Money. Doing it Right this Time.

Well I don't, in this thread in any case, want to get too drawn into a debate on Marxist principles. Though Marx's and Marxist thoughts on the subject of money are fine.

Not sure if this is on topic. Feel free to tell me off!

Marx's ideal economy is one with agrarian demands and industrial efficiency. He formed his ideas in 1830s and 1840s, a time when Industrial Revolution inventions were mostly about how to make the same stuff cheaper and quicker, such as with better looms and sewing machines. Gas lamps might have replaced oil lamps, but you still only want one in each room. Later inventions, by comparison, created completely new demands that did not replace something that had always existed, e.g. phones, cars, computers, etc.

If we assume demands would be static, given the exponential growth of industrial productivity, it was not a stretch to say that one day we will be able to make all the gas lamps we'd ever need. Indeed, we probably can, right now. The trouble is that we can't make enough more complicated, expensive toys for everyone, like sport cars or iPads. By the time we can make enough iPads, people would want newer, fancier gadgets, which will again be expensive and limited in quantity.

But let's go back to the 1840s and assume that no new toys would be invented. Demands now have an upper bound, and the potential of productive forces seems limitless. What do you do when you have made one gas lamp for every room in the entire world? You put one in each room. Since everyone will have enough gas lamps for all he needs, it's no longer necessary to decide who gets the next lamp and who doesn't. At this point, money becomes pointless for consumers. In fact, the only purpose it can serve is to stop someone from getting his lamp, which is wrong and immoral when there is no other, more physical reason why he shouldn't. That is what Marx thought capitalism was doing, by not paying workers the full worth of what they produce with their labour. In the ideal world, therefore, money should be abolished.

A number of other premises and corollaries work together with this logic. One is the upper bound of demands, which I think can be fairly called obsolete. Another is that understanding demands is easy, which would be the case if demands are static. If that is so, allocation of resources would not be a trouble either. Marx was mainly concerned with the allocation between classes. He'd never talk about how to assess which specific factory should get materials, so we can only assume that he thought it's trivial. That takes away another use of money (as well as the market). Then, whether natural resources can be exhausted was never touched on either, probably suggesting that he didn't thought it'd happen, at least not if you don't waste it with capitalist overproduction. His refutation against Malthus was that the society ought be able to produce more with a better relations of production, rather than Malthus's way of forcefully limiting the number of people.

Finally, unlike today's greenish lefties who complain about capitalism's ruthless efficiency, Marx believed that capitalism was exceedingly inefficient. In particular, the contradiction between, on one hand capitalists want to reduce wages as much as possible; on the other hand they also want to sell as much as possible. That causes commercial crises, which destroys businesses, drives workers into unemployment, and depresses both demands and productivity. A communist economy will have none of that, therefore it will be able to provide for every person according to his needs.
 
And it's lucky that Marxist thought ground to a halt the moment Cherlie breathed his last, or I might have to accuse Alassius of having failed to keep entirely up to date.
 
I was "demystifying" Marx himself, who was at least coherent within the mistaken premises. Not you later revisionists who realise the premises are wrong, but stick with the conclusions anyway :p
 
It's amazing how you can still believe that after what we're seeing!

Look, banks create money by granting loans and crediting a certain amount of new money in the borrower's account. There is no asset backing it. Only a double entry in the banks books - you can call a claim on a debt an "asset", but it's plainly a new one created just for accounting purposes. It's not an "hard" asset. Even if the borrower then goes to to, say, buy a house with it, that asset he buys is not backing the new money because it already existed prior to the creation of the money.

Only this way could lending have grown exponentially over the past decades. Each act of creating new money by the commercial banks is not matched by the creation of any new asset. Only accidentally can the money creation happen to match, on average, the actual production of new assets by mankind's labors. And it most certainly hasn't matched in for many years now!

Also, private banks do not simply leverage money created by a central bank. Private banks create money prior to a central bank intervening to back that money. The evidence of that is plain the the recent central bank intervention precisely to desperately try to back the excessive debt (money!) created by commercial banks. If banks truly were limited by central bank money creation they could never have possibly "over-leveraged" and would never have needed emergency backing.


Inno, I'm trying to find a way to explain things to answer your objections. And I'm not quite sure how to go about it.

Let's start with the Money Multiplier. A lot of misunderstanding comes from that. First, for the purposes of the money multiplier it doesn't matter what reserve requirement is chosen. You just plug in different numbers. The US uses 10%, and that makes the math easy. But it can be a different number, and the central bank just has to change the equations based on that. But it is easy as 10%, so we'll work from there.

$100 monetary base deposited in a bank. Bank loans $90, keeps $10 as reserves on hand or deposited in central bank or other permitted facility. $90 deposited by borrower, new bank loans $81. That deposited, new bank loans $72.90, ect ect. Eventually at a 10% reserve every dollar is leveraged into $10.

Some people use the term leverage, as say1988 does, some use money creation. The terms used don't matter so much.

Now the loans get repaid. $72.90 repaid, $81 repaid, $90 repaid, and we are back to just $100 is money.

Just $100. No other money has been created. It is not a perpetual motion machine.

Of course, once these loans are repaid, the bank makes new loans. So once the monetary base increase is out there, the effective money supply is increased, and remains increased until the monetary base changes again. But it does not continue to increase in the absence of a change in the monetary base.

As far as assets backing the money are concerned, yes, there is always an asset of some sort backing the money "created". Those loans represent either purchases, investments, or claims on the future earnings of the borrower. Banks have to have a collateral of some form before they will make a loan.

Now sometimes the value of the collateral is misspriced. Or sometimes it will collapse after the fact. Or will be destroyed by an accident. But the fact that there is a collateral, no matter what the real value of that collateral turns out to be, is the whole basis of the system in the first place. There has to be some form of collateral, even if it is occasionally a highly speculative one. And with most loans, new assets are in fact created. Because most loaned money goes to fund business startup and expansion. Or at least the purchase of durable goods. As far as your house example goes, the mortgage loans are not all for new houses, that's true. But it is still an asset. There is only one borrower at a time with a mortgage on that property. What does it matter if B takes out a mortgage on an existing house, and A pays off a mortgage on that same house when he sold it to B? The net result is the same.

It is all double entry bookkeeping. All assets are matched by liabilities.

So it is not the banking that is the cause of your objections. That is a misguided view of the situation. You are aiming at the wrong target.

My concern is not the banking, but the monetary base. Which is what my earlier question to Integral was about. In my Money and Banking textbook from college made it clear that money flows across national borders very easily. And when it does, the monetary base of the nations involved is changed, so the effective money supply is changed. And governments don't really control that. Now after I was out of school people stopped talking about that (in the parts of the argument I saw in any case, I wasn't tracking the academic literature). Now this is not "money creation" either. It is money flows. And it is out of the control of the central banks. Laws could be passed and enforced that would place some measure of controls on this. But the trend has been towards liberalized capital flows, not restricting them.

So there is the conundrum of monetary theory. If you believe, as I do, that the monetary base has more than one source, then you have a lot less faith in monetary policy as controlling of macroeconomic results. But the Monetarists believed that monetary policy was much stronger, because all money comes from the central bank.

Now the recent book that I am reading, the one linked in my signature, "This Time is Different", makes the point that money does flow across borders, and when a large amount of money flows into a country the authors refer to that as a "capital inflow bonanza". And that does have a strong tendency to inflate bubbles and inflation. And leads to banking crisises.
 
Let's start with the Money Multiplier. A lot of misunderstanding comes from that. First, for the purposes of the money multiplier it doesn't matter what reserve requirement is chosen. You just plug in different numbers. The US uses 10%, and that makes the math easy. But it can be a different number, and the central bank just has to change the equations based on that. But it is easy as 10%, so we'll work from there.

$100 monetary base deposited in a bank. Bank loans $90, keeps $10 as reserves on hand or deposited in central bank or other permitted facility. $90 deposited by borrower, new bank loans $81. That deposited, new bank loans $72.90, ect ect. Eventually at a 10% reserve every dollar is leveraged into $10.

Some people use the term leverage, as say1988 does, some use money creation. The terms used don't matter so much.

Now the loans get repaid. $72.90 repaid, $81 repaid, $90 repaid, and we are back to just $100 is money.

Just $100. No other money has been created. It is not a perpetual motion machine.

Of course, once these loans are repaid, the bank makes new loans. So once the monetary base increase is out there, the effective money supply is increased, and remains increased until the monetary base changes again. But it does not continue to increase in the absence of a change in the monetary base.

Thanks for the explanation, but I do understand how reserve requirements are supposed to work and their implications. And how on repayment of a loan the "money" which it created is supposed to be destroyed. However, the fact is that in reality banks do not act constrained by reserve requirements. Which makes it useless as a policy tool for controlling banks. If they did they could not have over-leveraged and then go demanding money from central banks.
I'm not going to post again in my own words the objections to this idealized model, suffice to say that it was observably wrong because the actual data just doesn't fit the theory. And for a discussion of that I'll just post (again?) one link of a short but easily accessible attack on it:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

This first major paper on this approach, “The Endogenous Money Stock” by the non-orthodox economist Basil Moore, was published almost thirty years ago.[4] Basil’s essential point was quite simple. The standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend,

“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”.[5]

Thus loans come first—simultaneously creating deposits—and at a later stage the reserves are found. The main mechanism behind this are the “lines of credit” that major corporations have arranged with banks that enable them to expand their loans from whatever they are now up to a specified limit.

If a firm accesses its line of credit to, for example, buy a new piece of machinery, then its debt to the bank rises by the price of the machine, and the deposit account of the machine’s manufacturer rises by the same amount. If the bank that issued the line of credit was already at its own limit in terms of its reserve requirements, then it will borrow that amount, either from the Federal Reserve or from other sources.

If the entire banking system is at its reserve requirement limit, then the Federal Reserve has three choices:

refuse to issue new reserves and cause a credit crunch;
create new reserves; or
relax the reserve ratio.

Since the main role of the Federal Reserve is to try to ensure the smooth functioning of the credit system, option one is out—so it either adds Base Money to the system, or relaxes the reserve requirements, or both.

Thus causation in money creation runs in the opposite direction to that of the money multiplier model: the credit money dog wags the fiat money tail. Both the actual level of money in the system, and the component of it that is created by the government, are controlled by the commercial system itself, and not by the Federal Reserve.

Central Banks around the world learnt this lesson the hard way in the 1970s and 1980s when they attempted to control the money supply, following neoclassical economist Milton Friedman’s theory of “monetarism” that blamed inflation on increases in the money supply. Friedman argued that Central Banks should keep the reserve requirement constant, and increase Base Money at about 5% per annum; this would, he asserted cause inflation to fall as people’s expectations adjusted, with only a minor (if any) impact on real economic activity.

Though inflation was ultimately suppressed by a severe recession, the monetarist experiment overall was an abject failure. Central Banks would set targets for the growth in the money supply and miss them completely—the money supply would grow two to three times faster than the targets they set.






As far as assets backing the money are concerned, yes, there is always an asset of some sort backing the money "created". Those loans represent either purchases, investments, or claims on the future earnings of the borrower. Banks have to have a collateral of some form before they will make a loan.

Now sometimes the value of the collateral is misspriced. Or sometimes it will collapse after the fact. Or will be destroyed by an accident. But the fact that there is a collateral, no matter what the real value of that collateral turns out to be, is the whole basis of the system in the first place. There has to be some form of collateral, even if it is occasionally a highly speculative one. And with most loans, new assets are in fact created. Because most loaned money goes to fund business startup and expansion. Or at least the purchase of durable goods. As far as your house example goes, the mortgage loans are not all for new houses, that's true. But it is still an asset. There is only one borrower at a time with a mortgage on that property. What does it matter if B takes out a mortgage on an existing house, and A pays off a mortgage on that same house when he sold it to B? The net result is the same.

I must continue to disagree with that. For example, you're assuming that the house was originally built with a mortgage. When it is perfectly possible (and was indeed necessary for the increased weight of credit in the economy) that loans be made to buy all kings of assets which were not previously mortgaged. Houses, for example, but also leveraged buyouts of whole corporations - which usually end up ruining said corporations be stripping its real assets and leaving a debt-riddled shell to be sold to some foolish investors.

Now the recent book that I am reading, the one linked in my signature, "This Time is Different", makes the point that money does flow across borders, and when a large amount of money flows into a country the authors refer to that as a "capital inflow bonanza". And that does have a strong tendency to inflate bubbles and inflation. And leads to banking crisises.

Yes, another problem with the present financial system... one other among so many!
 
Thanks for the explanation, but I do understand how reserve requirements are supposed to work and their implications. And how on repayment of a loan the "money" which it created is supposed to be destroyed. However, the fact is that in reality banks do not act constrained by reserve requirements. Which makes it useless as a policy tool for controlling banks. If they did they could not have over-leveraged and then go demanding money from central banks.
I'm not going to post again in my own words the objections to this idealized model, suffice to say that it was observably wrong because the actual data just doesn't fit the theory. And for a discussion of that I'll just post (again?) one link of a short but easily accessible attack on it:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/


That part you quote does not effectively change anything that I wrote. The sequence of events doesn't actually matter for the macro results. In seeking the money after the fact, they have to bid it away from other uses. That's what your author appears to miss: They can only "create money" here by "destroying money" someplace else.

As with any accounting ledger, when you look at only one side of it you are not really seeing what is going on.



I must continue to disagree with that. For example, you're assuming that the house was originally built with a mortgage. When it is perfectly possible (and was indeed necessary for the increased weight of credit in the economy) that loans be made to buy all kings of assets which were not previously mortgaged. Houses, for example, but also leveraged buyouts of whole corporations - which usually end up ruining said corporations be stripping its real assets and leaving a debt-riddled shell to be sold to some foolish investors.


It doesn't actually make any difference. It is still an asset backing the loan.


Yes, another problem with the present financial system... one other among so many!


This is potentially a problem with the system. But the fact that the system is imperfect is an argument for controlling it. Not for destroying it. Because, like I said in that other thread the other day, we don't actually have something to replace it with.
 
I was "demystifying" Marx himself, who was at least coherent within the mistaken premises. Not you later revisionists who realise the premises are wrong, but stick with the conclusions anyway :p
Unwillign to derail the thread any further as I am- some of us know the difference between an invitation for discussion, and an invitation for soap-boxing- I'll simply reserve myself to speculating if your reading on the topic has strayed far outside the confines of Orthodoxy. If you know your Castoriadis from your Callinicos, as it were.
 
That part you quote does not effectively change anything that I wrote. The sequence of events doesn't actually matter for the macro results.

Bit it does matter. It is critical to whether or not the purpose of reserve requirements can be achieved. Its point was to control private bank's money/debt creation. But if banks do it and then central banks must back them, no such control actually happens. Central banks pretend to police the rest of private finance, but what actually happens is that they must run after them trying to put out the fires!
And that is exactly what we are witnessing.

It doesn't actually make any difference. It is still an asset backing the loan.

How it doesn't matter? How can it not matter? Doing this is turning any asset into an ATM, wanting to both have the asset and have its equivalent in money to spend on other stuff. That new money has consequences. You could, following that logic, mortgage the whole planet and magically multiply the world's GDP by inflating the money in circulation while claiming that you had no inflation because it was all "backed by assets". But, of course, you would have price inflation: rising prices of those very same assets which were mortgaged. Leading to the refinancing of debts and more debt/money in circulation. Sounds familiar? It should, it's the story of all modern housing bubbles!

I don't care about what monetary theories have to say. I care about what reality has shown. And reality has shown, repeatedly, that banks do create money, that assets supposed to back that new money get overvalued as a consequence of that very same money creation, and that the whole thing, if left to its own evolution, spirals out of control until debts become unserviceable, prices collapse and bankruptcies follow because those assets weren't actually worth what they were marked for in the books.

Money creation is a useful tool, but it's also a dangerous one. It's extremely profitable - getting paid for (interest on) money you just created out of nothing - so any private enterprise allowed to do it will do as much of it as possible, and these financial booms and bursts follow.
I'm not advocating that lending in this way should simply be ended: regulating the amount of money in circulation is far too useful a tool to throw away. Only that if states are always the institutions which must pick up the pieces when the financial system fails, then states should be running it all the time in the first place, and run it with an aim towards economic advancement of the whole country, not towards maximum profits on the financial operations.

Actually, if the states ran their whole national finance and an appropriate international trade framework existed, they could not possibly profit from it: any state "profits" must necessarily be spent into the economy again in payments to suppliers or employees. Finance being all public there would be no state payments of interest to private concerns, not accumulation in any kind of treasury. Only money (debt) creation and destruction. A state running a tax deficit and "borrowing" the remainder of its budget from its own public financial institutions would just be taxing its citizens through inflation. And doing the opposite would be a "tax credit" through deflation. So long as this was known and accepted it'd be just another policy tool and economic activity would easily adapt to it.
International payments could also be integrated into this scheme, it was one of the possibilities discussed at Bretton Woods. Unfortunately the private banking concerns managed to keep the idea sunk do far. Their feudal-type privilege to get rents from any business or individual who needs money is so profitable that any means will be used to defend it.
 
Bit it does matter. It is critical to whether or not the purpose of reserve requirements can be achieved. Its point was to control private bank's money/debt creation. But if banks do it and then central banks must back them, no such control actually happens. Central banks pretend to police the rest of private finance, but what actually happens is that they must run after them trying to put out the fires!
And that is exactly what we are witnessing.


The CB doesn't have to. The bank needs to get the money from the other banks or financial markets. And pay a cost penalty if they didn't price the transaction right. The CB doesn't need to get involved at all. It is certainly not an inflation pusher.



How it doesn't matter? How can it not matter? Doing this is turning any asset into an ATM, wanting to both have the asset and have its equivalent in money to spend on other stuff. That new money has consequences. You could, following that logic, mortgage the whole planet and magically multiply the world's GDP by inflating the money in circulation while claiming that you had no inflation because it was all "backed by assets". But, of course, you would have price inflation: rising prices of those very same assets which were mortgaged. Leading to the refinancing of debts and more debt/money in circulation. Sounds familiar? It should, it's the story of all modern housing bubbles!

I don't care about what monetary theories have to say. I care about what reality has shown. And reality has shown, repeatedly, that banks do create money, that assets supposed to back that new money get overvalued as a consequence of that very same money creation, and that the whole thing, if left to its own evolution, spirals out of control until debts become unserviceable, prices collapse and bankruptcies follow because those assets weren't actually worth what they were marked for in the books.

Money creation is a useful tool, but it's also a dangerous one. It's extremely profitable - getting paid for (interest on) money you just created out of nothing - so any private enterprise allowed to do it will do as much of it as possible, and these financial booms and bursts follow.
I'm not advocating that lending in this way should simply be ended: regulating the amount of money in circulation is far too useful a tool to throw away. Only that if states are always the institutions which must pick up the pieces when the financial system fails, then states should be running it all the time in the first place, and run it with an aim towards economic advancement of the whole country, not towards maximum profits on the financial operations.

Actually, if the states ran their whole national finance and an appropriate international trade framework existed, they could not possibly profit from it: any state "profits" must necessarily be spent into the economy again in payments to suppliers or employees. Finance being all public there would be no state payments of interest to private concerns, not accumulation in any kind of treasury. Only money (debt) creation and destruction. A state running a tax deficit and "borrowing" the remainder of its budget from its own public financial institutions would just be taxing its citizens through inflation. And doing the opposite would be a "tax credit" through deflation. So long as this was known and accepted it'd be just another policy tool and economic activity would easily adapt to it.
International payments could also be integrated into this scheme, it was one of the possibilities discussed at Bretton Woods. Unfortunately the private banking concerns managed to keep the idea sunk do far. Their feudal-type privilege to get rents from any business or individual who needs money is so profitable that any means will be used to defend it.


An aggressively regulated banking sector is what you need, not government owned banks. And I would argue for that as well. There are too many problems with having the government run the banks directly.
 
If the entire banking system is at its reserve requirement limit, then the Federal Reserve has three choices:

refuse to issue new reserves and cause a credit crunch;
create new reserves; or
relax the reserve ratio.

[...]
Thus causation in money creation runs in the opposite direction to that of the money multiplier model: the credit money dog wags the fiat money tail.

That part you quote does not effectively change anything that I wrote. The sequence of events doesn't actually matter for the macro results. In seeking the money after the fact, they have to bid it away from other uses.

Non-responsive. Your last sentence quoted above simply denies inno's premise. It's also about as cogent as arguing that speeding never happens because it's against the law. Or to make the analogy a little better: that speeders can't change cops' enforcement policies by collectively making <speedlimit + 5> the norm.
 
I'm not sure I actually understand your objection. Inno is arguing that the banks are compelling the central bank to increase the monetary base. That isn't true. Perhaps I was less than clear on that. If a bank makes loans beyond its limits, it has to acquire the money someplace. But the CB is under no obligation to supply it. The bank has to get it by paying the going rate on the market.

"Lender of last resort" does not mean that banks can go to the CB any damned time they want. What it means is that when all else has failed and the economy itself is in jeopardy, the CB will make whatever loans are necessary to stabilize the situation.

And even if they did, the CB could sterilize the macro effect on the monetary base with its other tools. So in no way is bank lending driving ever growing inflation. That's a false conclusion drawn from a false premise.

Under normal conditions a CB refusing to issue new base to the banks does not cause a credit crunch. CBs do it all the time, when they want to cause interest rates to rise in the face of an inflation problem. Instead it is just a signal to that bank that they have reached the limits, and if they keep exceeding them, then the bank has to pay higher interest rates for the money it borrows.
 
Inno is arguing that the banks are compelling the central bank to increase the monetary base.

"Hand over the money, or else."

That isn't true.

Perhaps I was less than clear on that. If a bank makes loans beyond its limits, it has to acquire the money someplace. But the CB is under no obligation to supply it. The bank has to get it by paying the going rate on the market.

"Lender of last resort" does not mean that banks can go to the CB any damned time they want. What it means is that when all else has failed and the economy itself is in jeopardy, the CB will make whatever loans are necessary to stabilize the situation.

The economy itself being in jeopardy sounds like a pretty effective "or else" to me. Maybe the CB isn't (legally?) obligated to supply it, but hey, when a robber points a gun at you you're not obligated to hand over your wallet, either.

It sounds like you and inno agree on what kind of lady the CB is, and now you're just haggling over the price ;) In other words, both banks and the CB have some power over the situation, and you're just haggling over the acknowledgement of relative shares of power. The next questions are, how bad does a crisis have to be before the CB will blink? How do banks (dis)regulate their behavior in anticipation of such events? Empirically-based answers preferred.
 
First, you're confusing emergencies with day to day operations. Most days you don't have emergencies. In day to day operations, banks are obligated to not make loans they can't cover, but they have to cover them from the private sector, not the CB. It is only in emergencies that the CB needs protect the system, and so will let the needs of system have priority over other monetary goals. How often does that happen? Events are years apart. Once to twice a decade. Many decades don't have any financial crises at all. Only common periodic recessions.

As for what the options are, that's where you really need to make the distinction between monetary policy and regulatory policy.

And, as an aside, this is where you have to accept that no institutional arrangement trumps the people that are running that institution. And so we had Greenspan.

Because, you see, most of these issues are regulatory issues, not monetary policy issues. And Greenspan thought, and helped convince many elected officials, that regulation was unnecessary.

You don't want banks that have anywhere near the power to push CB actions? Anti-trust regulations: Forbid banks to become large enough pose a risk to the system. A bank that is less than 1% of the system cannot threaten the system. If they overreach, let FDIC take them over. You don't want banks to make notably risky loans, regulate the terms of the loans.

Monetary policy was the last resort to save the system because regulatory policy was dismantled or unused when it could have prevented all of the problems of the financial crisis. There are economics papers that show that financial deregulation is an accurate predictor that a financial crisis will follow.

How do banks (dis)regulate their behavior in anticipation of such events?

I don't understand this question. Could you rephrase it?
 
How do banks (dis)regulate their behavior in anticipation of [crisis] events?

In other words, if B of A anticipates that a crisis is oncoming, but also that Chase and Citigroup will soon be out of compliance, and are too big to fail, does B of A say "woohoo, we can do as we please"? To themselves, obviously - not out loud!

And, as an aside, this is where you have to accept that no institutional arrangement trumps the people that are running that institution. And so we had Greenspan.

Realism for the win.

You don't want banks that have anywhere near the power to push CB actions? Anti-trust regulations: Forbid banks to become large enough pose a risk to the system. A bank that is less than 1% of the system cannot threaten the system. If they overreach, let FDIC take them over. You don't want banks to make notably risky loans, regulate the terms of the loans.

Now you're speaking my language :love: as long as the people running the institutions either check-and-balance each other to enforce the actual rules, or else are in no danger of co-optation. In other words: as long as the checks and balances are well structured.
 
In other words, if B of A anticipates that a crisis is oncoming, but also that Chase and Citigroup will soon be out of compliance, and are too big to fail, does B of A say "woohoo, we can do as we please"? To themselves, obviously - not out loud!


A lot has been made of this. This idea that banks gamed the system in the expectation of a bailout.

I don't think it's really that simple.

But, that said, gaming the system wasn't absent. The biggest part of all the mergers and acquisitions that built the big banks into megabanks were primarily about generating immense bonuses and compensation for bank top executives. It really was personal greed driven.

But there were the other aspects. The Greenspan years had what came to be known as the "Greenspan Put". That is, Greenspan made it clear that he would not, as the old central bank saying goes, "take away the punchbowl just as the party was getting started". But at the same time he made it clear that he would not allow a market collapse. So he wouldn't stop up, but he would stop down. Now the Greenspan Put doesn't have anything to do with bank size and mergers. But it does have to do with the behaviors of the financial markets as a whole. As it makes them more likely to take risks. Now that's the financial markets as a whole, not specifically the banks.

Beyond that, there is a realization that the mergers to megabank status places them in a status of "must be bailed out because of the systemic risk".

So I don't think the mergers were for the purpose of creating that situation, but they did manage it, and there as an awareness of that.

The banks got bailed out after the Mexican debt crisis. So they knew that that was there. And the Greenspan Pus existed and was well know after the DotCom Bubble and Greenspan's failed efforts to handle that with monetary policy.

But what these incidents show is the failure of regulatory policy, not monetary policy. The bailouts were necessary because the regulations failed. They failed because they were dismantled or unenforced.

Those are your choices, really. You can regulate or you can have crises.




Realism for the win.

Now you're speaking my language :love: as long as the people running the institutions either check-and-balance each other to enforce the actual rules, or else are in no danger of co-optation. In other words: as long as the checks and balances are well structured.


Well structured regulatory environments is still critically important, even when it cannot overcome bad leadership. Part of the reason that the financial crisis happened was that the regulatory structure was so divided and dispersed. With dozens of regulators to work with, banks were much more able to game the system to evade regulation.
 
I read that recently Denmark and Germany have been able to emit bonds with a negative interest rate. So investors were actually paying for the privilege to finance the dept of those countries.

Now I am wondering: Why would anybody go for such a deal? Sure, Denmark and Germany are known for paying back their debt, but how is that better than not giving the money away in the first place? Is there some mechanism that prevents banks from sitting on a huge pile of cash? Couldn't they say: "There are no investment options that are safe enough and offer a return, so we will just keep the money until a profitable deal comes along"?
 
If someone is willing to accept a negative interest rate, it is because they need someplace safe to park their money. They cannot find an investment opportunity that pays more that they consider to be safe enough to justify the risk. They are probably betting that Europe is going to tank on the debt crises. And so most investment opportunities are not going to be safe enough to risk. Worst case scenario, they will at least get most of their money back. Best case scenario they can still make a profit if they can sell the bonds for substantially more than they bought them for. Worst case scenario for other investments would be the loss of all the money put into it. Worst case scenario for holding cash is substantial inflation or the collapse of the value of the currency. And if the Euro itself fails then holding the cash in Euros is potentially a very big loss.

Banks in the US are sitting on a lot of cash. But you have to recall what I said above about how banks make money. They have to make loans in order to make revenue to pay their expenses. So they can sit on some of their money, but they are always incurring their operating costs. And so they simply cannot sit on all of their money for very long. The lack of revenue will eventually drive them out of business.

Does that fully answer your question?
 
Sorry, but it just doesn't make sense. There have to be politics behind it. An individual investor would just hold cash, as in cash, the papery stuff kind. These are institutional investors doing it, too much money, I know. But their moves would be accompanied for a "scramble for currency" if this was an economic decision reflecting the current mood of individuals invested into those funds. The people whose money is managed by these "institutional funds" would be doing it: why pay fees to a fund holding negative interest and risky bonds for you if you can have instead what are effectively the last existing "bearer bonds" (paper currency) at zero interest?

And they're not doing it, to any visible degree. So there is a disconnect here... some states are getting stealth financing and some favors are being traded with certain financial institutions, or some short-term speculation on bond prices is being made. Politics...
 
Cash might not be as safe as the bonds. Not if the currency is in danger of losing a lot of value.
 
Cash might not be as safe as the bonds. Not if the currency is in danger of losing a lot of value.

Might be a good point, except that bonds are denominated in the very same currency. And if a state is going to devalue its currency then it's government would have to be mad to retroactively revalue its past (and locked, presumably) bond contracts to offset losses to bondholders. Currency devaluation should devalue bonds in exactly the same proportion as it does cash.
 
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