Quote
Originally posted by: DonDiegoQuote
Originally posted by: INdianapaddler
Will someone explain to me . . . why Wall Street is doing so well in spite of soaring gasoline prices and the general gloom-and-doom being spread by the likes of DonDiego? (nothing personal, DD, you are a likable person)
Why yes, . . . yes, someone will, . . . and it is DonDiego himself.
[
n.b.The reply to INdianapaddler's inquiry is not intended to be political; no one political entity is to blame; if the reader objects to the facts, DonDiego has no remedy. If the reader cannot believe it, DonDiego understands. That's the thing about "magic".]
o. BigBanks behaved badly for a long time. The collapse of 2008/2009 left BigBanks in perilous condition. Someone
had to come to the rescue.
i. Someone did. The Federal Government bought a lot of the "toxic assets" which had been on the Wall Street Banks balance sheets; that's what the TARP "Bank Bailout" was all about. The Government,
i.e. the taxpayers, paid full-price for mortgages and other loans most unlikely to return full value. The Banks are no longer on the hook for these bad loans. The taxpayer is.
ii. The Federal Reserve's "low-rate policy" now allows BigBanks to borrow money from the Federal Reserve Discount Window at very-near zero%. Banks can then buy US Treasury Bonds yielding ,say, 3% to 3.5% or so with no risk, so long as the US Government is solvent.
iii. The BigBanks, while collecting 3% to 3.5% on the Treasuries, can then leverage this income by also using the Treasuries as collateral for whatever deals they enter into. Zero interest loans parlayed with 3% interest bonds leveraged by collateralizing the bonds means Wall Street is doing well, indeed.
iv. But, back to that Federal Reserve Discount Window thing, . . . where does
that money come from? (Hmm, . . .
this is where the real magic happens.) The Federal Government issues bonds to pay for things for which it doesn't have the money. Normally BigBanks and Foreign Sovereign Banks and Big Investors of all types buy these bonds; but lately the demand for these financial instruments has been lagging a mite; there's so many out there already and as the dollar is falling the value of the bonds is questioned by potential buyers. S-o-o-o-o, the Federal Reserve buys lots of these new bonds; and once the bonds are on the Fed's balance sheet the Federal Reserve can then, . . .
this is where the magic comes in, . . . create money out of thin air. This, in fact, is one of the Federal Reserves main functions - controlling the money supply. This is the money the Fed loans to the BigBanks at near zero%
v. Money out of thin air means prices go up; this is essentially the definition of inflation. The stock market may well be rising
mostly based upon the increasing money supply; DonDiego and the reader should find out for sure if/when it slows or stops. Anyway, for now the banks' stock market investments are rising too.
About this time, the thoughtful reader might be wondering how he can partake from this horn of plenty.
Well, here's the recipe:
*First, make lots of questionable loans to lots of untrustworthy borrowers.
*Second, become too big to fail.
