Or, as some would say – `UK has had its day`.
Before you get to the tricky question at the end, you get
UK `real` wages and up-to-date mortgage lending.
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Is it not a legal requirement for banks to purchase bonds? They count as Tier 1 capital and the Basel agreement requires banks to hold a certain amount this??
But I suspect that even if this requirement did not exist they would still buy government bonds because that is the only sector that has any demand. Otherwise the money would end up at the central bank and effectively disappear (from our computer screens).
Ye…r….No. It is not a legal requirement. If they do, they are rated as 100% safe and don’t have to hold any extra cash `just in case`.
But …. Good Thinking.
Another but …. but why, why are they buying the bonds. Where do government bonds fit into their `business plan`~?
Well if it’s not a requirement I am tempted to say they buy bonds because they are in bed with the government. But I really think that’s too easy. Banks really do see purchasing government bonds as being a profitable thing to do.
I think they have surplus cash and the bond market is the only thing going. If the economy was booming the government couldn’t borrow now at these low rates because the banks would be loaning out to businesses.
And I also think there is an element of tradition involved and thinking inside the box. Banks see other banks investing in bonds, and they assume it must be the right thing to do.
I guess what I am driving at ….. is, why are they not lending out the `money`~? Why are they buying bonds with it~?
Is it not that banks make `profit` on borrowing cheap and lending at a few points more~?
Where do billions of bonds come into the equation~?
It is a very interesting point that you make.
The only reason that I can think of why the money is not being loaned out is the obvious one. Nobody wants it. The world is “deleveraging” as they say.
Basically the progress that mankind has made has now stopped. GDP growth is zero. Credit is only needed to fuel growth. The reason growth has stopped is due to energy costs, but thats just my guess. Somethings up.
Dear Mr. Mystic:
In answer to your question, I will speculate the banks are holding piles of government bonds because governments need the “cash”.
In the big game of double entry bookkeeping we are playing, this seems a logical tactic for governments living beyond their streams of revenue.
I suspect that governments have created some obscure rules (all in the name of “stabilizing the banking system”) that also make it advantageous for banks to buy and hold these instruments of government debt.
They’re (banks) certainly not holding them for the ROI, so I’m guessing the banks have been made some sort of ”offer they can’t refuse”.
Hello da John by the Creek hood man,
I can’t think of any reason a (non-primary dealer) bank should be holding any Treasuries on its own account.
It is, quite frankly, non of its business.
I suspect, as you do, it is part of an `unspoken back-scratching` insurance scheme.
Otherwise, I would have to guess that banks are purely a business, in the business of making money (and that surely is not right ….. they is a public service ain’t dey~?)
Back a year or two ago, there were rumors floating around the States, that the government was going to raid personal retirement accounts. The idea was even mentioned at a Congressional hearing. It’s tough to get “da real scoop” on stuff like this because the conspiracy crowd blows so much shite out there.
But the concept is easy enough to grasp. You go for the big, ripe, deep pools of “cash”. I’m guessing if things get “challenging” again, we’ll see the G-men use their powers of “persuasion” to ”facilitate” these swaps. Didn’t a South American country raid retirement accounts a while ago?
Enjoyed your YouTube vid about “rope” this morning. As aggravating as some of the YouTube players can be, there is always the chance that some of the younger crowd will be swayed by a more rational discussion of the situation. There is plenty of conspiracy based stuff floating around, and it seems like the “thirty-something” community is picking-up on it. They need some rational alternatives to consider!
Yes, I was happy with the `rope` pitch. They seem to like it as well.
Euro countries have made the pension raids ….. and arm-twisted the banks to buy the bonds~!
I can’t see that it will be needed in the US. They are kinda spending too much. A trillion a year, is a lot of digits. Leave it to the CB…..If they don’t wanna to play …… make ‘em play~!
Are US banks not selling off their investments in mortgages to central banks for a cash swap (QE #) and maybe the same in te UK ? They then need to do something with that cash (Basel III) that does not penalize their ability to leverage up on future loans when there is a future again to lend to the private sector again !?
Yes, but I was thinking at the hight of the boom, banks were stocked high with govvies.
I think Banks are holding Bonds, simply because they are seen as 100% safe, and they offer a rate of return…
The whole world wants a rate of return…
( In recent history too, as rates fall, this meant prices have increased ( Boosting balance sheets, although they can’t increase in price much more now…. ))
I get the impression you have realised something deeper though…
Lastly, did you hear..??
The UK is finally out of recession..??
If it’s actually true, I expect the Trippla Dippa to follow shortly…:(
Those charts you showed today in this presentation, tell a story of their own, do they not..???
Yes, the question is …. where did the banks get the money from to buy the bonds~?
(you haven’t answered last nights question yet~!)
Mostly, the banks got the money from deposits created when someone – somewhere – took a mortgage…
Partly also from all other forms of credit that created a deposit, and more recently, partly from QE…
BUT, primarily the housing market…
I’m not exactly sure why this was so… I’m thinking on it… I have reached the following point:
At the moment, I can see the rise in deposits through mortgages taken and then deposited, thus creating a desire for the banks to find a return on this idle money….
Roll on the 100% safe – Gilt / Bond / Treasury…
This seemed like a `No brainer`, so they lent more and more – in increasingly higher risk markets….
The more people borrowed, the more the banks parked in 100% safe bonds, purely because it is better than sitting on it…. As the MMT crowd say, “What else are they to do with excess reserves..?? “…
So, my vague answer, although not completely thought through yet, is the banks are so heavily invested in bonds, because the people are so heavily indebted in mortgages….
The people got greedy, and so did the banks….
With that in mind, why house prices went up at a higher rate than everything else..??
( I think that’s what you mean by last nights question )
I am not 100% sure… But I am thinking it is because partly, the new money bidded up house prices, but it didn’t all find its way into the economy after being deposited…..
In part, psychology must play a part too, where people can’t bear to be left behind or feel like they are missing out…
I keep thinking back to your `German house price` graph, which showed it flat, while the rest of the west exploded….
The answer must in part be found, by exploring the contrast between Germany, and the rest of us, as to why the Germans didn’t pile into the housing market too…. ???
Somehow, every one got pulled in, but the Germans didn’t, and I haven’t worked out why… Yet..:)
Feel free to tell me I am lost in thought at the moment…!!!
No, no …. That is deep joy to me ….. to know there is a Sned out there somewhere bumping into lamposts, while walking the dog, because his head is full of bank deposits.
(the other question was why people now can have a new house and and etc. (when it was not possible two generations before)).
Hi Nick i dont think banks have to count their gilts against their Basel capital requirements. Seems to me a lot of laundering is going on perhaps the banks are getting to swap all those toxic debts on their books for sovereign debt ?
I am kinda more talking before the crisis.
Why are banks in the Govvies game at all~?
Banks are middle-men who deal in notional value. They balance the accounts of creditors and debtors, funnelling the interest and capital payments from one set to the other. This business (usually) makes them a profit but also presents a risk, because the debtors might run out of notional value (or might not have to repay the capital just yet) but the creditors will still demand it. So the banks use their profits to buy some notional value to cover potential shortfalls. Government bonds are usually the safest notional value product.
The profit is expected to come from the middle-man side, not from the bond-owning.
I meant “nominal” rather than “notional”!
I wouldn’t mind the whole comment being re-done with new words, to be honest.
It never harms to write things in a way the most amount of people can understand, eh~!?