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I would suppose that the danger of such a "Dragon Country" scenario emerging could be determined by the "haircut" being required for repo operations.
It's not a problem with repo operations. It's a problem with banks accepting shit collateral against their loans. You don't solve that problem by prohibiting repo operations, you solve that problem by making the banks stop accepting shit collateral against loans.
Friends come and go. Enemies accumulate.
The whole situation is rather like a rich family or a royal family having a criminal in their midst who is empowered to continue his crime spree because, if found out, it would damage the family. If things get too out of hand, he could suffer an "accident". Except in this situation, failing a thorough-going housecleaning, none of the guilty are likely to pay any price, at least not a serious price. But there is already a world full of victims.
"It is not necessary to have hope in order to persevere."
The problem with low haircut high multiplier scenarios could well be that of creating 10 or 20 to one multipliers with "high powered money" and then using that money to blow asset bubbles in stocks and commodities.
The multiplier is irrelevant. It is an ex post accounting construct, not an ex ante operational constraint. As long as the financial regulator does not wish to ensure that banks do not finance speculative ventures, and as long as the central bank wants to retain control of the overnight funding cost (that is, the monetary policy rate), a lower multiplier simply means that more of the trash goes on the central bank balance sheet and a higher multiplier that it stays on member bank balance sheets.
If, as I suspect, the TBTFs are doing this starting with Fed money from one of the many "credit facilities", it will make it very difficult for the Fed to ever rein in the money supply by raising rates or reserve requirements without causing a monster crash.
Well, yeah, if you're using Maiden Lane facilities to cover up the fact that your big money market banks are insolvent, then it will end with Stuff Blowing Up. But a high money multiplier won't make stuff blow up any more spectacularly than it would with a low money multiplier. The money multiplier is a liquidity thing. You are having a solvency problem.
The insolvency of the general population - or rather a 'solvency' dependent purely upon inflated property prices - is a much greater problem than the related problem of the insolvency of the intermediary banks.
As Michael Hudson points out, 90% of the population are in debt to the other 10% who own substantially all the unencumbered productive assets.
And again, as he points out as an economic historian, there is nothing new about this: it's what always happens when compounding debt combines with private property in land, and is why debt relief such as Jubilees has been necessary, and is once again.
"The future is already here -- it's just not very evenly distributed"
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