One last time (KK questions)

I say in the video that there may be a `part two`, but there will not be.
This goes over the main banking / central banking questions that have disturbed the economics community of late.
Yes, it is another half hour, but, at the end of it, all should be clear (enough).
Audio -


Link

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  • Guest

    I guess I need to find your previous videos on reserve / capital requirements – I must have missed them. Other than clarifying those points, everything else made sense. 

    • http://overthepeak.com/wordpress/ Mystic

       `Reserves`  (now we know) are used by the central bank as their `lever` on interest rates (rates which banks charge each other for over-night loans).
      `Capital` is the difference on the books between Assets and Liabilities, or as it is better known – `equity` (what the owners own).

    • http://overthepeak.com/wordpress/ Mystic

       So….You have on the bank’s books – Assets (signed mortgages, bonds etc.) and Liabilities (deposits (that they are liable to pay out))…….Also on the liability side (just because it has to go somewhere) is `equity` (the owner’s portion).

      People (well not so much people as – bankers) set down rules for how much equity capital `Capital` a bank should have for how much mortgage, bonds etc…….a rule book full of stuff. 
      That is the `capital requirement` or `capital restriction` or `capital constraint` that is talked of.

      The idea is, that if the assets go south, the books can still be balanced by just marking down the amount that the owners think they own.
      When that is all gone, the bank is officially insolvent……..and the government has to put in more capital.

      • axionication1

        Nice!

      • snedmeister1

        Evening Nick, 

        haven’t watched this whole vid yet…. Time again…!!!

        If you answered it in the vid, apologies, if not I wonder if you could clarify where the reserves a bank holds sit
        on their balance sheet….

        I presume they are assets for a bank too, ( and thus a liability for the FED, when not held as cash by individual banks )…???

        • http://overthepeak.com/wordpress/ Mystic

           Reserves are assets.
          Not dumb question at all.  Although it seems obvious…everything has to be established good and solid, because some of this stuff is more than a little counter-intuitive at times~!

  • Bigcollapso

    The concept of “Capital” is completely broken in modern economics. It assumes that the “stored wealth” in one asset can offset the depreciation in another asset. This is the reason that they are trying to blow another housing bubble, and it will not end well.

  • CSARichardo

    How about this…interest rates have been coming down since 1980s.  This has put pressure on the banks.  Why because the bank’s capital comes either from external investment (ownership dilution) or their retained profits from their operations.  If interest rates are coming down, profits are therefore impacted at banks (since banks make money on the spread) who then have a problem growing capital internally via profits. If capital is restrained their loan book is restrained. Hence they look for creative risk management concepts and apply zero risk or capital requirements against sovereign debt.  You can see where that has gone !  At least that is one view of how the system has been working.  That means banks will do everything to be viewed as not being capital restrained and BASEL has gone along with them.  Why?  The BASEL Accords are all about preventing bank insolvency, not the financial system’s insolvency !

    • http://overthepeak.com/wordpress/ Mystic

       I can go along with enough of that, not to start picking at it……
      ….except I can’t help putting a fingernail under and….
      well….lifting a little edge -
      Grab yourself a chart of banks ROI and ROC over the last thirty years.

      (returns on investment and capital)

      • CSARichardo

        I guess I was trying to say that in a decreasing interest rate environment, given loan defaults (an expense) are stable and can be managed via yearly income (as opposed to the capital cushion) that capital growth will be constrained.  The system (due to bankster lobbying) however compensated by reducing capital requirements primarily on government debts which allowed banks to leverage.  Whether ROC was up, down or even .. is related to an individual banks performance in this environment and how it took advantage of the BASEL risk management changes. 

        My point is that you can come up with numerous combinations of inputs to get numerous ROI or ROC outputs from individual banks in the financial system.

        • http://overthepeak.com/wordpress/ Mystic

           Yes, but ROI and ROC were consistently `bottom left to top right`. 
          Why were they increasing~?
          Answer – More risk was being taken~!

          • Paul

            Do you think Obama is going to Risk another bail-out in a tight election year?  No, no Nanette.  2013 is when the real problems will begin, whether for for Obama or Romney.  Risk will be punished in 2013.  Batten down the hatches~!

            • http://overthepeak.com/wordpress/ Mystic

              Today’s presentation deals (to some extent) with this. 

              • Paul

                And here I was hoping for a Mystic meaning of life video.  Maybe over the Easter weekend?  Something related to rising from the dead?  Seems appropriate given the current circumstances.
                Oh well, Risk, ROI and ROC should be fascinating too?!

  • CSARichardo

    The real question is why is managing the interest rate by the central bank important ?  Maybe you mean managing the change in interest rate ?  Then this brings up the question of what is a normal interest rate that change would fluctuate around ?  There is the possibility that if the central bank only manages the change in rates required to manage liquidity between the banks and their reserve accounts that the trend in rates is still being managed by other forces.

    • http://overthepeak.com/wordpress/ Mystic

       But what use is that line of thinking~?

      • CSARichardo

        Because it is a complex system and trying to model it around reserves (or as some would say liquidity requirements) and capital requirements is too too simplistic.

        • http://overthepeak.com/wordpress/ Mystic

           Yes, childishly simplistic.

  • joebhed

    Nick

    Great job in clarifying some of what Ben Senf calls “the fog around money”.
    Well done.
    But this is a rabbit hole that needs avoiding, and not further clarifications.

    To what purpose, this?
    To what effect?

    Once you figure out exactly the fine relationship between the two CB screens
    with interest rates and reserve levels, and I mean have it EXACTLY figured out
    as to which is the cause and which is the effect, you end with the situation,
    as Ed says, of trying to “transmit monetary policy to the economy”.

    HELLOOOO !!!!!
    The economy.

    How’s that going?
    To hell in a handbasket.

    Forget the target federal fund rate.
    Forget the relationship between interest payments on excess reserves and the
    target federal funds rate.
    Forget the level of required or excess reserves.
    It’s a bunch of ill-conceived and unnecessary BS.
    This is the bankers’ money system, Nick.

    The thing about ‘transmitting” monetary policy is that regardless of its
    complexity or the sophistication that people keep on discovering as we inch
    forward, it is the FAILURE of transmitting the policy to the economy that has
    us in a lurch.
    What the economy needs, Nick, is MONEY.
    Not an ever more complex central bank operation hoping to transmit monetary
    policy.
    People without jobs don’t care about Bernanke-think on CB operations.

    Yes, banks respond in their lending to interest rate policy – about a half an
    inch.
    If that ain’t PAINFULLY obvious at ZIRP, then what is?

    Ed, the MMTers and to a degree Keen and Krugman ALL realize that what the
    economy needs is jobs and aggregate demand.
    How do you get jobs and aggregate demand growth using these BS central bank
    monetary policy understandings?

    You don’t.
     
    In the 60s and 70s, Milton Friedman said just have government – not the private
    bankers using debts – expand the money supply by 3 percent per year on average.
    “Spend it into existence”, just like Lerner and the MMTers call for.
    Yes, THAT Milton Friedman.

    No target FF rate.
    No interest rate manipulation at all.
    No pushing reserves here and there.

    Put the money into the system.
    The “transmission mechanism” is direct deposit.

    Thanks.

    • http://overthepeak.com/wordpress/ Mystic

       I don’t see the point of being twenty steps ahead.

      What you say hits a paradox.  That is, the politicians would have to decide what to spend the money on.
      Now, that would not seem to be a problem, but it is.
      The way it happens now is all fluff and nonsense.  They can play their silly games.

      If it goes to an `open system`, the pols would have to show that they have `a plan`.
      Politicians haven’t had to have plans for decades and I doubt they want to start.

      So, the paradox is, that we have modern `spend spend, buy vote type` politicians, that would turn down an offer to spend more.

      (and from my point of view.  I am not at all sure it would work (but I am working towards it (slowly))).

      • joebhed

        Nick,

        You’re right about the bad match between the politicians who got there through today’s political-money power and the need for a more public-purposed lot.
        I do congratulate your grasp of this big picture stuff.
         
        But you also need to think about it perhaps a little differently.
        Once we get through the slug of getting the toxic assets off the books and the shadow bankers out to pasture, all of this stuff becomes pretty routine, and there is no more NEED to trust the future politicians any more than we do now.  :-)

        With the economic task of providing new money so as to maintain stable buying power (inflation) and achieve GDP-potential (as full employment as the national economy can provide) the changes will have become legally and operationally systemic.

        The size of the federal budget will be the same – or whatever the public demands.
        Within that budget is the mechanism for creating the money needed to achieve those two objectives.
        Money will be a permanent medium, changing in quantity only in response to changes in the NEED for it (GDP-potential).

        So, there is no great ‘money-creation’ power to anything.
        It becomes much more mechanical than this silly Neo-vs-Post-Keynesian argument about how to push the interest-rate string in order to have the right amount of reserves to keep the banks lending in order to HAVE MONEY.

        We will HAVE money.
        Because the Congress adopts a budget that is funded through taxation and new money creation.
        And because ALL the money in existence remains in existence – it is not extinguished with debt.

        If you remember, Nick, the words of Robert Hemphill.
        This is a staggering thought.
        We need to have bank loans in order to have money.
        No loans equals no money.
        It is the most important subject that intelligent people can investigate and reflect upon.

        Still is, Nick.
        Investigate and reflect away.
        Thanks.

        • http://overthepeak.com/wordpress/ Mystic

           I see three systems -
          The government system.
          The banking system.
          and
          The capital markets system.

          All have their own little ways~!

          • Paul

            Obama and Bernanke are turning the economy in to a Centralized system, not unlike the Politburo in China.  Same thing for Europe.  Over-reach is a serious danger.  Time for Ben to go back to the White Tower of Academia.  His role as scape-goat is secure.

            • http://overthepeak.com/wordpress/ Mystic

               No.  There is no other way.  Central control is the only way out.
              We may not like it, but we would like the alternatives less~!

              • Paul

                To be determined~!  Whenever I hear the words Central Control, I immediately visualize Gulags.
                For the good of the People~!
                I am a died-in-the-wool Individualist.  You can have your Politburo, I’ll take my chances in my hermit cave.

                • http://overthepeak.com/wordpress/ Mystic

                   You will just have to stop thinking of Gulags, because that is silly.
                  Think of 1980′s Sweden and all those scandy girls being nice.

                  The fact is that you don’t, and will not, live in a hermit cave~!

                  • Paul

                    A hermit cave, outfitted by Ikea, with a couple of nice Scandy girls, doesn’t sound so bad after all.  OK, I’m in!

  • extremebuilder

    Morning Mr Mystic. It`s like smoking weed this finance thingummy. 
    One minute you can see the whole thing laid out crystal clear before you.
    Then `poof` off to sleep go brain cells and you`re back at cave man level.
    Thanks for those moments of clarity
    Happy Friday

    • http://overthepeak.com/wordpress/ Mystic

      We are getting there.
      Another step has just been posted.
       

  • Sam

    To round this off, Steve Keen interview on RT about the spat with Krugman:

    http://www.youtube.com/watch?v=iWEq27Ai6ZU

    • http://overthepeak.com/wordpress/ Mystic

       Lauren Lyster’s legs.

      • Paul

        Very tasty~!

        • Paul

          What a bunch of nonsense.  How many times does Keen reference Galileo?  Dumb shit.  I am sure that taking a class from Keen must be nauseating, as taking a class from Krugman.   Good try, Keen-o. you dope~!  Now, exit stage left, dope.

          • http://overthepeak.com/wordpress/ Mystic

             Please allow me to `give you a talking to`.
            It is not good thinking to bash from one extreme to another.  Things are rarely, if ever, out to the extremes.
            Krugman is not a dope.  Keen is not a dope (even if he does give a silly interview, to a silly bimbo on a silly tv channel).
            It is hard not to put things in extreme boxes, but I counsel against it.
            Leave things out of boxes.  Leave them all out in the middle of the floor.  Open to be watched.

            • Paul

              Duly chastised.  You are right.

            • Paul

              It is very frustrating at times.  I am a little brain.  I expect more from the big brains, or those academics who purport to be intellectual.  I can observe this debate at the pub any night of the week.  I have to remember that we are silly little creatures.  But, the inputs of those in the know can lead to catastrophe.  My words are of no consequence.  Their words can cause war and famine.

              • http://overthepeak.com/wordpress/ Mystic

                 There are no doubt some big brains out there.  I would put them as 0.0001% of the population.
                The chances are that their bosses are not big brain types……..and it is them that run things~!

                • Paul

                  That’s the dilemma.  Is that why you were so excited when Soros invited Keen to INET?  A chance for a big brain to speak untethered.  Is there an energy conference similar to the INET-type?

  • ZarathustraSpeaksAgain

    You are not going to believe this … I did not hear anything that I didn’t agree with. I imagine more than a few people tuned out just because of the nature of long explanations of bank mechanics, but it kept my interest and I think you did a great job of explaining everything.