What the Fed should tell the bankers

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.