The fatal flaw of Real Bills Doctrine

[criptix]

Great insight to infer mbs program to a tend towards owning all land.. However as all suuply is dried up and becomes unaffordable the whole country will default.. Why would the govt have incentive to do this? Or is it judt s byproduct of a malfunctioning system nearing its end? Its like askmg miners to collude so they can double spend.. Theres no incentive to break the network?

Is buying the mbs somehow a way to foot the bill for the interest on the outstanding loans via printing paper through selling treasury notes?

I think this inevitably leads to more and more assets get defaulted and bought up by the banks, and they might rent those house to you later and become the land lord of the whole country

Treasury note is just another name of debt, banks only buy debts nowadays (with money out of thin air), and eventually the whole country will be the debt slave of banks

This is not what happens.  If you default your mortgage the bank takes possesion of your house but if the market is down they eat the loss.  Banks don't want to sit in an inventory of houses nobody wants to buy.  Often they'll sell it at auction at loss.

Banks don't want debt slaves they want a booming economy where they can create more loans

you should read up some more about the 2008 housing bubble, i think it will clear up a lot of things for you!

[amspir]

In the RBD, actually, money isn't printed "just like that", but an asset is chosen to be "monetized".  Be it land, stock, gold, whatever.  If the RBD is applied honestly, it just looks like as if that asset is taken out of the economy and "destroyed"  (stored irreversibly in vaults) in a way, and REPLACED by fiat money.  It is as if the asset itself were now enforced to be "money", but that for practical purposes, we use paper instead of physically that asset.

The state could, for instance, just declare that land is legal tender.  But it isn't practical to go to the grocery and buy vegetables with 20 cm^2 of land.  So in order to make that more practical, the central bank buys up the actual land, and issues paper instead, that is "good for so much land".

This did happen in the time period leading up to 2008.   The fed kept interest rates low, to the point where they didn't pay for inflation.  Homeowners got home equity loans (converting land to government fiat demand deposits)   With all that free-to-borrow money, a bubble formed in the real-estate market, to the point where garbage loans were backed by unrealistic bubble-inflated assets.   When the whole thing collapsed, the fed ended up "printing" nearly $4 trillion USD to prop it up.

[hazenyc]

John Law's Real Bills Doctrine says that banks can create fiat money backed by his assets

John Law is also responsible for the infamous South Sea Bubble (sometimes called the Mississippi Bubble). Look it up.

[twiifm]

Great insight to infer mbs program to a tend towards owning all land.. However as all suuply is dried up and becomes unaffordable the whole country will default.. Why would the govt have incentive to do this? Or is it judt s byproduct of a malfunctioning system nearing its end? Its like askmg miners to collude so they can double spend.. Theres no incentive to break the network?

Is buying the mbs somehow a way to foot the bill for the interest on the outstanding loans via printing paper through selling treasury notes?

I think this inevitably leads to more and more assets get defaulted and bought up by the banks, and they might rent those house to you later and become the land lord of the whole country

Treasury note is just another name of debt, banks only buy debts nowadays (with money out of thin air), and eventually the whole country will be the debt slave of banks

This is not what happens.  If you default your mortgage the bank takes possesion of your house but if the market is down they eat the loss.  Banks don't want to sit in an inventory of houses nobody wants to buy.  Often they'll sell it at auction at loss.

Banks don't want debt slaves they want a booming economy where they can create more loans

you should read up some more about the 2008 housing bubble, i think it will clear up a lot of things for you!

Please point out where I'm wrong.  My friend is a house flipper and he routinely buys short sales. A lot of subprime borrowers just abandon their property if the mortgage becomes underwater.

Banks don't go around buying foreclosures, they are selling foreclosures at auction.  Usually at a loss

[twiifm]

There seems to be a confusion of what an MBS is.  Mortgage Backed Security is a SECURITY.  Its a pool of mortgages that is securitized so it can be traded by investors.  

Has nothing to do with the Fed buying property.  MBS is a way for banks to get the (illiquid) mortgages off their books and sell to an investment bank, who in turn sell it to investors.  The Fed isn't buying MBS to own property, they are buying it to lower lending rates.  You don't own any property if you buy MBS you are buying the interest stream.  Its a type of bond

http://www.investopedia.com/video/play/what-are-mortgage-backed-securities

Also, borrowers aren't in debt because of the Fed.  They are in debt simply because they borrowed money.  Nobody forces you to borrow money

[dinofelis]

There seems to be a confusion of what an MBS is.  Mortgage Backed Security is a SECURITY.  Its a pool of mortgages that is securitized so it can be traded by investors.  

Has nothing to do with the Fed buying property.  MBS is a way for banks to get the (illiquid) mortgages off their books and sell to an investment bank, who in turn sell it to investors.  The Fed isn't buying MBS to own property, they are buying it to lower lending rates.  You don't own any property if you buy MBS you are buying the interest stream.  Its a type of bond

http://www.investopedia.com/video/play/what-are-mortgage-backed-securities

Also, borrowers aren't in debt because of the Fed.  They are in debt simply because they borrowed money.  Nobody forces you to borrow money

This is correct.  However, by buying up these securities, the FED makes the price of these securities go up (which comes down to making the effective interest rate lower).  If securities are in a high demand, getting a loan becomes easy (there's a high demand for the interest rate on the loan).  As such, it makes banks holding securities rich, because they can now sell those securities on a market where there are higher prices for it.  It is then also tempting to write out loans to people who cannot pay them necessarily back (I'm not 100% sure, but I think that the risk of default goes with the security).  That's blowing bubbles in the mortgage market, and increasing indirectly the price of housing and land.

Now, I think the FED is doing the operation post-bubble, to avoid the collapse.  The bubble came for another reason, should now have collapsed, and the FED is buying up probably rather worthless securities to limit the bank's losses instead of having them make huge benefits (they thought they made them in the past).

I'm not 100% sure about what I write here, because it is somewhat opaque to me, but that's how I understand the MBS buying campaign. (also called QE).

In fact, the subprime mortgages were a smart move for the borrowers even though they seemed to be the culprit.  The subprime borrowers are in fact the people who consumed a lot what they didn't produce, and got the rest of the world in difficulty.  What was great for them with the mortgage system, was that their debt was limited to their real estate.  As such, they could borrow like crazy (the bubble value of their real estate), and consume all that, and they were not exposed to the full amount of their loan, but only to the limit of their real estate.   This was in fact a great cause of moral hazard !  You could make a debt that was going to be limited in any case to a part of your possessions, and the rest was not going to be affected.
Ok, you loose your (worthless) house, but you've been living and consuming like a prince, and nobody can do anything about it.

[amspir]

It is then also tempting to write out loans to people who cannot pay them necessarily back (I'm not 100% sure, but I think that the risk of default goes with the security).  That's blowing bubbles in the mortgage market, and increasing indirectly the price of housing and land.

AIG, considered "too big to fail" sold them default insurance that they weren't "big enough to honor" without the fed bailing them out.  Remember, they gave themselves bonuses for pulling off that scam after 2008.

   

[johnyj]

Ok, you loose your (worthless) house, but you've been living and consuming like a prince, and nobody can do anything about it.

Exactly, MBS are just securitised houses, just like monetized assets, different way to make things trad-able, they are essentially some kind of certificate of value. Since the house value crashed due to large amount of default, FED came out to support the price, the only one benefited is the one borrowed heavily and stayed in the same boat as banks

[johnyj]

Back to the topic of RBD. As this thread explained, if you can issue money backed by assets, then you could eventually buy out the whole country by repeating the money issuing process again and again

This bring some questions:

1. If this power is so huge, why government gave it to FED, which is a privately owned organization? Is it because this power just realized since the removal of gold standard and the power was not there under a gold standard?

2. Why there is no large scale of political/military fight over this power, or a supervisor regulating this power? Is it because not one in a million understand it, like Keynes said?

[twiifm]

Back to the topic of RBD. As this thread explained, if you can issue money backed by assets, then you could eventually buy out the whole country by repeating the money issuing process again and again

This bring some questions:

1. If this power is so huge, why government gave it to FED, which is a privately owned organization? Is it because this power just realized since the removal of gold standard and the power was not there under a gold standard?

2. Why there is no large scale of political/military fight over this power, or a supervisor regulating this power? Is it because not one in a million understand it, like Keynes said?

That's not how it works.  When a bank creates a mortgage holding the lien on deed as collateral.  IF in the event the borrower defaults, the bank can sell the house.

It is not your house until the mortage is paid. 

If they want to own the house they would but it in the first place.  Take off your tinfoil hat.

If a corporation sells a bond the bondholders lay claim to the assets.  They don't own the company.  If Apple went bankrupt, the bondholders don't own Apple. 

Same as Treasury bonds that back money creation.

You are confusing asset and property.  If you buy 1 share of AAPL stock.  Thats what you own.  Doesn't mean you can walk into their HQ and remove some desks and chair and claim your portion of ownership

The MBS the FED holds on its balance sheets are securities.  They don't have any claims to the houses that are under those MBS

[johnyj]

That's not how it works.  When a bank creates a mortgage holding the lien on deed as collateral.  IF in the event the borrower defaults, the bank can sell the house.

It is not your house until the mortage is paid. 

If they want to own the house they would but it in the first place.  Take off your tinfoil hat.

If a corporation sells a bond the bondholders lay claim to the assets.  They don't own the company.  If Apple went bankrupt, the bondholders don't own Apple. 

Same as Treasury bonds that back money creation.

You are confusing asset and property.  If you buy 1 share of AAPL stock.  Thats what you own.  Doesn't mean you can walk into their HQ and remove some desks and chair and claim your portion of ownership

The MBS the FED holds on its balance sheets are securities.  They don't have any claims to the houses that are under those MBS

If Apple went bankrupt, the bond holder have the right to sell everything valuable in Apple and divide the return, bond holders have higher priority than stock holders in that case, even the stock holders are the owners of the company

Of course FED would not buy house directly, that will expose the scheme directly under sun light, so they usually use complex terms like securities/lending etc... to mask the truth, if you failed to see the truth behind those masks, then it works. Banks don't even need that house, they need your debt. Debt is a much better form of asset than tangible assets, since it generates continuous return year over year, without maintenance

Again these are technical details, the main problem is: If I could issue money backed by securities, I would buy out all the securities in this country by repeating the process, it is the same double spending behavior, which is strictly forbidden in bitcoin monetary system, but widely practiced by the central banks around the world

[dinofelis]

Back to the topic of RBD. As this thread explained, if you can issue money backed by assets, then you could eventually buy out the whole country by repeating the money issuing process again and again

This bring some questions:

1. If this power is so huge, why government gave it to FED, which is a privately owned organization? Is it because this power just realized since the removal of gold standard and the power was not there under a gold standard?

2. Why there is no large scale of political/military fight over this power, or a supervisor regulating this power? Is it because not one in a million understand it, like Keynes said?

Because they are the same club of course !

The state is the machinery that has as a main purpose to extort the production of the productive and to give it to a certain unproductive club that lives in great wealth.  Long ago, that club was the king and the aristocracy, who lived rich lives on the production of the productive people, and played their games of power and wars with it while enjoying the good things of life.  Now, this is somewhat more diffuse, and is a club of politicians, bureaucrats, state-financed agents, financials and certain other "friends of the state" ; also, the pseudo democratic process (which I call an elective aristocracy instead of a hereditary aristocracy - a real democracy would be direct democracy where the people are the law makers directly and not their appointed representatives) makes that that club has now and then to do something so that the electors think that they care for the general good.  Sometimes, they even do something really for the general good.  This is then also the big excuse to make people cheer for the state, and avoid the guillotine.  The main purpose of representative democracy is to make the people believe that they are themselves responsible for all the mess their electives make and as such, avoid all forms of retaliation from the productive.  This works so good that people now in general cheer for this elective aristocracy.


BTW, I pointed this out already: the backing by assets is not necessary to buy up everything.  If you can issue money (whether backed or not) the seigniorage can buy up everything if you print enough.

[twiifm]

That's not how it works.  When a bank creates a mortgage holding the lien on deed as collateral.  IF in the event the borrower defaults, the bank can sell the house.

It is not your house until the mortage is paid. 

If they want to own the house they would but it in the first place.  Take off your tinfoil hat.

If a corporation sells a bond the bondholders lay claim to the assets.  They don't own the company.  If Apple went bankrupt, the bondholders don't own Apple. 

Same as Treasury bonds that back money creation.

You are confusing asset and property.  If you buy 1 share of AAPL stock.  Thats what you own.  Doesn't mean you can walk into their HQ and remove some desks and chair and claim your portion of ownership

The MBS the FED holds on its balance sheets are securities.  They don't have any claims to the houses that are under those MBS

If Apple went bankrupt, the bond holder have the right to sell everything valuable in Apple and divide the return, bond holders have higher priority than stock holders in that case, even the stock holders are the owners of the company

Of course FED would not buy house directly, that will expose the scheme directly under sun light, so they usually use complex terms like securities/lending etc... to mask the truth, if you failed to see the truth behind those masks, then it works. Banks don't even need that house, they need your debt. Debt is a much better form of asset than tangible assets, since it generates continuous return year over year, without maintenance

Again these are technical details, the main problem is: If I could issue money backed by securities, I would buy out all the securities in this country by repeating the process, it is the same double spending behavior, which is strictly forbidden in bitcoin monetary system, but widely practiced by the central banks around the world

No that's not how it works.  The Fed is like the blockchain.  They are the ledger that's between the public and private sector.  Also they control money supply. 

I don't think you understand how FOMC works and you confuse securities with property.

[johnyj]

BTW, I pointed this out already: the backing by assets is not necessary to buy up everything.  If you can issue money (whether backed or not) the seigniorage can buy up everything if you print enough.

I think it is necessary to have something valuable to back the fiat money. Since banks have to persuade the rich and powerful people to accept it. And usually these people can shake the money's credibility, like those nobles who crashed John Law's paper money 300 years ago

You see that happening when Swiss central bank suddenly removed the currency peg against Euro without a notice, since they don't want to be attacked by large speculators. Unfortunately we seldom see those inside fights unless during a financial crisis

[johnyj]

No that's not how it works.  The Fed is like the blockchain.  They are the ledger that's between the public and private sector.  Also they control money supply. 

I don't think you understand how FOMC works and you confuse securities with property.

If you do not understand who get the ownership of every newly created dollar, then all your knowledge from books are helpless

"The study of money, above all other fields in economics, is one in which complexity is used to disguise or to evade truth, not to reveal it."

[dinofelis]

I think it is necessary to have something valuable to back the fiat money. Since banks have to persuade the rich and powerful people to accept it. And usually these people can shake the money's credibility, like those nobles who crashed John Law's paper money 300 years ago

Face it, modern fiat money is NOT backed up by anything.  Backup up means: you can go to the bank and get your backup in place.  You cannot go to the FED and get stuff for your money.   So no, it is NOT backed up by the assets the FED bought. 

The reason why the FED buys stuff to issue money, is not to have those assets as "backing" (which would mean you could get those assets against any amount of money if you wanted to) ; but rather to avoid the blunt visible seigniorage to be too evident.  The trick of buying up stuff against freshly printed money instead of just issuing it makes it look like "a fair deal" and a bit less like a "counterfeiter", and in fact, its economic effects are also less severe by doing so: the seigniorage is more indirectly distributed instead of being concentrated to those receiving the freshly printed bills without counter value.

If the FED were to print truckloads of bills and just send them off by mail to "their friends", it would be too obvious.

Now, "their friends" have to exchange stuff against bills, so it looks like it's a fair deal.  And in reality, it is somewhat fairer too. 
But the stuff that is bought is no "backing" for the money printed.  It is not like as if it were backed by, say, gold, so that you can redeem your bills when you want against gold.

A mortgage is backed by the house you've bought with it, because the bank can come and take your house if you don't pay your mortgage.  But that's not possible with the stuff the FED has bought up.