Making Money Cash

Immediately after the recession took a dramatic dive in
September 2008, the Bernanke Fed implemented a policy that continues to
further damage the incentive for banks to lend to businesses. On
October 6, 2008 the Fed's Board of Governors, chaired by Ben Bernanke,
announced it would begin paying interest on the reserve balances of
the nation's banks, major lenders to medium and small size businesses.

 

You don't need a Ph.D. economist to know that if you pay
banks ¼ percent risk free interest to hold reserves that they can obtain
at near zero interest, that would be an incentive to hold the
reserves. The Fed pumped out huge amounts of money, with the base of
the money supply more than doubling from August 2008 to August 2010,
reaching $1.99 trillion. Guess who has over half of this money parked
in cold storage? The banks have $1.085 trillion on reserves drawing
interest, The Fed records show they were paid $2.18 billion interest on
these reserves in 2009.

 

A number of people spoke
about the disincentive for bank lending embedded in this policy
including Chairman Bernanke.

 

***

 

Jim McTague, Washington Editor of Barrons,
wrote in his February 2, 2009 column, "Where's the Stimulus:"
"Increasing the supply of credit might help pump up spending, too.
University of Texas Professor Robert Auerbach an economist who studied
under the late Milton Friedman, thinks he has the makings of a
malpractice suit against Federal Reserve Chairman Ben Bernanke, as the
Fed is holding a record number of reserves: $901 billion in January as
opposed to $44 billion in September, when the Fed began paying interest
on money commercial banks parked at the central bank. The banks prefer
the sure rate of return they get by sitting in cash, not making loans.
Fed, stop paying, he says."

 

Shortly after this article appeared
Fed Chairman Bernanke explained: "Because banks should be unwilling to
lend reserves at a rate lower than they can receive from the Fed, the
interest rate the Fed pays on bank reserves should help to set a floor
on the overnight interest rate." (National Press Club, February 18,
2009) That was an admission that the Fed's payment of interest on
reserves did impair bank lending. Bernanke's rationale for interest
payments on reserves included preventing banks from lending at lower
interest rates. That is illogical at a time when the Fed's target
interest rate for federal funds, the small market for interbank loans,
was zero to a quarter of one percent. The banks would be unlikely to
lend at negative rates of interest -- paying people to take their money
-- even without the Fed paying the banks to hold reserves.

 

The next month William T. Gavin, an excellent economist at the St.
Louis Federal Reserve, wrote in its MarchApril 2009 publication:
"first, for the individual bank, the risk-free rate of ¼ percent must
be the bank's perception of its best investment opportunity."

 

The Bernanke Fed's policy was a repetition of what the Fed did in
1936 and 1937 which helped drive the country into a second depression.
Why does Chairman Bernanke, who has studied the Great Depression of
the 1930's and has surely read the classic 1963 account of improper
actions by the Fed on bank reserves described by Milton Friedman and
Anna Schwartz, repeat the mistaken policy?

As the
economy pulled out of the deep recession in 1936 the Fed Board thought
the U.S. banks had too much excess reserves, so they began to raise the
reserves banks were required to hold. In three steps from August 1936
to May 1937 they doubled the reserve requirements for the large banks
(13 percent to 26 percent of checkable deposits) and the country banks
(7 percent to 14 percent of checkable deposits).

 

Friedman and Schwartz ask: "why seek to immobilize reserves at that
time?" The economy went back into a deep depression. The Bernanke Fed's
2008 to 2010 policy also immobilizes the banking system's reserves
reducing the banks' incentive to make loans.

 

This is a bad policy even if the banks approve. The
correct policy now should be to slowly reduce the interest paid on
bank reserves to zero and simultaneously maintain a moderate increase
in the money supply by slowly raising the short term market interest
rate targeted by the Fed. Keeping the short term target
interest rate at zero causes many problems, not the least of which is
allowing banks to borrow at a zero interest rate and sit on their
reserves so they can receive billions in interest from the taxpayers
via the Fed. Business loans from banks are vital to the nations'
recovery.

The fact that the Fed is suppressing lending
and inflation at a time when it says it is trying to encourage both
shows that the Fed is saying one thing and doing something else
entirely.

I have previously pointed out numerous other ways in which the Fed is working against its stated goals, such as:

• Reinforcing cyclical trends (when one of the Fed's main justifications is providing a counter-cyclical balance);

• Increasing unemployment (when the Fed is mandated by law to maximize employment); and

• Encouraging financial companies to make even riskier gambles in the future (when it is supposed to stabilize the financial system).

And see this.

Postscript: If the Fed really wants to stimulate the economy, it should try Steve Keen's idea.

Wow, finally people noticed.

All it took was Google to supposedly offer $3.5 million to an engineer to not go to Facebook. Now, that is what rational people would call cutting off the nose to spite the face. But these are not rational times. I have been writing about the escalating irrationality in Silicon Valley, which for some odd reason exists detached from the global economic reality.

In past few months, I wrote about three major and potentially troubling signs.

• Silicon Valley & the Scent of Money talked about the increased number of startups getting funded and the amount of money being pumped into the startups going up, thanks to hyperactive, always tweeting, angel investors.


• Silicon Valley’s Talent Crunch talked about how there was a decline in certain kind of engineering talent and other professionals in the valley, thanks to the breathless hiring from giants like Zynga, Google, Apple, Facebook and Twitter.


• The media’s focus on investors and not the founders.

There are some excerpts from Fred Wilson’s post I think are worth highlighting.

I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.

Irrationality often doesn’t seem irrational because it is often labeled as conventional or fashionable thinking. Let’s step back for a minute: if you take what Michael Arrington wrote or what Fred Wilson has to say or my own reporting, we are beginning to see signs of hyper-inflation in the web and startup landscape.

Fred doesn’t want to call it a bubble and he is right, mostly because it is not a classic case of mass hysteria, and instead it is a madness that impacts only a certain genus, the professional investor. The implications of this early stage investment hysteria are going to be felt across the ecosystem.

Let me explain.

Google, worried and perhaps tired of losing its great engineers and talented people to other companies including Facebook, decided to fight back with a weapon it knows can be effective in the short term: money. A ten percent across the board pay hike and generous offers to exceptional and standout employees are a good way to stem the flow of talent. Facebook and others, if they do indeed want these people, now have to spend cold-hard cash to lure people out of their cushy Google gig.

Of course, one could argue that what is good for the goose is good for the gander. The more cash big web companies offer as salaries, the more startups and others are pressed to offer higher salaries to their recruits, which in turn means that startups are going to need more money. More money means that tide might turn against the angels in favor of larger Sand Hill Road firms. A million-dollar angel round isn’t enough when you have to pay $100,000 or more in engineer salaries! In other words, the startup economics are going to change.

This is not good for startup founders either. Inflation means they need to raise more money, which will come at a cost: They will be giving up a bigger portion of their business to investors. Of course, higher valuations would make exits –- still few and far between –- tougher.

I think Wilson’s comment about “investors are showing up at the first meeting with term sheets” is particularly telling and indicative of the irrationality in the market. And the sad part –- it is only going to get worse.

Image courtesy of Flickr user joelogon

Related posts from GigaOM Pro (sub req’d):

• Why Google Should Fear the Social Web


• Lessons From Twitter: How to Play Nice With Ecosystem Partners


• What We Can Learn From the Guardian’s Open Platform

bench craft company reviews

Saturday <b>News</b> Briefs Nov. 27, 2010 | Albuquerque N.M. | KRQE <b>News</b> 13

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Miller returns to net tonight - Sabres Edge - Blogs - The Buffalo <b>News</b>

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bench craft company reviews

Immediately after the recession took a dramatic dive in
September 2008, the Bernanke Fed implemented a policy that continues to
further damage the incentive for banks to lend to businesses. On
October 6, 2008 the Fed's Board of Governors, chaired by Ben Bernanke,
announced it would begin paying interest on the reserve balances of
the nation's banks, major lenders to medium and small size businesses.

 

You don't need a Ph.D. economist to know that if you pay
banks ¼ percent risk free interest to hold reserves that they can obtain
at near zero interest, that would be an incentive to hold the
reserves. The Fed pumped out huge amounts of money, with the base of
the money supply more than doubling from August 2008 to August 2010,
reaching $1.99 trillion. Guess who has over half of this money parked
in cold storage? The banks have $1.085 trillion on reserves drawing
interest, The Fed records show they were paid $2.18 billion interest on
these reserves in 2009.

 

A number of people spoke
about the disincentive for bank lending embedded in this policy
including Chairman Bernanke.

 

***

 

Jim McTague, Washington Editor of Barrons,
wrote in his February 2, 2009 column, "Where's the Stimulus:"
"Increasing the supply of credit might help pump up spending, too.
University of Texas Professor Robert Auerbach an economist who studied
under the late Milton Friedman, thinks he has the makings of a
malpractice suit against Federal Reserve Chairman Ben Bernanke, as the
Fed is holding a record number of reserves: $901 billion in January as
opposed to $44 billion in September, when the Fed began paying interest
on money commercial banks parked at the central bank. The banks prefer
the sure rate of return they get by sitting in cash, not making loans.
Fed, stop paying, he says."

 

Shortly after this article appeared
Fed Chairman Bernanke explained: "Because banks should be unwilling to
lend reserves at a rate lower than they can receive from the Fed, the
interest rate the Fed pays on bank reserves should help to set a floor
on the overnight interest rate." (National Press Club, February 18,
2009) That was an admission that the Fed's payment of interest on
reserves did impair bank lending. Bernanke's rationale for interest
payments on reserves included preventing banks from lending at lower
interest rates. That is illogical at a time when the Fed's target
interest rate for federal funds, the small market for interbank loans,
was zero to a quarter of one percent. The banks would be unlikely to
lend at negative rates of interest -- paying people to take their money
-- even without the Fed paying the banks to hold reserves.

 

The next month William T. Gavin, an excellent economist at the St.
Louis Federal Reserve, wrote in its MarchApril 2009 publication:
"first, for the individual bank, the risk-free rate of ¼ percent must
be the bank's perception of its best investment opportunity."

 

The Bernanke Fed's policy was a repetition of what the Fed did in
1936 and 1937 which helped drive the country into a second depression.
Why does Chairman Bernanke, who has studied the Great Depression of
the 1930's and has surely read the classic 1963 account of improper
actions by the Fed on bank reserves described by Milton Friedman and
Anna Schwartz, repeat the mistaken policy?

As the
economy pulled out of the deep recession in 1936 the Fed Board thought
the U.S. banks had too much excess reserves, so they began to raise the
reserves banks were required to hold. In three steps from August 1936
to May 1937 they doubled the reserve requirements for the large banks
(13 percent to 26 percent of checkable deposits) and the country banks
(7 percent to 14 percent of checkable deposits).

 

Friedman and Schwartz ask: "why seek to immobilize reserves at that
time?" The economy went back into a deep depression. The Bernanke Fed's
2008 to 2010 policy also immobilizes the banking system's reserves
reducing the banks' incentive to make loans.

 

This is a bad policy even if the banks approve. The
correct policy now should be to slowly reduce the interest paid on
bank reserves to zero and simultaneously maintain a moderate increase
in the money supply by slowly raising the short term market interest
rate targeted by the Fed. Keeping the short term target
interest rate at zero causes many problems, not the least of which is
allowing banks to borrow at a zero interest rate and sit on their
reserves so they can receive billions in interest from the taxpayers
via the Fed. Business loans from banks are vital to the nations'
recovery.

The fact that the Fed is suppressing lending
and inflation at a time when it says it is trying to encourage both
shows that the Fed is saying one thing and doing something else
entirely.

I have previously pointed out numerous other ways in which the Fed is working against its stated goals, such as:

• Reinforcing cyclical trends (when one of the Fed's main justifications is providing a counter-cyclical balance);

• Increasing unemployment (when the Fed is mandated by law to maximize employment); and

• Encouraging financial companies to make even riskier gambles in the future (when it is supposed to stabilize the financial system).

And see this.

Postscript: If the Fed really wants to stimulate the economy, it should try Steve Keen's idea.

Wow, finally people noticed.

All it took was Google to supposedly offer $3.5 million to an engineer to not go to Facebook. Now, that is what rational people would call cutting off the nose to spite the face. But these are not rational times. I have been writing about the escalating irrationality in Silicon Valley, which for some odd reason exists detached from the global economic reality.

In past few months, I wrote about three major and potentially troubling signs.

• Silicon Valley & the Scent of Money talked about the increased number of startups getting funded and the amount of money being pumped into the startups going up, thanks to hyperactive, always tweeting, angel investors.


• Silicon Valley’s Talent Crunch talked about how there was a decline in certain kind of engineering talent and other professionals in the valley, thanks to the breathless hiring from giants like Zynga, Google, Apple, Facebook and Twitter.


• The media’s focus on investors and not the founders.

There are some excerpts from Fred Wilson’s post I think are worth highlighting.

I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.

Irrationality often doesn’t seem irrational because it is often labeled as conventional or fashionable thinking. Let’s step back for a minute: if you take what Michael Arrington wrote or what Fred Wilson has to say or my own reporting, we are beginning to see signs of hyper-inflation in the web and startup landscape.

Fred doesn’t want to call it a bubble and he is right, mostly because it is not a classic case of mass hysteria, and instead it is a madness that impacts only a certain genus, the professional investor. The implications of this early stage investment hysteria are going to be felt across the ecosystem.

Let me explain.

Google, worried and perhaps tired of losing its great engineers and talented people to other companies including Facebook, decided to fight back with a weapon it knows can be effective in the short term: money. A ten percent across the board pay hike and generous offers to exceptional and standout employees are a good way to stem the flow of talent. Facebook and others, if they do indeed want these people, now have to spend cold-hard cash to lure people out of their cushy Google gig.

Of course, one could argue that what is good for the goose is good for the gander. The more cash big web companies offer as salaries, the more startups and others are pressed to offer higher salaries to their recruits, which in turn means that startups are going to need more money. More money means that tide might turn against the angels in favor of larger Sand Hill Road firms. A million-dollar angel round isn’t enough when you have to pay $100,000 or more in engineer salaries! In other words, the startup economics are going to change.

This is not good for startup founders either. Inflation means they need to raise more money, which will come at a cost: They will be giving up a bigger portion of their business to investors. Of course, higher valuations would make exits –- still few and far between –- tougher.

I think Wilson’s comment about “investors are showing up at the first meeting with term sheets” is particularly telling and indicative of the irrationality in the market. And the sad part –- it is only going to get worse.

Image courtesy of Flickr user joelogon

Related posts from GigaOM Pro (sub req’d):

• Why Google Should Fear the Social Web


• Lessons From Twitter: How to Play Nice With Ecosystem Partners


• What We Can Learn From the Guardian’s Open Platform

bench craft company reviews

Saturday <b>News</b> Briefs Nov. 27, 2010 | Albuquerque N.M. | KRQE <b>News</b> 13

Midday News Webcast: Nov. 26, 2010. smoke_stacks_20100614105717_JPG. Chimneys at a factory emit carbon dioxide. File photo. shop_20101126090122_JPG. Shoppers stream into a Best Buy to take advantage of the store's early opening Friday, ...

Miller returns to net tonight - Sabres Edge - Blogs - The Buffalo <b>News</b>

The Buffalo News updated every day with news from Buffalo, New York. Links to national and business news, entertainment listings, recipes, sports teams, classified ads, death notices.

No Batmobile in Arkham City <b>News</b> - Page 1 | Eurogamer.net

Read our news of No Batmobile in Arkham City. ... Batman: Arkham Asylum 2 teaser 14 December, 2009. Latest News. Batman: Arkham City details emerge . Batman: Arkham City revealed, dated . Batman domains name Arkham sequel? ...

bench craft company reviews

Saturday <b>News</b> Briefs Nov. 27, 2010 | Albuquerque N.M. | KRQE <b>News</b> 13

Midday News Webcast: Nov. 26, 2010. smoke_stacks_20100614105717_JPG. Chimneys at a factory emit carbon dioxide. File photo. shop_20101126090122_JPG. Shoppers stream into a Best Buy to take advantage of the store's early opening Friday, ...

Miller returns to net tonight - Sabres Edge - Blogs - The Buffalo <b>News</b>

The Buffalo News updated every day with news from Buffalo, New York. Links to national and business news, entertainment listings, recipes, sports teams, classified ads, death notices.

No Batmobile in Arkham City <b>News</b> - Page 1 | Eurogamer.net

Read our news of No Batmobile in Arkham City. ... Batman: Arkham Asylum 2 teaser 14 December, 2009. Latest News. Batman: Arkham City details emerge . Batman: Arkham City revealed, dated . Batman domains name Arkham sequel? ...

bench craft company reviews