Mish's Global Economic Trend Analysis Mon 2009-12-21 19:32 EST

Fictional Reserve Lending And The Myth Of Excess Reserves

Michael Shedlock

...The chart shows an unprecedented amount of excess reserves, almost $1.2 trillion. According to Money Multiplier Theory (MMT) and Fractional Reserve Lending, this amount may be lent out as much as 10 times over and when it does, massive inflation will result. The above hypotheses regarding "Excess Reserves" are wrong for five reasons. 1) Lending comes first and what little reserves there are (if any) come later. 2) There really are no excess reserves. 3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely "fictional". 4) Banks are capital constrained not reserve constrained. 5) Banks aren't lending because there are few credit worthy borrowers worth the risk.

excess reserves; Fictional Reserve Lending; Mish's Global Economic Trend Analysis; myth.

Jesse's Café Américain Thu 2009-12-17 09:56 EST

Treasury Cancels Plans to Sell Citi Stake After Failed Equity Offering Stings Shareholders

Jesse

The shareholders of Citigroup should be furious at the greedy and reckless actions of Citi's management in diluting their shares in order to obtain a freer hand in granting themselves fat bonuses. Tonight's equity offering failed to bring in a sufficient price, serving up a significant 20% discount to existing holders of the stock...Technically, Citi can pay back the TARP money from the proceeds. I wonder if they have the gall to do that and pay themselves bonuses this year to boot, which is the basis for this exercise in dilution in the first place. This shows the farce that the Obama financial reforms really are. Nothing has changed except that big bank losses were transferred to the public debt.

Failed Equity Offering Stings Shareholders; Jesse's Café Américain; Sell Citi Stake; Treasury cancels plans.

The Guardian World News Wed 2009-11-25 10:31 EST

What was really behind the crash?

John Cassidy

In an exclusive extract from his new book, John Cassidy explains why the huge salaries of Wall Street bosses created a culture that helped trigger the financial crisis...In the wake of last year's crash, even some top bankers have conceded that Wall Street remuneration schemes lead to excessive risk-taking...But without direct government involvement, the effort to reform Wall Street compensation won't survive the next market upturn. For although the financial sector as a whole has an interest in controlling rampant short-termism and irresponsible risk-taking, individual firms have an incentive to hire away star traders from any rivals that have introduced pay limits. Compensation reforms, therefore, are bound to break down. In this case, as in many others, the only way to reach a socially desirable outcome is to enforce compliance. And the only body that can do that is the government.

Crash; Guardian World News; really.

Fri 2009-11-20 10:30 EST

Curious Meeting at Treasury Department >> naked capitalism

Yves Smith

The Treasury invited a small group of bloggers for a ``discussion'' with senior officials on Monday...we bloggers and the government officials kept talking past each other, in that one of us would ask a question, the reply would leave the questioner or someone in the audience unsatisfied, there might be a follow up question (either same person or someone interested), get another responsive-sounding but not really answer, and then another person would get the floor...the people we met are very cognitively captured, assuming one can take their remarks at face value. Although they kept stressing all the things that had changed or they were planning to change, the polite pushback from pretty all the attendees was that what Treasury thought of as major progress was insufficient...It was also striking to see that the Treasury officials did not articulate vision for a banking system for the 21st century that was materially different that the one we have now...

Curious Meeting; naked capitalism; Treasury Department.

naked capitalism Fri 2009-10-23 09:20 EDT

Paul Volcker, Mervyn King, Glass Steagall, and the Real TBTF Problem

Paul Volcker wants to roll the clock back and restore Glass Steagall, the 1933 rule that separated commercial banking from investment banking, but Team Obama is politely ignoring him. Mervyn King, the Governor of the Bank of England, is giving a more strident version of the same message...I think Volcker is wrong, but not for reasons one might expect...The problem is that we have had a thirty year growth in securitization. A lot of activities that were once done strictly on bank balance sheets are merely originated by banks and are sold into capital markets...you could in theory go back to having much more on balance sheet intermediation (finance speak for ``dial the clock back 35 years and have banks keep pretty much all their loans''). Conceptually, that is a tidy solution, but it has a massive flaw: it would take a simply enormous amount of equity to provide enough equity to all those banks with their vastly bigger balance sheets. We're having enough trouble recapitalizing the banking system we have...I have yet to see anything even remotely approaching a realistic discussion of how to deal with too big too fail firms, and we have been at this for months. My knowledge of the industry is not fully current, but even so, the difficulties are far greater than I have seen acknowledged anywhere. That pretty much guarantees none of the proposals are serious, and nothing will be done on this front. That further implies the system will have to break down catastrophically before anything effective can be done. I really hope I am wrong on this one.

Glass Steagall; Mervyn King; naked capitalism; Paul Volcker; Real TBTF Problem.

Credit Writedowns Fri 2009-10-23 09:00 EDT

The next crisis is already under way

Wolfgang Munchau of the Financial Times wrote a very important comment piece in today's Financial Times. In it he said that central banks are targeting asset prices to avoid the brunt of cyclical downturns. This policy is inducing asset bubbles and creating a more volatile real economy with unpredictable negative consequences...Munchau invokes Hyman Minsky's model of financial instability to help explain how this sets us up for a volatile future because traditional macroeconomic theory is inadequate for understanding what got us to this point. In essence, the idyllic state of economic and price stability we know as ``the Great Moderation'' is really just a financialization of the economy. However, a large financial sector leads to excessive dependence on asset prices to fuel growth, which in turn leads to an accumulation of debt...

credit writedowns; Crisis; way.

Jesse's Café Américain Tue 2009-10-13 20:23 EDT

Central Banks More Aggressively Reducing US Dollar Exposure In Their Reserve Portfolios

Jesse

``Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,'' said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. ``It looks like they are really backing away from the dollar.''

aggressively reduced; central bank; Dollar exposure; Jesse's Café Américain; reserve portfolios.

zero hedge Mon 2009-10-12 09:37 EDT

The 60% Plunge In Private Equity Deal Flow

If there is one sector that is really hurting despite the outperformance of all other asset classes (money being thrown at equities, bonds, and commodities without regard or prudence as Rosenberg has pointed out), it is private equity. Indeed, while credit has thawed in general, investors are still completely shutting out the 5x+ leverage transaction world: the bread and butter of the LBO business model. For a sober look at the desolation in the PE landscape, even as funds rush to raise more billions in dry equity powder which sits at banks collecting 1%, consider that YTD only $33 billion in 654 PE deals has been disclosed, a 60% drop from the 1,532 deals done through Q3 in 2008, and N/M when compared to the heady days of 2007....

60; plunge; Private Equity Deal Flow; Zero Hedge.

The Big Picture Sun 2009-10-11 16:08 EDT

Kaptur & Johnson on Bill Moyers

Former International Monetary Fund chief economist Simon Johnson and US Rep. Marcy Kaptur (D-OH) report on the state of the economy... MARCY KAPTUR: Think about what these banks have done. They have taken very imprudent behavior, irresponsible. They have really gambled, all right? And in many cases, been involved in fraudulent activity. And then when they lost, they shifted their losses to the taxpayer. So, if you look at an instrumentality like the F.H.A., the Federal Housing Administration. They used to insure one of every 50 mortgages in the country. Now it's one out of four. MARCY KAPTUR: Because what they're doing is they're taking their mistakes and they're dumping them on the taxpayer. So, you and I, and the long term debt of our country and our children and grandchildren. It's all at risk because of their behavior. We aren't reigning them in. The laws of Congress passed last year in terms of housing, were hollow. ... SIMON JOHNSON: And Rahm Emanuel, the President's Chief of Staff has a saying. He's widely known for saying, `Never let a good crisis go to waste'. Well, the crisis is over, Bill. The crisis in the financial sector, not for people who own homes, but the crisis for the big banks is substantially over. And it was completely wasted. The Administration refused to break the power of the big banks, when they had the opportunity, earlier this year. And the regulatory reforms they are now pursuing will turn out to be, in my opinion, and I do follow this day to day, you know. These reforms will turn out to be essentially meaningless.

Big Picture; Bill Moyers; Johnson; Kaptur.

The Economic Populist - Speak Your Mind 2 Cents at a Time Sat 2009-10-10 13:19 EDT

Friday Movie Night - Michael Lind Presents

New America Foundation, Policy Director of the Economic Growth Program, Michael Lind is on a roll. He's pulling in a host of economists and policy formulators who really are speaking truth, interviewing them an' putting 'em on the Internets. You're going to love these interviews with Thomas Palley, Ralph Gomory, Pat Choate and Peter Morici.

economic populist; Friday Movie Night; Michael Lind Presents; Mind 2 Cents; speaking; Time.

The Baseline Scenario Sat 2009-10-10 12:59 EDT

Too Politically Connected To Fail In Any Crisis

Simon Johnson

...If you run a big troubled bank, you need a man on the inside -- someone who will take your calls late at night and rely on you for on the ground knowledge. Preferably, this person should have little first-hand experience of the markets (it was hard to deceive JP Morgan and Benjamin Strong when they were deciding whom to save in 1907) and only a limited range of other contacts who could dispute your account of what is really needed. Goldman Sachs, JPMorgan, and Citigroup, we learn today, have such a person: Tim Geithner, Secretary of the Treasury...

Baseline Scenario; Crisis; fail; politically-connected.

naked capitalism Tue 2009-09-22 11:32 EDT

Guest Post: If Credit is Not Created Out of Excess Reserves, What Does That Mean?

George Washington

We've all been taught that banks first build up deposits, and then extend credit and loan out their excess reserves. But critics of the current banking system claim that this is not true, and that the order is actually reversed...Steve Keen explained that 25 years of research shows that creation of debt by banks precedes creation of government money, and that debt money is created first and precedes creation of credit money...monetary reformers like Ellen Brown argue that the entire banking system is based upon a fraud. Specifically, she and other monetary reformers argue that the banks have intentionally spread the false reserves-and-credit first, loans-and-debt later story to confuse people into thinking that the banks are better capitalized than they really are and that the Federal Reserve is keeping better oversight than it really is...Monetary reformers argue that the government should take the power of money creation back from the private banks and the Federal Reserve system.

created; credit; excess reserves; Guest Post; meaning; naked capitalism.

The IRA Analyst Thu 2009-09-17 10:22 EDT

Back to Basis for Securitization and Structured Credit: Interview With Ann Rutledge

To get some further insight into the world of securitization and cash flows, we spoke last week to Ann Rutledge of RR Consulting...The difference between a futures contract for T-bonds and a credit default swap is that the former is a real contract for a real deliverable, whereas the CDS trades against what people think is the cash basis, but there is no cash market price to discipline and validate that derivative market. Rutledge: a contract or structure without a cash basis should not be allowed at all. You cannot have a derivative that is honest and fair to all market participants without a true cash basis. ...derivatives markets such as CDS and CDOs that have no cash basis tend to magnify speculative excesses, while derivative markets where there is a visible cash basis market to discipline investor behavior seem less unstable in terms of systemic risk. Rutledge: If the cash market were visible and could be examined by all participants, then it would give away the ability of the dealer banks to tax participants in the market and extract these abnormal returns. So how do we fix the problem... Rutledge: These originators play this game over and over again and they don't get caught, in part because we do not have a common, standardized set of definitions for governing the most basic aspects of the securitization process. The buyers don't do the work and the accounting framework is a counterparty-oriented framework, not one that is focused on the underlying assets. So banks like Countrywide and WaMu originated and sold some truly hideous structures during the bubble, but the buyers only diligence was reliance upon recourse to these banks. It costs maybe 50bp for a buyer to get the data and grind the numbers to really diligence a securitization based on cash flows, even a complex CDO. But the cost to the buyer and the system of not doing the diligence is an order or magnitude bigger. If the Congress, the SEC and the FASB, and the financial regulators only do one thing this year when it comes to reforming the world of structured credit, then it should be to impose by law and regulation common standards for the definitions used in the marketplace.

Ann Rutledge; basis; interview; IRA Analyst; securitizations; structured credit.

zero hedge Tue 2009-09-01 19:43 EDT

Oil And Treasuries Paint A Divergent Inflation Picture, Yet Is It Even Relevant?

...bonds are reflecting a deflationary environment while commodities and stocks are betting on inflation...Yet...both stocks and bonds are potentially being manipulated to a point where they bear no reflection of the underlying assets, whose values they are purported to represent...is the debate about inflation versus deflation based on asset trends really relevant: a bizarro market dominated by animal spirits and intraday greed has ceased to indicate any long-term trends and our advice is to simply enjoy it for what it is - a ponzi casino...

Divergent Inflation Picture; Oil; relevant; Treasuries Paint; Zero Hedge.

Rick Bookstaber Sun 2009-08-30 12:07 EDT

Not with a Bang but a Whimper -- The Risk from High Frequency and Algorithmic Trading

Rick Bookstaber

``There is a general view that one way or another the end result of all the high frequency and algorithmic trading will be a blowup. But I don't think the risk is as big as many are making it out to be...the risk of a cataclysm is constrained by the lack of feedback and lack of tight coupling...As the field gets increasingly crowded, market impact will rise and opportunities will diminish'' First, let me point out the difference between high frequency trading and algorithmic trading. Both execute using computers, and since computers work really fast, both can be accused of whatever sins are embodied in millisecond trading. High frequency trading is a type of proprietary trading. The trader (or his computer) sees a profit opportunity and trades accordingly. This profit opportunity...

algorithmic trading; bang; High Frequency; Rick Bookstaber; Risk; Whimper.

ClubOrlov Wed 2009-08-26 11:24 EDT

Definancialisation, Deglobalisation, Relocalisation

kollapsnik

This talk was presented at The New Emergency Conference in Dublin, on June 11, 2009. ``we all have to prepare for life without much money, where imported goods are scarce, and where people have to provide for their own needs, and those of their immediate neighbours'' ``Most of the wealth is in very few private hands right now. Governments and the vast majority of the people only have debt. It is important to convince people who control all this wealth that they really have two choices. They can trust their investment advisers, maintain their current portfolios, and eventually lose everything. Or they can use their wealth to reengage with people and the land in new ways, in which case they stand a chance of saving something for themselves and their children. They can build and launch lifeboats, recruit crew, and set them sailing.'' 1. Good morning. The title of this talk is a bit of a mouthful, but what I want to say can be summed up in simpler words: we all have to prepare for life without much money, where imported goods are scarce, and where people have to provide for their own needs, and those of their immediate neighbours. I will take as my point of departure the unfolding collapse of the global economy, and discuss what might come next. It started with the collapse of the financial markets last year, and is now resulting in unprecedented decreases in the volumes of international trade. These developments are also starting to affect the political stability of...

ClubOrlov; Definancialisation; Deglobalisation; relocalisation.