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RE: Subprime lending not main trigger of real estate bubble


RE: Subprime lending not main trigger of real estate bubble
by Hijexx at 4:50 pm EDT, Jul 31, 2008

Decius wrote:

Hijexx wrote:

Curious what your take is on this:

Ben Bernanke's Hush Money

A hell of a lot of meandering without getting to the point. Seems to be opposed to the FDIC. Seems to touch the edge of an uninformed rant about immigrants but pulls back after making at least one stupid assertion. I basically stopped reading after "Foreigners do not... buy American goods." If you could explain what the point is I can tell you what I think. Yes, banks are based on the assumption that everyone won't simultaneously withdraw their money. That only happens when there is a panic. The FDIC provides a reason not to panic, thus usually preventing bank failures. Thats perfectly logical. Its not a moral hazard, unless you are opposed to banking, which takes us over the cliff of a wide array of radical notions that are of no practical use right now.

Based on what we know about Indymac one of the problems that we have is a lot of people are depositing large sums of cash in bank accounts. In some cases more than the FDIC insures. Thats stupid, and it reopens the risk of bank runs. The right answer to it is probably stock market annuities with set upper and lower bounds for return...

That point about sending the dollars out of the country is the point I was having trouble understanding. From the article:

The only contraction that is permanent is the contraction of currency withdrawn from a local bank and then sent to relatives outside the United States. When this is done, there is a permanent contraction of digital money in the banking system. But this rate of withdrawal is fairly constant, and so the banking system does not contract unexpectedly. This process actually reduces the rate of monetary inflation and the rate of price inflation in the United States. Immigrants send money to their relatives, and American consumers find that imported goods are paid for in effect by pieces of paper with Presidents’ pictures on them. Foreigners do not use the money to buy American goods, leaving prices lower in the United States than they otherwise would have been.

I *think* he meant:

* If I withdraw money from an ATM, I have just contracted the fractional reserve system while I have cash in hand.
* Once I spend my money and a store deposits it, that money is back in the fractional reserve system.
* No net contraction as long as the money stays in circulation
* Contraction is permanent if money is withdrawn from the system and sent out of country.
* He postulates that rate of contraction is fairly constant and actually has a net effect of reducing monetary inflation.
* I assume his premise is there are less US dollars chasing the same amount of domestic goods, so monetary and price inflations stay in check.
* He uses the word "foreigners" to mean people living in other countries receiving the money from the US but spending it in their own country. That money does not recirculate in our economy. Not sure if this was meant to be derogative but I didn't pick up that implication.
* WRT "imported goods are paid for in effect" that doesn't really make sense to me, other than meaning the money is then circulated in another country's economy to produce goods that we then import? Little hazy on that point.

All of that was a sidebar to explain money expansion and contraction in terms of cash circulation.

RE: Subprime lending not main trigger of real estate bubble

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