Monday, September 29, 2008

What was it about 1995 and the US Federal Reserve?

1990 – 1992 era. The changes began then that led to the elimination of the reserve requirement.

1992 The Fed Reserve ratios were lowered.

1995 – The US Federal Reserve effectively eliminated the fractional reserve ratio. Banks were no longer required to back assets that largely corresponded with “broad money” (M3) with cash reserves. The consequence was that banks could effectively create money without limitation. From early 1994 to late 1996, most of the remaining reserve deposits disappeared. "This transformation of banking practices seems to have started small, but really picked up steam by 1996 and 1997, likely due to competitive pressures among banks; those banks that used these methods could easily out-compete those that did not."[1]

1995 – US Fed and other central banks printing money like confetti….It is reasonable to suppose that such a gigantic increase in money supply would produce price rises in assets, housing and commodities BUT consumer price inflation remained under control. Why? Rapid growth of India and China (source of cheap labour)? Internet and telecommunications revolution rapidly improved the cost structures of existing products? Labour-free productivity of manufacturing. The stepping up of the rate of environmental rape (mining of raw materials and forests) associated with industrial production? The WTO established.

1995 Dow First close above 5000. Stock Market Keynesianism. Never before had a US economic expansion become so dependent on the ascent of the stockmarket.

Mid 1990s – the collapse of the First Italian Republic. It involved large-scale criminal influence in government and originated as an American parapolitical operation.

1995 – 1999 – The vice president of the Bank of New York sets up illegal accounts to facilitate the movement of funds into and out of Russia. Her crimes of money laundering did not result in a sentencing for her.

1995 – 2001 – the dot com speculative bubble.

1990 – 2005 – doubling of the global workforce

1995 – 2005 – about 3.2 million US homeowners bought houses on the basis of subprime mortgages or similar credit terms

1995 – 2005 Global ‘Savings’?? Glut. “..a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders…” (Ben Bernanke in 2005)

[1] What (Really) Happened in 1995? How the Greenspan Fed Screwed Up in the Mid-90s and set the stage for the Greatest Financial Bubble in the History of the World. By Aaron Krowne

Also see: ‘Made in U.S.A. 1995’ by Eric Janszen. March 22, 2006


Anonymous said...

I've felt this whole magic of pumping money to assets while targeting "wage inflation" has been a key to the shift of wealth to the few and the top.

I think a part of the plan, at least a side bet, was for asset values to out-run the indebtedness we'd build up on foreign lending. Hence a number of players unconcerned about 5% a year trade deficits and loans from abroad, as long as asset values were growing even faster. That could keep the illusory "good times" rolling. But now asset prices are cratering. Who maintains the illusion we can run 5% a year trade deficits indefinitely in this environment?

Squaring home valuations with incomes is a necessary piece of stabilizing the housing and mortgage market. That's a long haul process in any case. But I'd say a progressive piece of that resolution ought to be that the targeting of wages should shift, maybe to a targeting of commodity prices, I don't know what. But it is time to grow, or at least stabilize, from the bottom up.

Yowie, zowie. Who will pay more than book value on financial institutions any more? And who will even trust book value?

Myrtle Blackwood said...

'From the bottom up' being the operative words. It sure doesn't appear to work the other way. Interesting comment, thanks.

Anonymous said...

I think it helps to clarify things when you add two events of 2006. In Feb '06 Bernanke is appointed Chairman of the Federal Reserve system. In June '06 Henry Paulson is appointed Secty of Treasury. Talk about status quo. Two long time players in the game moving into critical positions. Paulson's appointment is probably more significant. During a 35 year career he moves from Dept of Defense, the office of John Ehrlichman, on to Goldman Sachs to begin collecting his rewards and now again back to gilder of the lillies at Treasury.

What I wonder about is how could any one hand over an additional $700 billion to a person who has shown nothing but contempt for the average citizen, if not obviously at least as a result of his many decisions in his illustrious career.

Myrtle Blackwood said...

Why do Americans allow key policy-making positions in government to be filled by individuals not subject to the electoral process??

Interesting information revealed about Paulson from bloggers. "When he left as chief executive to become Treasury Secretary in 2006, Goldman awarded him $110 million in cash to cover remaining stock options and restricted stock, in addition to $51 million to repurchase family shares. These payments were on top of the approximately $500 million in Goldman shares Paulson sold when he joined the government."
Ugly American September 27, 2008 at

and "Anyone remember the 1995 $500
Billion bailout? it's almost identical [to TARP]
Well, Henry Paulson was the architect of THAT little nightmare also.
Again, his conditions are "no oversight, reviews and NO legal charges for any of his cronies!
Moreover, this was the "Keating 5" Scandal".....of the 5 senators who were caught.....yep, John Mcain. How curious Instead of a bailout, I hope they just get bail, heh.
Jean-Claude | September 27, 2008

buermann said...

Is this related?

"Credit default swaps were invented with collateralised debt obligations in 1995 by Blythe Masters, a 34-year Cambridge graduate who was then the head of JP Morgan’s Global Credit Derivatives group."

Myrtle Blackwood said...

Bound to be.

Early 1990s – New risk management methodology used in capital markets. VAR for ‘Value at Risk’. The assumptions were: securities prices move continuously with no jumps, that these prices are random and normally distributed, and market trends don’t exist. (Mathematicians came into fashion after the adoption of the ‘Black-Scholes’ options valuation model in 1973. It had the enormous benefit of providing a ‘value’ however spurious.)

Mexican bailout to the tune of $500 billion.

Other economic history of the 1990s:

"1991 – The US moves in to permanently police the Middle East after the Gulf War. The oil price is characterised by extreme volatility.

1991 – Bill Clinton attended the Bilderberg Conference in Baden-Baden where it is asserted by a researcher on the Bilderberg Group he was ‘anointed’ to the US presidency. Shortly after he took an unexpected, unannounced trip to Moscow. The purpose of the trip appeared to be for Bill Clinton to ensure his student-era anti-Vietnam war files from the KGB were ‘buried.’

1991 – David Rockefeller thanks the Washington Post and New York Times and Time Magazine etc for their discretion for over 40 years. He refers to the preference for supranational sovereignty of an intellectual elite and world banks to national auto determination.

1991 – Sweden’s financial meltdown. The government guaranteed the obligations of the entire Swedish banking system.

1991 or 1992?? – Kissinger talks at the Bilderberger Conference in Evians, France. “..individual rights will be willingly relinquished for the guarantee of their well-being granted to them by the World Government.”

1991 – The fall of communism and the subsequent debt default in Russia. The Russian people threw out their communist controllers and established a Russian republic. The financiers immediately took over through the Government of Boris Yeltsin and began to divide up the nation’s resources through their local allies, the “oligarchs”. Yeltsin also triggered a worldwide slump in financial markets after the country defaulted on ruble-denominated debt and devalued the currency more than threefold against the US dollar. A number of large hedge funds and investment banks had speculated on Russian economic relationships normalising using vast amounts of leverage. A financial crisis emerged that threatened the global economy. The US federal Government organised a $50 billion rescue of Long Term Capital Management.

The Russian people refused to comply with Yeltsin and the oligarchs. They elect Vladimir Putin, a nationalist leader who moved quickly to establish a self-governing Russian state that the financiers and the Western press clearly intend to take down.

Update to May 2008. Banks and hedge funds seek to redeem their loans to Russia by the end of the year, in order to take advantage of much higher global interest rates.