jlf1961
Posts: 14840
Joined: 6/10/2008
From: Somewhere Texas
Status: offline
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I am going to try and explain this in the simplest possible way. I am sorry if my explanation (similar to the way I would explain it to a 10 year old) is too complex for you to follow
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ORIGINAL: pahunkboy
If this system is so good then why are so many of the banks insolvent?
The banks to which you refer are held by stock holders and not the federal reserve. A bank's solvency or insolvency is directly connected to its assets versus its debits. In other words, if a bank has more bad loans out, and has had to foreclose on property with no way to sell the property to make back its investment, the bank becomes insolvent, i.e the bank no longer has the assets to cover its liabilities. Foreclosed property is still a liability since the bank has to have that in ready cash.
This process is done with what is known as a foreclosure sale. The property is put up for auction and cannot be sold for less than the outstanding debt that is held against that property.
For example, if a bank has foreclosed on a $250,000 dollar house with an outstanding debt of $50,000 against it, the bank still has to liquidate that asset for whatever the debt is owed against it. In other words if you had the cash to bid $50,001 dollars on the house, the bank would gladly sell it to you, IF you were the winning bid and no one out bid you on the property.
Many people have actually made money buying foreclosed properties, fixing them up and reselling them. Of course that was before the housing market tanked. It was the big thing to do during the eighties.
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ORIGINAL: pahunkboy
Why did I have to bail out Fannie Mae, Freddy mac, AIG, Bear Sterns, GM, why did I have to pay TARP bail outs?
Well Fannie Mae and Freddy Mac are government run agencies, and their bailout was due to the fact they wrote a lot of bad loans during before the housing bubble burst. In other words, they wrote loans to people who no other institution would loan money to, and the loans were guaranteed by the federal government.
As for AIG, Bear Sterns, GM and others, it is a little more complicated, but each of those firms among others got over extended, having more debits (liabilities) than assets to cover them. The super banks were deemed to large to fail and GM's failure would have further impacted the economy. ( It must be noted that GM has repaid its loan, in full with interest far ahead of its schedule.)
If the super banks would have failed, the impact on the stock markets as well as companies that owed them money would have been a economic disaster, much like the crash of 1929.
These banks had paper assets, meaning loans that were outstanding. Many of them were heavily invested in the housing markets, either in mortgages OR in loans to developers who were building the houses. Others were heavily involved in the derivatives markets, betting that their loans would increase in value, or they had bought loans from other institutions without thinking the loans would fail.
If these institutions were to have failed, then someone would have to buy their assets, including the bad loans. Now, if there is no other banks willing to buy those outstanding loans and actual assets, then the FDIC would have had to step in and pay off claims against the banks, and they only cover up to $100,000 per depositor.
In this case, say you had $10,000,000,000 million on deposit with AIG, and it failed. You are only entitled to $100,000 of your total deposit.
From the FDIC website:
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For starters, banks and other depository institutions don't actually go bankrupt. The Bankruptcy Code doesn't allow it. Instead, when a bank becomes insolvent, its state or federal chartering authority orders the bank into receivership and usually appoints the FDIC as the receiver. In that role, the FDIC assumes control over the bank's receivership estate, which includes the bank's assets (e.g., loans with payments due, investment securities) and liabilities (e.g., deposits, undisbursed loan funds, leases, qualified financial contracts).
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ORIGINAL: pahunkboy
If this system is so fair- then surely Ron Pauls audit would solidify for us just how nice they are doing us a favor.
But the fed is regularly audited, internally. And yes, perhaps an external audit by the GAO would be good to have done. The simple truth is that the FED is subject to Congressional Oversight, which begs the question, how can the head of the Fed refuse to answer questions put forward by members of congress.
There is also the simple fact that every audit by a branch of the FED is publicly recorded, both in written records and online. Granted to understand the audit you probably need an accounting degree, because even though I have taken accounting courses when I had my own business, I only know enough for simple books. I had another accountant double check my records and make sure I paid the proper taxes.
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ORIGINAL: pahunkboy
If the treasury can in fact create money then it needs to create 14 trillion- to pay off the national debt. Why doesnt the treasury do this?
pahunk, the treasury cannot just print money. It would just lead to inflation, run away inflation at that.
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The American dollar is backed by the faith and credit of the United States of America since we went off the Gold Standard.
The Gold Standard Act of the United States was passed in 1900 (ratified on March 14) and established gold as the only standard for redeeming paper money, stopping bimetallism (which had allowed silver in exchange for gold). It was signed by President William McKinley.
The Great Depression in the 1930s resulted in the abandonment of the gold standard by the United States. President Franklin Roosevelt changed the valuation of gold to $35 per ounce of gold as an inflationary measure, where an increase in the valuation of gold tends to increase price levels in general. Farmers, for example, will get more dollars for their grain, but they will have to pay more for the goods purchased with the inflated grain sale proceeds. The Gold Reserve Act of 1934 also withdrew all gold from circulation, and Congress nullified clauses in public and private contracts that provided for payment in gold. In 1935 the U.S. Supreme Court considered the constitutionality of the ban on gold in the so-called Gold Clause Cases, where the court upheld the statute's negation of gold clauses: Perry v. United States,Nortz v. United States, and Norman v. Baltimore & O.R.R.
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ORIGINAL: pahunkboy
If this system is working then why are over 9% unemployed right now?
Unemployment and the economy is only affected by the fed when it changes interest rates for prime lenders. That in turn affects the interest rates banks charge on loans. When you want to stimulate the economy, you charge lower interest rates, when you want to slow it down, charge higher interest rates. (dont ask me why anyone would want to slow the economy down, I dont know.)
The present prime rate charged by the fed is the lowest it has been in some time. The problem is that no one is willing to risk investments right now.
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ORIGINAL: pahunkboy
Why is CA and IL bankrupt?
California and Illinois are bankrupt because tax and general state revenues do not meet the minimum amount needed to cover expenses.
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ORIGINAL: pahunkboy
Cant the treasury just enter a book keeping entry to fix the mess?
Basic accounting, you cannot create an asset that does not exist. For each asset, there is a liability or debit and any accountant or accounting student, even from highschool will tell you that assets and debits must balance, meaning that they have to be equal.
If you have 1 trillion in assets, you have to have 1 trillion in debits or liabilities. In accounting, if you have more assets than liabilities, you have done something wrong in the bookkeeping.
Surpluses are either paid out in dividends or reinvested in the company.
In the form of the government, considering the programs the government have borrowed against, for example social security, a budget surplus is used to repay those debts, or pay the debts incurred by the government. Either way, the surplus actually has a liability against it
I hope that answers your questions.
_____________________________
Boy, it sure would be nice if we had some grenades, don't you think?
You cannot control who comes into your life, but you can control which airlock you throw them out of.
Paranoid Paramilitary Gun Loving Conspiracy Theorist AND EQUAL OPPORTUNI
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