How Can Securitization Lending Be Made Safer ?
Dinner Guest: How can we all have died at the same time?
Grim Reaper: The Salmon Mousse!
Host: Darling, you didn’t use canned salmon, did you?
Wife: I am most dreadfully embarrased~!
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In his column today, Floyd Norris asks “Can the world be made safe for the return of securitizations?”
To a degree, that is the wrong question.
While some people have become focused on securitization, what we should really be looking at is the step prior in the process — the actual underwriting standards of the mortgage loans that were bundled and resold. It was the abdication of lending standards by the “lend-to-sell-to securitizers” business model that caused so much of the trouble (yes, there were subsequent errors, but they came after the lending standard failures).
Were the the dinner guests in the Monty Python film killed by whipping ingredients in a food processor until they were creamy smooth? That is a similar question to the issue of securitization — the primary problem was not the process, but rather, the ingriedients that went into the process.
The securitization process simply amplified the poisonous underwriting, and fed it to the world. Canned Salmon — Garbage In, Garbage Out.
The way to fix securitization is to fix lending in general — develop standards, enforce them, educate borrowers, halt predatory lending.
Back to Norris:
“Can the world be made safe for the return of securitizations?
That is a question of great importance to those like John C. Dugan, the comptroller of the currency, who say they believe that the banking system on its own is unlikely to have the ability to provide enough credit to sustain an economic recovery in the United States.
“We need a vibrant, credible securitization market to help fund the real economy going forward,” Mr. Dugan said this week. He was preaching to the choir — a meeting of the American Securitization Forum — but it is an opinion widely held in financial markets.
It is possible to question that thesis. Securitization grew as a way for banks to get around capital rules, not because of any profound desire by investors for such assets or any real unwillingness by banks to make the loans. But since it was more expensive to hold capital against the risk if the loans were not securitized, they were securitized. That also opened the market to new players, who neither wanted to, nor could amass, the capital to hold onto loans.”
It wasn’t that the non-bank lenders could not amass the capitasl — that wasn’t their business model. Instead, their inventory was cash, and the greater they turned over their inventory, the more profits they made.
That is, until they went bankrupt. As of the most recent count by mortgage imploder, ~ of these lenders have gone belly up
Norris concludes:
“There are several essential elements to any fix. The underlying loans have to be of better quality. The investors have to believe that is the case and that they are being compensated for risks that were much higher than they previously believed. Another 30 percent collapse in home prices is unlikely, but it will be a while before anyone’s models deem such a thing impossible.”
That seems about right . . .
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Previously:
Paul Krugman is Wrong About Securitization (March 28th, 2009)
http://www.ritholtz.com/blog/2009/03/krugman-is-wrong-about-securitization/
Source:
Seeking a Safer Way to Securitization
FLOYD NORRIS
NYT, February 5, 2010
http://www.nytimes.com/2010/02/06/business/06secure.html
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February 6th, 2010 at 9:45 am
40-50% down payments would eliminate much of the stupidity. Hell, make it 100%. It’s not like renting while saving to buy makes you a lesser human being. It might even eliminate a lot of the concomitant materialistic stupidity that went along for the ride during the bubble.
February 6th, 2010 at 9:50 am
LOWER RESERVE RATIOS SO BANKS CAN ONLY LEND 10:1. OR LESS.
Since banks PRINT MONEY and do not “LEND” diddly-squat – there should be SEVERE RESTRICTIONS on any and all lending with incredibly stringent requirements for borrowing. And let’s stop calling it LENDING. It’s bs and everyone knows it.
Yes – it means boring and slow economic growth. But it will be REAL growth and if Americans learn to save – it will mean REAL prosperity and strength for the middle class. Instead we have speculatory credit-driven pretend-growth which ALWAYS collapses.
February 6th, 2010 at 9:56 am
“amplified the poisonous underwriting, and fed it to the world”. While true, it was the ratings agencies that put it on the menu and labeled it as prime rib, making sure they got a nice kickback from the packagers. William Cohan’s “House of Cards” title is from an internal e-mail where even the ratings employees could smell the stench from the kitchen. So far nothing has been done to address any part of the chain of fraud. Japan’s “lost decade” was because those responsible were not punished and purged from the system, so no one trusted the system anymore. Those with political leverage secured their own getaway after the heist, at the expense of the country. The current solution so far seems to be the same – to continue as before, making mark-to-marker rule changes that make banks “profitable” so big bonuses can be justified (or did they suddenly become so much better manager-monkeys as to deserve such corporate generosity?). Predatory practices on their clients (and because of their privileged position, one could argue, the world) is used to make up the shortfalls.
February 6th, 2010 at 10:11 am
Its funny… bc this isnt really a problem anymore.
Today Moody’s and S&P would put ratings on structures that were too conservative.
(Anyone notice that they downgrade everyone these day? “Berkshire Hathaway is AA+”, “US Govt is on negative watch”. THANKS CHAMPS! What a bunch of douches.)
Its easy to add… underwriting standards would also be too conservative today. The problem isnt “overall level of underwriting”, it isnt the level of leverage, it isnt that no-job, no-doc, no-income loans should never be done.
I do favor more incentive for higher downpayments (20-30% is plenty, lotsa loans were down 5-10% in the past cycle). Why cant I get a 3% mortgage if I have 50% down?
The main problem, is that everyone is so pro-cyclical. The same people screaming for safe guards now will be the loudest voices for de-regulation and capitalist “market forces” in the heat of the next bubble. Its a classic “mark-to-market” phenomenon. So silly.
We need to start thinking counter cyclically. Especially regulators.
February 6th, 2010 at 10:22 am
There was a posting the past couple days where 5/3 Bank was doing 125% refis with no docs or credit score -actually worse than it was a few years ago when they were only doing 105%.
Does anybody know if the banks are putting recourse terms into their loans?
I can just imagine people who should be walking away from a killer underwater mortgage being conned into a refi with killer recourse terms. After initially being scammed by sleazy appraisers, brokers and bankers they now get stripped of all their assets when they rollover the original killer mortgage into a refi that completely fleeces them – while the MSM beats on the drum that walking away is immoral!
February 6th, 2010 at 10:24 am
Barry,
I think your post misses the boat here a bit. Of course, I wholeheartedly agree with you on the notion that fundamentally, a return to decent underwriting standards is crucial to avoiding future credit bubbles and subsequent busts.
However, don’t you think that it was precisely securitization that enabled this plunge in loan quality? Underwriting standards would never have gotten remotely as poor in the first place if the lenders had to carry that loan on their books and eat the consequences of that loan themselves.
I am amazed that I don’t hear more talk of what strikes me as a profoundly simple idea that I think goes a long way towards remedying the problem: force the securitizer to retain on their books a certain % (my thoughts: at least 30-50%) of any loan that they seek to bundle. You want to securitize a package of loans that you aggregated? Well guess what, you’re keeping exposure to 50% of any loan you put in that bundle. You better damn well believe that any securitizer is going to do their due diligence in that scenario–they now have skin in the game and it’s 50% their money that’s on the line.
You might argue that this doesn’t get at the heart of the problem–i.e., origination of bad loans in the first place, but I would argue that it does exactly that. If there is no mid-chain demand (i.e., securitizers will not buy your crappy loans because they don’t want that exposure), then I think you’d be amazed at how quickly that type of dodgy origination would dry up–those originators, after all, would not want to run the risk of –gasp–having to keep that loan on their OWN books, now would they?
Please, poke holes in this line of thought–I never understand why I don’t hear it discussed more, particularly in the blogosophere.
February 6th, 2010 at 10:26 am
I see more problems and easier solutions. One, “securitization” was picked up by every country, hey, you gotta do it, the jone’s are, that was not good. Please only one Ponze per world, guys. Two, a republican belief system, jk, that you can HEDGE ANY AND EVERYTHING, I can bet the house with the right hedge, a belief system, that has grown with computers to create, “spread sheet blindness”, ie, throwing away common sense because group think uses a spread sheet verses there eyes and ears and brains.
IMHO, you can’t securitize unless there is a demand, and who bought it, basically it all started with Pension Funds, hey, an extra % on a bazillion makes you a hero. And like all things it worked, at first quite well……………………….
Almost a problem of you get so rich you realize you can’t protect it all all the time, and getting nicked for 3% on a bazillion is shocking to the owner of the bazillion, more ssb, spread sheet blindness.
on a side note: there ain’t no crime like white collar crime, cause you rarely do time if you got half a mind
it ain’t the laws, it’s the dudes in handcuffs, handcuffs and hardtime scare put the fear of god in the 90% who sit on the fence, without that incentive, it would never get to a look the other way business as usual bs
anyone in the market see’s so many malfeseances it ain’t funny, look at charts of air products and air gas, you can’t tell me someone didn’t game that for major buckos
February 6th, 2010 at 10:32 am
SOUND LENDING:
1. Joe puts $10K in the bank. Mike needs to borrow $9K to buy a car. Mike is a plumber with a city contract, decent credit and the car is at a good price. The loan is sound BECAUSE – both the collateral (car) AND the borrower are both sound. So…the bank “lends” Mike $9K of Joe’s money and receives an IOU in return.
Now….if Mike misses payment # 1 (!) the bank can repo the car, sell it for $8K and only take a $1K loss. this is WORST CASE SCENARIO.
This is CRUCIAL BECAUSE….at 10:1, repeating the same type of transaction could result in up to $55,000 of ‘lending’ all from the one $10K deposit.
Now if 10% of the loans default – the total loss could be up to $5,500 for the bank.
AT 20:1 –
You can get up to $104,500 of lending in the real economy from $10K in deposits.
10% default rate is now $10,450!!! You double the risk.
But the REAL problem is if you make unsound lending de rigeur because THEN your default rates increase.
But the problem gets FAR FAR worse when you throw derivatives into the mix because now – that $10,450 loss gets multiplied by the GIGANIC INVERTED PYRAMID of derivatives sitting above everything.
It is clear we have a LOT of rebuilding and restructuring to do.
My guess is – we get ANOTHER, BIGGER crash before long. When that happens – USA will most likely default in some fashion (via printing – diluting the $ etc.). TBTF banks are once and for all broken up, we get a huge shitstorm and that is that.
February 6th, 2010 at 10:45 am
But MayorQuimby… the thing is -
the “default rate” is not really a product of un-sound lending. its a product of the macro economy, right?
what looks like “sound” lending at the peak… is unsound. what looks like “unsound” lending now… is fine.
remember Bear and Lehman mades $Bs PER YEAR in subprime lending starting in the early 90s. it is the massive profits from lower end lending (which is typically over-priced in interest spread) that attract the big boys (C, BAC, MER) and that causes a bubble… combined with an economic downturn this cuases the losses.
two other things you missed in your run-through: 1) down payments, 2) interest spread. Remember losses only happen 1-2-3 years of the 10-year cycle. The other 7-yrs credit losses are very low.
The whole point of paying interest above treasuries is that interest spread covers for losses, right?
February 6th, 2010 at 10:47 am
My one thought throughout reading the article was how can you discuss securitization and not once mention the rating agencies! Duh. Even if you make bad loans, as long as the default probability is realistic and is part of the tranching and pricing, there is nothing wrong. You will have smaller AAA tranches and the sucritization will be priced accordingly and bring in less $$$ than with better loans which provides incentive to make higher quality loans. It is all about the rating agencies! People still don’t get that. If the rating agencies enforced the proper structure based on realistic probabilities, there would have been little incentive to make such bad loans because you wouldn’t be able to sell them for such a profit. Yet another Times reporter who doesn’t understand securitization or the markets a la Gretchen Morgenson. I have almost given up on the NYT these days because they are factually wrong on a lot of things. The crisis went on long enough that you would think these reporters could get an education in the subject they are reporting on. Take a few classes.
February 6th, 2010 at 10:48 am
Remember, Securitization is one of those things that have been around for decades without any problems. They are the food processors of lending.
The Rating agencies are an entirely different clusterfuck — there is no doubt they played major role in this.
I quote Joe Stiglitz in the book, who called them the “prime enablers” of the entire credit crisis. And I totally agree. To stick with the Python metaphor, they were supposed to be the health inspectors, making sure no one is selling spoiled salmon in a can.
There is no doubt, had they not been corrupt whores, much of this would not have occurred.
However, we have to start at square one, and before you get to the credit agencies, or the securitizers, someone is making either good or bad loans. That needs to be fixed.
February 6th, 2010 at 10:52 am
cognos don’t agree,
you don’t care about sound lending when you have folks who will eat the securitization
it looks unsound because it is, please tell me where future tax rates, health care costs, gasoline, oil, copper, food prices will be 1-3-5 years out? if you know those answers you can back into the soundness of labor income
February 6th, 2010 at 11:01 am
Cognos- It is irrelevant WHY the default rate occurred. There will always be a default rate. Let’s say 1.5% or 2%.
“what looks like “sound” lending at the peak… is unsound. what looks like “unsound” lending now… is fine.”
Nonsense (no offense). Downpayments are irrelevant. ALL THAT MATTERS is can the borrower make the payments. If I have $100K and borrow $5
“remember Bear and Lehman mades $Bs PER YEAR in subprime lending starting in the early 90s. it is the massive profits from lower end lending (which is typically over-priced in interest spread) that attract the big boys (C, BAC, MER) and that causes a bubble… combined with an economic downturn this cuases the losses.”
Wrong again. They PRINTED themselves profits by CREATING derivatives. Go back to a normal lending transaction. That entire transaction generates cashflow as Mike pays back the “loan” plus interest. As the chain letter expands, so does the cashflow. So I decide to sell you the right to take the cashflow yourself. IOW – if I know I’m getting exponentially more cashflow as the monetary chain letter expands, why not take 60% of the profits NOW and hand CalPERS the rest? I buy some CDS protection from AIG and I’m 100% COVERED NO MATTER WHAT HAPPENS NOW. if the loans all default – CalPERS gets screwed as they can’t resell the CDO/MBS whatever unless they take a HUGE loss. AIG is on the hook for the diff anyway.
But what’s that you say? AIG has no money?!!! And CalPERS can’t take ANY losses and needs more and more cashflow?!!!!
KABOOM
That’s where we’re headed.
“The whole point of paying interest above treasuries is that interest spread covers for losses, right?”
No. It’s is a CHAIN LETTER. Banks can lend one dollar out THIRTY TIMES and collect interest on it. It isn’t even THEIR dollar!!!!!!!!
So – 5% mortgage on $1 = $.05 in the bank’s pocket…TIMES THIRTY. That’s right – $1.50 profit off $1 of someone else’s money. TBTF banks figured they’d sell the “right” to collect on some of this gravy train to “investors” like CalPERS. CalPERS says – hell yeah! Free money for us as the sheeple slave away in endless indebtedness. We LOOOOOVE higher prices for stocks, clothes, cars, housing – it means sheeple have to slave slave slave to pay interest to firefighter unions, politicians and bankers. Hence the income gap.
Treasury yields are irrelevant for this discussion. They factor in but I’m talking basic lending here.
February 6th, 2010 at 11:03 am
It never though about it too much…but securitization should be banned forever. At the very heart of securitization is enticing some sucker down the line to overpay for the loan you made. Otherwise, why securitize it? So you can then make more loans and securitize them? Sounds very ponzi-ish. Eliminate securitization and immediately lending standards will improve, because anyone stupid enough to make poor loans will be out of business (of course unless they get bailed out, but that is another topic). This gets back to a post a few weeks ago here about the benefit of these “innovations”:
http://www.ritholtz.com/blog/2009/12/volcker-only-financial-innovation-has-been-atm-machines/
February 6th, 2010 at 11:03 am
Messed up the post:
“what looks like “sound” lending at the peak… is unsound. what looks like “unsound” lending now… is fine.”
Nonsense (no offense). Downpayments are irrelevant. ALL THAT MATTERS is can the borrower make the payments. If I have $100K and borrow $50K, it is a sound loan because I have capital to back the transaction. Downpayments are irrelevant.
February 6th, 2010 at 11:04 am
Well, it would be tougher to blow credit bubbles if they did that, BR. We can’t have that now. It’s the whole basis for our “growth” economy.
February 6th, 2010 at 11:04 am
Securitization works a lot better when someone wants to buy the subordinate loss tranches. Lots of people want to do that when house prices are skyrocketing and you can make ‘AAA’ CDO sausage. But no one wants the 1st loss position now, and even in normal times should only take it for a considerable risk premium.
Obviously, improving credit standards by increasing down payment, requiring income documentation, and making the loan fully amortizing and without teasers will help attract investors. But even with this it is hard to compete with Fannie, Freddie, and particularly Ginnie, since they are all basically undercapitalized non-profits.
Banks are the natural investors in mortgages, since they have a government license for leverage, they originate the mortgages, and they service the mortgages. By them retaining the mortgage it solves a lot of agency problems. Bank portfolio lending used to be the way savings was converted to investments, and it generally worked well. It still works well in Canada. Savings = Investment. Securitization and trickery allowed us to bring in enormous savings from abroad, as well as arbitrage domestic capital requirements; thus increasing investment without increasing the cost of money. Sounds great.
But the US didn’t need all that fixed investment. We have several years of houses, office buildings, and such laying fallow (particularly if the economy remains weak). In more normal times, without the manic demand for real estate investment, and more reasonable savings rates, and with a much smaller government buyer of mortgage credit risk (but definitely needed during crisis), then banks should take their place.
Because if banks aren’t going to hold loans, then why are they collecting deposits? And why do we need banks, as opposed to just financial transaction processors? Without functioning banks, you remove the ability for average Americans to have their savings invested into the economy. Instead they “invest” in the secondary equities market, which is really just speculation.
As for non-bank holders of savings, such as pension funds and insurance companies, they need to either stick with investing in government debt, or do their own due diligence when they loan/invest money rather than relying on rating agencies. That should be why those fund managers get those big fees.
February 6th, 2010 at 11:07 am
Steve- It is ALL a ponzi. The entire monetary system. One giant ponzi.
If you believe fractional reserve is worth preserving and using (I think it is time for a serious debate on this topic as there are tremendous pros and cons) – then you MUST MUST MUST restrict it more than ANYTHING else in society. I agree 100%. There should be NO securitization. Securitization = creating money out of nothing. But when the music stops (aka borrowing), you are SCREWED. All that phony money that you THOUGHT you had – literally disappears as the VALUE of the securities vanishes in a microsecond.
Unless of course Bernanke is on speed dial and is holding a J6P voodoo doll in one hand and a toothpick in the other.
February 6th, 2010 at 11:12 am
torrie-amos:
yep, exactly. so right now everyone is worried – about employment, income, prices, taxes, healthcare, and copper(?). because of this… many loans that look “unsound”… will turn out to be highly over-priced in credit spread. lending risk takers will just continue to make money (man, did they make money 1-yr ago).
fast forward 5 years… risk takers, making “unsound” loans in your terms… have killed. they made many multiples of the people who were “worried” about docs, jobs, credit score, economy, etc. The bigger investment dollar notice this… and chase performance. At the same time, worries are lower. Most people are sheep (and the sheep today are scared).
This is the natural business cycle writ into the natural credit bubble, right?
My point is… you have to deal with the evolution of the process from 1992-to-2008. It was a 16-year cycle. Sub-prime and securitizations made large amounts of money for roughly 13 of 16 years. It was still securitizations. People, in your terms… still “didnt care about sound lending” but they all made money. Of course this drove speculative “prices” or “credit spreads” lower and lower. It grew the market bigger and bigger. It drove the rated AAA tranches larger and larger. At the peak it was 70% AAA, at 6 bps of spread. But 16-years before it was very different… it was far too conservative. Just as it probably it today.
And repeat.
February 6th, 2010 at 11:12 am
“Securitization works a lot better when someone wants to buy the subordinate loss tranches. Lots of people want to do that when house prices are skyrocketing and you can make ‘AAA’ CDO sausage. But no one wants the 1st loss position now, and even in normal times should only take it for a considerable risk premium.”
Securitization NEVER works. It ONLY works for a time – like any other ponzi. The minute the sheeple stop borrowing or population changes cause a shift in home purchases etc. – you are screwed.
“And why do we need banks, as opposed to just financial transaction processors? Without functioning banks, you remove the ability for average Americans to have their savings invested into the economy. Instead they “invest” in the secondary equities market, which is really just speculation.”
Not true. You could make banks a function of gvmt like the post office.
February 6th, 2010 at 11:18 am
It is obvious that securitization was never the problem – neither were the mechanics of any kind of loan – the loans that were made were the problem. Blaming securitization is a shortsighted as blaming the CRA. The more interesting quote from above to me is this:
“That is a question of great importance to those like John C. Dugan, the comptroller of the currency, who say they believe that the banking system on its own is unlikely to have the ability to provide enough credit to sustain an economic recovery in the United States.”
And what exactly will securitization do to solve the problems of furnishing loans to insolvent borrowers or increasing demand from over-leveraged Americans who don’t want added debt? Isn’t this quote in essence a blanket admission that the U.S. economy cannot funtion without Ponzi financing to sustain it – that the only recovery possible is another illusion of prosperity built upon unmanageable debt? The statement is an admission that without the shadow banking system furnishing a clearinghouse for pools of debt the capital requirements on banks will exhaust the debt resources before expansion (read: Ponzi) of debt can occur.
The quote is saying that we need another bubble in order to grow.
This is the reason IMO for an American lost decade – our current economic system is dependent upon excessive debt as its engine of growth but we are fresh out of willingness to borrow.
February 6th, 2010 at 11:24 am
MayorQuimby – “downpayments are irrelevant”
You could not be MORE WRONG. And all you would have to do is walk through your same basic example with the car loan and fractional reserve banking. What if the person had put 1k down on the car? Howabout 2k? Now, most losses accrue to the down payment. Changes the “losses” enormously right?
Take it a step further… and have the loan pay 5% annual interest credit spread and 20% pay down (typical car loan). Now again… we have a 10% cushion from DPs, a 5% annual cushion from interest, and a 20% annual pay down. In 1-year… if 20% of car loans default… we have 35% cushion on those loans (10+5+20) and another 4% cushion from the interest spread on the 80% of car loans that dont default = 39%. As long as we can re-sell the 20% defaulted cars, at 1-yr old… for >60% of purchase… we have no losses.
Downpayment matters.
Interest spread matters.
February 6th, 2010 at 11:25 am
The FDIC issued proposed rules to fix securitization/lending. What’s wrong with their fix and why isn’t it part of this discussion? Yves Smith posted an excellent summary and evaluation of the proposed rules at: http://www.nakedcapitalism.com/2010/02/fdic-proposes-tough-minded-securitization-reforms-industry-howls.html
Elnino, I agree, the NY Times reporters’ understanding of macroeconomic is far below what is needed from the leading national paper. I suggest a letter-to-editor campaign to get them to hire some help for their reporters. Journalism students rarely take econ classes.
February 6th, 2010 at 11:26 am
“You could not be MORE WRONG. And all you would have to do is walk through your same basic example with the car loan and fractional reserve banking. What if the person had put 1k down on the car? Howabout 2k? Now, most losses accrue to the down payment. Changes the “losses” enormously right?”
NO IT DOES NOT.
ONCE AGAIN – IF I HAVE $100K IN CASH – I SHOULD BE ABLE TO BORROW UP TO $50K with NOTHING DOWN. IT IS SOUND BECAUSE I CAN NOT ONLY MAKE THE MONTHLY PAYMENTS BUT ALSO ANY POTENTIAL INTEREST GOING FORWARD.
IT IS ALL ABOUT CASH FLOW and WHAT YOU CAN AFFORD. THIS IS AS SIMPLE AS SIMPLE GETS.
February 6th, 2010 at 11:30 am
A further word can be said on DOWNPAYMENTs:
which is that downpayments are the key driver on self-policing of the “soundness” of the overall transaction. is the price fair? are the loan terms ok? are you commited to paying this back?
there is no better driver than the simple economics of having “skin” or “downpayment” in the game. the focus on securitization or on the low interest rates is misplaced. higher downpayments would be far better to moderate bubbles and cover for fraud.
February 6th, 2010 at 11:33 am
Hey…
I have no problem with the best borrowers, on simple consumer transactions having “no money down” if thats what people who sell cars, tvs, etc want to do. I am not railing against you buying a new Toyota without putting up $1. I dont care.
But I do have a problem with you questioning fractional reserve banking… with your silly example… that does not include downpayment or credit spread. That’s naive. Put the downpayment in… and you’ll see the effect.
February 6th, 2010 at 11:35 am
Cognos- Forget it. You can’t play psychologist every time someone makes a loan. You look at numbers and stats and do your best. I agree with you in practice since most Americans have ZERO CASH and would be quick to walk away – if I were a banker I would DEMAND my clients had 40% – 50% down PERIOD. Non-negotiable. And I would SCRUTINIZE both borrower AND the collateral. My bank would be ROCK SOLID but at the expense of the big short-term bucks.
February 6th, 2010 at 11:39 am
Many people in the last 2 years… have walked away from their houses… who had plenty of CASH FLOW. I know a number of them, advised them on the transaction, and it was a good move.
That was actually the great trade of 2000-… buy every speculative real estate property you could… with very little money down. Try to flip for 20-50% higher in <1yr. When the music stops, walk away with your cash. Some people made $100s of Ms this way. A few made $Bs.
Most of the losses are in high-spec, middle to high-end properties in FL, AZ, CA and similar areas.
So tell me again, how its about cash flow?
February 6th, 2010 at 11:44 am
@Winston Munn: Ageed. Hence my short snarky post above. And I think that our elite masters know this and are doing everything they can to blow another bubble. The question is, will the Sheeple play along this time, and if so, for how long?
February 6th, 2010 at 11:46 am
MayorQuimby —
You obviously dont really understand “lending”. Its not about having “zero” losses. Its about have the right mix of underlying assets, downpayment, and interest spread.
If there are NO losses, then everyone pays US Treasury interest rates, right? Investing or lending in only very very safe situations is the biggest driver of losses. It just loses by never having any upside… right?
Sure, it looked good 1-yr ago. At YE 2008 your bank would be the best. You would be laughing at all the “bad loans”. But have you seen the last year? Those same “bad loans” are up 50-100% in price. And they look like they will all pay the 9% coupons and repay principal just fine.
Its really easy to hide in cash and safety. This is THE biggest destoryer of wealth over time.
February 6th, 2010 at 12:05 pm
Cog- I understand PERFECTLY WELL. You are simply 100% incorrect. Re-read what I said. Do you even understand that banks lend THE SAME DOLLAR out 20 -30 times at the same time???
If not – go back to Eco 101.
“Its not about having “zero” losses”
Never said that. You just lied.
“Its about have the right mix of underlying assets, downpayment, and interest spread.”
True. But that’s just a small part of it. It’s REALLY about lending 30 people $1 at 9% AT THE SAME TIME.
“Those same “bad loans” are up 50-100% in price. And they look like they will all pay the 9% coupons and repay principal just fine.”
1. No, they’re not. The only ones that have gone up have done so because of THE FED. There is no cashflow for any of it since default rates are RISING. Hence cashflow is CRASHING.
2. This is why the FRE/FNM bailout has been increased to INFINITY. Nothing fine is going on which is why such a ridiculous step was necessary.
February 6th, 2010 at 12:17 pm
@MayorQuimby: I was lying in the weeds waiting for that. It shouldn’t be called “securitization”, but it’s true name, “counterfeiting”. It’s akin to shorting stocks or some security that you don’t really own or don’t even exist (“naked shorting”), is it not?
February 6th, 2010 at 12:35 pm
MayorQuimby — Again, fighting some battles I’m not fighting. Just wish you would check out your own
“fractional reserve” model with downpayments and interest spread. Fixes your “losses” problems.
Also, you are def WRONG on the credit, HY, losses point:
See VWEHX, Vanguards HY Corp Bond fund — up 40.25% since Dec 31, 2008. Up 25.51% on 5yr… or 4.65% annualized. Interest spread more than compensated for losses, even despite the 1/100 yrs 2008 downturn. Other Corp HY lending funds shows similar numbers +/-.
But it sounds nice, when you say… “hence cashflow is CRASHING”… its just NOT TRUE.
February 6th, 2010 at 12:39 pm
cognos,
I understand what you say and the cycles, actually negotiated a pay package for ex Fannie exec for a Bear sup-prime shop in 2004. Kind of a funny story, the exec wanted to do things right, Bear wanted knolwedge and someone to manage the paper flow, I warned em, good thing is they got a decent severance in the end.
Back too the point, I happen to believe we do not have enough profit to service debt, pretty simple. Thus, it’s a treadmill of time and price, there’s a nice cycle.
I’m a fan of law of large numbers and complexity theory from Sante’ Fe brains. Thus the A in the equation is China, the B is USA, the C europe, and D…canada, australia, brazil, and E the emerging markets, of which middle east and russia and india reside, add em up and there you go. The long term historical cycle is PROGRESS, short term all kinds of shyte happens, I see SH presently with myopathy of spread sheet blindness……………………..how she goes only the shadow knows, which means not me said I.
I just takes me best guesses and do me best.
February 6th, 2010 at 12:58 pm
This points to the same point — you are mising the importance of interest spread and downpayment.
You’re right, defaults have been higher in 2009 (always the case after the “bust” part of the cycle). But 1-yr ago… when HY bonds went down to 50 pts and cash interest was 20%… this overpriced for losses.
So we’ve had 10% defaults in 2009 (recovery rate of >50%) against 20% in cash interest… for 17% cashflow. The fund I pointed you had 17% cashflow in 2009.
That does not seem like “CRASHING” as you put it.
February 6th, 2010 at 1:02 pm
Somewhat related:
Americans Reject Keynesian Economics
http://tinyurl.com/ybluta3
February 6th, 2010 at 1:06 pm
torrie — isnt it all just business cycle? we are in the midst of recovery again. these broad points about things “all being broken” have been made for decades (that I can remember) and likely for 100s of years.
its not “all broken”. in fact, the opposite seems to be true. humans are unbelievable productive, even grossly so. our lives are absurdly stuffed with wealth. and our problems… crime, health issues, education, persecution, opportunity… are better than ever and seem to constantly grind better over time.
yet, still we complain.
yet, still we makeup grand conspiracies instead of just working for recovery and the general good.
this “market” thing is pretty easy — buy when people are afraid / sell when people are euphoric. where are we today? I see plenty of fear, and that smells like upside.
February 6th, 2010 at 1:08 pm
Sorry… 12% cashflow. The fund had 28% price return and 40% total return.
February 6th, 2010 at 1:22 pm
Why allow securitization of debt in the first place? Isn’t being able to buy and sell debt instruments sufficient? Why do we need to bundle junk, slap a fraudulent rating on it, and re-sell debt that has already been sold?
What societal good can this possibly provide?
JUST SAY NO TO DEBT SECURITIZATION.
February 6th, 2010 at 1:27 pm
cognos,
I’ve read papers from 100′s of years ago, and headlines are all the same, oh the complaints of too many people is kinda funny, and not enough this, so I get that.
don’t disagree about humans
agree on market, buy weakness sell strength
midst of recovery, i’m just a growth in sales leads to growth in earnings peter lynch person, u discern demand to extrap growth, manage cost for earnings
it’s also a postion of your safety net, all income comes from trading mom, my own mom, not opms, I keep it simple simple, when things are illogical to me i don’t force the issues, i’ve seen enough people in power in action to have fatih in me and few others
February 6th, 2010 at 1:29 pm
Is it cognitive dissonance that causes Libertarian thinking to blame fractional reserve banking for the reality of laissez-faire failure? Fractional reserve is as old as the concept of banking – it simply means a depository institution will not be faced with demand withdrawls for all its cash at once so it can earn interest by lending more than it holds. Without this ability to earn interest, depositors would have to pay interest to the banks for safely holding onto their money or else put it under their mattresses at home.
Bottom line is this: we do not always act rationally; disequalibrium occurs and when it does the markets do not discount it properly and become inefficient.
February 6th, 2010 at 1:31 pm
Cognos, they all don’t get away with real estate scams.
Go to mortgagefraudblog.com
A constant stream of grifters getting nice jail time for their troubles.
Federal time means no parole or time off for good behavior I believe.
The Feds have caught up with at least some of the bastards.
February 6th, 2010 at 1:43 pm
Cog-
You’re wrong. Read up on fractional reserve banking. That’s all there is to say about anything with you. You entire understanding of money is flawed 100%.
Where does money come from? That is the only response needed here from you.
http://research.stlouisfed.org/fred2/graph/?s1id=MULT
Explain that one!
You won’t be able to because you don’t understand money creation.
February 6th, 2010 at 1:46 pm
You can securtize loans all day long — but they have to be decent loans written on good lending standards — credit scores, income, debt service, LTV, assets, etc.
If you want tog et fancier with Subprime/Alt A type stuff, well then you better have a way to evaluate the junky portions. Its readily apparent that the rating agencies are incapable of competently performing those duties.
February 6th, 2010 at 1:50 pm
@Winston:
“Fractional reserve is as old as the concept of banking – it simply means a depository institution will not be faced with demand withdrawls for all its cash at once so it can earn interest by lending more than it holds.”
Oh nonsense. And my family goes back to the Florentine bankers lol (honestly).
Fractional Reserve is a chain letter. It is as simple as that. It is a ponzi.
Pros: All the human ingenuity and effort and skill is unleashed and unlocked because people are FORCED to work hard, CREATE NEW MONEY and then chase the ensuing inflationary effects caused by their own efforts. The sheeple are turned into dogs that chase their own tail or hamsters on the hamster wheel. The energy created by these efforts is gathered by corporate and political leaders and turned towards building spaceships, weapons, technology, architecture etc etc etc….it is why your father tells you “get a job!”
Cons: The system basically turns every person into a debt-slave that HAS to chase inflation and HAS to work and create and innovate. There is NO freedom here unless you live like the unabomber. Also, the system has a couple of MAJOR inherent flaws – 1. It break down completely from time to time like any ponzi and 2. There will ALWAYS be a HUGE majority of have nots and a VERY small majority of HAVES. That’s simply the math of it all.
TThe big issue I have with it is political. Frac reserve enables gvmts to wage wars, get into too much debt and cause nothing but mischief. Why? Because gvmt is like the charioteer and we are the horses. They are racing the other charioteers (China, Russia etc.) and so they have to whip us into a fury. We have to work our ASSES off so THEY can win the chariot race. When they do (like Rome, England or USA), THEIR FRIENDS get rewarded. The sheeple get thrown some doggie biscuits and that is all.
So…RISE to GLORY in service of your KING! Or in our case – KINGS. MQ out.
February 6th, 2010 at 1:52 pm
MayorQuimby — I understand fractional reserve banking quite well. As WinstonMunn says… its as old as banking itself. I see no problems with fractional reserve banking. Actually… even over the past 10-years its fine. A huge net positive. Its just about the right mix of interest, downpayment, and leverage.
You can always hold cash. If you want to earn money on your “savings” they have to be “lent”. Banks have the centeralized ability to do this… with some skill, and in size. That is why we use banks. If we all lent out the money ourselves, individually to bonds, friends, etc. The same “money multiplier” effect would happen and no individual would have liquidity. Is that your alternative?
I repeat it again — money does not magically pay interest.
February 6th, 2010 at 1:55 pm
FRB is a form of taxation and it allows bankers to determine the amount of demand and competition in an economy while being above competition themselves
It skews the competitive playing field in the favor of bankers at the expense of all other citizens. Since citizens need money to transact economically the banking system should be a level playing field and not a competitor and benefactor of people’s prosperity and suffering that the bankers themselves create. Lending at worst should be a commodity, currently it is a tool for power and control of a society
February 6th, 2010 at 1:55 pm
The mortgage crises would never be so severe if banks had the initiative to stick to normal underwritting standards:
- Loan to Value ratio should be below 90%; home buyers need to show fiscal discipline: if they are not able to save and put 10% downpayment, then they are not ready to become owners;
- Pay to income front ratio= (monthly mortgage payment/pretax monthly income) < 30%;
- Pay to income back ratio = (mortgage payment+all other credit payments)/pretax monthly income <36%
Private home equity insurance should be obligatory for every home buyer, who doesn't own at least 30% of the equity of his house. There are plenty of private insurance companies that are willing to sell such insurance.
Banks' employees should be held personally responsible for the MBSs that they sell to investors. If a supermarket knowingly sells bad food, they are responsible for the damage. Why it should be any different for the banks.
February 6th, 2010 at 1:56 pm
MQ – You are insane.
There are more wealthy people today (who dont have to work, have large boats, private G5s, etc) than ever. Most of them are just the nerdy kids from high school!
There are less wars today. Than ever.
According to you, the last 500-1500 years have been a time of “enslavement” to debt… when the time before that was…? Its just stupid.
February 6th, 2010 at 2:00 pm
Cog-
“You can always hold cash. If you want to earn money on your “savings” they have to be “lent”. Banks have the centeralized ability to do this… with some skill, and in size. That is why we use banks.”
You simply don’t get it. Banks DO NOT LEND MONEY. THEY create NEW MONEY in exchange for an IOU. It is a CHAIN LETTER. The interest is 100% fabricated. If I put $1 into the bank, the bank lends that $1 to 30 people AT THE SAME TIME and CHARGES THEM INTEREST AS IF THEY DID ANYTHING!!!!
It is FRAUD but may be necessary fraud.
At any rate – in a loan transaction if I put $10K into the bank and YOU borrow $9K of MY MONEY (my receipt STILL SAYS the $10K is IN the bank) to buy a car, what happens when I miss payment NUMBER ONE?!!!
The bank is short ALL $9K. That means the bank MUST repo the car so that when I go to withdraw my $10K, IT IS THERE.
But the bank won’t be able to get $9K. They will only be able to get $8K or less so they are SHORT MONEY and are INSOLVENT.
Therefore – THIS CHART shows you that as regards M1 – FRACTIONAL RESERVE HAS FAILED COMPLETELY AND IS FAILING.
http://research.stlouisfed.org/fred2/graph/?s1id=MULT
No cashflow = money has to be printed hyperinflation-style to fill those gaps which just kicks the can OR deflation embraced.
THERE IS NO OTHER OPTION.
WE GET ANOTHER, BIGGER CRASH and keep repeating bubblemania until we’re broke OR we embrace the necessary correction.
GET IT?
February 6th, 2010 at 2:02 pm
“MQ – You are insane.
There are more wealthy people today (who dont have to work, have large boats, private G5s, etc) than ever. Most of them are just the nerdy kids from high school!
There are less wars today. Than ever.
According to you, the last 500-1500 years have been a time of “enslavement” to debt… when the time before that was…? Its just stupid.”
Cog- if this were my forum, you’d be banned. You do not respond to any points I make and so discussing anything substantive is a complete waste of time. I can literally prove you incorrect (and have already done so) and you will simply wipe the TRUTH away with words backed by NOTHING.
Respond to my points or be gone with ye.
February 6th, 2010 at 2:08 pm
“How the Common Man Sees It Says:
February 6th, 2010 at 1:55 pm
FRB is a form of taxation and it allows bankers to determine the amount of demand and competition in an economy while being above competition themselves
It skews the competitive playing field in the favor of bankers at the expense of all other citizens. Since citizens need money to transact economically the banking system should be a level playing field and not a competitor and benefactor of people’s prosperity and suffering that the bankers themselves create. Lending at worst should be a commodity, currently it is a tool for power and control of a society”
THANK YOU.
February 6th, 2010 at 2:11 pm
http://research.stlouisfed.org/fred2/series/MULT
February 6th, 2010 at 2:14 pm
MQ – I thought I responded to all your silly points about how FR banking:
“turns us into hamsters on a wheel” — but freedom an opportunity are better than ever?
“turns us into debt slaves” — but empowerment and good jobs are more the norm than ever?
“energy is turned by corporate and political leaders into… weapons” — but war is lower than ever?
Its hard to respond to non-sense. You also mentioned all the “inflation” — where is that?
Take away banking… just lend your money to some friend, directly. He goes and spend that money to some merchant. Who lends that money to his friend. Now the money has been lent 2x without a bank.
The point you are making is AS SIMPLE AS LENDING itself. You are basically say — “there should be no debt”. Do you realize, this is the same as saying, “there should be no savings” –? Because one man’s savigns is just another man’s debt. Right?
The book for you, and it echos alot of your thoughts, is “The Communist Manifesto”. Its bad economics.
February 6th, 2010 at 2:20 pm
Cog- You have misread everything.
“turns us into hamsters on a wheel” — but freedom an opportunity are better than ever?
Not my point and never said that. Reread.
“turns us into debt slaves” — but empowerment and good jobs are more the norm than ever?
Never disputed that either.
“energy is turned by corporate and political leaders into… weapons” — but war is lower than ever?
Not my point. My point is that gvtm can print new money backed by future taxation to wage war on our behalf.
“Its hard to respond to non-sense. You also mentioned all the “inflation” — where is that?”
You’re in hyperinflation right now but can’t even see it because you don’t understand money creation.
“You are basically say — “there should be no debt”.”
On the contrary – I’m saying the opposite. I’m saying that all money IS debt. It is a BOND. It is a chain letter.
“The book for you, and it echos alot of your thoughts, is “The Communist Manifesto”.”
Once again A LIE. I say the opposite. Communism is WORSE. Because in communism you get the SAME corruption and FRAUD but WITHOUT the innovation and economic growth. Once again you misconstrue EVERYTHING I HAVE SAID because you don’t understand THE VERY BASICS of money creation.
February 6th, 2010 at 2:22 pm
@BR — you left out the best part:
As they are being led out of the cottage by the Grim Reaper
Guest: I didn’t eat the Mousse.
February 6th, 2010 at 2:23 pm
I responded very well to your silly point about car loans and banking. The bank has a DOWNPAYMENT on the car loan. Furthermore, the banks earns a large INTEREST SPREAD across many cars loans. You want to simply ignore these.
If you account for interest spread and downpayments… it now becomes much, much harder to lose money in fractional reserve banking. Most years it prints wonderful 25% return-on-equity. Now once every 10 years it goes through a small, medium, or large tough period. We just saw one in 2008.
But just because something has losses 1-in-10 years does not make something — a “PONZI”, “CHAIN LETTER” or “FRAUD”. You have to look at gains against losses. It seems the very real gains far outweigh the losses. Now, of course, if a business pay out too much of gains as “salary+bonus” over the 9 good year… and then losses are larger than expected in the 1 bad year — the business or bank ends up in trouble. But again, these issues are at the margin. One needs to manage things well and get the balance right. But the existence of some bad management, or some bad periods does not support anything you are saying.
February 6th, 2010 at 2:25 pm
Put it this way – without Ben’s printing press – this is what would have happened:
Markets would have crashed to 4K while at the same time TBTF banks would have been destroyed. Pensions and mutual funds and 401K’s would have gone BYE-BYE and the price of EVERYTHING would CRASH 90% or more. Martial law would be REAL and unemployment would be 40 – 50% at a minimum. The dollar would SPIKE higher and higher and higher and then CRASH. It would be a DEBACLE.
OTOH however – once that all happened – NEW MONEY CREATION WOULD BEGIN. Those with CASH – PHYSICAL – would BUY important assets like trucks, trains, machinery etc. and then RESTART THE FRB process from scratch.
So – that’s the correction Ben is fighting by printing raw, unbacked cash.
And he’s FAILING. HE CAN’T PRINT FAST ENOUGH. LOOK AT M1.
Now – as insane as this sounds – the above scenario is BETTER imo because you restart FRB whereas right now – we are doing things to PREVENT FRB FROM OCCURING.
February 6th, 2010 at 2:27 pm
“I responded very well to your silly point about car loans and banking. The bank has a DOWNPAYMENT on the car loan. Furthermore, the banks earns a large INTEREST SPREAD across many cars loans. You want to simply ignore these.”
I HAVE ALL DAY AND YOU ARE WRONG
THAT IS NOT HOW LENDING WORKS
GO READ UP ON FRACTIONAL RESERVE
YOU DO NOT UNDERSTAND HOW IT WORKS – SIMPLE AS THAT
IT MOST CERTAINLY IS A CHAIN LETTER
IF YOU DISAGREE WITH IT BEING A CHAIN LETTER
YOU DON’T UNDERSTAND A THING
There is no shame. No one is born understanding FRB – just go look it up. It will take you 20 minutes at most.
February 6th, 2010 at 2:27 pm
MQ -
You said everything I quoted. I took them directly from your 150pm post.
You said just now, “you’re in hyperinflation now but cant even see it”.
How are we in “hyperinflation” when the prices of houses are way down (1/3 of consumption basket) and the prices of commodities (oil, copper, wheat, corn, etc) are down almost 50% from the 2008 peak?
Explain how we are in hyper-inflation? What prices are going up at 10% annualized? Wont it be very easy to pay back all the debt with our new hyperinflated money?
February 6th, 2010 at 2:32 pm
So wait… “prices would crash 90%” (225pm)…but “we’re in hyperinflation”(220pm)?
Did you go to a special school?
February 6th, 2010 at 2:32 pm
@ How the Common Man Sees It Says:
“February 6th, 2010 at 1:55 pm
FRB is a form of taxation and it allows bankers to determine the amount of demand and competition in an economy while being above competition themselves.”
Bankers cannot determine demand. If that were true there could not have been a Great Depression, a lost decade in Japan, or the current Great Recession. Debt-deflation events are caused by a drop in aggregate demand – and banks cannot force demand for debt on a population of savers.
February 6th, 2010 at 2:34 pm
Explain how we are in hyper-inflation?
Will do but first I will explain money creation for you.
I put $10K into a bank – we’ll call it Cognos Savings Bank.
Money Supply is now $10K
Joe Blow comes in to buy a car. He borrows $9K OF THE $10K. The bank however does not record having LOST $9K and lent it out – it records the $9K as AN ASSET and the $10K as a liability. So Joe Blow has $9K and I still think I have $10K in the bank!!!
Money Supply is now $19K
Joe Blow hands the NEW $9K to Toyota who then take the money and PUT IT RIGHT BACK into Cognos Savings Bank.
Money Supply is now – $28K
Now Joe Blow needs to make money so he goes and delivers newspapers with the car and gets paid a salary.
Money Supply is now $28K plus the interest on the $9K loan – money that comes from the newspaper company.
Next – The newspaper needs to make money by selling newspapers so they BORROW money from COGNOS SAVINGS to buy a printing press. They borrow $10K.
Money Supply is now $38K.
How did Cognos bank go from $10K to $38K in a few weeks? Where did the money come from?
The fact is – it didn’t come from anywhere. All that exists is a series of obligations – IOU’s.
THE MONEY YOU THINK IS IN THE BANK DOESN’T EXIST YET
More and more money creation MUST TAKE PLACE to make your money “real”.
Chain letter.
February 6th, 2010 at 2:39 pm
http://research.stlouisfed.org/fred2/series/MULT
Since no new money creation is taking place ALL THAT IS HAPPENING IS HYPERINFLATIONARY PRINTING
which is simply Bernanke TRYING TO MAKE IT LOOK like money creation is taking place.
It is not.
Your money is therefore NOT REAL and DOES NOT EXIST.
There IS NO cash flow.
If a small % of us took our money out – the whole system crashes and shuts down. Simple as that.
February 6th, 2010 at 2:39 pm
MQ – Nothing new there. I understand FRB quite well. I have no problem with what you wrote there as the basics of FRB. Money creation is controlled via the credit/rate/leverage process. I get it and am not worried about it.
We have no inflation (kinda some deflation actually, since 2008). If we did have inflation we put the governor on this process by raising interest rates. If we want to encourage borrowing and money creation we lower rates (like now).
Money… itself, is meaningless. Money does not make you wealthy. Money is just a mechanism for allocating goods and services, right? We obviously have tons of wealth — condos, cars, lobster, jets, vacation houses, 50″ flat screens, etc.
February 6th, 2010 at 2:46 pm
Well that I do agree with. We certainly do have lots of wealth.
But the key point is this – MONEY IS A COMMODITY. It is GROWN and CONSUMED. It is a derivative of real labor (what we all do at WORK).
If no new money creation occurs – you RUN OUT OF FRN’S. LITERALLY. This KILLS pricing and is the very definition of deflation.
So…follow the logic.
If money creation stops – what is going on? Why aren’t prices going down? Well – Ben is trying to inject UNBACKED MONEY – money that has nothing but general taxation of future labor into the mix. This isn’t money borrowed off of a guy starting a farm or building something. This is just a hail mary pass.
Look at that chart of M1. It tells you one VERY IMPORTANT THING.
GLOBALIZATION has destroyed our manufacturing base and has therefore resulted in fewer and fewer SOLD dollars – backed by production – being created.
All we have done therefore is print money with PAPER ASSETS as collateral. One big house of cards. And since REAL economic activity is declining – we are in DEEPER CRAP than we were in 2008. MORE debt, more phony paper wealth etc.
ALL CASH FLOW is a derivative of REAL ECONOMIC activity. M1 shows you that that is on the decline.
Short version:
REAL ECONOMY = TANKING
PAPER ECONOMY = GOING UP
Guess which one wins in the end (always)?!!!
February 6th, 2010 at 2:47 pm
“SOLD = SOLID” typo
February 6th, 2010 at 2:54 pm
@Winston-
“Debt-deflation events are caused by a drop in aggregate demand – and banks cannot force demand for debt on a population of savers.”
Nice try. Truth is – they can NEVER force demand for debt or even control it. They can only try. Hence the truth – The Fed is powerless. They can only make liquidity AVAILABLE – they cannot control rates at all. If the sheeple don’t bite, they don’t bite. Savings has nothing to do with it AT ALL. That’s simply an ever-changing function of cultural and societal priorities.
Savings is ultimately a healthy thing for the individual and for society because (and this is what Keynes would have said):
If you think of compounding debt interest as gravity – and deflationary – we are trying to keep inflation going by WORKING. We are all trying to keep the plane in the air. But deflation is ALWAYS an issue so we ALWAYS have to work. And that energy is keeping the plane aloft.
What happens however when the compounding debt interest (gravity) gets too strong? The plane stalls and starts to fall. IF WE HAD SAVINGS IT WOULD AKIN TO HAVING an excess fuel tank we could ignite. This is what Keynes though. BUT WE DON’T. So Krugman etc. are saying the we should try and ENTER THE STALL and turn the plane TOWARDS the ground by borrowing a SHITLOAD more money in order to generate some economic velocity.
If it works, we pull out JUST in time.
If it fails, WE CRASH INTO THE GROUND AND DIE.
I believe it will be the latter because:
a: .gov seemingly doesn’t get this.
and
b: They are doing EVERYTHING they can to eoncourage people to NOT work which is EXACTLY what they shouldn’t do. 99 weeks of unemployment, earned-income credit – SSI disability etc. All wrong.
February 6th, 2010 at 2:55 pm
Turn the rating agencies into insurance agencies and regulate them as such. No more false AAA stamps for money. If it is “rated” AAA you must sell CDS on that paper for the low price of AAA insurance. If it is A+ you must sell insurance on it for the higher price of A+ insurance. We could actually get rid of ratings completely and just “rate” securities according to what prices are offered for CDS insurance on it. If the people making the ratings are forced to put their money where their mouth is then investors will again be able to trust the ratings. Otherwise it will be decades before people forget the scam those bastard pulled on everybody and again fell comfortable paying low prices for securities based on ratings (and nobody have the resources to carefully evaluate the underlying assets every time they invest a small amount in a security). The housing credit market can continue just fine with F&F where you get the CDS insurance automatically as part of the price.
February 6th, 2010 at 2:57 pm
MQ,
“Banks” do not create money. The Federal Reserve alone has that right. It is based upon purchasing debt. Not even the Fed creates money from nothing – they can only create money by purchasing debt instruments or creating loans (assets for the Fed). The idea of FRB is to put a limit on the amount any one depository institution can lend based upon the amount of deposits it holds.
For every dollar borrowed into existence there is an equivalent liability. When debt is repaid, it is the same as adding +1 and -1, or zero.
FRB is not a chain letter or Ponzi finance. Every asset has a corresponding liability. The sum is always zero. There must be equivalent debt in order to increase the money supply. The backing for the currency is not gold, but a promise to pay. There is no fraud in that anywhere.
February 6th, 2010 at 3:05 pm
That is simply not true Winston. Retail banking fractional reserves itself new money creation constantly. The Fed is simply lender of last resort. It’s the difference between M0, M1, M2, M3 etc.
“The idea of FRB is to put a limit on the amount any one depository institution can lend based upon the amount of deposits it holds.”
HA!! Limits?! What limits?! You funny man.
“FRB is not a chain letter or Ponzi finance. Every asset has a corresponding liability.”
******DEAD WRONG******
How can one post a car or house ONE DOES NOT YET OWN as collateral for a loan transaction to be repo’d by the bank?!!!! Bank of America has over a million homes they were just handed for FREE! Why aren’t they dancing in the streets? Because they are on the hook for the LOAN VALUE not the CURRENT VALUE of the house.
And not only that but since the bank takes the loss on the sale – THEY ARE AT A LOSS EVEN THOUGH THEY JUST GOT A NEW CAR!!!!
It most certainly IS a chain letter with FUTURE LABOR backing EVERY SINGLE FRN in the system.
That’s right.
FUTURE.
No future labor – money RUNS OUT. It disappears. It goes to the creditors – the banks, the farmer, China etc. You will have less and less and less and less and then none. All the Fed can do is print a few trillion and HOPE people work and borrow and work and borrow.
February 6th, 2010 at 3:13 pm
@Concerned Capitalist and Steve Barry. Writes Concerned Capitalist: “I think your[Ritholtz] post misses the boat here a bit . . . . don’t you think that it was precisely securitization that enabled this plunge in loan quality?” Quite so! Ritholtz has omitted a crucial link in the chain of incentives. Only by virtue of securitization could the originators and underwriters pass on to a greater fool the bad loans in question. Securitization promotes bubbles in many ways, but primarily by increasing the effective turnover, or velocity of credit. It’s dandy for all players until the ultimate market–here, the housing market–peaks. As to Concerned Capitalist’s observation that few in the blogosphere adequately appreciate the incentive to deceive inherent in securitization: I can’t speak for the blogosphere, but Charles Gasparino adequately limned this point in his latest book, “Sellout,’ where we read, for example on pp. 159-160, “The wholesalers didn’t mind extending credit to those least able to pay them back because they were off-loading so many of their mortgages to Wall Street, which through securitizing them could diversify away the risk of the subprime loan, or so it seemed.”
February 6th, 2010 at 3:16 pm
>> The same people screaming for safe guards now will be the loudest voices for de-regulation and capitalist “market forces” in the heat of the next bubble.
Cheap, wrong ad hominem attack.
February 6th, 2010 at 3:23 pm
>> the “default rate” is not really a product of un-sound lending. its a product of the macro economy, right?
>> what looks like “sound” lending at the peak… is unsound. what looks like “unsound” lending now… is fine.
>> remember Bear and Lehman mades $Bs PER YEAR in subprime lending starting in the early 90s. it is the massive profits from lower end lending (which is typically over-priced in interest spread) that attract the big boys (C, BAC, MER) and that causes a bubble… combined with an economic downturn this cuases the losses.
I’ll spin that a little differently: Unsound lending in small amounts can go unnoticed. But, when unsound lending becomes the economy, it leads to a strong bust.
February 6th, 2010 at 3:26 pm
>> My one thought throughout reading the article was how can you discuss securitization and not once mention the rating agencies! Duh.
Barry wrote a book on the many causes of this recent bubble/bust cycle. He can’t repeat his entire book with each post. Even if it were somehow practical, I think his publisher would sue!
February 6th, 2010 at 3:29 pm
“The Rating agencies are an entirely different clusterfuck — there is no doubt they played major role in this.
I quote Joe Stiglitz in the book, who called them the “prime enablers” of the entire credit crisis. And I totally agree. To stick with the Python metaphor, they were supposed to be the health inspectors, making sure no one is selling spoiled salmon in a can.
There is no doubt, had they not been corrupt whores, much of this would not have occurred.”
I am not sure Prof Stiglitz is correct. The ratings agencies did not pay themselves to improperly rate the tranches of trash. As in “All The President’s Men” – follow the money. Where did the financial remuneration come from to have the Health Inspectors put their seal of approvals on the trash bins? This guaranteed they would be mis-priced at inception, wouldn’t it?
February 6th, 2010 at 3:36 pm
>> fast forward 5 years… risk takers, making “unsound” loans in your terms… have killed.
Only because of bailouts!
Cognos, yeah, “unsound” loans are “great” if you wait for them to lose a lot of value and buy as government comes in to bail them out. That’s good trading. Not good policy.
The value of those bad loans sans government intervention is zero.
February 6th, 2010 at 3:46 pm
Winston, Mayor Quimby, Steve Barry, I hear “tastes great, less filling”.
There are MANY ways to create firewalls in our financial system. Steve wants a ban on securitization. Cognos wants big downpayments. Volcker says put a firewall between risky activities and government-insured deposits. I’d like multiple firewalls, please! Unlike Morpheus, I don’t see why we must settle for “the *one* solution”.
February 6th, 2010 at 3:50 pm
wunsacon-
Agreed. Ideally you want all of those things.
And guess what? WE HAD THEM. All that REALLY happened is…people fell asleep and gvmt repeated the same mistakes of the past because it FORGOT them.
I’m still waiting for ONE INDICTMENT re: options-backdating which was 100% FRAUD.
February 6th, 2010 at 4:04 pm
@ MB,
“How can one post a car or house ONE DOES NOT YET OWN as collateral for a loan transaction to be repo’d by the bank?!!!!”
You’ve got your dogs chasing the wrong scent. You are certainly correct in the problems, but not the cause. FRB has little-to-nothing to do with your example. FRB does not determine LTV or the price of assets. The lenders – the ones making the loans – determine if the borrower can repay and if the purchase price is reasonable.
Making a 100% LTV without verifying employment or income on a house priced 4 standard deviations above historical median is not the fault of FRB.
Blaming FRB is like blaming the ingredients because the chef made botched the dish.
February 6th, 2010 at 4:08 pm
wunsacon –
what you miss in my points you cited… is that one has to look at the whole cycle. if someone wants to talk about subprime lending and securitization and the modern mortgage market, please look at the entire cycle from 1992-2008.
its really easy to say: “no doc, no job, no income, or even subprime loans make no sense”. its easy to say — “they should never be done”. the problem is, this financially is quite incorrect. For 13 of the 16 years… those types of loans were OVERPRICED and just made everyone involved too much $$$. Which is why people got rich on all parts of the process — mort brokers, securitization packagers, and investors who bought the product. this, of course, bubbled to the extreme and ended in 3 very bad years in 06,07,08 vintages.
but if you dont understand the 13 good years. the fact that lending to risky borrowers often is the most profitable. then one really doesnt understand much. its silly in two ways. first, things are more like 1992 than 2006 right now. subprime lending and securitizations are probably back to being a great business and a great investment (just like all risky credits were 1-yr ago). and second, because the main theme is one of the bubble process built into capitalist speculation. we want some smart, gentle, counter-cyclical regulations. but we’re not trying to stop the business cycle, right?
the Internet bubble 1992-2000 was basically the same phenomenon on tech/telecom companies. Early stage is very profitable. Some amazing profit stories attract widespread speculation. Initially this feeds the bubble… which then goes too far. Commodities 2000-2008. Same speculative story in hard assets.
No sense drawing crazy conclusions.
February 6th, 2010 at 4:17 pm
I’m not blaming FRB. I think it is both a FANTASTIC and GOD-AWFUL ponzi-fraud at the same time. To date – it’s the best mankind can do so I’m fine with leaving it but strictly controlling it.
OTOH- You’re not understanding simple money creation. It is a chain letter.
If all the retail clients Of Quimby Saving added up their balances, they might say they have $100 million in the bank. But the bank only has $4 or $5 million. That’s it.
Simple – I put $600K in the bank and YOU borrow $500K for a $500K house. Now – the bank lends you $500K of MY MONEY but still tells me my money is in there. Now – if you foreclose on day one – the bank has a $500K hole on its balance sheet!!! If I walk in to withdraw my $600K – they say they only have $100K left. Now what happens is the bank has to repo the house (foreclosure) and sell it for AS MUCH AS POSSIBLE. Let’s say they get $300K. NOW they are STILL SHORT $200K of MY MONEY. At that point – they go to the Federal Reserve and Ben prints them new money backed by bonds (ie future taxation) and LENDS it to the bank. When ordinary healthy loans get paid off (ie people paying $400K for a $200K house by paying interest for THIRTY YEARS) – the banks make money and must use THAT MONEY to fix the $200K hole and PAY BACK THE FED.
So….short version:
ALL MONEY is created on the retail side NOT by the Fed in the form of a chain letter. Because it is a chain letter – if the Fed stepped aside and let the necessary correction take place – YOU WOULD SEE PRICES DROP BACK TO 1940′s levels – or worse!!!!!! In theory the price of everything – even houses could go as low as a penny.
The Fed is simply a lender of last resort that ENCOURAGES the inflation of the FRB chain letter. The money they have “printed” since Greenspan took over is simply CREDIT – a giant loan/IOU. It all gets paid back. In the end – you will ALWAYS see GDP and money growth closely aligned unless the Fed REALLY messes with stuff.
…which is EXACTLY what they have been doing.
““How can one post a car or house ONE DOES NOT YET OWN as collateral for a loan transaction to be repo’d by the bank?!!”" Because it is a ponzi. The bank is on the hook for the full amount of the purchase price of the car INSTANTLY even though NOT ONE PENNY of loan payment was ever given to the bank. If it were NOT a chain letter – the bank would be able to POCKET the value of the car repo’d when someone doesn’t pay as PROFIT. It is not profit. The difference between the money that came in on the loan and the money that was lent to the borrower to make the full payment is their LOSS.
Mish explains the same thing here:
http://endrtimes.blogspot.com/2009/12/fractional-reserve-lending-constitutes.html
February 6th, 2010 at 4:28 pm
Remember… over the good years, lots of taxes are paid. I might roughly estimate that banking and financial services sector pays over $500B PER YEAR in taxes.
Kinda makes the $100B of “maybe” govt losses on AIG, FRE, FNM… look pretty trivial.
February 6th, 2010 at 4:42 pm
MQ,
As much as I like and have read Mish and agree with his deflation call, i believe he lets his Libertarian ideology stand in the way of his rationality when it comes to certain topics.
Your example is inaccurate. The $500K house that is repossessed and sold for $300K? That loss is the bank’s loss, not the Federal Reserve’s. That’s why they have requirement for loan-loss reserves. The Fed does not have to make that loss good – if that were so the FDIC would never have to close any bank – the Fed would simply print money to keep all banks solvent. It doesn’t do that. In your example, the bank would be closed, and you would be out $500K for making a bad choice in banks, and for putting more than the $100K FDIC guarantee in a single bank.
The only time the Fed creates money unbacked by debt is in quantitative easing – only QE creates any risk of hyperinflation.
Or perhaps you misuse Ponzi and chain letter – in either, there is no underlying asset. This is never the case in FRB unless we are talking about personal lines of credit such as credit cards.
February 6th, 2010 at 5:01 pm
MQ – One more time.
We all understand FRB. We’re just not that worried about it. One could make the same point about just about anything… imagine if everyone wanted to:
– sell gold at the same time, price = $0. Its just a yellow hunk of metal.
– sell their houses at the same time, price = 0. We have too many houses anyway. Lets all rent.
– sell their stocks at the same time.
– take a vacation at the same time. but WHO WOULD FLY THE PLANE!!!???
Just because one can think up (an unrealistic) but IF EVERYONE scenario… doesnt mean that its all a ponzi scheme. Except in the way that all modern society is a system than hangs together. Its just the power of specialization of labor.
The point you are making is not interesting or inciteful. FRB creates money through lending, we get it. You need to think a little harder about the “equity” in front of that lending. Equity takes 2 forms: the downpayment; the banks equity. People tend to not want to lose their equity.
February 6th, 2010 at 5:21 pm
Two other things that need to be fixed for securitized lending on real estate I’ve not seen mentioned:
1. Appraisals need to be fixed. There needs to be a uniform method of appraisals, and appraisers need to be completely independent of whether or not the sale goes through, or the loan gets funded, etc. Appraisal fraud played a large role in some areas of this mess (California for one) and quite frankly, the whole “valuation by comp sales” just doesn’t cut it with me. So the guy down the street got lucky and sold his house to some people who absolutely fell in love with it on the walk-through, and he got his absurd asking price – and that makes my property value go up in absence of any buyers knocking on my door? C’mon, this is an absurd valuation system. The valuation should be a blend of what the market is paying, what it costs to replicate the property and any intrinsic value the property has.
2. The credit checks on the borrowers need to become much more uniform, and perhaps a review of borrower’s credit is performed before their note is dumped into the securitization pool of notes. When I buy a bond of RMBS paper, I want to know that someone has done some due diligence on the notes under that paper to make it “AA” or whatever.
And, FWIW, insert the canonical rant here about the ratings agencies.
February 6th, 2010 at 5:26 pm
Barry Ritholtz Says:
February 6th, 2010 at 10:48 am
Remember, Securitization is one of those things that have been around for decades without any problems. They are the food processors of lending.
The Rating agencies are an entirely different clusterfuck — there is no doubt they played major role in this.
I quote Joe Stiglitz in the book, who called them the “prime enablers” of the entire credit crisis. And I totally agree. To stick with the Python metaphor, they were supposed to be the health inspectors, making sure no one is selling spoiled salmon in a can.
There is no doubt, had they not been corrupt whores, much of this would not have occurred.
However, we have to start at square one, and before you get to the credit agencies, or the securitizers, someone is making either good or bad loans. That needs to be fixed.
~~
hmmm, BR, now?, we’re ‘starting at square one’??
February 6th, 2010 at 6:42 pm
Can there even be a viable, large securitization market in the absence of “credit insurance”, whether in the form of GSE guarantees, CDS, or monoline insurance? If the answer is no, and I suspect that it is, then there should not be a large scale return to securitization. Credit insurance serves no purpose other than to concentrate and magnify risk, while encouraging market participants to underprice that risk. It should be banned.
February 6th, 2010 at 6:57 pm
Here’s how securitization worked in the housing debacle…it’s funny and informative. Then decide if this is a practice that needs to be reinvigortaed. It’s like handing teenagers guns, but saying don’t worry, they’ll only use it for protection and BTW, we’ll regulate it.
http://docs.google.com/present/view?skipauth=true&id=ddp4zq7n_0cdjsr4fn
February 6th, 2010 at 7:33 pm
cognos, there are trillions in losses. Are ye defending the gross misallocation of resouces by pointing to taxes paid on imaginary gains?
You’re growing incrementally less persuasive.
February 6th, 2010 at 7:34 pm
Mayor Quimby, you’re right. And, if the “broken windows” policy of Captain Bratton has any relevance in the FIRE economy, then not jailing people for backdating options seems to be yet another smallish factor in the subsequent boom/bust.
February 6th, 2010 at 7:49 pm
“Making a 100% LTV without verifying employment or income on a house priced 4 standard deviations above historical median is not the fault of FRB.
Blaming FRB is like blaming the ingredients because the chef made botched the dish.”
Winnie,
do you really think so? do you, really, think that those Prices, as you mention, would have been achievable w/o FRB (Fractional-Reserve Banking)?
and, remember, our, current, style of FRB has the FedRes as “lender of last resort”..
something tells me that “No Way!” Prices would have been up, to the extent that they were, if People were borrowing those Funds from “Savings”(of others), as opposed to stroking themselves by stroking thos ‘Promissory Notes’/”Bank Assets” that were Cashiered into Purchase Checks..(and, as we saw, sold down the River(to the ‘borrowers’ Pension Fund..))
February 6th, 2010 at 9:10 pm
Mark,
FRB is not the enemy. The ones to watch out for are the ones who attempt to go outside the bounds of the regulatory reach of FRB – and the Fed for aiding and abetting that transgression.
Consider this: securitization actually serves as a zero boundary for utilizing capital reserves. Loans sold for fees are no longer charged against reserves, so in theory the same amount of deposits could fund an unlimited amount of secured loans. That would be infinity: 1 reserve requirement.
FRB actually prevents banks from over-reaching their capital reserves unless someone like the government or the Fed allows them to utilize SIVs to move risk off balance sheet or to change leverage rules or capital reserve requirements.
Fractional Rerserve Banking is nothing new – and it is certainly not a plot to enslave. The interest banks earn is payment for risk.
February 6th, 2010 at 9:19 pm
Wusacon -
There are certainly not “trillions” in direct losses for the US taxpayer.
Its dangerous to say this, because some foolish people actually believe there are. The same people thought that TARP was a $700B “bailout” even though it was LOANED at 10%… and is now 80% paid back. With NO material certain losses yet. (I dont know I would say I was “bailing a friend out” by loaning them my money at 10% interest). Another reason silly people believe this… is that FRE/FNM are tough situations. There are some significant losses over there and plenty of mortgage credit exposure. But people mainly forget than the ~4T portfolios of FNM/FRE accrue about $250B/yr in interest and have been accruing that for a decade. That interest cover alots of losses. They are only defaulting at a rate of about 5% annual… in the peak crisis period.
Now in INDIRECT terms… there are trillions of losses but this seems to be the wrong way to think about it. House prices in the US are lower by 30%… one might estimate this to be around $7-10T. But while that is a loss to current home owners… it is a huge GAIN for future homeowners. It is also just the unwinding of speculative gains made in previous years. Second while resources were “mis-allocated” to construction workers, real estate agents, and mortgage brokers. And its painful to go through the economic transition period. Those incomes and taxes represented trillions of dollars in GDP, taxes, etc. Who am I to begrudge that sector and those people their economic day-in-the-sun?
We dont live in a command economy. Mis-allocation of resources is a natural part of the capitalist process. Overall the income, GDP, and tax benefits from bubbles seem very large in comparison with the transitional costs of the clean-up and hangover. Would you take another Internet bubble for 5 years? Would you take another RE bubble? The totals seems to be broadly positive for social economic development. The next 10-yrs will bring more opportunity, speculation, excess and aftermath. Overall great prosperity for all.
February 6th, 2010 at 9:32 pm
Sorry for the quick double post but a few things I left out.
Mark,
If a bank could only lend 1:1 to deposits, the price of money would skyrocket as supply of available loans would be squeezed without a compensating falloff in demand. This would truly create economic horror as no one but the most creditworthy willing to pay the highest fees would be able to borrow – everyone else would be forced to live on a cash basis. How much of an economy would that concept produce?
I think many different schools of economic thought each have correctly identified a piece of the whole picture, but like the blind men describing an elephant by touching different parts, none have the entire picture within their particular method of illumination.
Politics is no different – including a reliance on too much Libertarian ideology.
February 6th, 2010 at 10:29 pm
Winnie,
We may do well to cogitate on what these guys were pointing to:
W. E. B. Du Bois, quotes about Banking:
It is the growing custom to narrow control, concentrate power, disregard and disfranchise the public; and assuming that certain powers by divine right of money-raising or by sheer assumption, have the power to do as they think best without consulting the wisdom of mankind.
Marriner Stoddard Eccles, quotes about Banking:
That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.
Thomas A. Edison, quotes about Banking:
People who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest.
and, think, again, why this: “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;”
http://www.usconstitution.net/xconst_A1Sec8.html
was so central to our Framer’s views..
and, why this: “…Section 9. And be it further enacted, That there shall be from time to time struck and coined at the said mint, coins of gold, silver, and copper, of the following denominations, values and descriptions, viz.
Eagles EAGLES–each to be of he value of ten dollars
or units, and to contain two hundred and
forty-seven grains and four eighths of a
grain of pure, or two hundred and seventy
grains of standard gold…
http://www.constitution.org/uslaw/coinage1792.txt
as, but, for a counter-weight to the Paper they knew the ‘Banks’ could so freely emit?
~~
I, actually, agree w/this: “The ones to watch out for are the ones who attempt to go outside the bounds of the regulatory reach of FRB – and the Fed for aiding and abetting that transgression.”
it’s time to re-rule the ‘Banking’ System’, or it will, more than certainly, turn, ever more, into ” a device to enslave.”
they are, as we speak, trading nothing, for something..as we know, ‘it’s a bad bargain if nobody wins’..
February 6th, 2010 at 10:30 pm
As BR says, mortgage securitization has been around for decades, but until the late 90′s it was almost exclusively Fannie, Freddie, and Ginnie (excluding the RTC securitizations). The remainder, the “private label” overwhelmingly chose loans that weren’t eligible for the GSE’s or FHA – mostly subprime, with some jumbo as well. And after the first few years of subprime securitizations, that blew up, though having little to do with securitizations or credit standards. Gradually private label expanded increasingly more Alt-A, and in 2005 when big into Option ARM’s.
Mortgage securitizations that don’t rely on direct or indirect government support only existed for about a decade, and that period was typified by unusually high real house price appreciation. They couldn’t compete with the undercapitalization of Fannie, Freddie, and Ginnie, so they went after everything that those 3 couldn’t. And of course the rating agencies didn’t matter on Fannie, Freddie, and Ginnie.
Can securitization prosper without government taking much of the credit risk? Only in the good times. In the bad times, no one wants to touch it. A mortgage market built on private label securitization would exacerbate macroeconomic swings.
The problem with the government subsidizing mortgages so heavily is that every time they make financing cheaper and increase demand it has the effect of increasing the price of houses. Thereby making housing even less affordable. If the government wants to make housing more affordable – make more houses. Regardless of affordability, the government is needed to constantly offer to take catastrophic risk in some way so that the mortgage market continues to function during bad and uncertain economic times.
February 6th, 2010 at 10:35 pm
quotes, above, link– http://quotes.liberty-tree.ca/quotes_about/banking
and, somewhat tangentially, this: “It all started in the 1920’s with Yellow Journalism.
William Randolph Hearst, who arrived on the scene in 1887, was already in control of the headlines on a day-to-day basis because of his efficient business practice within the industry. He was able to produce his Newspapers at next to nothing by manufacturing the tree pulp used and controlling the channel of production down to his papers, the San Francisco Examiner, and eventually the New York Journal (Which became a leading Newspaper).
He teamed up with Henry Dupont to manufacture the ink used in the New York Journal and the partnership began to grow.
ALONG CAME HEMP
Hemp grows 4 times faster than the timber used for tree pulp by Hearst.
Hemp grows annually and can be grown more times
Hemp produces a better quality paper.
Hemp can be grown in any region of the United States.
Since Hemp grew so fast and it grew in every region, Hearst could not stop the middle class farmer from decentralizing the industry. Hearst knew that he could not provide the intellectual property to keep Hemp from destroying his industry and replacing it with middle class producers.
In other words he was afraid of the free market. He was afraid of us… he had to stop it!
Dupont and Hearst knew then that not many Americans understood the difference between Hemp and Cannabis. So they used it against the Americans by claiming Cannabis will make you rape and kill your sister if smoked, illustrating the dangers of inhaling by using grim reapers in their newspapers with joints. And people believed it!
Time and Time again they would use this propaganda through the New York Journal, claiming that Mexicans bringing Marijuana across the border would sleep with White Wives and take White Jobs. They were also saying this about Black Americans who took up smoking and started the Jazz movement…”
http://www.dailypaul.com/node/122957
~~
Toxic Sludge is Good For You: Lies, Damn Lies and the Public Relations Industry by John C. Stauber
In Stock.
Trust Us We’re Experts: How Industry Manipulates Science and Gambles with Your Future by Sheldon Rampton
Propaganda by Edward L. Bernays
http://www.amazon.com/exec/obidos/ASIN/1567510604/ref=nosim/cryptogoncom-20
~~
FRB, much like Fire, can, either, “Warm the Hearth”, or, “Burn the House down.” We should wonder which it is, currently, doing..
and, as an aside, w/this: “W. E. B. Du Bois, quotes about Banking:
It is the growing custom to narrow control, concentrate power, disregard and disfranchise the public; and assuming that certain powers by divine right of money-raising or by sheer assumption, have the power to do as they think best without consulting the wisdom of mankind.”
it amazes me how little play this dude, among others, gets from the NAACP..
February 7th, 2010 at 1:27 am
There are two interesting points I’d like to respond to in this chain.
One, cognos says that all bad debts are paid for by either taxes or are made up by the interest on the good debts that ‘worked’
So are you saying cognos that the hard workers and prudent investors should be taxed in order to pay for the bad investments of others? Should taxpayers who saved their money and took on no debt themselves have to pay for the bad debts that the gamblers created? The same debt that drove up the prices and then destroyed the jobs of the savers during the boom and then bust period? How is it that moral?
Now winston says that FRB is not creating money out of thin air. I will show you that it is:
In this example we will assume that all the money in the economy is 100K
On Monday, person A has been saving his money for 10 years and puts his $100K in the bank. The bank then puts 10% on reserve, turns around on Tuesday, and loans $90K to person B to buy a diamond ring from person C. On Wednesday, because person C does not trust banks, he goes into the bank with the check and demands 90K cash which he takes home and stuffs under his mattress.
At this point we still have $100K in the economy. $10K is in the bank, 90K is on loan to person B who gave it to person C. That $90K is sitting under person C’s mattress.
Here is the problem. On Thursday person A decides he wants his money back. So he goes down to the bank and says he wants his $100K, in cash. What does the bank do? It loaned out the money to Person B and is sitting under some anti economy whacko’s mattress right now. Does the bank tell the guy no? After all, they can’t very well demand instant payment on the loan. That would destroy the economy by not letting the loan play out. They could demand the ring and sell it but that is not what the bank does.
What the bank then does is it phones up the Treasury and says they have demand for $100K dollars that they don’t have on deposit. The Treasury is then required BY LAW to PRINT those dollars to satisfy the demands of those deposits.
So in four days we have this situation. We now have the original $100K that took ten years to produce. We have a $90K loan covered by a $90k diamond ring. We also have $90K stuffed in someone’s mattress. So in four days the banking system created almost as much currency as it took a laborer TEN YEARS to produce and the banking system earns interest on that currency(and usually at a higher rate than what it pay the original depositor)
So what did the banker do to earn this money? They were granted a special membership by their friends in high places. They didn’t do anything to earn it. And only by special access can someone get in on this club. Not anybody can go and open a bank thus competition is limited to a special cabal of powerful elite members
February 7th, 2010 at 7:47 am
Giving investors access to leverage, is like giving a toddler access to a candy store. They are by nature irresponsible gamblers, and the leverage allowed them to multiply their bets by up to 35 fold. That was, and still is, a disaster waiting to happen (now when they are all banks they are “only’ allowed to multiply their bets by 10, but then the FDIC is on the hook when they go broke). The good of fractional banking has been extended to the greedy bastards/desperate gamblers of Wall Street, with the expected results.
Imagine a situation where those people gambling on securitized loans could not leverage at all. Where for every security with a nominal value of 100K, there was actually an underlying ~100K of assets, rather than just 3K of assets. There would never have been this desperate demand for securities that pulled any warm brainless body into a huge house in order to produce enough chips for all the gamblers at the table. Nor would the demand for real estate based securities have been so high (and prices and return so low) that conservative investment outfits such as teachers pension funds got desperate to find a way of adding a little to their miniscule (non-leveraged) returns.
February 7th, 2010 at 7:53 am
Thank you Common Sense Man, but your last paragraph blows it.
Cognos: you are so wrong about your merry view of what happened. The effects of the fraudulent aspect of securitization has crushed people world over. Securitization taken to the level it was is like money laundering. It removed the criminal passage of the fruits of fraudulent/ irresponsible lending to be distanced from the perpetrators. Who is criminally responsible vs. ignorant depends on what they knew and when they knew it. The cast of characters is large: real estate hucksters who said r.e. never goes down; builders who overbuilt on ninja loans; brokers who approved ninja loans; mgt that oversaw it; appraisers; speculators whoplayed hot potato; dumb or criminal bankers; same for rating agencies; regulators; the slice and dice mob; the math magicians & risk analysts; the regulatory agencies including the Fed; the politicians- on and on.
Let me not forget to mention the shadow banking system!
The stock market often operates the same way. Each bid that is higher than the next creates corporate value out of thin air ( Buffets votonig machine vs. valuation machine). Using leverage without limits lets prices reach infinity.
I don’t believe what I read last night – what a headache! I don’t care if noone reads this but if my memory serves me correct Mayor Quimby had it correct. The fractional reserve system does have elements of a ponzi scheme. If kept in proportion it allows for growth with an inflationary bias. Actually the I.T. revolution added to the problem allowing speed of light transactions- securitescash could almost be in 2 places at once. If housing transactions could achieve that speed housing would be liquid as cash. That in effect is hyper inflation- you’ve got to keep the article of exchange moving as fast as you can before the evr upward bid causes a loss in value. Bear mkts can move so rapidly when thwere is a realization that there was no basis for prices and the get me out of here sell button is hit. If your I.T. gizmos are the fastest you have an incremental advantage.
Cripes, peoples lives have been crushed! Who are we to begrudge the perps their day in the sun? Nonsense- sheer utter nonsense. I can’t believe it.
February 7th, 2010 at 9:43 am
vote for the mayor, lol……………………………we all know it’s FRB, and you need a governor, those were written laws, they were ignored, for whatever reason one wants to conjure, and thus you end up where you is………….
agree with zell, IT, just ramped up HEDGING, which imho is what 500T or something, thus, the spread sheet blindness factor i’ve mentioned, if you don’t understand the crux of something you can easily be led astray, and the reason why politicians and lawmakers pockets are stuffed with cash
February 7th, 2010 at 9:45 am
Zell –
I dont disagree with your points about how far amuck securitization ran.
But the “buyers” of structured product are not some ignorant “customer” they are among the most sophisticated and well-paid financial institutions in the world. They are not “victims” they WANTED to speculate for yield. AIG, CalPers, hedge funds like Sowood (ex-Harvard Mgmt) or Pelaton (ex-Goldman)… these guys were not naive folk taken advantage of by “criminal” mortgage brokers or Wall Street.
Wall Street is a very simple, but very competitive game. Some pension fund, insurance comp, or asset manager wants to buy or sell something… they call 4 dealers. FOUR DEALERs! Lets say, Goldman, JP Morgan, UBS, and Morgan Stanely. They ask for prices from ALL FOUR. They only take the best price. This is a competitive process. Do you want to win the buy/sell deal? In many cases the same dealers and investment banks… lost enormous money on the same product. The same product (same NINJA loans, same fraudulent mort brokers) delivered enourmous profits in 1992, 95, 97, 99, 01, 03., etc. To call it “criminal” or “fraud” is just silly and reactionary. Of course it looks like that today. But it did not look at all like that when the deals were being done.
February 7th, 2010 at 9:49 am
Zell –
The “taxpayers” are not on the hook for ANY MATERIAL losses? Where are the checks from the taxpayers to the cover the losses? I dont see any tax payer checks.
The small potential losses to tax payers… seem to be to AIG, FNM/FRE and GM/Chrysler. Yet I see no complaints about the Insurance companies… Fannie and Freddie were always govt entities… and the autos are bailed out for decades of bad union policy.
Everyone is somehow confused… bc Goldman, JP Morgan, Morgan Stanley… heck, Lehman, Bear… the “taxpayer” paid for NONE of their losses.
Again, where are these “taxpayer” losses you speak of?
February 7th, 2010 at 9:52 am
Correction — Last post was a response to COMMON MAN @ 127am. “Taxpayers… pay for bad debts of gamblers”.
February 7th, 2010 at 10:40 am
each taxpayer owed like 250k of national debt in 2010, it’s now 400k, so your person in the last decade I guess they did great
February 7th, 2010 at 10:46 am
Yes, they do cognos, in many ways. When a bank loses money on a debt they write it off against earnings. That means they wipe out profits and therefore do not have to pay taxes on the profits of the ‘good’ debts because they have written off bad debts. That means there is less tax revenue earned by the USG that has to be made up in other ways. Hence a higher marginal tax rate for the average American saver who did nothing to create this mess in the first place!
We’re not even talking about the buying power destruction of printing money to cover banks when they get in trouble.
And the fact that the Fed has to keep rates artificially low in order to cover losses and help ailing institutions to ‘recover’ mean that American savers are being ‘taxed’ in a different way. They are not receiving fair market value for their deposits
February 7th, 2010 at 10:51 am
The small potential losses to tax payers… seem to be to AIG, FNM/FRE and GM/Chrysler. Yet I see no complaints about the Insurance companies… Fannie and Freddie were always govt entities… and the autos are bailed out for decades of bad union policy.
As Quimby said above you have no idea how FRB works or you wouldn’t be asking those questions.
Those bailouts wouldn’t be happening if the Feds did not have access to the printing presses. You are pointing at the fruit and refusing to look at the root
February 7th, 2010 at 11:15 am
Torrie-amos: I dont understand. It is 2010… how is our debt different? Yes, I agree we are running govt deficits because we are in a broad economic downturn. Thats the business cycle. The downturn in the business cycle… caused the banking/housing losses… just as much as the other way. You are basically saying — Wall Street is responsible for the business cycle. This is stupid.
CommonMan — You saying the same thing… and even worse, your saying “if you lose money in your business then your steal from tax payers… bc you didnt have gains and pay taxes”. This is ludicris. People make profits = they pay taxes. People have losses = NOT = taking from taxpayers.
You’re arguments about “lower buying power in USD” are backwards. The economic downturn has caused a LARGE INCREASE in USD BUYING POWER! Prices are down in houses, stocks, oil, food, cars, etc. USD is very strong versus foreign currencies. So now… the US consumer owes banking because the crisis increased USD buying power?
February 7th, 2010 at 11:39 am
You are ignorant cognos. Debt inflates the price of everything. Too much debt hyperinflates things. The natural direction for prices is supposed to be deflationary due to productivity enhancements. Those are eliminated by the printing presses
You saying the same thing… and even worse, your saying “if you lose money in your business then your steal from tax payers… bc you didnt have gains and pay taxes”. This is ludicris. People make profits = they pay taxes. People have losses = NOT = taking from taxpayers.
If you deliberately game the system so that losses are created in order to capture huge swaths of the economy at pennies on the dollar then yes, you are stealing from tax payers and citizens.
BTW many times losses are nothing more than an accounting trick. It is not as if the business has actually lost anything. For example, the writedown of a property that was overpriced in the first place. You pay 100 million for it and now you write down the value to 80 million. You put that against your taxes and wa-la, taxpayers have just footed the bill for your rampant speculation
February 7th, 2010 at 12:02 pm
cog, you’re putting words in my mouth, wall street causing the biz cycle, lol, last time I checked, and could be wrong, it was always demand and supply
if you feel much more richer after you’ve gotten a bill for 150k from the government for the last decade, then that is good for you and you should be happy, i see it as a loss I did not ask for
every government on earth is in stimulus mode, every one, in due time we will see how it all works out
again, i’m pretty simple, if the guvment doesn’t stimulate, taxes and home values will fall, and there debt will end up like greece, there income stream is real estate and sales taxes and income taxes (majority), if they do not levitate those, states and muni’s are basically kaput, pension funds….sionara, etc.
same problem everywhere, somehow you percieve this as normal and it will all work out fine, thus go long with leverage I guess, especially if you’re paid a fee to invest opm’s, if it’s your own you’re obviously free to do whatever
mr. forrest gump said, stupid is as stupid does, my point of view is again simple, illogical is as illogical does………..when i see illogic, i cannot evaluate risk, note the I part
confidence is consistency creates security…………….i consistently see illogic on all fronts, i’ve seen it in many corp meetins, and have seen the outcomes
good luck too all and each man and women for themselves
February 7th, 2010 at 12:32 pm
It is easy to think FRB is the culprit because eliminating FRB would certainly reduce the likelihood of a bubble – but this kind of thinking is as simpleminded as Sarah Palin’s foreign policy. If we deflated our way back to a gold standard and 1:1 reserve lending we would still be in the horse and buggy with lanterns for light.
Sure, FRB helps create excess money from demand for loans during bubbles – but it is the interest rate charged and the quality of the loan that causes the problems. The worst FRB can accomplish is to exacerbate the problem.
February 7th, 2010 at 1:02 pm
@How the Common Man Sees It,
Your example of FRB was wrong. Let’s see how it works in reality.
Bank “A” holds $1 million in deposits, of which $100,000 are deposited with the Federal Reserve as reserves, which are paid interest. (Note, this is an electronic transaction – the money does not actually move from the bank). Bank “A” now lends out at a 10:1 ratio, or $9 million dollars. (Note: with each loan approved, the Fed creates an equivalient amount of currency to cover the transaction. This is the money borrowed, not “the depositors money”. In truth, the $1 million never leaves the bank.)
Now we have Bank “A” with $9 million is loans with $100,000 earmarked for reserves yet it still has all $1 million in its vault. If depositor “B” comes in and demands his $100K, it temporarily places the bank in trouble for being under their reserve requirement – but the U.S. Treasury does not make that good. No, the bank borrows from another bank short-term to cover their shortfall. If the bank cannot borrow from other banks, it has to go to the Fed’s Discount Window for the money – again, borrowing so there is a net plus and net minus, equalling zero new money issued.
It is only when a bank cannot borrow to cover its shortfalls that it could be in serious trouble.
It takes a lot of effort to understand this stuff – (for simplification in the above we didn’t deal with loan-loss reserves or “sweeps” for example ) – so I would advise taking all you read about the Fed and FRB with a grain of salt, me included. If it sounds too simplistic, chances are it is.
February 7th, 2010 at 1:37 pm
No, actually it doesn’t take a lot of effort to understand it and you are just making it overly complicated.
Now we have Bank “A” with $9 million is loans with $100,000 earmarked for reserves yet it still has all $1 million in its vault. If depositor “B” comes in and demands his $100K, it temporarily places the bank in trouble for being under their reserve requirement – but the U.S. Treasury does not make that good. No, the bank borrows from another bank short-term to cover their shortfall. If the bank cannot borrow from other banks, it has to go to the Fed’s Discount Window for the money – again, borrowing so there is a net plus and net minus, equalling zero new money issued.
You are making the example overly complicated. Lets say the 1 million dollars is all the currency (printed) money in the US banking system (because to properly understand the flaws in a system you have to take it to its extreme example). The bank, as you say has just created 9 million dollars in loans (not currency at this point, but loans). So that 9 million in checks are all going out to the sellers of the goods that those people bought with their loans. Let’s assume that they are 9 condos in a condo development each worth 1 million dollars. On Friday the borrowers get a check from the bank for 1 million each and they give those checks to the sellers.
On Monday the sellers show up at the banks and ask for the checks to be cashed for currency instead of depositing them. Now remember, the 1 million dollars is all the currency in the US banking system. So where does the bank get the literal paper dollars to satisfy the demand of these legitimate checks? Just remember that the banks have loaned out the money. They haven’t created any actual currency yet. Where do they get the currency to satisfy the demand of those (lawful) checks that they issued to the borrowers to give to the sellers of the condos?
February 7th, 2010 at 1:45 pm
Both of you are missing key points of FRB:
Here is a better example. I know 2 guys who took wealth events and started their own banks. I used to do trading/research for large major banking institutions (GSEs, Wells, Wachovia, Chinese and Japanese Central banks). This is the basic profile:
Wealthy guy take his $100M in equity and capitalizes a bank. (Equity = $100M)
Bank grows by taking liability funding (deposits, CDs, bonds) that cost 3% interest.
Bank grows by investing in assets (loans, funds, businesses) that earn 7% interest
The FRB works just like those posts written above… except each project has 10-20-30% down in front of the leverage. Further, the entire bank has the $100M in equity.
This bank above, small merchant bank with its 4% gross interest margin, wants to be ~10x leveraged. So if it had $1B in earning assets and $1B in liability funding. It earns $40M… operations of the bank cost $15M (salaries, overhead, etc). And so the bank targets a $25M/yr or 25%/yr ROE (return-on-equity).
The bank has 10% of funding available in the “equity”. So the statements that if “someone wants there money… ITS NOT THERE”. Are just false. I can always roll-over ~10% of funding with my equity. But of course the idea is to have the right mix of diverse, stable, funding sources so that the bank has no funding issues.
Furthermore… there is not some cavalier… “oh, Im just leveraging up”. It is MY $100M that capitalized the bank. Now if I start the bank in 2005 and immediately want to ramp into a bunch of condo developments. I am going to fail. I am going to lose my equity… and maybe, even probably cost the FDIC some money in receivership. But if I ramp stably over the course of 5 years and am careful with leverage and equity. This is a timeless, high quality business. It both supports jobs and economic activity and can be extremely profitable for people to run it well.
February 7th, 2010 at 2:05 pm
either you are being willfully blind or you are just plain stupid then cognos. I am assuming the former because you seem to be here to spread disinformation and obfuscation. Do they pay you for that?
And so the bank targets a $25M/yr or 25%/yr ROE (return-on-equity).
So the banks get 25% ROE every year and pay depositors 2% on their deposits and this is what you call a level playing field? Since 2/3 of those earnings goes out in the form of ‘bonuses’ and stock options it looks like the elite executives in the banking system are making like bandits by leveraging and skimming quite a bit of coin from the system
I’m pretty sure that if competition at the very least were introduced into the banking system there wouldn’t be the returns that you have boasted about
February 7th, 2010 at 2:12 pm
BTW this might sound absurd to you BUT we are not talking about ‘reality’ here as you guys want to push into the argument. Reality is where bankers stay (most of the time) in order to keep the mobs at bay. We are talking theory here. Theory is where reality goes when it can’t make any money being reality any more or when an outcome is desired to be achieved. We aren’t talking about the 2006′s or the mid ’90′s, we are talking about the black swan events that the system can be geared to head towards if the CBs so choose
February 7th, 2010 at 2:33 pm
CommonMan — Do you have $? Do you have the ability to “take risk”? If so… you too can make 25% ROE. It was easy to make 50-100% over the past year (and easy to make more than 2008 losses).
I suspect you are very risk averse. Risk averse savings pays… 0-3%. It deserves no more. LOTS of people want to be safe at 0-1%. Simple supply/demand.
Smart risk and hard work pays >25%. There are many ways to do that — public markets, entreprenurship, small business, banking, real estate, etc. It is subject to risk. Lots of bankers and real estate guys lost it all in 2008 (Jimmy Caybe (-1.5B), Hank Greenberg (-5B), Goldman partners who sold at $50/shr, etc). With upside… comes risk.
February 7th, 2010 at 2:36 pm
CommonMan –
That said, you hit on a very important point at the end — increase competition in banking.
The govt and regulators should be using TARP to capitalize 100 new banks on a shared basis with other investors. This is the way to incent lending, without incenting the formerly screwed up institutions. There are a bunch of very smart PE firms that would like to start banks (JC Flowers, Ripplewood) and the regulators have generally been unsupportive of this… its a shame.
What a great move that would’ve been 1-yr ago… cuz the new instituions would’ve been levered to the recovery and yet also clean bal shts, looking for new loans to make, etc. Still a good idea.
February 7th, 2010 at 5:27 pm
@ Common Man,
“So where does the bank get the literal paper dollars to satisfy the demand of these legitimate checks?”
From the Federal Rerserve who creates them at the stroke of a key – a ledger entry – to replace the check. The money is backed by its debt. As the debt is repaid, little by little the money disappears except for the interest.
February 7th, 2010 at 6:26 pm
cognos,
w.this: “This bank above, small merchant bank with its 4% gross interest margin, wants to be ~10x leveraged. So if it had $1B in earning assets and $1B in liability funding. It earns $40M… operations of the bank cost $15M (salaries, overhead, etc). And so the bank targets a $25M/yr or 25%/yr ROE (return-on-equity).”
something tells me you’re mixing/mis-defining terms..
there’s enough Finance/Accounting for Banking Institutions available, on the web, care to provide Proofs/links to your suppositions, above?
February 7th, 2010 at 11:05 pm
Banks dont actually borrow from the Fed very often.
There is lots of cash in the world. If it is not lent, it earns zero. If Fed pegs UST bill rates at zero… then lending to banks on a short-term basis becomes more attractive (last fall this helped 3L come down from 4% to 2%… it took till summer to take it to ~50bps).
JPM balance sheet is roughly $2T. Its not like the Fed is a “source of funds” for the banking industry (which is $10s of Ts). Banks raise money mainly through customer deposits, inter-bank markets, term bonds and CDs. Under all normal circumstances there is plenty of available funding… at the right price.
February 7th, 2010 at 11:09 pm
@ Mark Hoffer – What do you mean? What terms do you find unclear? What am I mixing/mis-defining?
I dont focus on this kinda stuff anymore… but 7 years ago, I used to do asset-liability trade consulting for the largest banks and financials in the world (Fannie, Freddie, Wells, Wachovia, Chinese central bank, Japanese central bank, and lots of smaller institutions). I am pretty sure my breakdown is a good rough, textbook overview.
February 7th, 2010 at 11:18 pm
CommonMan — Do you have $? Do you have the ability to “take risk”? If so… you too can make 25% ROE. It was easy to make 50-100% over the past year (and easy to make more than 2008 losses).
I suspect you are very risk averse. Risk averse savings pays… 0-3%. It deserves no more. LOTS of people want to be safe at 0-1%. Simple supply/demand.
Smart risk and hard work pays >25%. There are many ways to do that — public markets, entreprenurship, small business, banking, real estate, etc. It is subject to risk. Lots of bankers and real estate guys lost it all in 2008 (Jimmy Caybe (-1.5B), Hank Greenberg (-5B), Goldman partners who sold at $50/shr, etc). With upside… comes risk.
Actually, I take a lot of risk. I trade options so I know all about risk and reward. Just because I can survive and even thrive in a system doesn’t mean I have to agree with it.
The problem is that people should not be forced into the marketplace to take ‘risk’ to just survive and keep up. It is a recipe for societal failure. What happens to the guy who is the world’s best artist and yet can’t manage money? He loses. That skews societal benefits towards people who know how to manage money at the expense of everyone else. That means that if your only gift in life is to know how to handle money then you win. If you have any other gift and don’t know how to handle money you lose. Coincidentally, this system was set up by those who handle money for a living. They shouldn’t have the right to tax a 95% tax on people’s labor
February 7th, 2010 at 11:54 pm
@Winston
It is a moot point regarding who actually prints the currency. The real point is who actually creates and who benefits from the creation of that currency at who’s expense. Even the Fed reserve of New York plainly admits that it is banks that ‘create’ money through the money multiplier:
Reserve Requirements and Money Creation
Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+…=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+…=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.
That’s is directly from the website of the NY Fed
February 8th, 2010 at 6:09 am
cognos,
unpack this: “wants to be ~10x leveraged. So if it had $1B in earning assets and $1B in liability funding.”
and, break it down/define it..
also, if you would, note how this “gross interest margin” phrase/term is, actually, a mis-direct v. ROE (return-on-equity)..
~~
HTCMSI,
see: “Release Date: September 29, 2008
For immediate release
The Federal Reserve Board on Monday announced the annual indexing of the reserve requirement exemption amount and of the low reserve tranche for 2009. These amounts are used in the calculation of reserve requirements of depository institutions. The Board also announced the annual indexing of the nonexempt deposit cutoff level and the reduced reporting limit that will be used to determine deposit reporting panels effective 2009.
All depository institutions must hold a percentage of certain types of deposits as reserves in the form of vault cash, as a deposit in a Federal Reserve Bank, or as a deposit in a pass-through account at a correspondent institution. Reserve requirements currently are assessed on the depository institution’s net transaction accounts (mostly checking accounts). Depository institutions must also regularly submit deposit reports of their deposits and other reservable liabilities.
For net transaction accounts in 2009, the first $10.3 million, up from $9.3 million in 2008, will be exempt from reserve requirements. A 3 percent reserve ratio will be assessed on net transaction accounts over $10.3 million up to and including $44.4 million, up from $43.9 million in 2008. A 10 percent reserve ratio will be assessed on net transaction accounts in excess of $44.4 million…”
http://www.federalreserve.gov/newsevents/press/bcreg/20080929a.htm
note: I didn’t see, during a quick peek, the ’2009′-update..
February 8th, 2010 at 10:40 am
@MEH
I haven’t checked lately, maybe they changed it, but the last I knew up here in Canada they eliminated reserve ratios altogether. Basically, banks can loan money into existence whether they have any on reserve or not. It is all based on a borrower’s ability to pay.
Of course we know what they say about a rising tide…..and a sinking one
With zero reserve requirements money has been completely corrupted
February 9th, 2010 at 5:08 am
HTCMSI,
it’s, a lot, like that, currently..
“With zero reserve requirements money has been completely corrupted”
the old RRR=10% is a fairy-tale..I’m not sure why so many, still, use it in their examples..
and, looks like we’re not to receive any answers from ‘cognos’–the, self-proclaimed, ” I used to do asset-liability trade consulting for the largest banks and financials in the world (Fannie, Freddie, Wells, Wachovia, Chinese central bank, Japanese central bank, and lots of smaller institutions). ”
it’s too easy to say ~”with ‘minds’ like “cognos”‘s ‘consulting’, to the ‘banking industry’, it’s no wonder it broke”, so, I won’t say it..