Socialism bailing out capitalism? (The Federal Reserve and the Banking problems)

I generally agree with your assessment. Here are some issues I might raise concerns about... I see two different concepts of "consumer" within that paragraph. It is true that increased consumer spending helps move a system out of recession, but confidence alone is not capable of getting people to spend. Real, stable amounts of money in the consumers' hands is what generates spending.While feds stopped a stock sell-off, I'm not sure what that meant to the consumer (meaning the person wanting to spend money on the latest gizmo... or food). It would seem in this case, the consumer you are referring to is the investors, who do not really pump money into the economy in the areas we most need to remove a recession. These are people who pump money higher up the economic ladder (or structure) and then take money back out in turn.I'm not dismissing the need to make stockholders feel secure and so stabilize a market. It's just that it is not the key to generating the kind of spending that is needed, and in some ways emboldens the bad deals we see happening, as it grants an immunity to risk.Again I would point to the last bailout. It took a long time for the ground level consumers to get money in their hands and so start spending which eventually pulled us out of the recession. In the mean time it was the corporate level people who walked away generally unscathed, to invest again another day. What did they learn? Well I do think we have some better systems to use as examples. Sweden and Denmark are two that come to mind. We don't have to scrap our system, but we could do some jerry-rigging.

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"Civilized men are more discourteous than savages because they know they can be impolite without having their skulls split, as a general thing." - Robert E. Howard

Hey Grizz Let me preface this by saying that I am not an expert on economics and I haven't read the whole thread yet.However, I do have a question.If one of the government's roles is to "keep the economy healthy" and one of the ways in which it does so is by occasionally bailing out a failed company (using taxpayer money), then would it be fair to say that the government should have as much say in the regulation of businesses as is required to avoid such expensive bail outs and other potential economic disasters?I do understand some of the complexities involved in the economic world and I also understand that tighter regulation, especially now in the face of huge competitors such as China, India, et al, might cause many corporations to completely jump ship and that the answers are not simple. The monster has been created. How do you propose we tame it?

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"You are metaphysicians. You can prove anything by metaphysics; and having done so, every metaphysician can prove every other metaphysician wrong--to his own satisfaction. You are anarchists in the realm of thought. And you are mad cosmos-makers. Each of you dwells in a cosmos of his own making, created out of his own fancies and desires. You do not know the real world in which you live, and your thinking has no place in the real world except in so far as it is phenomena of mental aberration." -The Iron Heel by Jack London"Hazards exist that are not marked" - some bar in Chelsea

Because...As I understand the credit crisis, it was the behavior of firms like Bear as well as the rating companies that created the problem in the first place.

The FED's policies played a large role in that behaviour by lowering rates.But I think many have a mistaken idea of what capitalism is. Capitalism is not anarchy, the absence of government. Regulations are therefore part of a capitalist system. Stated another way, government regulation is not the same as socialism.One could argue that by the government controlling or a gov appointed central bank controlling the money supply, that in that sector alone, the control and issuance of money, we have adopted a socialist system, but that's pushing it to say so, imo. Capitalism does not negate the government's role completely.

The FED is actually not the government per se. It's a privately owned central bank. The government does play a role in appointing chairman and directors.

The Federal Reserve System is "privately owned" in the sense that all banks in the US are privately owned, and most of them are members of the Federal Reserve System.However, the Federal Reserve System is governed by political appointees, not by a board of directors appointed by private individuals.

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From Wikipedia:
The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.'

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Concerning governance:

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Also from Wikipedia:
The seven-member Board of Governors is the main governing body of the Federal Reserve System. It is charged with overseeing the 12 District Reserve Banks and with helping implement national monetary policy. Governors are appointed by the President of the United States and confirmed by the Senate....
Each Federal Reserve Bank has a board of directors...drawn from the general public and the banking community and oversee the activities of the organization. They also appoint the presidents of the Reserve Banks, subject to the approval of the Board of Governors....
Each Federal Reserve Bank is subject to oversight by a Board of Governors.

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There is a tragic flaw in our precious Constitution, and I don't know what can be done to fix it. This is it: Only nut cases want to be president. -- Kurt Vonnegut

It's Board is governed by political appointees, but at the same time, those appointees have tremendous power and can affect a president's political viability in a major way if they so desire. Moreover, despite the so-called low rate of return, the members meake a ton of money via easy credit.

I am not sure what cycle you are referring to. Stocks crash because investors lose confidence and take their funds out. In a free market system you cannot stop investors from selling off their shares if they get jitters.In a nutshell, here's how it works:It doesn't matter if you're McDonalds or a Chase Manhattan, for a publicly traded company, initial Capital comes from investors. The upstart company will get SEC approval and a license for incorporation and will then announce an IPO(initial public offering.) The controlling party will use the investment funds brought about by sales of stock to build capital that is used to run the business. Once profit is realized, the controlling party will usually supply a dividend to shareholders - so much per share. The holders of the stock are always free to sell their shares or buy new shares at their discretion. The company does not control this.Anyone can by or sell stock in any corporation. It is not limited to the rich or high and mighty.The price of a stock is not determined by the feds or the controlling parties -- the price is simply what investors are willing to pay at any given time. It is nothing but an auction. When stocks are auctioned on the trading floors, the price you see on the tickers represent the current bid for a share of common stock --it's what people are willing to pay. If nobody bites, the corporate traders on the floor lower the bid until buyers start emerging. If there is a large volume of 'sells', the value of the stock bid also goes down due to low demand. If the sales volume goes up, the price bid goes up as the demand is high. It's supply and demand and nothing more.How investors manage their shares is influenced by a lot of things - news, company reports, financials, lawsuits. Just about anything negative can cause shareholders to dump the stock in a heartbeat. With Bear Stearns, bad news kept coming in and coming in. One year ago, the taking bid for Stearns was $190 a share ! That's what people were willing to pay. Last Tuesday, a rumor circulated that they were going insolvent and that was the end of BSC. The bids kept dropping and nobody was buying --$50, $20, $15, $10..still nobody buying. The closing bid was $2.57 and still, nobody was buying. The stock crashed. The company lost it's capital position and could no longer continue as investors pulled all their funds. Kaboom.How do you prevent this? What do you fix? You can fix issues that cause the bad news but you cannot change the dynamics. It's all fear and panic that causes selling. That's the nature of the beast.If the Fed's had not stepped in, about 5 other financials would have tanked along with BSC. NCC and WAMU dropped 62% in 5 minutes on the BSC news as investors frantically sold their shares thinking the same would happen to them. Basically, the BSC scenario scared the living daylights out of investors. Stocks are always a gamble --you are basically betting that the company will come out ahead. If it doesn't, you stand to lose.Regarding whole market crashes -- after the 80's crash, the FEDS put in place a safety measure to stop trading if investor sell-off reached a certain mark.Other than that, what can you do?

It depends on how diverse their investments were. If 90% of your funds were invested in Bear Stearns, you are acrewed. We know for sure they lost a lot, regardless of what the percentage was. Nobody gained from this. Anyone who owned controlling shares lost a lot. The price went from $190 to $2.57.

The government does have a lot of regulatory powers already. I am not sure what else can be added as there are so many unknowns. We learn from our mistakes and go from there. If I could answer that question, I wouldn't be here -- I would be accepting the Nobel prize in Economics.It would take an expert on international trade to really offer up any serious opinions on that. I wouldn't know where to start to be honest. The only thing that comes to mind is what everyone else is thinking --to keep corporations from going overseas, offer tax breaks.

For those wanting change, here is a thought on the most expedient way to bring it about:We, the consumer, are the economy. We are all consumers -- some consume more than others, but we all consume. As consumers, we have the last say. Corporations are only giving us what we want. For good or bad, we built this structure, all of us. We continue to feed it. The system is neither good or bad, the system is fullfiling on our wants, not our needs.We do in fact consume more than any other nation on the planet. We sit and act helpless, complaining about the powers-that-be controlling us when it is we, the consumer, that controls production.Here in the US, we are not concerned with what we need but what we want. There is nothing wrong with fulfilling wants, but it is irrational to complain about the system when the system is simply giving us what we ask for.-- We need food to survive. We do not need Ho Ho's, Big Macs, Beer, and Chips. We want them.-- We need clothes for survival. We do not need designer jeans, fashion accessories, makeup and Macy's. We want them.-- We need shelter for survivial. We do not need 5,000 square foot homes. We want them.-- We want an SUV when we can drive a car. We then complan about gas prices and Big Oil.We want IPOD's, computers, technology, and research. We want the Internet, ISP's, and Google. We want Plasma screen TV's when our old 30 inch Diodes will do just fine. We don't need these things, we want them. The free market systems in the US, Japan, Canada, and the UK has supplied these to the world. It is our economic system that makes these things possible. Without investors, capital, and corporations, these things would not exist as they do now.Are we really willing to forego these things to 'make things right'? The only way to change the system is by changing consumption patterns. If you really want to affect the environment, stop buying SUV's when you can get buy with the 2 door sedan -- or just take the bus. If you want to affect food consumption and availability, stop buying the Big Macs, twinkies, and chips.Without the demand, these things would not exist. We drive the economy. You, the consumer, have more power to bring about change than the government ever will.

Not sure what you mean here......certainly I don't think there is really a "low" rate of return. 6% on money created out of thin air is not really poor. Plus, they get free money essentially.Edited by randman, : No reason given.

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The FED's policies played a large role in that behaviour by lowering rates.

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What? That makes little sense. The Fed actually raised rates over the growth of the bubble. And in the past, the Fed had rates much lower then the peak rates of the subprime bubble and we did not see anything of this magnitude. How can you blame the Fed when it was the rating agencies and banks who created the actual problems?I recently spoke to a Brandis money manager who stated that the ratings agencies literally sold ratings to the highest bidder in a similar way that the Big 5 accounting firms sold audits. That's the problem, not the Fed. But now I'd agree that the Fed is creating a future problem in how it went about with the Bear Sterns issue.

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Stated another way, government regulation is not the same as socialism.

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Of course. Without government regulation, capitalism cannot be sustained.

Everyone should also keep in mind that Socialist policies and a Free-Market are not mutually exclusive. Also, there never have been pure socialist or pure capitalist economic systems. The idea of equal distribution of wealth is as much a pipe dream as is the idea of a capitalist market free of restraints. Neither system would last long.We tend to view things in black and white, but the reality is actually a canvas of color that spans the spectrum.

Where can I go to get this free money that materializes out of thin air?I was reading a story on CNN about a guy who allegedly auctioned off a Corn Flake for $500. He says when he went to pour milk on his cereal, he saw the face of Mary staring up at him from one of the flakes. According to the story, he sold it for $500 to a Nun in Sweden. I don't know if the story is true, but let's assume it is and lets assume the guy was being honest when he thought he actually saw an image of Mary on a Corn Flake.Our first response is to laugh and try to figure out what kind of sucker would purchase something the average Joe wouldn't fork over a penny for. It doesn't matter if you think it was worth $500, however -- someone obviously thought it was. Did the guy deserve the $500? Someone out there said yes. Also, the money didn't materialize out of nowhere, it already existed. He didn't get money for free -- he exchanged it for goods that were in demand by a buyer.We say the same about Executive salaries and to us they seem ridiculously excessive, and to me they are. The fact is, however, that is what the corporations are willing to pay the executives to run the company. Again, it is supply and demand. That's the current asking price for a CEO. Without the salary, no CEO. The money to pay the salary does not materialize out of nowhere and they are not getting it for free. Overpriced bell hops? Perhaps. But just like the $500 Corn Flake, a commodity was exchanged in trade.I am not defending excess and I am far from wealthy -- I am making ends meet as I finish up Grad School. I don't think either scenario above is a fair exchange but again it's now what you or I think -- it's what the buyer and seller think. I just realize there is nothing we can really do about these things. That's the market value of a CEO or a corporate executive -- or a Corn Flake inscribed with an image of Mary. Edited by Adminnemooseus, : Topic derailment alert.