Taking on the currency cranks

[free spirit]

Bank's borrowings in the money markets is not borrowing 'actual hard currency'

i'm not sure you actually know what you mean when you use the phrase 'actual hard currency' either

of course it is.

The interbank lending market is entirely about banks being able to borrow actual hard currency from other banks to cover any short term liquidity issues. This and other similar wholesale money markets are what froze up.

wtf else do you think they'd be borrowing? Hi barclays, can I borrow that government gilt you've got and secure it against this government gilt we've got please?

 

[love detective]

the way you used 'actual hard currency' previously gave the indication you believed it to be actual physical money that could be used if customers wanted to physically withdraw money in person - you talked about this in the context of a customer bank run

so if you actually mean that there is no difference in your definitions between 'actual hard currency' and 'money' then fair enough, but certainly the additions of 'actual' & 'hard' to the word currency gave a strong indication you were using it to mean something other than what you now claim you mean by it (a bit similar to in the past when you were banging on about capital reserves without having a clue what you were talking about or what they even where, and then laterly pointed out you meant something totally different to what the phrase you used actually meant)

why bother adding the words actual and hard if, under your definitions, they don't actually add any difference to the simple phrase of money?

edit: and by the way, well done on once again avoiding/dodging all the points made to you in my various replies over the last page - this is my last post on this, not worth the effort if you are unable to engage with, or at least acknowledge, the various responses to your posts

 

[free spirit]

are you being deliberately obtuse here?

what the fuck else would I mean by 'actual hard currency'?

I was trying to clearly differentiate between that and other assets the bank may own, but which it can't use directly to pay out with.

 

[Jazzz]

So, suddenly, when "full reserve banking" is introduced, the money that is lent starts to circulate whereas it doesn't now!

Yes, that is what I'm saying, but I'd just call it "banking" as that's the principle on which banks operate.

Banking is based on the assumption that depositors will be leaving most of their money in the bank and not withdrawing it. This is why most money deposited can be treated as if it were a "time-deposit" and lent out. There is nothing dishonourable or dishonest about this. Actually, what happens is that all the money deposited, whether in a current account or a time-deposit, goes into one pool out of which a bank makes loans and other payments.

I imagine you think that any extra money needed will be done by the government or the central bank "printing" it. Hello (higher) inflation.

"Banking is based on the assumption that depositors will be leaving most of their money in the bank and not withdrawing it. "

With respect, no, this isn't it - it's that they are not withdrawing cash. What the banks can expect is for vast amounts of transactions to other banks of broad (their created) money to be balanced by similarly vast amounts in the reverse direction, leaving a much smaller fraction to be cleared with the central bank. This was partly what my example was intended to highlight. Of course, if there is a run on a bank, then this doesn't happen - people might not be withdrawing cash, but just transferring their money to other banks. Big trouble!


I've already said, with full-reserve banking you must make a distinction between "demand" deposits as "time-deposits". If you accept time deposits, you cannot let the original depositor draw on them for a certain time, or they are not time-deposits. When you say that a

I don't think you have grasped the fundamental difference between full and fractional reserve. You may like to consider this. If a bank accepts a cash deposit as a "demand" deposit, and then "lends it out", then you could say that they have created the original demand deposit.

 

[free spirit]

No, your point was that the threat of a customer bank run, withdrawing their deposits was both a major cause of the credit crunch (wrong)

can I just check why you've added the word 'customer' to the beginning of 'bank run'?

It looks to me as if you're trying to make it look like I'd only been talking about customers withdrawing money over the counter or similar, whereas I'm referring to all type of liabilities that were payable on demand, of which the customers queuing outside the bank is just the highly visible tip of the iceberg.

But yes, the threat of a potential bank run (including any loan repayments) is what's largely problematic about the freezing up of the interbank lending markets and other sources of access to ready cash that a bank operating on something below a 1.3% cash reserve ratio to sight liabilities is highly reliant upon to prevent even minor runs on the bank from resulting in them running out of cash.

That banks had a demand for cash, was not the motivating factor behind QE - i've already explained what I see as being the main stated and unstated factors for the state doing QE. That the banks were willing to be the other side of the QE transaction and benefited from it in terms of additional access to liquidity is without doubt, this doesn't mean it was the motivating factor for doing so. As i've already explained, there are countless other state schemes in operation both then and now, which were directly aimed at ensuring banks were propped up with the liquidity that they needed, QE wasn't one of them

OK, so you agree that cash reserves / liquidity were seriously problematic throughout the banking sector, and yet you also contend that a scheme that's resulted in £375 billion (IIRC) of government securities being swapped for newly printed cash wasn't the motivating factor behind QE, particularly when only £100 billion or so of that has ended up as increased business lending, which was the publicly stated aim.

This strikes me as being a rather peculiar position to take, hence my earlier comment.

Note that I'm not saying, and never have said, that it's the only reason, just that it's a significant unstated reason for it all that suits the purposes of both the BOE and the banks, but's seemingly not so good for the rest of us.

My point about NR was that it wasn't a customer bank run, or threat of a bank run that caused NR problems, it was its inability to roll over its short term funding in the money markets that it had been dependent on to fund its long term lending. When they, along with all other banks, were shut out of the money markets in September 2007, the state had to step in as the lender of last resort and put in something like £30bn to replace the funding that it had lost from the markets. Only at this point did customer bank run take place which resulted in a couple of billion being withdrawn from NR (and indirectly placed directly back with it, as that money withdrawn flowed into other banks, who at the time were shit scared to lend it to anyone, so they placed it on deposit with the central banks, who in turn had to increase their funding to NR to make up the shortfall - so in that sense bank runs on individual banks where a central bank exists, are self funding)

So can you tell me which number is bigger free spirit the £30bn of lost funding that NR suffered due to the money markets freezing up or the £2bn of lost funding that NR suffered due to customer withdrawls?

That you continually refer to the £2bn figure as being the reason for the downfall in light of all this is getting into Jazz like absurdity

Even the link that you provided says exactly this

I've not referred to a £2bn figure once that I can remember, though the straw the broke the camels back analogy springs to mind.

I see from this that I was right about your use of the word 'customer' in front of bank run though, so I'll restate, that I wasn't differentiating between any forms of money that was able to be withdrawn from the bank on demand, merely stating that the problem occurs when more money in total is being withdrawn than the bank has cash reserves to meet, or the ability to rapidly raise via the sale of assets or interbank lending (or similar).

I'm also not saying that this was the root cause of northern rocks problems, obviously it wasn't, but at the end of the day, it's running out of actual cash, and being seen to have run out of cash, that would completely kill a bank. This is why it was at this stage that the BoE had to step in to provide emergency cash to the bank, as well as fairly soon afterwards increasing the guarantees to depositors with the bank, both of which were clearly designed at bolstering the banks ability to withstand a run on the bank / reduce the scale of any run on the bank.

btw, I think you've been inferring a lot of this from my post 153. Please note that this post was in response to your stupid post before it about you personally asking the bank to break down your account into nominal vs hard currency. In my post I wasn't talking about what actually did bring northern rock down, just the fact that one person isn't going to take the bank down, but if all the customers tried to take their money out at once then it would, particularly if the bank was being frozen out of the interbank lending markets. If you'd stop responding as if this post was actually describing what I think happened to Northern Rock I think it'd help move things along.

 

[Jazzz]

This is another currency crank fallacy. Interest on loans comes out of future production, either from the profits businesses make by using the loan or, in the case of personal loans, out of wages earned by working.

Some advocates of "full reserve banking" recognise this. For instancve Michael Reiss in his book What Went Wrong with Economics:

(quote explaining Steve Keen argument that the interest paid may flow back into the economy from the banks, which can then be used to maintain further interest payments)

I leave you to settle this with your fellow full reserve banker.

I'm really not at all sure what the Steve Keen argument quoted has to do with the first part of your post. It makes me wonder if you actually read the quote you posted? Keen's argument has nothing to do with microeconomic considerations which can't possibly help here.

However, I must play the post. Keen's proof that the interest can be repaid doesn't answer all the questions for me. Suppose, instead of returning all the interest paid back into the economy, the bank's beneficiaries decide to let some of it stockpile. Then everything goes out of the window. We are left with everyone else overall owing more money than they have to pay it back with. The banks then get to gain another way, for they will seize real wealth through bankruptcies. After that, after the recession - well they still have the extra interest they stockpiled! It's not like they lost it by keeping it back for a while. Indeed, this rowing of the economy between boom and bust perfectly fits with experience.

As far as I can see, Keen's argument that interest can be repaid relies on assuming that banks will act altruistically. Whereas my understanding is that wealthy people like to see their wealth keep rising - stockpiling even! - and will not care too much whether others benefit. Isn't this just what happens?

This is claimed to be an infamous banking memorandum from the USA:

"On September 1st 1894 we will not renew our loans under any consideration. On September 1st we will demand our money.​

We will foreclose and become mortgages in possession. We can take two-thirds of the farms west of the Mississippi, and thousands of them east of the Mississippi as well, at our own price ... Then the farmers will become tenants as in England ... ,"​

1891 American Bankers Association, as printed in the Congressional Record of April 29, 1913.

http://www.iamthewitness.com/books/Andrew.Carrington.Hitchcock/The.History.of.the.Money.Changers.htm

 

[free spirit]

i'm gonna ask my bank today to break down my bank account balance into nominal pounds and real/hard currency pounds - i don't want none of that nominal shit finding it's way in and mixing itself up with any of the hard stuff that may or may not happen to be in there as well

detective free spirit may be required to go in and sort out the wheat from the chaff

btw, have you now sussed out what I was getting at on the other thread with nominal vs hard currency?

when you've got UK banks that only actually have 1.3% of their on demand liabilities held in actual cash reserves, or around 13% held in supposedly easily convertable forms such as government gilts etc, it should be pretty obvious that there's a significant difference between a £1,000,000,000 loan that's made in actual cash, and the same loan that's just made electronically by a bank extending you a line of credit electronically where only a small minority of that loan is actually fully funded.

99.9999% of the time both loans are of equal value, but in the event of a serious run on that bank, you could find that it wasn't actually able to either give you the cash, or even to transfer it electronically to another bank, though it possibly could still allow you to keep making purchases or payments against it with other customers of the same bank.

This is why they should be viewed differently IMO.

I've used a big number here to illustrate the point, but the same applies to a million £1000 loans, other than the fact they're less likely to all be withdrawn at once.

 

[SpineyNorman]

Suppose, instead of returning all the interest paid back into the economy, the bank's beneficiaries decide to let some of it stockpile. Then everything goes out of the window. We are left with everyone else overall owing more money than they have to pay it back with. The banks then get to gain another way, for they will seize real wealth through bankruptcies. After that, after the recession - well they still have the extra interest they stockpiled! It's not like they lost it by keeping it back for a while. Indeed, this rowing of the economy between boom and bust perfectly fits with experience.

Do you honestly believe this is what causes the cycle of boom and bust Jazzz? Cos that's clear, demonstrable bollocks.

 

[love detective]

can I just check why you've added the word 'customer' to the beginning of 'bank run'?

It looks to me as if you're trying to make it look like I'd only been talking about customers withdrawing money over the counter or similar, whereas I'm referring to all type of liabilities that were payable on demand, of which the customers queuing outside the bank is just the highly visible tip of the iceberg.

Because the initial post that you made in response to my 'stupid post' which started off this whole discussion, was squarely in the realm of customers 'going in' and withdrawing money from banks and then the state having to step in if that happened, which you then used NR as an example of this in action (despite it being nothing of the sort). Here is what you said:-

unless you've got a massive bank balance I doubt they're going to have a problem paying you in cash.

If every customer went in and withdrew their money though they'd not have anything like sufficient reserves to pay out in cash, and would have to attempt to then borrow the hard currency from elsewhere in order to pay out.

If the other banks / sources of finance lose their faith in that banks ability to repay those loans with interest in short order, they're then going to stop lending to that bank, meaning that either the government has to bail it out, or it will fail and those customers will find out exactly how real the numbers on the balance sheets were (or apparently the government will step in and pay out anyway, so it's all hunky dory).

If a similar thing happens to all or most banks though, then there's nobody left to provide the short term lending of hard currency to the banks that needs it, and you get a credit crunch situation that can only be eased via the release / printing of vast quantities of new hard currency just to meet the banks existing liabilities.

So you linked the reason for QE and the reason for the credit crunch (last paragraph) directly to the threat/potential of customers 'going in' and withdrawing money (first paragraph)

All throughout this discussion you seem to to take great offence at me responding to the words you've actually used to make your case and then moan at me for responding to things you have said, to which you then later claim that you didn't really mean what you said and you actually mean something different and I should be able to mind read so I can distinguish between what you mean and what you actually say.

Fair enough if you now say that you were referring to all types of liabilities that were payable on demand (which very little money market lending is, it's usually some kind of term, albeit fairly short term) 'of which the customers queuing outside the bank is just the highly visible tip of the iceberg' then that makes more sense. However your post above which prompted my initial involvement in this discussion was very clearly talking about customers, you refer to customers, you refer to them 'going in' which clearly makes reference to customers going into high street bank branches and taking money out, and then the conclusion of all these 'customers' 'going in' was for you the credit crunch and the reason for QE.

OK, so you agree that cash reserves / liquidity were seriously problematic throughout the banking sector, and yet you also contend that a scheme that's resulted in £375 billion (IIRC) of government securities being swapped for newly printed cash wasn't the motivating factor behind QE, particularly when only £100 billion or so of that has ended up as increased business lending, which was the publicly stated aim.

This strikes me as being a rather peculiar position to take, hence my earlier comment.

I've agreed from the very start that liquidity was a huge problem for the banking sector throughout the crisis. I disagree that the motivating factor for QE was to provide liquidity to banks for two reasons:-

1. The money markets started to freeze up in September 2007 with 2008 being the real crunch time. This period from late 2007 to 2009 was the real crunch point in terms of little or no liquidity being available in the open markets for banks. While from 2010 onwards the money markets have not went back to how they were pre 2007, they have certainly thawed a great deal. Anyway, the point is that in late 2007/early 2008 they froze completely, this is the time that if any bank was going to need assistance in liquidity, it was going to be then.

So at this stage we have serious liquidity problems for banks, and we both agree that they needed some kind of assistance to get by. You claim that QE was this assistance. The first batch of QE didn't get transacted until March 2009, and by September 2009, a full two years after the money markets had froze, the amount of QE was only £175bn. So you are saying that the motivating factor behind QE in 2009-2012 was a response to problems bank's were having as a result of the freezing up of money markets in 2007 to 2008. The nature of money market borrowing is that it is usually very short term, 1 week/1 month/3 months being the most popular terms. This means that when these 1 week/1 month/3 month loans expired and weren't able to be rolled over as they previously where, banks were then in a dire situation liquidity wise. A scheme starting a good year or so later and initially involving quite small amounts, is not a scheme that looks anything like a response to the liquidity problems of 2007/2008

So it's simply unfeasible to suggest that QE which was introduced nearly two years after the key freeze time, was a response to this liquidity seizure. Since 2011/2012 the banks have actually been able to fund themselves reasonably well in the money market, so those seizures in the money markets in 2008/2009 are simply not present at the moment. Yet in the last year alone another £175bn of QE has been transacted. So in short the timings alone of money market seizures and QE transactions are a glaring indicator that the later is not a response to the former. If it was, then it was a seriously daft response as it didn't do anything for a couple of years when the money markets froze up and banks were in desperate need of liquidity. And then once they had thawed & opened up again so that bank's weren't in desperate need of liquidity, it ramped up the QE transactions hugely. Surely you can see that this alone suggests that you are wrong to assert that bank liquidity problems are a primary driver for QE?

2. As i've previously mentioned, many timess, the state has stepped in with a myriad of liquidity schemes to help/bail out banks who were caught out when the money markets froze out. The biggest was the Bank of England's Special Liquidity Scheme which, unlike QE above, was launched in April 2008, right in the middle of the money market freezing up, and in a matter of month (not years like QE) provided near on £200bn of liquidity to banks (in exchange for collateral). Also in October 2008, again right in the middle of the key seizing up period, the Treasury's Credit Guarantee Scheme was launched, in contrast to the Special Liquidity Scheme which provided liquidity assistance directly to banks, this merely guaranteed any borrowings that the banks did in the market, so with a state backed guarantee, banks were able to access the money markets once again with the help of the state crutch. This scheme ended up guaranteeing around £250bn of credit and again was conducted in that key crunch time 2008/2009. So just these two schemes together provided over £400bn of liquidity assistance to banks in the period of 2008/2009. In contrast the first batch of QE of £75bn didn't appear until March 2009. There were also many other smaller schemes and in addition the regular normal open market operations that the BOE does in which liquidity is provided to banks.

So, once again it is simply absurd to say the motivating factor of QE was to provide liquidity to the banks. There were all manner of liquidity schemes in operation around 2008/2009 which were totally & utterly designed to provide liquidity to banks. QE was not one of them. QE wasn't done when banks did desperately need liquidity and was done when they didn't have any need for state assisted liquidity. So to say that QE is all about providing liquidity to banks is simply incorrect. I'm sorry if you don't like this being pointed out, but there is no empirical or rational reason to suggest that what you say is true.

The stated purpose of QE was not to provide liquidity to banks, but pretty much to take it away. In that the hope was that bank's would swap highly liquid gilts for cash and then use that cash to make longer terms loans to customers & business, which were less liquid and less immediately realisable than the gilts that they held. We all know that this was a fuckwited idea and never likely to work, but again it doesn't really matter as the main unstated reason was to ensure that there was an effective demand for new govt issued debt in the markets

 

[love detective]

I'm not denying that QE has ended up with banks's having an additional way to get liquidity through selling their gilts and just hoarding the cash that they get for them. But this in no way indicates that this was the motivating factor behind the scheme. Bank's still have all manner of schemes in which they can get access to liquidity form the bank of england by putting their gilts up for collateral, so QE was not required from this perspective. That QE didn't work is a fair point, that the intended outcome of QE didn't materialise is a fair point. But to say that the purpose of QE was to provide liquidity to banks, is wrong. It shows a poor understanding of what actually happened, when it happened, and why it happened. And me saying this in no way means that I agree or support anything that the state/govt has done. I just want to respond to this lazy analysis that we see on the left that goes 'omgz printing money and giving it to the banks, the banks, the banks, the banks - it's all about the banks'

If we're not able to understand what is actually happening and why it is happening and the context of which it is happening in, then there's little chance of being able to even try and do something effective about it - this is why I spend so much time on threads like this countering shite from jazz and the like

 

[Jean-Luc]

However, I must play the post. Keen's proof that the interest can be repaid doesn't answer all the questions for me. Suppose, instead of returning all the interest paid back into the economy, the bank's beneficiaries decide to let some of it stockpile. Then everything goes out of the window. We are left with everyone else overall owing more money than they have to pay it back with. The banks then get to gain another way, for they will seize real wealth through bankruptcies. After that, after the recession - well they still have the extra interest they stockpiled! It's not like they lost it by keeping it back for a while. Indeed, this rowing of the economy between boom and bust perfectly fits with experience.

As far as I can see, Keen's argument that interest can be repaid relies on assuming that banks will act altruistically. Whereas my understanding is that wealthy people like to see their wealth keep rising - stockpiling even! - and will not care too much whether others benefit. Isn't this just what happens?

This is another currency crank fallacy: that all interest received by banks is pure profit. Actually it is only the bank's gross income, out of which must be paid the bank's running costs (buildings, computers, etc) as well as staff wages but also interest to those from who the banks have themselves borrowed money (according to Robert Peston, the "interest margin" between what banks charge for loans and what they pay out in interest is currently not much above 2%, ie if they charge borrowers 6% they pay lenders to them 4%). What's left is profit, out of which is paid dividends to shareholders, big bonuses to top executives or which is accumulated as more capital. Apart from the last, all the interest is distributed to people or institutions who will spend it and even the part transferred to the reserves as more bank will be spent in the sense of being invested in bonds. It won't be hoarded ("stockpiled"), as you seem to be suggesting. This is not banks behaving "altruistically" but the way they work.

You are on the right track in seeing crises as having something to do with profits being "stockpiled" (held in liquid form, ie as bills or bonds that can be quickly converted into money, rather than re-invested in production), but this doesn't apply just to banks but, more importantly, to businesses in the productive sector of the economy. They do this because the prospects for profit-making have fallen, which happens when one key sector of the economy overproduces in relation to the market for its products and this has a knock-on effect on the rest of the economy (including the stock exchange and banks). Crises and downturns are caused by events in the real economy, not by events in the banking sector which is secondary and subordinate to the real economy.

 

[littlebabyjesus]

Crises and downturns are caused by events in the real economy, not by events in the banking sector which is secondary and subordinate to the real economy.

That's a big statement. The sub-prime mortgage crisis could not have happened if the banking sector had not made it happen. Banking takes a leading, not subordinate, role in encouraging debt because that's their business - the bigger the debt, the bigger their profits. They can't create demand for loans on their own, but they're by no means passive.

 

[littlebabyjesus]

from Jazzz:

"On September 1st 1894 we will not renew our loans under any consideration. On September 1st we will demand our money.​

We will foreclose and become mortgages in possession. We can take two-thirds of the farms west of the Mississippi, and thousands of them east of the Mississippi as well, at our own price ... Then the farmers will become tenants as in England ... ,"​

1891 American Bankers Association, as printed in the Congressional Record of April 29, 1913.

This is an argument I've seen put before - that it is in the interests of banks to cause default on loans in order to seize the assets the loans were secured against. But I'm not entirely clear that this is a coherent argument. By doing this, the banks cause a collapse in confidence and the devaluing of those assets - and of course, they never get the money back from their loans as a result.

 

[happie chappie]

FTW, here’s my (only semi-informed) analysis.

I think LD had clearly demonstrated the chronology of events and the link between the shortage of liquidity of the banks, and QE (ie, very little and only then tangentially).

It appears to me that the credit crunch (as relating to the operation of the money markets), didn’t stop lending completely, but it was severely restricted. Some money market lending was going on, but lenders were only willing to lend the limited amount of money available to organisations with a strong balance sheet and hence a good credit rating - put crudely those institutions lenders were (reasonably) sure could pay them back.

The overall balance sheet is the key here - not liquidity. Indeed, there’d be little point in a bank which is sitting on huge piles of cash (ie, highly liquid far in excess of its day-to-day requirements) going to the markets to borrow lots more cash. All things being equal, it would be more likely to be a lender in such circumstances, not a borrower.

Financially strong institutions (ie, those with a healthy balance sheet) would first in any queue for (the limited) money market funds. As the available funds for lending diminished prospective borrowers with relatively weaker balances sheet would be next in line (and presumably were charged a higher interest rate commensurate with a higher perceived risk) and so on down the line until lending stopped.

As I mentioned previously, at the time the wholesale money markets were spooked as they couldn’t be sure of the value of the assets held by institutions looking for funding. Some of these assets were worth far less than appeared on the books and some highly complex ones probably weren’t worth the paper they were written on.

This meant that when NR went to the wholesale markets for short-terms borrowing to help with liquidity they were at the back of the queue because the wholesale markets either knew, or had a strong suspicion, that NR’s solvency could be in question because of it’s fundamentally flawed business model - high loan-to-value ratio mortgages on the back of unsustainable multiples of income. I’m sure this helped NR write lots of new business (and generate lots of bonuses for senior executives), but it ultimately brought the bank down, not a short-term liquidity problem.

As an aside, when the money markets returned to a semblance of normality, retail banks didn’t simply return to their previous lending model as they would have done if their problems were solely caused by a temporary shortage of liquidity. They stopped offering high loan-to-value mortgages and income multiples as a way of shoring up their balance sheets, not just their cash balances.

With NR unable to access funding on the wholesale markets, the BoE stepped in as lender of last resort to provide cash.

So far so good – but it actually wasn’t.

If NR’s only problem was one of liquidity (as LD says, borrowing on the wholesale markers in this respect is essentially short-term), the BoE stepping as lender of last resort would have dealt with the problem and it probably would have ended there.

The BoE is only one actor in state intervention re NR. The other is the Government. When BoE provided short-term liquidity NR to help it meet its day-to-day activities, it didn’t take ownership of the bank. The state only took ownership when the Government steeped in to effectively nationalise it after the BoE had provided emergency liquidity as a stop-gap measure.

The underlying solvency issue was a major problem that couldn’t just be spirited away until the wholesale money markets returned to normality, or by the BoE pumping in additional liquidity when the bank itself was insolvent (not just suffering from a lack of liquidity).

Anyway, if the wholesale markets had returned to normality in fairly short order, the cat would have been out of the bag and the rates that would have been charged to NR to raise liquidity form the markets would have been unsustainable, partly because it had already had to go the BOE for cash (not a great sign in itself) and its fundamentally weak balance sheet - making a poor very risk indeed.

The Government nationalised NR to address the longer-term solvency problem by removing the toxic loans from the balance sheet – something that the BoE couldn’t do as it didn’t own NR at any time. Its role was simply to provide short-term funding as lender of last resort. Sorting out the balance sheet takes far, far, longer.

As LD goes on to demonstrate in his/her wider analysis of the macro-economic rational for QE, it had nothing to do with the “original” credit crunch, but was designed to remedy what later became the credit crunch in retail (as opposed to wholesale) lending. QE was designed primarily to increase bank lending to businesses, as a way of boosting economic activity. How effective it’s been is another matter entirely.

Again, we come against the difference between the liquidity of an institution (which doesn’t really tell you about its fundamental strength), and its solvency, which is far more important. As a very simple example, the amount of cash I have in my pocket right now may tell you how liquid I am, but tells you nothing about my overall financial position.

In post 180 Free Spirit links to Daily telegraph article about banks having to increase their cash reserves, ie their liquidity. That was the headline, but you have to read down to see the true picture. It relates to Basel III Regulations which dealt with the health of the banking system. The most onerous parts (and the bits the banks really squealed about) related to capital requirements, Basel III was about ensuring the overal sustainability of the banks’ balance sheets, not just their liquidity.

Anyway, a result interesting thread with has derailed my lunch plans so I’ll have to stop for the time being and come back to edit it later.

 

[happie chappie]

This is an argument I've seen put before - that it is in the interests of banks to cause default on loans in order to seize the assets the loans were secured against. But I'm not entirely clear that this is a coherent argument. By doing this, the banks cause a collapse in confidence and the devaluing of those assets - and of course, they never get the money back from their loans as a result.

It's not a coherent argument because it assumes the asset is always worth more than the loan.

Anyway a mortgage gives the bank a good income stream over many years. From memory, a house buyer pays back roughly twice the original amount borrowed over the life of the loan.

In terms of property, the banks already have first charge on the asset until the mortgage is redeemed. Therefore, all things being equal, it’s a good bet for the bank.

 

[SpineyNorman]

Another reason it’s not a coherent argument is that it assumes the asset is always worth more than the loan. Again coming back to the NR example, it many cases it wasn’t.

Secondly, a mortgage gives the bank a good income stream over many years. From memory, a house buyer pays back roughly twice the original amount borrowed over the life of the loan.

In terms of property, the banks already have first charge on the asset until the mortgage is redeemed. Therefore, all things being equal, it’s a good bet for the bank.

You seem to be having problems with the text format in your posts HC - if it goes all to cock you can reset it by highlighting the text then clicking the button at the top left of the reply box that looks a bit like a rubber eraser (next to where it says "font family").

 

[happie chappie]

You seem to be having problems with the text format in your posts HC - if it goes all to cock you can reset it by highlighting the text then clicking the button at the top left of the reply box that looks a bit like a rubber eraser (next to where it says "font family").

Thanks SN - I'll give it a go

 

[Random]

It is not to be sneezed at, taking in (if I have counted correctly) no less than five Nobel prize winners, including Irving Fischer, James Tobin, Milton Friedman, also including a former senior economist at the World Bank, and the latest support coming from our own guv'nor Mervyn King.

Why should we care at all about such proposals from mainstream economists? Would the world really be even better if even more of Friedman's economic dreams were made reality?

I just don't see it as something even worth arguing about.

 

[Blagsta]

That's a big statement. The sub-prime mortgage crisis could not have happened if the banking sector had not made it happen. Banking takes a leading, not subordinate, role in encouraging debt because that's their business - the bigger the debt, the bigger their profits. They can't create demand for loans on their own, but they're by no means passive.

Banks can't lend without having money to lend. The money does not come from the bank, it comes from the actual productive economy. This is ld's essential point I think - to look at what banks do in isolation from the rest of the economy is silly.

 

[Jean-Luc]

That's a big statement. The sub-prime mortgage crisis could not have happened if the banking sector had not made it happen. Banking takes a leading, not subordinate, role in encouraging debt because that's their business - the bigger the debt, the bigger their profits. They can't create demand for loans on their own, but they're by no means passive.

I agree that perhaps the most common view is that the crisis was caused by the reckless and greedy behaviour of the banking sector, with the implication that if the bankers hadn’t been so reckless and so greedy there would not have been a slump.

Obviously the banks and other mortgage-lenders played a role but the crisis was brought about by overproduction in the house-building industry in the US

The financial crisis broke out in August/September 2008. Housing prices had started falling well over a year before this. So this rules out one explanation: that it was the financial crisis that caused housing prices to fall. So what did?

An increased demand for housing, fuelled by easy mortgages, brought forth an increased supply. Speculative builders took out loans to build more housing – and not just more houses and apartment blocks but also more shopping malls and the like. These loans were “speculative” in the sense that they were made to building firms to build houses, apartment blocks and shopping malls without having firm orders for them beforehand.

In the end, supply came to exceed demand and housing prices fell. It was a classic case of overproduction: a market was expanding; those supplying it assumed that it would go on expanding and produced (in this case built more housing) in anticipation of this expansion continuing. The end result was that more came to be produced than could be sold.

The housing market was “oversupplied”. Prices fell. Building firms went under. The banks that had lent them money suffered losses. Building workers and those working in firms producing supplies were laid off. Those who of them who had taken out loans couldn’t keep up with their payments. And the whole downward spiral began.

That there was an actual overproduction of houses in the US (as opposed to just a bubble in the prices of already-built houses) was confirmed in a paper published in 2008 by an economist, Luci Ellis, working for the Bank of International Settlements in Berne entitled “The housing meltdown: Why did it happen in the US?” As the title suggests, she set out to explain why the housing boom first ended in the US rather than in Britain or some other European country:

Her conclusion is interesting:

“In contrast to some other countries, strong housing demand was met with additional supply that exceeded underlying needs. When the boom stopped, the United States was left with an overhang of excess supply that other countries have not built up” (p. 1).

“US housing construction peaked in early 2006. By the end of that year, housing starts had fallen by around 40%” (p. 2)

“… between 2001 and 2006, the United States built more new homes than would seem to have been required by the growth in its population” (p. 3).

“The US housing construction sector seems to have managed to build up a substantial oversupply of housing. The United States was therefore more likely to experience a sharp fall in prices than some other countries, even before credit supply tightened” (p. 24).

So there really was an actual oversupply of new housing in relation to paying demand. What Ellis called an “overbuilding of new houses” is of course an “overproduction” of them. And this happened “even before credit supply tightened”. In other words, the oversupply of housing preceeded the financial crisis and was in fact the event in the real economy that provoked it.

 

[love detective]

pretty much agree with that - only qualifier would be to say that supply exceeded effective demand, not actual or real need/demand

and that the level of effective demand was overstated/misjudged for many years in the run up to the crisis through the drive of capital to exploit new avenues of appropriation, not in the sphere of production, but within the sphere of circulation - sup prime lending on teaser rates and an assumption that house prices would keep on rising forever now that neoliberal economics had abolished boom & bust and those loans could be renewed on new teaser rates after the initial 2-3 year teaser rate expired, so the day of judgement would never come

so from that perspective you could say, yeah it was the banks that facilitated it , but the driver for it to happen was falling rates of profit and falling opportunities for value extraction elsewhere, i.e. in real production in the wider economy. When faced with that kind of squeeze, capital goes roaming elsewhere for new markets to exploit, and it found one in the shape of borrowers who couldn't really afford to borrow, yet this was just a barrier that capital could temporarily smash through, moving the problem onto a different plane and for a different time - that's capital in a nutshell.

So as Jean-Luc says, to look at banks independently from everything else (like most money first/currency cranks do) is not likely to help in understanding what banks do and why they do it

 

[Jean-Luc]

I don't disagree that the way the banks behaved did play a role, especially in spreading the crisis worldwide (there was no actual overproduction of houses in relation to effective demand in the UK). They, too, are profit-seeking businesses and they, too, in a sense “overproduced” – they “over-lent” and for the same reason that the speculative builders “overbuilt”: in pursuit of profits. The official US Financial Crisis Inquiry Commision Report said:

Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. In many respects, this reflected a fundamental change in these institutions, particularly the large investment banks and bank holding companies, which focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging and selling trillions of dollars in mortgage-related securities, including synthetic financial products.

But what were they supposed to do? With “hefty profits” in the offing any capitalist corporation is bound to go for them. If, in this particular case, one bank had refused to enter into the chase for these profits they would make less profits than their rivals. In any event, if one bank wouldn’t do it another would. So what happened would have happened anyway.

So you could say that, in the end, it was the capitalist system of production organised by profit-seeking businesses that was the cause of this (and past and future) crises.

 

[littlebabyjesus]

Banks can't lend without having money to lend. The money does not come from the bank, it comes from the actual productive economy. This is ld's essential point I think - to look at what banks do in isolation from the rest of the economy is silly.

I agree that to look at banks in isolation is silly. However, banks do in a very real sense create money, in the act of making loans. What they don't do is create the value that is attached to that money in the process of circulating.

 

[love detective]

So you could say that, in the end, it was the capitalist system of production organised by profit-seeking businesses that was the cause of this (and past and future) crises.

wasn't that exactly what i said!

 

[happie chappie]

I agree that perhaps the most common view is that the crisis was caused by the reckless and greedy behaviour of the banking sector, with the implication that if the bankers hadn’t been so reckless and so greedy there would not have been a slump.

Obviously the banks and other mortgage-lenders played a role but the crisis was brought about by overproduction in the house-building industry in the US

The financial crisis broke out in August/September 2008. Housing prices had started falling well over a year before this. So this rules out one explanation: that it was the financial crisis that caused housing prices to fall. So what did?

An increased demand for housing, fuelled by easy mortgages, brought forth an increased supply. Speculative builders took out loans to build more housing – and not just more houses and apartment blocks but also more shopping malls and the like. These loans were “speculative” in the sense that they were made to building firms to build houses, apartment blocks and shopping malls without having firm orders for them beforehand.

In the end, supply came to exceed demand and housing prices fell. It was a classic case of overproduction: a market was expanding; those supplying it assumed that it would go on expanding and produced (in this case built more housing) in anticipation of this expansion continuing. The end result was that more came to be produced than could be sold.

The housing market was “oversupplied”. Prices fell. Building firms went under. The banks that had lent them money suffered losses. Building workers and those working in firms producing supplies were laid off. Those who of them who had taken out loans couldn’t keep up with their payments. And the whole downward spiral began.

That there was an actual overproduction of houses in the US (as opposed to just a bubble in the prices of already-built houses) was confirmed in a paper published in 2008 by an economist, Luci Ellis, working for the Bank of International Settlements in Berne entitled “The housing meltdown: Why did it happen in the US?” As the title suggests, she set out to explain why the housing boom first ended in the US rather than in Britain or some other European country:

Her conclusion is interesting:



So there really was an actual oversupply of new housing in relation to paying demand. What Ellis called an “overbuilding of new houses” is of course an “overproduction” of them. And this happened “even before credit supply tightened”. In other words, the oversupply of housing preceeded the financial crisis and was in fact the event in the real economy that provoked it.

I think this is right, but only up to a point as it primarily looks at, and explains, the over-production of housing in America and the knock-on effect it had on the US economy.

What made this crisis more than just what would have been, in normal circumstances, a manageable and containable problem of supply and demand, were the systemic weaknesses in the world financial system, notably in relation to sub-prime mortgages in the US and the complex financial instruments they were packaged in to which were then sold on to institutions after they were assured they were copper-bottomed investments. They turned to be nothing of the sort. Investors could hold them on their balance sheets as “assets” and lend against them which merely amplified the problem as events unfolded.

However, in the end these securities turned out to be virtually worthless as, in many cases, the properties they were secured against were bought by people who didn’t have a hope in hell of being able to afford the mortgage. IIRC many house buyers were offered original deals that were literally too good to be true to tempt them into taking on the loan, thus generate lots of business for the loan companies. When the “deal” ended and the true repayments became apparent, there were mass foreclosures as people simply couldn’t afford them, and asset values plummeted.

So when the US housing crisis really hit home, and the highly dodgy nature of the mortgage-backed securities was exposed, the shit really hit the fan as the world markets realised there was a major problem not limited to an over supply of housing in the USA.

Therefore, I’m not sure that the near melt-down of the global financial system was rooted on the excess housing production in the USA (although it probably didn’t help). Without the existence of the casino element of the finance sector, the consequences wouldn’t have nearly been as bad.

 

[littlebabyjesus]

What got me when I started looking into this was that people were warning of the problem of sub-prime back in 2000, saying exactly what the problem was and what it would cause.

 

[love detective]

a marxian analysis has been saying what the problem has been for over a hundred and fifty years, saying exactly what the problem was and what it would cause

 

[littlebabyjesus]

a marxian analysis has been saying what the problem has been for over a hundred and fifty years, saying exactly what the problem was and what it would cause

Yes, true enough. But these were warnings in mainstream economics journals by non-marxists.

 

[happie chappie]

a marxian analysis has been saying what the problem has been for over a hundred and fifty years, saying exactly what the problem was and what it would cause

In this regard, there was one other thing I meant to mention with regard to the role of capitalism and labour in all this.

It is somewhat ironic that the crisis that so nearly brought capitalism to its knees was nothing to do with a straight conflict between capital and labour in the traditional sense as much of the post-war left thought it would.

IIRC, its analysis was that, yes, the banking system was bad, but that any crisis would be brought to a head by the actions of organised labour, in particular relating to mass industrial action.

That’s why the CP and, to a lesser extent, Militant and other groups expended a lot of time and effort trying to gain influence in the trade union movement so it could be used as the “battering ram” against the bosses.

It appears that they’ve wasted a lot of their time as the true struggle has turned out to be between financial capitalism and financial capitalism, with labour (at least in the organised, trade union, sense) a bit part player.

 

[love detective]

huge chunks of volumes 1 to 3 of Marx's Capital, in fact almost all of it is focussed on looking at the contradictions within capital itself, looking at things which capital does in one sphere and at one time and how these come back to haunt it in another sphere at another time, so it is very much the type of thing that we have seen play out over the last decade or so (and wider over the last couple of hundred years)

that's not to suggest though that all that needs to be done to get a better world is to sit back and wait for capital to tear itself apart though