This is correct. There was a tense period a few years back when Volker came up for reappointment. Reagan reappointed him. I have read editorials that say that though there have been some disagreements, generally the Fed (as it is called) is in line with the exective branch's policies. It is an incredible thing, though, that the Federal Reserve is an independent branch of the government. In civics in grade school we were taught that there are the exective, legislative, and judicial branches of the government. Oh well, they also taught us that if we were children in "Red China," they would put us in cages (which would have been a great relief to my teachers). pesnta!idsvax!steiny Don Steiny - Computational Linguistics 109 Torrey Pine Terr. Santa Cruz, Calif. 95060 (408) 425-0832
kurt@fluke.UUCP (Kurt Guntheroth) (06/28/85)
A note on FDIC insurance:
FDIC insurance does not protect all your investment. Individuals are
protected up to an aggregate maximum of $100,000.00 by the FDIC. I do not
believe corporations are protected at all. The purpose of FDIC insurance is
to reassure people that their money is safe in banks -- that they won't be
wiped out by a bank default as happened at the beginning of the depression.
Personal savings is the most lucrative source of bank funds since it pays
the lowest interest and Roosevelt (or advisors, whatever) wanted to lure
people back to banks so their savings would be available to stimulate the
economic recovery. This is one of the few federal regulations which does
not favor the very rich.
How our strong currency affects trade:
Say the US and Germany produce identical tractors for the equivalent of
$100,000 each in 1980. Over the next five years the US dollar increases in
value compared to the Mark. It now costs $120,000 in Marks to buy the US-made
tractor. But the German-made tractor still costs only $100,000 in Marks.
In 1980 a German would be just as likely to buy the US-made tractor as the
German-made tractor, but now he has a strong motivation to buy the German
tractor. He shuns US-made products. His US counterpart sees that the
German made tractor is cheaper, and imports a German tractor, paying the
import duties and shipping costs out of the difference in price. The US
buyer prefers foreign goods. The trade defecit increases. This is
acturally happening to Caterpillar Corp.
How our strong currency affects our debtors:
If US currency rises in value against your currency, and your loan must be
repaid in dollars, you must pay back more of your currency than the stated
amount on the loan. It is as if the interest rate had risen unexpectedly.
Even if your country is in good economic shape, you find a rising percentage
of your budget going to these outstanding loans, and there is nothing your
country can do to improve the problem, because the problem is really caused
by an underlying weakness in the US financial situation.
Now, a question:
The national debt is rapidly mushrooming. Can we estimate a time when the
debt becomes a critical problem (it is now, of course, but I mean can we say
when it will have a direct, noticable effect on things like our credit)?
For instance, what measures are used for corporations? How much debt can a
corporation have before it is judged unhealthy? As a percentage of assets?
As a percentage of Revenue?
--
Kurt Guntheroth
John Fluke Mfg. Co., Inc.
{uw-beaver,decvax!microsof,ucbvax!lbl-csam,allegra,ssc-vax}!fluke!kurtbobn@bmcg.UUCP (Bob Nebert) (07/03/85)
> > > > Isn't the Federal Reserve seperate from any branch of the Federal > > Government. I thought Congress and the President may apoint members, > > but after that, they had little control of the policies. The > > administration (as mentioned above) I take to mean the Executive Branch > > or Reagan. I thought I remember him criticizing Volker and the Federal > > reserve for keeping interest rates higher than neccesary and thus keeping > > interst rates and unemployment up as well. > > Scott A. Stewart > > LMSC > > This is correct. There was a tense period a few years back > when Volker came up for reappointment. Reagan reappointed him. > I have read editorials that say that though there have been > some disagreements, generally the Fed (as it is called) > is in line with the exective branch's policies. > > It is an incredible thing, though, that the Federal > Reserve is an independent branch of the government. In > civics in grade school we were taught that there are the > exective, legislative, and judicial branches of the government. > Oh well, they also taught us that if we were children in > "Red China," they would put us in cages (which would have > been a great relief to my teachers). > >> I have always been taught that the Federal Reserve System was >> a privately owned corporation.