"Macro" Musings

[giofranchi]

Vice versa, today banks are almost as powerful as they were in 2007, almost as if nothing had happened in between…

 

They can't so much as take a piss today without getting approval.  Here we are waiting for "permission" to pay a dividend.

 

Well, if you had to assign a probability to the fact that Mr. Fisher's proposal will truly be implemented, which would it be?  ???

 

giofranchi

 

Low probability.  Why?  I don't think "the people" even want it.

 

For example, I bank with Wells Fargo.  It's not because they have a gun to my head, it's because I've moved from Los Altos Hills, to Eugene, to Los Angeles, then on to Seattle, and now Montecito.

 

Never have I had to open a new bank account.  It's very convenient.

 

Why would I want Mr. Fisher to create a law that says Wells Fargo can only be a small community bank?  What a pain in the rear in today's world where you don't grow up, work, and die in your same small community.

 

Eric,

commercial banks can do business wherever they want, opening how many branches they want. What Mr. Fisher proposes is they cannot be commercial and investment banks at the same time. And only the assets of commercial banks should be guaranteed by the government.

What’s wrong with that?

 

giofranchi

 

[ERICOPOLY]

Vice versa, today banks are almost as powerful as they were in 2007, almost as if nothing had happened in between…

 

They can't so much as take a piss today without getting approval.  Here we are waiting for "permission" to pay a dividend.

 

Well, if you had to assign a probability to the fact that Mr. Fisher's proposal will truly be implemented, which would it be?  ???

 

giofranchi

 

Low probability.  Why?  I don't think "the people" even want it.

 

For example, I bank with Wells Fargo.  It's not because they have a gun to my head, it's because I've moved from Los Altos Hills, to Eugene, to Los Angeles, then on to Seattle, and now Montecito.

 

Never have I had to open a new bank account.  It's very convenient.

 

Why would I want Mr. Fisher to create a law that says Wells Fargo can only be a small community bank?  What a pain in the rear in today's world where you don't grow up, work, and die in your same small community.

 

Eric,

commercial banks can do business wherever they want, opening how many branches they want. What Mr. Fisher proposes is they cannot be commercial and investment banks at the same time. And only the assets of commercial banks should be guaranteed by the government.

What’s wrong with that?

 

giofranchi

 

I didn't realize that he was an advocate of letting firms continue to control a trillion in deposits.

 

Rather, I thought he was gunning for all banks over $250b in assets.

 

They may be misquoting him, but here is what one author claims:

 

He identified 12 "megabanks" with assets of over $250 billion as too big to fail.

 

http://www.cnbc.com/id/100385916/Fed039s_Fisher_Break_up_banks_that_are_039too_big_to_fail039

 

It sounds like he wants to "down-size" the commercial banking operations, but maybe it's just a poorly worded sentence and I'm misunderstanding him:

 

"Only the resulting down-sized commercial banking operations, and not shadow banking affiliates or the parent company, would benefit from the safety net of federal deposit insurance and access to the Federal Reserve's discount window," he said.

[giofranchi]

Vice versa, today banks are almost as powerful as they were in 2007, almost as if nothing had happened in between…

 

They can't so much as take a piss today without getting approval.  Here we are waiting for "permission" to pay a dividend.

 

Well, if you had to assign a probability to the fact that Mr. Fisher's proposal will truly be implemented, which would it be?  ???

 

giofranchi

 

Low probability.  Why?  I don't think "the people" even want it.

 

For example, I bank with Wells Fargo.  It's not because they have a gun to my head, it's because I've moved from Los Altos Hills, to Eugene, to Los Angeles, then on to Seattle, and now Montecito.

 

Never have I had to open a new bank account.  It's very convenient.

 

Why would I want Mr. Fisher to create a law that says Wells Fargo can only be a small community bank?  What a pain in the rear in today's world where you don't grow up, work, and die in your same small community.

 

Eric,

commercial banks can do business wherever they want, opening how many branches they want. What Mr. Fisher proposes is they cannot be commercial and investment banks at the same time. And only the assets of commercial banks should be guaranteed by the government.

What’s wrong with that?

 

giofranchi

 

I didn't realize that he was an advocate of letting firms continue to control a trillion in deposits.

 

Rather, I thought he was gunning for all banks over $250b in assets.

 

They may be misquoting him, but here is what one author claims:

 

He identified 12 "megabanks" with assets of over $250 billion as too big to fail.

 

http://www.cnbc.com/id/100385916/Fed039s_Fisher_Break_up_banks_that_are_039too_big_to_fail039

 

It sounds like he wants to "down-size" the commercial banking operations, but maybe it's just a poorly worded sentence and I'm misunderstanding him:

 

"Only the resulting down-sized commercial banking operations, and not shadow banking affiliates or the parent company, would benefit from the safety net of federal deposit insurance and access to the Federal Reserve's discount window," he said.

 

I have posted his most recent speech on this thread.

 

We recognize that undoing customer inertia and management habits at TBTF banking

institutions may take many years. During such a period, TBTF banks could possibly sow

the seeds for another financial crisis. For these reasons, additional action may be

necessary. The TBTF BHCs may need to be downsized and restructured so that the safetynet-

supported commercial banking part of the holding company can be effectively

disciplined by regulators and market forces. And there will likely have to be additional

restrictions (or possibly prohibitions) on the ability to move assets or liabilities from a

shadow banking affiliate to a banking affiliate within the holding company.

 

To illustrate how the first two points in our plan would work, I come back to the

hypothetical structure of a complex financial holding company. Recall that this type of

holding company has a commercial bank subsidiary and several subsidiaries that are not

traditional commercial banks: insurance, securities underwriting and brokerage, finance

company and others, many with a vast geographic reach.

 

Under our proposal, only the commercial bank would have access to deposit insurance

provided by the FDIC and discount window loans provided by the Federal Reserve. These

two features of the safety net would explicitly, by statute, become unavailable to any

shadow banking affiliate, special investment vehicle of the commercial bank or any

obligations of the parent holding company. This is largely the current case—but in theory,

not in practice. And consistent enforcement is viewed as unlikely.

 

 

If you then look at the slide that follows the quoted paragraphs, I think it becomes very clear what he is advocating. Maybe, I misunderstood him, but I don’t think he is saying that “parent holding companies” should not exist, and he is not putting any limit either on the dimensions of a pure commercial bank. Am I missing something?

 

giofranchi

[ERICOPOLY]

Vice versa, today banks are almost as powerful as they were in 2007, almost as if nothing had happened in between…

 

They can't so much as take a piss today without getting approval.  Here we are waiting for "permission" to pay a dividend.

 

Well, if you had to assign a probability to the fact that Mr. Fisher's proposal will truly be implemented, which would it be?  ???

 

giofranchi

 

Low probability.  Why?  I don't think "the people" even want it.

 

For example, I bank with Wells Fargo.  It's not because they have a gun to my head, it's because I've moved from Los Altos Hills, to Eugene, to Los Angeles, then on to Seattle, and now Montecito.

 

Never have I had to open a new bank account.  It's very convenient.

 

Why would I want Mr. Fisher to create a law that says Wells Fargo can only be a small community bank?  What a pain in the rear in today's world where you don't grow up, work, and die in your same small community.

 

Eric,

commercial banks can do business wherever they want, opening how many branches they want. What Mr. Fisher proposes is they cannot be commercial and investment banks at the same time. And only the assets of commercial banks should be guaranteed by the government.

What’s wrong with that?

 

giofranchi

 

I didn't realize that he was an advocate of letting firms continue to control a trillion in deposits.

 

Rather, I thought he was gunning for all banks over $250b in assets.

 

They may be misquoting him, but here is what one author claims:

 

He identified 12 "megabanks" with assets of over $250 billion as too big to fail.

 

http://www.cnbc.com/id/100385916/Fed039s_Fisher_Break_up_banks_that_are_039too_big_to_fail039

 

It sounds like he wants to "down-size" the commercial banking operations, but maybe it's just a poorly worded sentence and I'm misunderstanding him:

 

"Only the resulting down-sized commercial banking operations, and not shadow banking affiliates or the parent company, would benefit from the safety net of federal deposit insurance and access to the Federal Reserve's discount window," he said.

 

I have posted his most recent speech on this thread.

 

We recognize that undoing customer inertia and management habits at TBTF banking

institutions may take many years. During such a period, TBTF banks could possibly sow

the seeds for another financial crisis. For these reasons, additional action may be

necessary. The TBTF BHCs may need to be downsized and restructured so that the safetynet-

supported commercial banking part of the holding company can be effectively

disciplined by regulators and market forces. And there will likely have to be additional

restrictions (or possibly prohibitions) on the ability to move assets or liabilities from a

shadow banking affiliate to a banking affiliate within the holding company.

 

To illustrate how the first two points in our plan would work, I come back to the

hypothetical structure of a complex financial holding company. Recall that this type of

holding company has a commercial bank subsidiary and several subsidiaries that are not

traditional commercial banks: insurance, securities underwriting and brokerage, finance

company and others, many with a vast geographic reach.

 

Under our proposal, only the commercial bank would have access to deposit insurance

provided by the FDIC and discount window loans provided by the Federal Reserve. These

two features of the safety net would explicitly, by statute, become unavailable to any

shadow banking affiliate, special investment vehicle of the commercial bank or any

obligations of the parent holding company. This is largely the current case—but in theory,

not in practice. And consistent enforcement is viewed as unlikely.

 

 

If you then look at the slide that follows the quoted paragraphs, I think it becomes very clear what he is advocating. Maybe, I misunderstood him, but I don’t think he is saying that “parent holding companies” should not exist, and he is not putting any limit either on the dimensions of a pure commercial bank. Am I missing something?

 

giofranchi

 

Unless there is another, here is the one you posted to this thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/'macro'-musings/?action=dlattach;attach=1306

 

On page two, under "Defining TBTF", he writes:

 

The reduction of market discipline has been further eroded by implicit extensions of the

federal safety net beyond commercial banks to their nonbank affiliates.

 

Notice how he says "further eroded"?  He thinks size alone is too big of a deal and must be curbed -- the ones with non-bank affiliate protection are not the only ones he is gunning for, they are merely icing on the cake.

 

Then he goes on to say how big banks are a problem but not small ones when they "get into trouble" -- he is not talking here about non-bank affiliates enjoying protection, he is clearly saying that size alone of the commercial bank is enough to pose unacceptable risk:

 

The 12 institutions that presently account for 69 percent of total industry assets are

candidates to be considered TBTF because of the threat they could pose to the financial

system and the economy should one or more of them get into trouble. By contrast, should

any of the other 99.8 percent of banking institutions get into trouble, the matter most

likely would be settled with private-sector ownership changes and minimal governmental

intervention.

 

 

[ERICOPOLY]

giofranchi,

 

I think earlier you posted that you are worried the savings rate had gone down again.

 

I notice in Fisher's document he is concerned that the big banks aren't lending enough.

 

Are you guys worried about different things?

 

The road to prosperity might be paved with more debt after all, if you follow Fisher's line of reasoning.

[giofranchi]

Vice versa, today banks are almost as powerful as they were in 2007, almost as if nothing had happened in between…

 

They can't so much as take a piss today without getting approval.  Here we are waiting for "permission" to pay a dividend.

 

Well, if you had to assign a probability to the fact that Mr. Fisher's proposal will truly be implemented, which would it be?  ???

 

giofranchi

 

Low probability.  Why?  I don't think "the people" even want it.

 

For example, I bank with Wells Fargo.  It's not because they have a gun to my head, it's because I've moved from Los Altos Hills, to Eugene, to Los Angeles, then on to Seattle, and now Montecito.

 

Never have I had to open a new bank account.  It's very convenient.

 

Why would I want Mr. Fisher to create a law that says Wells Fargo can only be a small community bank?  What a pain in the rear in today's world where you don't grow up, work, and die in your same small community.

 

Eric,

commercial banks can do business wherever they want, opening how many branches they want. What Mr. Fisher proposes is they cannot be commercial and investment banks at the same time. And only the assets of commercial banks should be guaranteed by the government.

What’s wrong with that?

 

giofranchi

 

I didn't realize that he was an advocate of letting firms continue to control a trillion in deposits.

 

Rather, I thought he was gunning for all banks over $250b in assets.

 

They may be misquoting him, but here is what one author claims:

 

He identified 12 "megabanks" with assets of over $250 billion as too big to fail.

 

http://www.cnbc.com/id/100385916/Fed039s_Fisher_Break_up_banks_that_are_039too_big_to_fail039

 

It sounds like he wants to "down-size" the commercial banking operations, but maybe it's just a poorly worded sentence and I'm misunderstanding him:

 

"Only the resulting down-sized commercial banking operations, and not shadow banking affiliates or the parent company, would benefit from the safety net of federal deposit insurance and access to the Federal Reserve's discount window," he said.

 

I have posted his most recent speech on this thread.

 

We recognize that undoing customer inertia and management habits at TBTF banking

institutions may take many years. During such a period, TBTF banks could possibly sow

the seeds for another financial crisis. For these reasons, additional action may be

necessary. The TBTF BHCs may need to be downsized and restructured so that the safetynet-

supported commercial banking part of the holding company can be effectively

disciplined by regulators and market forces. And there will likely have to be additional

restrictions (or possibly prohibitions) on the ability to move assets or liabilities from a

shadow banking affiliate to a banking affiliate within the holding company.

 

To illustrate how the first two points in our plan would work, I come back to the

hypothetical structure of a complex financial holding company. Recall that this type of

holding company has a commercial bank subsidiary and several subsidiaries that are not

traditional commercial banks: insurance, securities underwriting and brokerage, finance

company and others, many with a vast geographic reach.

 

Under our proposal, only the commercial bank would have access to deposit insurance

provided by the FDIC and discount window loans provided by the Federal Reserve. These

two features of the safety net would explicitly, by statute, become unavailable to any

shadow banking affiliate, special investment vehicle of the commercial bank or any

obligations of the parent holding company. This is largely the current case—but in theory,

not in practice. And consistent enforcement is viewed as unlikely.

 

 

If you then look at the slide that follows the quoted paragraphs, I think it becomes very clear what he is advocating. Maybe, I misunderstood him, but I don’t think he is saying that “parent holding companies” should not exist, and he is not putting any limit either on the dimensions of a pure commercial bank. Am I missing something?

 

giofranchi

 

Unless there is another, here is the one you posted to this thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/'macro'-musings/?action=dlattach;attach=1306

 

On page two, under "Defining TBTF", he writes:

 

The reduction of market discipline has been further eroded by implicit extensions of the

federal safety net beyond commercial banks to their nonbank affiliates.

 

Notice how he says "further eroded"?  He thinks size alone is too big of a deal and must be curbed -- the ones with non-bank affiliate protection are not the only ones he is gunning for, they are merely icing on the cake.

 

Then he goes on to say how big banks are a problem but not small ones when they "get into trouble" -- he is not talking here about non-bank affiliates enjoying protection, he is clearly saying that size alone of the commercial bank is enough to pose unacceptable risk:

 

The 12 institutions that presently account for 69 percent of total industry assets are

candidates to be considered TBTF because of the threat they could pose to the financial

system and the economy should one or more of them get into trouble. By contrast, should

any of the other 99.8 percent of banking institutions get into trouble, the matter most

likely would be settled with private-sector ownership changes and minimal governmental

intervention.

 

Well, maybe it is like you say. Anyway, when was it the last time that a TBTF institution had to be bailed out because of its commercial bank operations?! I cannot recall a single instance in witch it actually happened. Of course, there must be some examples, but don’t you agree with me that they are by far a minority of the cases?

Even if they weren’t, and small or medium sized commercial banks were actually required, I would be glad to change my bank account, when I move from one city to another, if that were required to prevent the pain of bailing them out every 10 or 15 years!

 

giofranchi

[giofranchi]

giofranchi,

 

I think earlier you posted that you are worried the savings rate had gone down again.

 

I notice in Fisher's document he is concerned that the big banks aren't lending enough.

 

Are you guys worried about different things?

 

The road to prosperity might be paved with more debt after all, if you follow Fisher's line of reasoning.

 

Eric,

I don’t understand your point here. Savings = Investments, provided, of course, that you actually invest them! If people deposit money in the banks and the banks don’t lend, that money is not put to work… Isn’t that a problem? Another story is “how much” money people deposit in the banks, and therefore how much they save.

I would like to see people saving 10% of their income, and banks putting those savings prudently to work.

Sorry, surely I missed your point…

 

giofranchi

[ERICOPOLY]

Well, maybe it is like you say. Anyway, when was it the last time that a TBTF institution had to be bailed out because of its commercial bank operations?! I cannot recall a single instance in witch it actually happened. Of course, there must be some examples, but don’t you agree with me that they are by far a minority of the cases?

giofranchi

 

I'm with you there, but Fisher isn't.

 

So what's up with him?  Is he campaigning for political office?

 

 

[ERICOPOLY]

giofranchi,

 

I think earlier you posted that you are worried the savings rate had gone down again.

 

I notice in Fisher's document he is concerned that the big banks aren't lending enough.

 

Are you guys worried about different things?

 

The road to prosperity might be paved with more debt after all, if you follow Fisher's line of reasoning.

 

Eric,

I don’t understand your point here. Savings = Investments, provided, of course, that you actually invest them! If people deposit money in the banks and the banks don’t lend, that money is not put to work… Isn’t that a problem? Another story is “how much” money people deposit in the banks, and therefore how much they save.

I would like to see people saving 10% of their income, and banks putting those savings prudently to work.

Sorry, surely I missed your point…

 

giofranchi

 

Your desire to boost savings would be working against Fisher's desire to stimulate aggregate demand from credit growth.

 

Begin with income, add to it new credit, and take away savings.  That gives you aggregate demand.

 

 

[vinod1]

Feeding the Dragon - GMO paper on Chinese credit bubble.

 

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIA6KcUdqlSIwIXyKFLDu0ahgi%2fVwwPhMBjQBiRm%2bRLnDmOmauuxY3ieIGb5rFygoEWoFXDEs8Gu%2bAyctYJBUNhPmb9KxTYFrE8%3d

 

From a valuation perspective, Chinese equities do not, at first glance, look to be a likely candidate for trouble. The PE

ratios are either 12 or 15 times on MSCI China, depending on whether you include financials or not, and the market

has underperformed MSCI Emerging by about 10% over the last three years (ending December 31, 2012). Neither

of these characteristics screams “bubble.” And yet, China has been a source of worry for us over the past three years

and continues to be one, affecting not merely our behavior with regards to stocks domiciled in China but the entire

emerging world, as well as some specific developed market stocks, which we believe are particularly vulnerable

should things in China go down the road we fear it might.

 

Vinod

[ERICOPOLY]

Do I need to start a separate thread for optimistic macro musings?

 

http://www.bloomberg.com/news/2013-01-25/bridgewater-s-dalio-sees-game-changer-as-money-shifts.html

 

 

[vinod1]

Ok Eric, this might make you happy.

 

http://www.businessinsider.com/goldman-the-economic-crisis-ends-in-2013-2012-12

 

Vinod

[ERICOPOLY]

I was watching Roubini interviewed today.

 

Last night I saw Zero Dark Thirty.  There was the point where all of the senior CIA people were putting 60% odds on Bin Laden's presence at the compound.  The female analyst put it at 100%, then said "okay, I know you people hate certainty so 95%".  The CIA director walked out of the meeting saying "they're all cowed".

 

 

[giofranchi]

Sprott's Market at a Glance January 2013

 

giofranchi

MAAG-Jan-2013.pdf

[giofranchi]

giofranchi,

 

I think earlier you posted that you are worried the savings rate had gone down again.

 

I notice in Fisher's document he is concerned that the big banks aren't lending enough.

 

Are you guys worried about different things?

 

The road to prosperity might be paved with more debt after all, if you follow Fisher's line of reasoning.

 

Eric,

I don’t understand your point here. Savings = Investments, provided, of course, that you actually invest them! If people deposit money in the banks and the banks don’t lend, that money is not put to work… Isn’t that a problem? Another story is “how much” money people deposit in the banks, and therefore how much they save.

I would like to see people saving 10% of their income, and banks putting those savings prudently to work.

Sorry, surely I missed your point…

 

giofranchi

 

Your desire to boost savings would be working against Fisher's desire to stimulate aggregate demand from credit growth.

 

Begin with income, add to it new credit, and take away savings.  That gives you aggregate demand.

 

Eric,

I am not so sure I understood what you mean.

Let me explain what I mean: whenever a client pays my firm for a service it has provided him/her, I immediately take 20% of the money coming in and I invest it in other productive businesses, which I believe have good future prospects. I don’t use that 20% to give parties, or to buy a fancier office space. Now, I don’t see any difference with an individual or a family. Ok, 20% maybe is too much, so let’s say I would like to see each family save 10% of its income. Then, because not everybody is able to spend much time evaluating the best way to put to work their savings, there are banks. Which collect savings and should in theory be smart enough to use them properly. And, of course, to use them properly means to facilitate credit to those businesses which really deserve it.

There is a whole world of difference between lending to good businesses on their way to be highly profitable, and letting homeowners borrow because they want a new, bigger “palace” they cannot afford, or letting the government borrow and squander people’s money on its largesse or on silly projects.

I think Mr. Fisher is deploring the fact that big banks, to misleadingly strengthen their balance sheets, have ceased to lend to trustworthy businesses, the only ones truly capable of creating employment and wealth.

 

giofranchi

[giofranchi]

I think this is a very good interview with Mr. Taleb, and he also talks about the TBTF problem:

 

http://www.zerohedge.com/news/2013-01-25/taleb-skin-game-and-his-disdain-public-intellectuals

 

giofranchi

[ERICOPOLY]

giofranchi,

 

I think earlier you posted that you are worried the savings rate had gone down again.

 

I notice in Fisher's document he is concerned that the big banks aren't lending enough.

 

Are you guys worried about different things?

 

The road to prosperity might be paved with more debt after all, if you follow Fisher's line of reasoning.

 

Eric,

I don’t understand your point here. Savings = Investments, provided, of course, that you actually invest them! If people deposit money in the banks and the banks don’t lend, that money is not put to work… Isn’t that a problem? Another story is “how much” money people deposit in the banks, and therefore how much they save.

I would like to see people saving 10% of their income, and banks putting those savings prudently to work.

Sorry, surely I missed your point…

 

giofranchi

 

Your desire to boost savings would be working against Fisher's desire to stimulate aggregate demand from credit growth.

 

Begin with income, add to it new credit, and take away savings.  That gives you aggregate demand.

 

Eric,

I am not so sure I understood what you mean.

Let me explain what I mean: whenever a client pays my firm for a service it has provided him/her, I immediately take 20% of the money coming in and I invest it in other productive businesses, which I believe have good future prospects. I don’t use that 20% to give parties, or to buy a fancier office space. Now, I don’t see any difference with an individual or a family. Ok, 20% maybe is too much, so let’s say I would like to see each family save 10% of its income. Then, because not everybody is able to spend much time evaluating the best way to put to work their savings, there are banks. Which collect savings and should in theory be smart enough to use them properly. And, of course, to use them properly means to facilitate credit to those businesses which really deserve it.

There is a whole world of difference between lending to good businesses on their way to be highly profitable, and letting homeowners borrow because they want a new, bigger “palace” they cannot afford, or letting the government borrow and squander people’s money on its largesse or on silly projects.

I think Mr. Fisher is deploring the fact that big banks, to misleadingly strengthen their balance sheets, have ceased to lend to trustworthy businesses, the only ones truly capable of creating employment and wealth.

 

giofranchi

 

I misunderstood you then.  By increasing savings to 10%, what you really mean is you want everyone to take 10% of their incomes and invest it in expansion of their businesses.

 

I had in mind the kind of "savings" where people make fewer trips to the malls, instead using their incomes to pay down their mortgage or car loans.  Therefore final demand falls, and businesses no longer feel confident to invest in further expansion of their operations.  Therefore, they don't want loans from banks.

 

Thus you would be at odds with what Mr. Fisher wants.

[SharperDingaan]

You might find it useful to think out of the box a little:

 

The only major way you get a large, long-term, loan book is to lend to bums.

The good corporate credits are going to issue their own lower cost paper (LIBOR+, CP, BA, bonds, etc) to pay you off, as soon as they can. Good individual credits are either paying down monthly (P & I), or have the ability & intent to pay down at some future date of their choice. You have a book of bums and a book of 'churn'. When there hasn't been much economic activity for an extended period, the churn book is smaller than normal, you do what you can to frustrate the good credit's ability to leave, & the bums wag the dog.

 

A good chunk of the bum book is often money-laundering related; there was never intent to repay, & the launderer did it to indirectly control the bank. The bank will lend additional funds to service the loan interest, or watch the loans default & the write-off wipe out the banks capital. And if the bank lends ... its shareholders will receive 'earnings' on those loans, the market will grant a higher share price, & everybody walks away with bonus. That 'new' money ultimately comes from the spread on the churn book. 

 

Repaying a loan lets a bank 'play the game' a little longer; it is effectively an insurance premium against the bank collapsing in the near-term. Investing the savings increases the bank's churn book (recipient borrows against your equity investment to expand the business) to produce additional margin. Both essentially produce the same result.

 

Notable is that whether the bum is the underworld, or a sovereign, you get the same result. If Greece fails to service its debt, prominent German & French banks collapse. If XYZ fails to service, prominent Arab banks collapse ... but the Emir still gets to keep those nice buildings in the desert  ;)

 

The capitalist solution is to periodically deliberately collapse banks, & start fresh.

Unfortunately, that is waaay too anti-fragile!

 

       

[lookingstill]

giofranchi,

 

I think earlier you posted that you are worried the savings rate had gone down again.

 

I notice in Fisher's document he is concerned that the big banks aren't lending enough.

 

Are you guys worried about different things?

 

The road to prosperity might be paved with more debt after all, if you follow Fisher's line of reasoning.

 

Eric,

I don’t understand your point here. Savings = Investments, provided, of course, that you actually invest them! If people deposit money in the banks and the banks don’t lend, that money is not put to work… Isn’t that a problem? Another story is “how much” money people deposit in the banks, and therefore how much they save.

I would like to see people saving 10% of their income, and banks putting those savings prudently to work.

Sorry, surely I missed your point…

 

giofranchi

 

Your desire to boost savings would be working against Fisher's desire to stimulate aggregate demand from credit growth.

 

Begin with income, add to it new credit, and take away savings.  That gives you aggregate demand.

 

Eric,

I am not so sure I understood what you mean.

Let me explain what I mean: whenever a client pays my firm for a service it has provided him/her, I immediately take 20% of the money coming in and I invest it in other productive businesses, which I believe have good future prospects. I don’t use that 20% to give parties, or to buy a fancier office space. Now, I don’t see any difference with an individual or a family. Ok, 20% maybe is too much, so let’s say I would like to see each family save 10% of its income. Then, because not everybody is able to spend much time evaluating the best way to put to work their savings, there are banks. Which collect savings and should in theory be smart enough to use them properly. And, of course, to use them properly means to facilitate credit to those businesses which really deserve it.

There is a whole world of difference between lending to good businesses on their way to be highly profitable, and letting homeowners borrow because they want a new, bigger “palace” they cannot afford, or letting the government borrow and squander people’s money on its largesse or on silly projects.

I think Mr. Fisher is deploring the fact that big banks, to misleadingly strengthen their balance sheets, have ceased to lend to trustworthy businesses, the only ones truly capable of creating employment and wealth.

 

giofranchi

 

That's assuming little or no debt. Usually when people with average/substantial debt start "saving", they don't invest. Like ERICOPOLY said they start paying down debt. When they bring the debt down to the level they are comfortable with, they'll start spending/raising debt level again. What you are talking about requires broad and substantial change in western/american mindset. And it is tough in the culture of immediate gratification and "you deserve better/the best".

[Hawk4value]

The government at this time can choose not to do much and just let nature take its course and let those who have recklessly borrowed more money suffer. The result would be that economy would take a much sharper downturn....The problem with this approach is that it would cause tremendous suffering....There is a moral component to this line of reasoning.

 

Suffering, like greed, in a capitalistic system is a necessity for the system to work properly. Why??  Because human beings are prone to excess. The excess, when it occurs, has to be purged. Now you can choose to let nature takes its course, or you can inject all kinds of bandaids, the most insidious of which is the printing of money. If you want to discuss morality, lets talk about the responsible people who worked, saved, were underleveraged, and had a cash cushion to get thru the crisis. These people, their wealth, are being wiped out because their money is being devalued, and they cannot get a reasonable return on their cash without undue risk because of rate suppression. In order to live, these people have to spend their principle. How moral and fair is that.  Now who benefits: the politicians keep their jobs; and the financial types game the system and make extrordinary amounts of money. You have heard of the $50mil to $90mil dollar condos in NYC. Who do you think are buying these properties.

 

 

 

[PlanMaestro]

Home-Equity Loans Heat Up

http://online.wsj.com/article/SB10001424127887323854904578262020944266466.html?mod=googlenews_wsj

 

After years of declines, home-equity lending is starting to make a comeback.

 

That is presenting new opportunities for homeowners seeking to finance a major purchase, consolidate debt or refinance a mortgage with a small balance.

J.P. Morgan Chase originated $373 million in home-equity lines of credit in the fourth quarter, up 35% from the same period a year earlier. At Buffalo-based M&T Bank Corp. the dollar volume of home-equity originations increased 27% last year, while TD Bank, a unit of Canada's Toronto-Dominion Bank,  saw a 27% increase in the number of home-equity originations. McGraw-Hill Federal Credit Union, which serves employees of about 120 companies in the New York area, says its home-equity balances were up 53% in 2012.

 

Overall, the number of home-equity loans originated increased by 19% in the fourth quarter versus the same period a year earlier, according to Equifax's National Credit Trends Report, while home-equity-line-of-credit originations jumped by 13%.

 

[…]

 

One big driver of home-equity lending is the improving housing market, which gives borrowers more equity to tap and lenders more confidence their loans will be repaid.

 

"Home prices are starting to stabilize and even increase," says Caleb Cook, vice president for lending at Seattle Metropolitan Credit Union, which has seen a pickup in home-equity loan demand. "It's restoring some of the equity people lost."

 

Another piece of good news for borrowers: interest rates are at or near historical lows. Rates on home-equity loans averaged 6.32% in December, the most recent data available, according to mortgage tracker HSH.com, down from an average of 8% in January 2010. Rates for home-equity lines averaged 5.17% versus an average of 5.54% two years ago.

 

[…]

 

Home-equity lending was hot during the housing boom, but lenders pulled back sharply as home prices tumbled. Despite the recent uptick, the total amount of home-equity loans and lines outstanding is 35% below its 2007 peak, according to Inside Mortgage Finance, a trade publication.

[LC]

Well said, Hawk4value.

[giofranchi]

giofranchi,

 

I think earlier you posted that you are worried the savings rate had gone down again.

 

I notice in Fisher's document he is concerned that the big banks aren't lending enough.

 

Are you guys worried about different things?

 

The road to prosperity might be paved with more debt after all, if you follow Fisher's line of reasoning.

 

Eric,

I don’t understand your point here. Savings = Investments, provided, of course, that you actually invest them! If people deposit money in the banks and the banks don’t lend, that money is not put to work… Isn’t that a problem? Another story is “how much” money people deposit in the banks, and therefore how much they save.

I would like to see people saving 10% of their income, and banks putting those savings prudently to work.

Sorry, surely I missed your point…

 

giofranchi

 

Your desire to boost savings would be working against Fisher's desire to stimulate aggregate demand from credit growth.

 

Begin with income, add to it new credit, and take away savings.  That gives you aggregate demand.

 

Eric,

I am not so sure I understood what you mean.

Let me explain what I mean: whenever a client pays my firm for a service it has provided him/her, I immediately take 20% of the money coming in and I invest it in other productive businesses, which I believe have good future prospects. I don’t use that 20% to give parties, or to buy a fancier office space. Now, I don’t see any difference with an individual or a family. Ok, 20% maybe is too much, so let’s say I would like to see each family save 10% of its income. Then, because not everybody is able to spend much time evaluating the best way to put to work their savings, there are banks. Which collect savings and should in theory be smart enough to use them properly. And, of course, to use them properly means to facilitate credit to those businesses which really deserve it.

There is a whole world of difference between lending to good businesses on their way to be highly profitable, and letting homeowners borrow because they want a new, bigger “palace” they cannot afford, or letting the government borrow and squander people’s money on its largesse or on silly projects.

I think Mr. Fisher is deploring the fact that big banks, to misleadingly strengthen their balance sheets, have ceased to lend to trustworthy businesses, the only ones truly capable of creating employment and wealth.

 

giofranchi

 

That's assuming little or no debt. Usually when people with average/substantial debt start "saving", they don't invest. Like ERICOPOLY said they start paying down debt. When they bring the debt down to the level they are comfortable with, they'll start spending/raising debt level again. What you are talking about requires broad and substantial change in western/american mindset. And it is tough in the culture of immediate gratification and "you deserve better/the best".

 

That’s exactly why I agree with Hawk4value and think that suffering sometimes can be useful and even necessary. Though, I also agree with Eric and Vinod, when they say policymakers will never allow suffering to last longer than very few months. So, we are stuck with a very uncertain situation: what could really be useful, won’t be allowed to happen, because politically unacceptable. The result is a sort of limbo: we don’t suffer much, but we neither improve much.

Of course, there is another solution: maybe tomorrow everyone with a western/american mindset will reopen his/her copy of Charles Dickens’s David Copperfield, read those words of wisdom once again, and act accordingly: 

 

“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

 

:)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[twacowfca]

Forget for the sake of argument what The Fed has done to provide stability to the banking system and liquidity greater than hurricane Sandy.  Look through all this to the flow of funds between the federal government and the private sector.  The results are surprising. 

 

Federal deficits (the government's negative savings rate) peaked in 2009 and have been coming down since then.  Offsetting the government's deficit, the private savings rate (consumers and businesses) also peaked about then and likewise has been coming down ever since 2009 as GDP has been picking up. 

 

There is still slack in the economy, and the US is leading Europe out of the depression.  The fiscal and debt ceiling cliffs are looking more like green ski slopes. Keep an eye on the change in the private savings rate.  If it doesn't begin to increase significantly, markets have a way to go by the Fed Model before Prem and other bears will eventually be proven right.

 

:)

[giofranchi]

IceCap Asset Management January 2013

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”

- John Maynard Keynes

IceCap_Asset_Management_Limited_Global_Markets_January_2013.pdf