Bernanke press conference: Banks can not only handle a sustained increase in interest rates, but...

Bernanke press conference: Banks can not only handle a sustained increase in interest rates, but should thrive, he says, as higher rates mean increased net interest margins and a higher franchise value. Suggestion for a follow-up: What if it's short-term rates which increase?

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Comments (16)
  • Tom Guttenberger
    , contributor
    Comments (714) | Send Message
    Fed funds rate will be at 0 forever.
    20 Mar 2013, 03:27 PM Reply Like
  • Mad_Max_A_Million
    , contributor
    Comments (1175) | Send Message
    Inflation as far as the eye can see...
    20 Mar 2013, 03:36 PM Reply Like
  • mickmars
    , contributor
    Comments (1312) | Send Message
    Remember the "Fed considers raising rates" articles back in 2010... he-he


    Blankfein and Dimon prefer 0%.
    20 Mar 2013, 04:05 PM Reply Like
  • ebworthen
    , contributor
    Comments (2799) | Send Message
    They will confiscate (steal, expropriate) depositor money before raising rates.


    Reporter: "As a Central Banker do you think it was appropriate or fair to place a levy on deposits...?"


    Bernanke (paraphrased): "They are facing a difficult situation and need to find resources to address the situation..."


    The direct question about Cyprus is at 34:20.


    There is a follow up direct question at 38:35: "Will the FED ever put a levy on U.S. deposits?".


    Bernanke never says he won't do it or that it would be wrong, only dodges by mentioning the FDIC and that a levy would be "unlikely".


    Full press conference question/answer session:
    20 Mar 2013, 06:23 PM Reply Like
  • Whitehawk
    , contributor
    Comments (3121) | Send Message
    A steepening yield curve with low short-term rates is profitable for lenders. If short-term rates correct higher, then not so much. It is all about spreads. However, there is risk borrowing short and lending long, in fact that practice led to some spectacular failures in the last 10 years. If we see a rev-up of the repo and short-term lending markets to juice spreads, that is more Ponzi finance BS.
    20 Mar 2013, 03:35 PM Reply Like
  • Jason Cawley
    , contributor
    Comments (5447) | Send Message
    Yes it is about spreads, no it is not about the spread between short and long rates. It is mostly about the spread between safe and less safe credits, that banks make money on. They really are not in the business of taking long rate risk for their counterparties. The average duration (IR risk divided by total assets) of the position of a big money center bank is tiny. They have short side assets - their cash position, long side Repos, owned commercial paper - and variable rate assets - most lines of credit, ARM mortgages, many asset backed securities - that pay them more when rates rise rather than less. Their longer positions are all ladders and portions are resetting at new rates (higher or lower) all the time.


    If they can't command a sizable credit risk spread and at the same time the yield curve goes flat, they can have trouble. They always have trouble when credit losses spike above the levels expected and therefore eating up their whole initial credit risk spread. That is really about it. On a group basis, they have better credit ratings and their own liabilities are more liquid and safe than their counterparties, and taking that liquidity risk and having those better credit ratings pays them their stable, full cycle profits.
    20 Mar 2013, 04:42 PM Reply Like
  • Kyle Spencer
    , contributor
    Comments (1208) | Send Message
    Institutionally, the Fed is much more comfortable with inflation than ZIRP thanks to the Volkner experiment, and hiking the interest rate is effectively the same as re-loading the Fed's depleted arsenal. The whole point of this exercise is to make holding bonds exceedingly painful.
    20 Mar 2013, 05:12 PM Reply Like
  • Jason Cawley
    , contributor
    Comments (5447) | Send Message
    There isn't any inflation to speak of.


    All the Fed bashers have been comprehensively wrong about absolutely everything, since 2009.


    The private financial sector continues to contract, and public sector and monetary ease has only kept broad credit narrowly positive, growing much slower in the last 4 years than in the previous 4. That is why CPI inflation has remained low. CPI inflation under Bernanke is the lowest of any Fed chairman since WW II.


    But entire ideologies and political movements were constructed around fears of inflation, back when it was actually a problem. And they are frozen in amber, completely unable to update themselves, and frankly completely unaware of what has actually been happening in the private financial sector, especially its non-bank portion.


    On the top of the SA page, hit the Macro View tab. Upper right part of the screen, you will see the best and worst performing asset classes over the year just past. You will find precious metals and commodities at the very bottom, stocks at the very top, and bonds right in the middle. If the Fed bashers were correct, the precious metals and commodities would be at the top, the bonds at the bottom, and stocks in the middle.


    They simply aren't. Why? Because their diagnosis is flat wrong. The Fed knows what it is doing, it is reacting to the actual state of the financial system, and its detractors are broken records that have been repeating the same stale slanders for a decade straight by now, without taking a breath.
    20 Mar 2013, 06:17 PM Reply Like
  • investingInvestor
    , contributor
    Comments (2168) | Send Message
    Since 2009, the price of a gallon of milk has doubled, and the price of a ream of 500 copy sheets has doubled. Significant inflation has been occurring.


    I figure doubling is easy for you to remember. Gas is up about 40 percent. Meat is up. Nothing is down except residential real estate.
    20 Mar 2013, 08:13 PM Reply Like
  • sloemoe
    , contributor
    Comments (42) | Send Message
    Back when the data used to measure inflation was meaningful.
    20 Mar 2013, 09:24 PM Reply Like
  • Jason Cawley
    , contributor
    Comments (5447) | Send Message
    My cost of living has not doubled since 2009. My housing costs have not doubled, my taxes have not doubled, the price of a car has not doubled, the price of computers has not doubled, my utility bills have not doubled. I don't live on milk, and I barely use paper for anything.


    CPI is weighted by what actual people actually pay for all the items they actually choose to buy. And it is barely moving. In a stunning coincidence, it has increased by only about 5%, over a period in which total dollar debts outstanding have also increased by only about 5%.


    I don't know why this is apparently so hard to grok, but massive losses to specifically financial institutions are strongly deflationary. The total ability to pay for things in dollars depends on total credit outstanding, not on the breakdown within that aggregate. And financial institutions that get their capital gutted and receive mandates to cut their leverage in half at the same time, do not exactly extend credit with a free hand.


    The debts out of the US private financial sector have fallen by $3.5 trillion since the end of 2008.


    In the 1990 recession, the last recession with a major fall in real estate prices, the rate of expansion of private financial sector debt out, *bottomed* at *positive* 6% per year. It has *averaged* 14% per year since the Korean war, growing twice as fast as the economy, as financial intermediation deepened. The last time it actually went in reverse was the 1930s. Not famously the most inflationary decade in US history.
    21 Mar 2013, 05:23 PM Reply Like
  • moreofthesame
    , contributor
    Comments (739) | Send Message
    Ha, I knew it, they pump up the market, followed by ridiculous talks about how well the US economy is doing and now come the raise the interest talks again. Gotta squeeze the people. btw, raising interest rates will diminish the money supply which means less inflation rather than more. You have to slowly drain the money out of the economy again, like boiling the frog to the point where it just won't die yet, so that afterwards they can pump money into the economy again and make everybody feel rich again. The puppeteers do enjoy their trickery.
    20 Mar 2013, 08:26 PM Reply Like
  • The Geoffster
    , contributor
    Comments (4276) | Send Message
    Raise interest rates and watch the deficit soar.
    20 Mar 2013, 09:41 PM Reply Like
  • Ghosts of Kariela
    , contributor
    Comments (152) | Send Message
    Yeah that's just talk, ZIRP as far as the eye can see! Bernanke's got this covered, he's a smart guy, Congress on the other hand....
    21 Mar 2013, 03:13 AM Reply Like
  • whidbey
    , contributor
    Comments (3483) | Send Message
    Jason C makes a valiant defense of the Fed, but it seems that the misapplications of capital which current monetary policy has induced could be a problem. Housing is doing OK, but we know that the GSEs (bankrupts) are behind most existing home sales and the Home Builders are wiring their own finance for new homes to those with financial problems (about 80% of sales). We know that banks are loaning more money, but nothing like the shadow banking community which has grown greatly in the last five years. They are the "cowboy bankers" with few constraints, but maybe the liberal ideal of free wheeling banks. Problem is these banks are holding up a great deal with no visible means of support or supervision. Then there is the massive corporate debt sales to the public to take advantage of current rates. This capital will go for acquisitions, M&A writ large, but maybe additions not desired in the long run unless they can be made profitable. Rapid expansions of credit must be based on consumers having jobs and being willing to spend their money. Balance matters and historical norms are not immutable but they are compelling. The Fed policy is not beyond question. Bubbles happen or are induced.
    26 Mar 2013, 10:09 AM Reply Like
  • Jason Cawley
    , contributor
    Comments (5447) | Send Message
    "nothing like the shadow banking community which has grown greatly in the last five years"


    Um, the shadow banking system has contracted by over $3 trillion in the past 5 years, $3.5 trillion on some definitions of that category. Asset backed issuers alone shrank by $2 trillion. You have it exactly backwards - the shadow banks burgeoned and barged in the preceding bubble, and they are also the ones that cratered. Smaller banks have contracted slightly since 2008 as well, while the major money center banks, precisely on balance sheet not off, have been the only growing portion of the financial sector. They are also the most competitive financial institutions on the planet, and much more soundly financed and positioned today than in 2008.


    There is no rapid expansion of credit going on at present. The major banks are growing modestly, and the Fed and treasury are issuing lots of money and treasury debt respectively - but that is just replacing shrinking asset backed securities, mortgage pools, and money market funds. Precisely the shadow banking model of issuing securities and short term commercial paper to fund loans on real estate and receivables, is what has collapsed since 2008. And it isn't coming back.
    26 Mar 2013, 11:54 AM Reply Like
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