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Published 9/01/05.
Rumors are circulating about the 9/15 meeting the New York Fed called with
the largest bankers. Although the press describes the meeting as a discussion
on derivatives (which is one huge hamper of dirty laundry that could
seriously benefit from exposure to sunshine and fresh air), the rumors
persist in painting dark portraits of conspiracy and potential panic. The
Optimist's Pollyanna perspective, in contrast, helps him see a more pragmatic
and soothing explanation. Its probably just time for the government's
revolving door to spin again, and Fed bureaucrats want to collect a fresh
stack of business cards so they will know whose names to prominently display
on the cover letters of their resumes. Even so, there might be a few moments
when financial topics could be discussed between rounds of imported coffee
and pastries (no boring domestic stuff for these movers and shakers!).
The Fed needs an optimistic view
Considering all the dismally depressing news we will face in the future,
the Fed really needs an optimistic keynote speaker to get their meeting
started in a positive direction. In appreciation for the helpful advice the
Optimist has already offered to the Fed, he anticipates that they will choose
him to set that optimistic and positive tone which is so essential to a
successful session of emergency preparations. Unfortunately, there are only
two weeks before this meeting. Just in case they cannot email the invitation
to me because two weeks is not enough time for the Fed to find my email
address (which is cleverly hidden at the bottom of this page), I'll give them
an Executive summary of the points I would highlight at their meeting.
Fractional Reserve Banking
I would begin my remarks with the obligatory joke to establish rapport and
show them that I understand their banking business. "How many bankers
does it take to multiply the money supply?" No doubt many of the
illustrious bankers already heard this old chestnut, but they won't spoil the
punch line because they love it so much. The answer, of course, is that any
fraction of the bankers has the power in reserve to create as much funny fiat
stuff as they wish! Get it? Fraction. Reserve. Bankers. Power! Even the guys
who heard this many times before will be rolling in the aisles. After I
succeeded in getting these stodgy old bankers loosened up and feeling
schmoosey, I would have the Fed follow up with the bad cop message that they
need to be a little careful with all this fractional reserve power they have
been using with abandon. The Fed would remind the bankers that the people who
take the freshly created fiat aren't getting something for nothing. Those
people are borrowing the fiat, and going deeper into debt. Before the
banker's grumbling deteriorates into disrespectful noises, the Fed could
hasten to add that going deep into debt is, of course, the American way, and
that encouraging deeper levels of debt is a patriotic service that bankers
perform. Even so, the Fed could gently encourage the bankers to keep at least
a cent or two of real reserves for each hundred dollars of debt they happily
create for willing borrowers.
Credit cards
While speaking of debt, I would respectfully encourage the bankers to
review their credit card programs. Everyone recognizes and applauds their
patriotic fervor in massively issuing new credit cards, without which the
American economy would quickly self destruct as consumers reverted to ancient
patterns and began to pay down debt and to actually {!}Warning! The
government considers the following four letter word to be offensive to most
people, and bankers with weak cardio systems should stick their fingers in
their ears to avoid hearing this dreadful word. The Optimist apologizes in
advance for his impertinence at mentioning it in such an illustrious
presence.{!} save. Bankers are, of course, to be commended for their
pro-active approach of mailing multitudes of pre-approved credit cards to
every member of all households. Teenagers are already deeply indebted for
this thoughtful service, and the kids will also be more appreciative soon
after they graduate from kindergarten. The delicate issue the Optimist feels
obligated to mention, however, is that this process causes a small amount of
confusion for pet owners when their pets receive too many different
pre-approved credit card offers. Fewer pre-approved letters would mean the
pet owners need to make fewer urgent and essential decisions for their pets.
It would be a wonderful improvement if all of you bankers could channel a
portion of your exceptionally effective and close collusion so as to send
only a single pre-approved credit card to each dog, cat, canary, etc.
All the prestigious banks represented here are to be congratulated for
being among the leaders in the creative use of plastic to substantially
expand the debt of Americans. I hope and trust that the White House is
seriously considering the creation of a new medal (perhaps to be called the
Order of Debt Disorder?) with which government can appropriately recognize
the selfless public service which the banks provide to the economy. As only a
small note presented as an aside and not intended to be negative in any way,
the Optimist would gently caution that although Americans are super strong
and can carry very heavy weights for an extended time, they might eventually
begin to tire a little from carrying debt loads which are ten times higher
than the average annual wage in Asia. The Optimist would respectfully suggest
that banks might consider new alternatives for the inevitable expansion of
debt. For example, Asians seemed really happy when we exported cigarettes to
their teenagers. Perhaps they would like some of our pre-approved credit card
technology to improve their own economies. If Asians like that idea enough,
maybe we could offer a trade where they get their debt levels up over their
heads, and they give us back a few of our manufacturing jobs.
Real estate
This is a delicate topic which must be discussed with great sensitivity.
The Fed can rest easy with the Optimist at the podium because he knows that
no one in the Fed and none of the bankers ever again want to hear any word
that has three Bs in it. Instead of criticizing the Fed and bankers in any of
the ways they hear about too many times each day, the Optimist will butter
the bankers up with compliments about how they single handedly delivered the
economy to its current precipice. Only the bankers and the Fed can claim
credit for creation of new concepts in which even deadbeats with no job
prospects can purchase houses not only with nothing down, but more importantly
they can get enough cash back at closing to have a really wild binge in Las
Vegas. Bankers deserve all the accolades for the current situation in the
American economy, and the state of the housing market clearly shows the
bankers at the best they can be.
After the Optimist's praise has the bankers grinning and patting
themselves on the back, he will again ask the Fed to deliver a more somber
message of mentioning that there is a lot more housing debt than equity.
Despite the mood swing from euphoria with the Optimist, to despair at a
comparison of debt to equity, the Fed should proceed with suggesting that
bankers might want to consider collecting some amount of down payment at
closing. If the buyer has no cash, for example, the Fed could recommend that bankers
ask for a wrist watch, or maybe an old shoe as collateral. Tightening up
their lending standards that much would be difficult for bankers, to be sure,
but having that old shoe in their possession would make it much less likely
that the buyer would hop away on one foot to abandon the house after a small
price decline.
Interest rates
The Optimist will be prepared to jump back to the podium when the bankers
show a pained and puzzled expression at the suggestion that house prices
could possibly decline. He would quickly reassure everyone that a house price
decline is only a theoretical possibility mentioned in a tiny footnote on the
five page thick banker's unabridged guide to all financial operations titled
"I used to couldn't even spell bancer, and now I are one." Since
there has never, ever, in the entire history of the universe, over the full
10 years of their banking careers, been a decline in house prices, anywhere
within a few blocks of the prestigious hotel where this meeting is catered,
it must be safe for these bankers to conclude that it isn't possible for
house prices to decline anywhere in the future.
The only reason that pessimists mention possible price drops for housing
is that interest rates appear to be rising. Fortunately, the Optimist has
just the good news the bankers want to hear. Higher interest rates offer
greater profit potential for banks. Also over the last year, interest rates
have more than tripled, and house prices just keep rising! This long term
trend over a whole year from artificial lows is enough to prove that rising
interest rates are bullish for house prices. Since it is reasonable to guess
that interest rates will continue to rise, the bankers can be wildly upbeat
about the continued escalation in real estate prices. The only cloud on the
horizon is that the Fed cannot promise to continue raising interest rates
forever unless inflation always rises faster. Bankers are a naturally
optimistic crew, so they can be happy with visions of interest rates climbing
forever.
Silver and Gold
The Optimist knows how to work this crowd, and he will rev them up with
abundant praise for their magnificent performance in holding down the prices
of silver and gold. Even the Fed will have to confess that they couldn't have
performed this duty so flawlessly without the inspirational efforts
contributed by the banks. At this point, I would offer to let the Fed take
over, so they could deliver the bad news directly, but they would nervously
push me back to the podium.
I would continue by assuring the bankers that all of us in this room are
well aware of the intense economic risk the bankers have had to take on while
supporting the Fed's continuing war against those strange people who like a
little old silver and gold better than a lot of newly printed paper. There
comes a time in every war, however, when the leaders must reconsider their
strategies and tactics. Although the Fed, with the noble assistance of the
bankers, succeeded admirably in pushing silver and gold out of the average
American's viewpoint, a new enemy is increasingly difficult to keep docile.
All those foreigners whose economies we support by purchasing a few gadgets
from them now and then, and by giving them a few token jobs from our surplus
of work in the manufacturing sector, are beginning to ask what they can do
with the mountains of fiat dollars we pay them. Such ingratitude! You never
hear the foreigners thanking us for our massive efforts to keep our printing
presses running at full speed night and day just so we can give them huge
stacks of brand new dollars. Instead of showing proper appreciation and
respect for all the fiat paper we give to them, those foreigners are
beginning to think about spending some of that paper. That would be OK if
they only wanted to convert some of our fiat paper into some of our friend's
paper, since our Fed and theirs have worked it out so that paper is paper
regardless of what color ink is used to print it. The bad news that I am
obligated to share with you is that foreigners are now considering spending
paper to buy things that are real, including silver and gold.
After the howls and anguish reduces to a few sobs and murmurs of woe and
doom, I would continue to offer some practical guidance for continued banking
prosperity. The Fed and I agree that it would be a wise change of tactics for
bankers to begin quietly accumulating a few ounces of silver and gold for
their bank's reserves. Those among you who still have huge silver and gold
short positions in the futures markets have done noble work for the Fed, but
now is the time to begin slowly unwinding those shorts. We will all work
together, as usual, to engineer sharp but brief drops in the prices of silver
and gold, but you should expect the lows of each intervention to be higher
than previous lows, and set your buy points at the levels near each bottom
where uninformed people will be selling. The Fed and I know that all of you
are deeply concerned about your massive exposure to the amount of silver and
gold that you have borrowed and then leased over the years. We share your
anguish about the absence of any real silver and precious little gold that
you could use to pay back the metal you borrowed to lease out. Again, I would
pause respectfully for the crying and wailing to settle down before continuing.
Have no fear about that small technicality. I can speak for the Fed when I
tell you that all of the combined agencies in Washington will band together
to support you, our most trusted allies. Any lease contract provisions which
require repayment in real metal will be declared null and void because an
unpreventable act of nature made it impossible to repay the metal that you
knew wouldn't exist anymore when you profited by leasing it out anyway.
Washington will then change the rules to settle all of those contracts by
simply paying some amount of fiat that we all know exists in unlimited
supply. The thought of simply making these impossible problems vanish with a
few rule changes and lots of fiat will bring joyful smiles back to the faces
of all the bankers.
Derivatives
For a rousing finish, I would save my best news for the end. There is no
need for bankers to worry because all banks are fully protected with
derivatives. No doubt the Fed has heard wonderful reports about how
completely effective those derivative thingies are, and they are just real
happy that bankers have eliminated risk in the economy. For those few new
bankers and Fed staffers in the audience who do not fully appreciate the
exotic sophistication of the total protection provided by derivatives, I will
create a complex graphic picture to explain all the subtle details. What? Oh,
sorry. It seems that the bankers broke all my crayons and marked on all my
paper during my presentation. Fortunately, I am prepared with an appropriate
equivalent explanation complete with all the technical detail known about
derivatives. I'll wave my hands to show that there is a box on the left side
that does nothing unless just any old problem develops anywhere in the
economy. Then the box springs into action, jumps through these here hoops in
the center, bounces around those there pegs on the right, cascades down the
waterfall in the middle, and then pumps out at the bottom whatever amount of
fiat that anyone needs to solve whatever problem that they might be having
that day. Even the senior bankers will be impressed with how precisely I was
able to describe the level of protection their businesses depend upon. As I
strut victoriously off the stage amid gales of cheerful applause, the new
staff will be shouting "Bravo!", "Well done!", and
"You make this complicated stuff really easy to comprehend!"
The Optimist hopes that his talking points will provide an inspiration in
the meeting between the N.Y. Fed and the bankers.
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