On 2008-10-11, Ed Huntress wrote:

"Ignoramus18712" wrote in message
...
On 2008-10-10, Ed Huntress wrote:
And the reason for this happening, is that with the new financial
structures, derivatives etc, there are many players that act like
quasi-banks, borrowing money and lending it, without being subject to
reserve restrictions. So during the growth years, all of that stuff
ballooned, leveraged up and expanded.

If you look at M3 versus M2 in that graph to which I posted a link
earlier
in this thread, you can see it happening. It's no wonder the government
no
longer reports M3. It makes it look like the money supply is out of
control.
'Can't have that, being monetarists and all...

So here comes the corollary.

More entities than banks participated in lending and creation of money
(such as hedge funds buying mortgages on credit using leverage, etc).

Right.


And now, besides banks per se, these entities are also suffering from
losses and forced liquidations.

Well, commercial banks are suffering (probably) *because of* the losses and
forced liquidations of the "shadow banks."

A part of it.


So, obviously, bailing out banks would not restore lending capacity of
these other entities. So the money contraction cannot be prevented by
bailing out banks.

I suspect that money contraction, at least at the M3 level, would be
impossible to stop. At the M2 level it still will be somewhat contracted.
But whether it's going to have a long-term effect on M1 is questionable.

Keep in mind that M2 is also expanded by these "non-bank banks".

Here's a good graphic showing how this bear market compares to
historical ones (Great Depression, 70s, etc).

It looks very scary.

http://www.nytimes.com/interactive/2...ARKETS.html?hp

Much of M2 and M3 is really ethereal stuff, which exists mostly in the form
of claims by one institution upon other institutions, much of it out of
connection to the system that provides real liquidity to the real economy.
Now we're going to find out if its existence has irreversible consequences
to the economy that produces goods and services. Recent comments by a couple
of Chicago School economists say they don't think so. The answer to that is
'way over my head, but I can imagine a scenario in which the government
intervenes at a point that cuts off that ethereal money and lets it
disappear, while providing liquidity and enabling the credit system that
operates for the real economy to continue.

This is a point where many bifurcations are possible, including
flooding the economy with money to cause inflation and effectively
erase all debts. What is not possible is to return to the pre-crisis
times quickly.

I think that ultimately, we, as a whole, were misled about how wealthy
we really were. Much of that wealth was self delusion and
borrowing. So in the end we will wake up and realize that in fact we
are collectively only 1/2 or 1/3 as wealthy.

Check out the above graphic.

It is very scary.

i

That's all an abstraction, of course.




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