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  • Never Mind Their Distrust Of Data And Forecasts, Austrians Can Help You Predict The Economy [View article]
    The point of pumping in tons of reserves was to lower funding costs to protect capital.

    What regulators do you talk to on a regular basis, because they are sure saying something different from the ones I talk to.

    Again the initial point was that cash in a bank was wealth that did nothing, clearly it does. Also take a look at accounting theory to see how the income statement gets rolled into capital.
    Jul 25 06:43 PM | Likes Like |Link to Comment
  • Never Mind Their Distrust Of Data And Forecasts, Austrians Can Help You Predict The Economy [View article]
    "savings" more used in the economy"

    But the point I was disputing was that it is never used. Indeed it is. It is being used to preserve bank capital whereas the alternative would be an erosion which would require banks to either shrink, chase capital (lower share price), or both.

    "What if the money is simply spent, thereby increasing the GDP"

    It would have the same effect as simply chasing the stocks. If it were "spent" on TVs rather than bank deposits, the cost of deposits would rise, the value of bank capital would fall, but earnings in companies would go up, and presto, so would the stock values.

    Then you would get less banks, and the banks that did survive would just lend less.

    "I think the basic area where we disagree is that you think the savings actually affects the bank cot metrics"

    Agreed. When people choose bank deposits over stocks or TVs, bank deposits costs less. Less interest expense means higher profits for banks. Higher profits means stronger capital. Its just math. Its the "E" in CAMELS. Bank regulators make a big deal out of COF, so even if it doesn't matter to you, it matters to them, and banks with high COF get criticized and that can result in higher FDIC assessments, which also hurts capital.

    OK, so you disagree. It doesn't matter. I can tell you what is going to happen if there isn't massive regulatory reform. As long as people are afraid to borrow because of regulations and as long as banks are afraid to lend because of regulations, banks will face low loan growth, and regulatory costs are going to continue to rise. The way to deal with that will be consolidation. Volume is how you deploy capital, so since they can't get loans, they will buy other banks to get their loans and lever up their existing compliance departments. Actual loan growth will remain weak, but the number of banks will continue to be weak. Thus, what you want to look for are the survivors. Banks that get acquired going forward will be lucky to get book. Eventually the worn out board memembers and management teams will consider themselves lucky to get 90% of book.

    Granted the savings used wasn't used to bid up stocks or TVs, but that would have only been temporary. The money was used to keep banks afloat when many more would have gone away than did. Its really not right or wrong. Its just a side effect of the deeper regulatory issues that make the US less productive, and as a result has retarded the growth in our standard of living.
    Jul 25 05:24 PM | Likes Like |Link to Comment
  • Never Mind Their Distrust Of Data And Forecasts, Austrians Can Help You Predict The Economy [View article]
    "Mixing capital requirements/ratios and funding costs with deposits ("savings"), as if the latter directly leads to the former, is misleading."

    No, you have to understand how accounting works. Interest expense on deposits is closed out to capital. Holding everything constant, if you increased your interest expense, when you closed out the period, you would have less capital. That would mean your capital got smaller in relation to your assets, thus giving you a lower capital ratio.

    "And, of course, deposits do nothing at all for the capital side of the equation, as deposits are a bank liability, not an asset, so they improve a bank's lending capacity not at all"

    Yes, deposits (a CR on the balance sheet) are not combined with capital (also a CR on the balance sheet), but they do have a major impact on lending capacity. You need to talk to some regulators sometime. The "L" in CAMELS is about liquidity, and one of the factors regulators use in determining how they feel about the growth in the balance sheet is how well funded the bank is. They take a pale view of repos, FRB and FHLB advances as a funding source. They LOVE local deposits, especially non interest bearing DDAs. Now, if you have lots of off balance sheet capacity (like Fed & FHLB lines), your need to go out and chase deposits is limited. That means you don't have to go out and pay up for commodity deposits like MM and CDs. That means less interest expense, which means you don't reduce capital as much if you had higher interest expense.

    The lower interest expense not having to chase deposits helps the banks, but it doesn't cure loan demand. That's a function of two things. How regulations hurt the general economy by fostering an anitbusiness environment, and regulatory panic. The CFPB makes all sorts of lending way too risky. Smaller banks shut down their mgt and consumer depts, because one false step can have you in deep water. Also coming down the pike are new ALLL rules, which will probably result in 30% to 40% higher ALLL balances. As such, you need higher credit quality loans, which means less loans, which is also fueled by people not wanting to get loans because the costs of taking on more risk are just too high given Ocare, EPA, etc, etc.

    So, loan growth stays muted, the Fed is pushing cash into banks, regulatory environment has business scared, so they stay in cash and park it at banks, and the regulators are making it harder to lend. The result is no one wants to get a loan, the banks have plenty of deposits (funding), so yields overall stay low for both loans and deposits. The banks find an equilibrium that preserves capital, and that protects the banks.

    So, again, there is a use. The alternative would be people chasing stocks, loan demand wouldn't change, interest costs go up, banks on the capital fringe get purged (failure), and the stronger banks see their capital erode, which encourages them to shrink their balance sheet.
    Jul 25 04:32 PM | Likes Like |Link to Comment
  • Never Mind Their Distrust Of Data And Forecasts, Austrians Can Help You Predict The Economy [View article]
    "the use by others you imagine."

    But it is in use by others. You have to understand the interaction between the various levels of bank regulators. You have the Fed regulators, the FDIC, the OCC, the states, etc. It boils down to a tug of war. The FDIC and OCC tend to be the "heavies" in all this. One of the issues in CAMELS is the E for earnings. One of the things the regulators harp on is low deposit costs. Low deposit costs translate into higher capital ratios. Keeping capital ratios up, keep regulators off your back. That means you have more latitude in lending/investing.

    So, the "others" are still being helped. If it wasn't for the contribution to capital from the lower funding costs, banks would have to shrink assets to shrink back into their capital, which would mean even less lending. So the "others" are the people that have loans now, that would either have their loans called, not renewed, or never have been made in the first place.

    So, far from nobody wanting them or needing them, they are useful for bank, because banks don't have to chase hard for funding, which would mean higher deposit costs.

    So given all that, money in banks is not money out of the economy. What is happening, instead of the money bidding up TVs and ipods, it is bidding up the value of bank capital by keeping deposit rates low.

    As such, back to the idea that wealth can be in a state where it is never used is a nonsense statement. It ignores economics. Its like saying a person will keep building up food stores that they could never eat. Once again, this ignores economics. People might develop a small surplus beyond what they need in emergency food stores, but they will never just keep building up more and more food that would never be of any use to them. It just gets too expensive, and nature (their human nature) would cause a correction. This is the same reason Malthus was wrong about population.

    The money in banks is just another manifestation of a flight to quality. Its a market signal that the risks of riskier investments is more that what people are comfortable with. To solve that you would need regulatory relief. For example, reign in the EPA, labor laws, and income taxes. The fixed costs imposed by these price blind fixed costs would be lowered, returns for riskier investment would go up, and that would attract people away from banks. Deposit costs would go up as banks had to fight to attract those deposits back, but so would the yield for loans as the demand for loans would also increase, so the margins would stay the same or improve, thus protecting capital.
    Jul 25 03:36 PM | Likes Like |Link to Comment
  • Never Mind Their Distrust Of Data And Forecasts, Austrians Can Help You Predict The Economy [View article]
    "It doesn't really."

    Then you don't know much about banking. You need to talk to a few regulators to find out how they feel about banks attracting deposits. Banks use those deposits as funding sources, which facilitates the bank's lending. So whether you buy a stock which supports a single company in productivity, or you put it in bank which lends it to a single company so it can engage in productivity, that money is in use.

    So the idea that a person has more wealth than they can use is nonsense. All wealth gets used. Now, a single person may have more assets than they can consume, but yet again, that's absurd as well. The point of having excess assets, is so you can have the option of letting someone else use them who can create additional productivity. Like having extra food that you let someone else use while they devise a way to build a house so you can both live in it.

    Your point was that there were circumstances where wealth never gets used. It always gets used. What you are parroting is a looters mindset, where if you can rationalize that something isn't being used, then its OK for you to take it so you can consume it. That's the welfare mentality where people rationalize taking wealth from the rich because they don't need via the evidence that it isn't being used.

    Well that's confusing consumption that leads to further productivity (like lending food to the guy finding a way to build a house ie putting money in a bank that "funds" a bank for lending) as opposed to just giving food to someone that sits on the river bank to watch the water flow by.

    Either way, all wealth is used. Its total nonsense to think any wealth is just sitting being fallow because a single person is not the one consuming it. Such statements are just semantics. The point of putting it in banks is so other people can help you underwrite another person that can use that wealth to create even more wealth, so you don't have to pick all the stocks on your own. For that service the bank charges fees.
    Jul 25 02:18 PM | Likes Like |Link to Comment
  • Never Mind Their Distrust Of Data And Forecasts, Austrians Can Help You Predict The Economy [View article]
    "If you have money in the bank "

    And what does the bank do with it?
    Jul 25 01:25 PM | Likes Like |Link to Comment
  • Never Mind Their Distrust Of Data And Forecasts, Austrians Can Help You Predict The Economy [View article]
    "the phenomena of individuals creating more wealth than they utilize during their lifetime whether it be hard assets or owning IOU's"

    There's no such thing. All wealth is utilized. A person may have more assets than they can consume, but everyone having the goal of consuming all your assets before they die is how you create a third world economy.
    Jul 25 11:16 AM | 1 Like Like |Link to Comment
  • The Financial Storm Nobody Is Expecting [View article]
    Yeah, you have to understand the mindset that developed at the time, and that we still have it today.

    There was this frame of mind that was developing in the late 1800s and early 1900s that the economy needed to be taken out of politics. This was the rise of the technocrat, the supposed experts who were above the so called chaos of the free market. These superhumans (reference Also Sprach Zarathustra) who were Phds and so called experts would make decisions that all the irrational rabel would not.

    From this nonsense sprang the Fed and all sorts of other "independent" gov sponsored enterprises (ie FDIC, FHLB, FANNIE, FREDDIE, etc). Even today the CFPB echoes these sentiments as it was designed to not answer to Congress or the President. IPAB (aka death panels) from Obamacare is another.

    So the idea was that this "independent" Fed Res would calm the economy and protect us from economic downturns and if it couldn't prevent them, then save us from them after they occurred. Its all really a sham. The Fed pays some of its "profits", but the rest goes to the Treas. So if the gov is picking your leardership and you are paying your "profits" to the gov, the real owner is the gov. After all, to whom should profits be paid if not the owner.

    Also, we are now seeing studies that the Fed responds to political pressure just like everyone else in gov and the Fed tends to follow the wishes of the President and Congress. The Fed was just one of these orgnizations that was really gov, but that the gov didn't want to call gov so they could get it passed. Now, like all regulators, they hide behind the indpendence so they can both blame each other.
    Jul 22 03:04 PM | 1 Like Like |Link to Comment
  • Never Mind Their Distrust Of Data And Forecasts, Austrians Can Help You Predict The Economy [View article]
    "While the decline in housing activity has been significant and will probably continue for a while longer, I think the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—have been largely allayed."

    Janet Yellen
    Jul 22 01:39 PM | 1 Like Like |Link to Comment
  • Making The Rich Richer [View article]
    I made this comment on Aug 3, 2011. The 10yr on that date was around 2.60. Since then we have seen it down near 1.40. Today its around 2.48. Its all about the subsidy mix folks. You can ignore the claims of the mouth foamers and trust reality.

    "...When the 10 yr yields would get pushed up during QE periods or heavy issuance auctions, I would deploy some cash. During QE times, it was tough looking at unrealized losses, especially when the 10 yr would get past 3.50, but there were times I just had to stick to the plan and trust my basic analysis.

    To me there are two reasons interest rates go up.

    1. Demand for capital out strips supply - a vibrant growing economy (I didn't see this suggested in economic data)

    2. Credit risk - US debt has some baked in the cake treasury buyers (anybody that does business with us has to use dollars, and they have to use those dollars for dollar denominated assets - like treasuries). Thus, I didn't see a lack of demand for our debt. With all of our problems, there are definitely worse places. Thus, I saw plenty of buyers.

    Now that yields are dropping, the gains are back. Of course, now I have to think about what to do with those gains..."
    Jul 22 12:20 PM | 1 Like Like |Link to Comment
  • Making The Rich Richer [View article]
    "Her plan relied more on "opting in" rather than outright confiscation."

    This touches on an important point. If such a plan ever gets close to being implemented, you can bet your last doughnut that it won't be called confiscation. The Telegraph article lays out how it will be done. It will be called the "Retirement Security Act" or "The Savings Unification Act" or some such thing. First it will be floated as "voluntary", but when people don't sign up in droves, "volunteering" will become mandatory.

    Again, they won't call it outright confiscation. What will happen will be a campaign against 401ks and IRAs, then it will be called a crisis, then the "solution" will be proposed.

    Then trial balloons get floated in Congress.

    People get alarmed, and then, the mouth foamers who are always wrong will say, "Awww, that will never happen. Sure it happens other places but not in the US", and then they will say, "But I still believe the US is not exceptional". When it does happen, these same mouth foamers who once told us it will never happen, will be the first to support it.

    Again, this may not be right around the corner, but since my goal is to protect myself, its important to keep an ear out for the language that signals it. You just don't want to get caught blindsided.
    Jul 22 08:27 AM | 5 Likes Like |Link to Comment
  • Making The Rich Richer [View article]
    John Allison also talks about this.
    Jul 22 08:13 AM | Likes Like |Link to Comment
  • Making The Rich Richer [View article]
    Another news flash. Giant squids migrated from Argentina to Poland.
    Jul 21 09:34 PM | 1 Like Like |Link to Comment
  • Making The Rich Richer [View article]
    This just in. Giant squids ruling in Poland.
    Jul 21 09:27 PM | 2 Likes Like |Link to Comment
  • Making The Rich Richer [View article]
    Taking advantage of the wealth transfer is an old strategy. I call it, "The Cantillon Method".
    Jul 21 04:14 PM | 2 Likes Like |Link to Comment