Posted on 04/27/2008 3:01:19 PM PDT by shrinkermd
I merely asked about your tag line. We are all for victory. I was just wondering whether you know what Victory would look like in Iraq if we were to achieve it. The total capitulation of Sadam Hussein and the destruction of his army occurred long long ago and we don't right now seem to be a lot better off for it.
I think the FED now and forever should keep the expansion of the broad supply of money to the rate of GDP growth, GDP fairly measured with "reasonable" corrections for inflation, but not unreasonable ones [e.g. when you get a pacemaker to keep you alive, that is GDP growth. When we double the cost and make it in multiple colors, we should simple count the cost as doubled without attempting an hedonic correction for the fact that you can now enjoy parti-colored pacemakers].
I also think that the FED should get real tight when bubbles start to appear, and bubbles are a whole lot easier to spot than Greenspan claims. The dotcom bubble was a bubble, pure and simple, and anyone anywhere near the state of california at the time knew it was a bubble. The real estate bubble was a bubble and he went out of his way to help inflate it with deliberate malice of forethought).
Well that's just what it has done. You can't define "reasonable" any more than you can turn lead into gold.
I also think that the FED should get real tight when bubbles start to appear
It did. Now you have to define "start to appear". Try to hit that moving target.
Greenspan said there was no moving target. I suppose one is always entitled to the perspective that central bankers cannot see the trucks that will run them over until it is too late. Why have them then?
So you can spend your days second guessing them with the benefit of 20/20 hindsight?
Individual banks create new money every time they make a new loan. Making a loan does not destroy the original depositers account balance. It does increase the lend-ee's account balance. After that lend-ee spends the money and it ends up in the hands of someone who wants to save it, you have 2 bank balances, at the same bank or at different ones. If at different ones, the original loan-originating bank can simply borrow from the other bank.
New loans are self funding, in the aggregate. The new savings needed to support the new loans, are created by those loans themselves. If holders of all the new money thereby created, all want to keep that extra new money in checking accounts or withdraw it in cash, then there is a Fed reserving requirement against the portion of it, they want in that form. Not all of it, just 10% of it.
But if they don't demand physical cash or a checking account balance, and instead prefer to hold a savings account balance, a CD, or an institutional money market balance, then there is no reserving requirement against the new money, at all. And as a result, no Fed action of any kind, is required to create new money this way.
And in fact, over the last 3 years, the Fed has not allowed M1 to expand at all, but commercial banks have been able to expand the broad money supply by $2 trillion, anyway.
As for Basel capital requirements, they are not 10 percent of all assets. Citicorp have 20 times as many assets as capital, and some banks have 33 times. The regulatory standard, as I keep telling you, is net worth (equity capital) equal to 4% of *risk adjusted* assets, and total capital (which includes long term debt, not just equity) must be equal to 8% of *risk adjusted* assets.
And what is the risk adjustment? For treasuries, the face value times *zero*. I.e. no reserves needed at all. For mortgage debt or any other debt secured by real property (e.g. aircraft leases, shipping loans), 15%, 25%, or 35% depending on its quality level. Meaning, for the middle figure, a bank can have 100 times as much of that stuff as it has share capital, and 50 times what it has capital and long term debt combined. For corporate debt and personal loans, no adjustment. Meaning 25 times equity for those.
A bank can move its mix of assets toward the treasury end, to support any degree of leverage, without breaking those capital standards.
It can also sell more debt to increase the second sort of capital, and more preferred or common to increase the first sort, without any net earnings. Or it can just let retained earnings increase the equity - often at double digit rates.
These are not meaningful restrictions on a bank's ability to create new broad money, precisely because it is nearly suicidally reckless to go as far as these standards allow. In practice, the better large banks pull in their horns when their tier 1 capital ratio falls below 8% - not 4%. But e.g. Citicorps current tier 1 ratio is 7.7% and its total capital is 11.2%, even with assets to tangible book in the 20 times range. Why? Because 30% of the assets are treasuries, requiring no reserves at all. And much of the rest is mortgages or agency mortgage backed, with 15% risk adjustments.
Notice, the capital requirement binds a bank's *asset mix*. The Fed reserve requirement binds, instead, a portion (only) of its *liability* mix (the portion of its liabilities that are checking account, demand deposits). The bank has wide discretion to move about in ways that relax either bind.
If the liability mix shifts toward loans from other banks or the money market, or issuance of commercial paper, or floating more bonds, or customers holding more CDs - then the second, liability side regulatory control eases. If the asset mix shifts toward governments and high rated mortgages, the asset side regulatory control eases. The same if it sells a new preferred stock issue.
Both sides of the balance sheet need to be actively managed. But on neither side, are the regs so tight that banks can't create new loans at will, when they think those loans are sound and will be repaid, and can be made at rates that cover their funding costs and running costs, and leave a profit.
Those considerations, and not either regulatory regime, govern the pace of expansion of bank balance sheets.
Frankly for the largest, the single reg that binds the most is the limit on the portion of all deposits in the hands of one institution. Citi at times, and both Bank of America and JP Morgan Chase now, bump up against those limits. And consequently seek further growth abroad, or from funding sources besides US deposits, including moving more heavily into Wall Street finance (securities issuance and purchase) rather than main street finance (deposit taking and loan origination). All pay large cash dividends (and some internal salary cost-bloat) to avoid growing faster than the whole economy. Because left on autopilot, they would.
Since it is easy to partner with the existing banks, anyone who prefers to lend to them (hold bank money deposits) instead of share their risks and their rewards, has no just cause for complaint about them. If they have a deal so good it is a scandal, join them. If, on the other hand, a ride so rocky in sometimes means 50% drops in less than a year puts you off enough that you prefer CDs, don't complain that they make more money over the long haul, than the CDs do.
No it cannot because there are accounting rules as to how many assets the bank is allowed to hold. Furthermore, the money is not fake. When I sold my house, I didn't get any old piece of paper. The other guy's bank put cash into the escrow account that got paid to me on closing. When I take out a car loan, the other guys car dealer got a check for cash moeny. That money eventually gets recyled into another real estate loan is the whole point of fractional reserve banking and how the banking system multiplies injected money.
Yes the entire derivatives world has created a set of off FED balance sheet IOU's that could be considered to constitute a private monetary arrangement. The whole system comes tumbling down every time simeone tries to turn any significant fraction of this mountain of IOUs into real cash, as has just been happening. In order to save the banking system the FED has actaully been monetizing some of this junk, expanding the money supply, but that is a voluntary act of the FED, not the banks that created the IOUs. If you read Volker's speach carefully you would have seen that he excoriated Bernanke for this.
My cat's pedigree is not money either though it has some value if it is a valuable cat. There is nothing that stops us from trading pedigrees as money. That does not expand the money supply. The day the FED purchases pedigrees in open market operations it would monetize the pedigrees.
False, on its face. Also, I said "any institution", and it is true even of non-banks. But take a bank. There is no limit whatsoever in any law, limiting how many assets a bank can hold. Their can be capital requirements to hold assets of a certain type, but any bank can meet those by issuing more IOUs (debt and preferred stock) if anyone will take them. Which is exactly the subordinate clause of my statement.
"the money is not fake."
Didn't say it was, you are the one so confused you think anything someone can create at will, if another agrees to accept it, is "fake". When Joe gives the bank his IOU, that IOU is a real asset. If Joe can perform what he promises, it is as sound an asset as exists anywhere in the universe.
And it is created and supported the same way all value is, of any form whatsoever. No one brings anything into existence out of nothing. We merely rearrange things into more useful forms. That rearrangement can come from physically moving an object to where it is more urgently needed, on a truck, and that is "production of value". Real value. Or it can come just from arranging that this much of X and that much of Y should be mixed to produce Z, if Z is valued higher than its inputs. It can come from just seeing that it would be better to do so and betting on it, even.
Promises that men can actually perform are real assets in intertemporal trade. Nothing fake about them, at all. Try pretending you own $1 million face value of bonds of JP Morgan Chase because they are "fake" and see how far it gets you. They simply are not fake.
"I didn't get any old piece of paper."
A bank, did. And accepted it. If it hadn't, you wouldn't have sold your house, and certainly not for as much as you got for it. A bank got a buyer's IOU on a scrap of paper. That's what a mortgage is. And believed enough in it, to hand over a bank deposit for it. You got a bank deposit, and the builder got a bank deposit, because you both preferred them to having the end buyer's IOU. The bank prefers the end buyer's IOU - it pays more, if he stays current anyway.
"When I take out a car loan, the other guys car dealer got a check for cash moeny."
From a bank, which holds only your IOU, and treats that IOU as being as valuable as the money it handed over to acquire it. Because, in fact, it is. At least as valuable.
"the whole point of fractional reserve banking"
False. The point of fractional reserving is merely to limit how much there is in checking accounts plus printed bank notes. But the point of *banking* is to sell things that you think are "more real" but aren't, and buy things that you think "aren't real" but are, and to earn on your benighted confusion in the matter. Or, less colorfully, to take the other side of everyone's pressing liquidity preference by being less liquid but more profitable, by holding future claims rather than present ones.
"the entire derivatives world has created a set of off FED balance sheet IOU's"
An inaccurate statement. Perhaps you are trying to be poetic about it. But no, the Fed's IOUs aren't any more real than anyone else's IOUs. They are of exactly the same kind, and their value is just as subject to revision by everyone else's faith in them or preference for them, as your IOUs or mine, or Citicorp's or Ford's. Also, those aren't "derivatives". Also, they are on people's balance sheets, just not on the Fed's.
"that could be considered to constitute a private monetary arrangement."
Actually, every form of money is such a private and voluntary arrangement. Even the government and all authorities can only participate finance by using such free, mutual, voluntary means.
"The whole system comes tumbling down every time simeone tries to turn any significant fraction of this mountain of IOUs into real cash"
Sorry, no, it doesn't come tumbling down, it stands, it supports tens of trillions in real capital value. And the reason for your confusion in the matter is obvious - you don't see the reality of future claims, and you can only imagine their "reality" as some physical mcguffin in your possession. Everyone who buys a stock knows better. All the mcguffins currently in existence aren't a twentieth part of the real value being regularly produced, let alone of the greater value that will be produced, like clockwork, out into an endless future of rising human prosperity.
"the banking system the FED has actaully (sic) been monetizing some of this junk, expanding the money supply"
Except, the money supply controlled by the Fed is not in fact expanding. What is actually happening is the banks, free to destroy monetary claims as well as to produce them, by paying down debt or extinguishing assets by writing them off as uncollectable, are first forcing a cash flow in their favor and then using it to reduce their outstanding obligations. Lowering narrow money supply. And the Fed is merely keeping it level as they do so.
"If you read Volker's speach carefully you would have seen that he excoriated Bernanke for this."
I read it far more carefully than you, and he does not criticize Bernanke for it or for anything else. He does say he thinks Fannie and Freddie could be parking places for more mortgage paper instead of the Fed - but it is a comment that shows little appreciation of their present weakness, compared to their government enterprise role in his own day. They might be returned to that role, and taken charitably that is what he was advocating. (Along with an Obama presidency).
"There is nothing that stops us from trading pedigrees as money. That does not expand the money supply."
Savings deposits at commercial banks are not cat pedigrees. They are US dollars, just like checking accounts at commercial banks. And they trade into checking accounts at the will of the depositer. But their creation is not controlled by the Federal Reserve.
The broad money supply is endogenous, and your special controlled already existing mcguffins view of money and its role in modern finance, is just hopelessly wrong.
You are an idiot. The bank had to have the $10,000 in cash on deposit in order to write the check. Otherwise, when the clearing house tries taking it from your bank and giving it to the other guy's bank and the balance falls below zero, it bounces, and your bank gets shut-down because it is bankrupt.
A bank cannot send out money to anyone unless it has real money at the bank to send out.
Furthermore, even if the check clear's your bank, but your banks's reserves fall below required levels the FED starts charging you penalties.
No, bank's don't just arbitrarily issue pieces of paper that count for money. If they could BSC would not have gone under as well as many other banks in the recent crisis.
You are so cute I can't stand it anymore.
Bank reserves do not fall if the holder of the new balance wants savings or CDs.
That is how the money supply rose $2 trillion in the last 3 years, without a single net new reserve from the Fed, aka no change in M1 whatsoever.
You continue to confuse a bank's need to have an *asset* for every liability, with an inability to create both. There is no such inability, banks can pick how large their balance sheets are, as long as anyone accepts their debts. But they have assets to match their liabilities (and a little more).
Increasing liabilities without having any assets, is not only impossible for them, they don't have any reason to want to. Assets and liabilities balance (equity is just one of the later, the residual). That is just double entry accounting and an identity. You seem terminally confused on this point. Obviously, banks increase their liabilities solely to fund new and larger holdings of assets, not for its own sake.
Banks can't create net worth, but they can create matching increases in their assets and liabilities, at will. Subject to very loose regulation for transactions accounts only on the liability side, and some funding requirements scaled to assets on the asset side, with quite liberal risk adjustments. In practice, simply prudence is what restricts their leverage level. They know what their liabilities will cost, but not what their assets will be worth.
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