Tag: banks

Mailvox: you talking to ME?

Serge Tomiko is a rather strange anklebiter who enjoys informing me that I know absolutely nothing about economics, which statement is inevitably followed by an economics-related assertion that indicates he has read the appropriate material, but he hasn’t understood it. He’s very much like Kevin Cline in A Fish Called Wanda; the last time he showed up, he failed to understand that the graph he was citing to dispute my contention was charting the data from the very same Federal Reserve report I had cited in the first place.

This time he felt the need to “correct” my factual statement that deposits are unsecured loans from the depositor to the bank:

Once again, Vox shows he is absolutely clueless about how banking functions. Deposits are NOT loans to the bank. Banks do not in any way require deposits. It is a service they provide.

Banks create money by the authority of the government, which is given to entities in exchange for interest payments. They do not lend money. In this case, the banks are being perfectly honest. It doesn’t matter in the slightest whether or not they have deposits. In fact, this kind of policy is intended to discourage deposits. 

Because beating up on Serge feels rather like kicking a toddler in the head, I thought I should give him the opportunity to retract his foolish “correction”.  I wrote: “Serge_Tomiko, I humiliated you the last time you tried to correct me.
Fair warning: I’m going to prison-rape you on this one, brutally, if you
don’t retract this. You have until tomorrow to think this over.”

Not being the brightest bulb on the planet, Serge proceeded to double-down.

What more can one say? It should be blatantly obvious. How could banks charge negative interest rates if their lending was at all dependent upon deposits?

This is a complicated issue, but Vox has it completely wrong.

This would a good, recent work that not only demolishes Vox’s common, yet ill informed idea of banking, it explains the origin of his error. Will he read it? I doubt it. 

As it happens, I did read it. I could have written it. And not only do I completely agree with it, but I note that it has precisely NOTHING to do with my original contention. The article deals with what bankers do with the money they are loaned by their depositors and says absolutely nothing about the nature of that money or the nature of the legal relationship between the depositor and the bank. Regardless of what Serge thinks, the central message of Buddhism is not every man for himself.

On the other hand, the 1848 Foley-Hill case in the English House of Lords said everything that one needs to know about both.

Edward Thomas Foley,–Appellant; Thomas Hill and Others,-Respondents

(1848) 2 HLC 28
English Reports Citation: 9 E.R. 1002
July 31, August 1, 1848.

Mews’ Dig. i. 42, 1007; ix. 76; xi. 988. S.C. In 8 Jur., 347; 1 Ph. 399; 13 L.J. Ch. 182. On point as to relation between banker and customer, considered in St. Aubyn v. Smart, 1867, L.R. 5 Eq. 189; A.-G. v. Edmunds, 1868, L.R. 6 Eq. 390; Moxon v. Bright, 1869, L.R. 4 Ch. 294; Summers v. City Bank, 1874, L.R. 9 C.P. 587; Marten v. Rocke, 1885, 53 L.T., 1948. Distinguished on point as to limitation (1 Ph. 399; cf. 2 H.L.C. pp. 41, 42) in In re Tidd (1893), 3 Ch. 156, and in Atkinson v. Bradford Third Equitable, etc., Society, 1890, 25 Q.B.D. 381.

EDWARD THOMAS & FOLEY, – Appellant; THOMAS HILL and Others,–, Respondents [July 31, August 1, 1848].

Banker and Customer–Accounts not complicated, subject for action, and not for bill.

The relation between a Banker and Customer, who pays money into the Bank, is the ordinary relation of debtor and creditor, with a superadded obligation arising out of the custom of bankers to honour the customer’s drafts; and that relation is not altered by an agreement by the banker to allow the interest on the balances in the Bank.

The relation of Banker and Customer does not partake of a fiduciary character, nor bear analogy to the relation between Principal and Factor or Agent, who is quasi trustee for the principal in respect of the particular matter for which. he is appointed factor or agent.

Is that sufficiently clear? The relationship between the depositor and the bank is the normal one between a creditor and a debtor. Because it is a loan from the former to the latter. In case the Old English legalese is too complicated for you, we can go from 1848 to 2013 and make it even simpler. Last week, the investor Jim Sinclair explained the same thing on Market Sanity:

I think that our listeners need to understand that when they make a deposit in a bank, they don’t have an asset. They become an unsecured lender to the banking institution, that goes back to British law in the 1850s and present law in North America and elsewhere. In fact, it’s universally accepted that once you make a deposit in a bank you’re lending the money to the bank. When you hear that the bondholders and lenders will have to undertake the rescue of any banking institution that faces difficulty to the listener, you are the lender. You are a lender without collateral. You are in a very junior financial position.

And if you’re still in doubt, it is right there in US law, specifically 12 USC § 1813 – Definitions

The term “deposit” means—
(1) the unpaid balance of money or its equivalent received or held by a bank or savings association in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial, checking, savings, time, or thrift account, or which is evidenced by its certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness, or other similar name, or a check or draft drawn against a deposit account and certified by the bank or savings association, or a letter of credit or a traveler’s check on which the bank or savings association is primarily liable:

What is an “unpaid balance of money received?” It is a loan. As it happens, it is an unsecured loan, albeit one that is nominally guaranteed by the FDIC, at the FDIC’s sole discretion. Which is exactly what I stated in the first place. Banks are nothing but middlemen, which is why they require loans from their “depositors” in order to make new loans and profit from the difference between the interest they pay and the interest paid to them. The real service they provide is collecting all of the many smaller deposit-loans into a single large credit pool that can then be borrowed from more efficiently in larger loan packages. This is a legitimate function, perhaps even a necessary one, but hardly one that rationally justifies nearly 30 percent of all the operating profit in the country being devoted to it.

As it happens, the ability of the banks to create money is not completely dependent upon receiving loans from the general public. They can also receive loans directly from the Federal Reserve. And, as per the previous post, that $2.5 trillion injection of credit from the Fed is what has produced the $2.1 trillion nominal increase in bank assets since 2008.

The amusing thing about this particular failure to grasp the obvious is that Serge is a self-avowed fascist who flatters himself with the idea that he understands the English Common Law. It appears he is still stuck on the Magna Carta and hasn’t reached the 19th century yet.

Yikes

Everyone has been wondering where the anticipated inflation is.  The answer, it appears, is in Chinese bank assets.

Go to Zerohedge to read the whole thing.  But the key bit is this: “In the past five years the total assets on US bank books have risen by a paltry $2.1 trillion while over the same period, Chinese bank assets have exploded by an unprecedented $15.4 trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion – some two and a half times the GDP of China!

 Putting the rate of change in perspective, while the Fed was actively pumping $85 billion per month into US banks for a total of $1 trillion each year, in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!“

This is going to end well. Real well. And here I thought things were bad just looking at the USA, Europe, and Japan.

Paying to give them money

This is a fascinating example of the potential consequences of American bank depositors failing to understand what their bank deposits are:

Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves. Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.

This is akin to the credit card company paying you for the privilege of borrowing their money. It should also eliminate any last vestige of belief in the idea that the Federal Reserve, the Congress, or the banks have any capacity for putting either the economy or the American people before their own short-term pecuniary interests.

Just to make it clear, your bank deposit is a loan you make to the bank. It is an unsecured loan that the bank can utilize in any way it pleases, and since it is unsecured, if the bank happens to lose the money by making bad investments or spending it on cocaine and expensive hookers, you have no legal recourse. This is why John Corzine is not only not in jail, but hasn’t even been charged with a crime; he didn’t commit one.

It’s not stealing if you’re dumb enough to give them the money in return for an unsecured promise to pay it back so long as you ask for it before they don’t have it on hand.

And note that this is bank industry opposition to a rate cut, not the much-feared rate increase.

Confessions of a Credit Easer

A mea culpa from the manager of the Federal Reserve’s mortgage-backed security purchase program:

Confessions of a Quantitative Easer

We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street.

I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system’s free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.

The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed’s central motivation was to “affect credit conditions for households and businesses”: to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative “credit easing.”

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed’s trading floor? The job: managing what was at the heart of QE’s bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.

This was a dream job, but I hesitated. And it wasn’t just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.

It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

If you’ve read RGD, (published in 2009), then you are aware that even at the time it was obvious that the neither the Fed nor the White House was trying to help home buyers. They could have simply written off the debts owed by mortgage holders, but instead, they funneled trillions to Wall Street.

This proves, once more, that the Federal Reserve has zero interest in fixing, saving, or otherwise improving the US economy. It has other objectives, other goals, and it is a category error to even discuss the Fed’s future actions in terms of whether they will be good for the economy or not.

To do so is like discussing whether the future run/pass ratio of the New England Patriots will be good for the New York Yankees. It’s not even relevant to the discussion except perhaps as an unintended consequence.  And notice that they changed the name from credit easing to quantitative easing just to make the concept harder to grasp for the average American. Simple, but effective, because MPAI.

No reason

The Fed is testing susceptibility to counterparty credit risk in 2014. Just to, you know, be on the safe side. Nothing to worry about here. No problems are anticipated. Hey, look there, green shoots!

Lenders including JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) will have to show they can survive the demise of a trading partner or a plunge in value of high-risk business loans in the 2014 version of U.S. stress tests.

The scenarios for the annual tests, outlined by the Federal Reserve in a statement yesterday, reflect some of the most pressing threats seen by regulators as they gauge the ability of the U.S. financial system to withstand economic shocks. Bankers will have to show what would happen to the value of leveraged loans they hold, the impact of another housing bust and how they’d fare if a firm that owes them substantial sums collapses.

The test was designed in part to build resiliency against what some see as emerging asset bubbles, said a Fed official who spoke on a conference call with reporters. The counterparty failure test aims to prevent a repeat of the 2008 crisis, when distress at Lehman Brothers Holdings Inc. and American International Group Inc. threatened to destroy their biggest trading partners.

Of course, regular readers here know another way to spell “a plunge in value of high-risk business loans”. C-R-E-D-I-T-D-E-F-L-A-T-I-O-N.

Mailvox: the Fed imbalance

JD asks about the Fed’s balance sheet:

Fed balance sheet may not return to normal until 2019?  What does this mean to lay people?  Would you enlighten The Dread Ilk, please?

The short version is that quantitative easing, which is the Federal Reserve’s euphemism for “printing money” under the current monetary regime, is not working in terms of returning the economy to full employment or stimulating economic growth. However, the Fed doesn’t dare stop QEn because doing so would almost instantly crash the stock market and hurl the global financial system into crisis, if not collapse. So, the program is going to continue indefinitely, which we already know due to the appointment of Janet Yellen, who is even more expansionary-minded than the man named Helicopter Ben.

Wikipedia has a good definition of quantitative easing: “Quantitative easing (QE) is an unconventional monetary policy used by central banks to prevent the money supply falling when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base. This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value.

“Expansionary monetary policy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates. However, when short-term interest rates are at or close to zero, normal monetary policy can no longer lower interest rates. Quantitative easing may then be used by monetary authorities to further stimulate the economy by purchasing assets of longer maturity than short-term government bonds, and thereby lowering longer-term interest rates further out on the yield curve. Quantitative easing raises the prices of the financial assets bought, which lowers their yield.”

This is why the stock market is up considerably since early 2009 and why corporate borrowing is up when the other private borrowing sectors are down. The reason that the QE program has continued for nearly five years now is that it hasn’t had the triggering effect that it was supposed to have in 2009 or any subsequent year. This is exactly what I have been talking about for years, in pointing out that the Fed cannot expand the money supply in the same way that was done in Weimar Germany and in Zimbabwe, because there are material and significant differences in the way the Fed “prints” money and the way past governments have printed money.

The Fed won’t simply print money in the traditional manner because the coterie of investment institutions they serve can’t profit that way; it is all inflationary downside without a leveraging upside. The US government could certainly do it, of course, and all it would have to do is completely shake off the chains of Wall Street first. So, needless to say, printing trillions of dollars and distributing them to the citizenry is not going to happen.

Given that they STILL haven’t taken the simple step of forgiving mortgage debt to free up disposable income, it should be obvious that they’re not going to indiscriminately hand out cash to everyone either.

My case for debt-deflation doesn’t rest on the physical impossibility of money printing, but on the improbability of Wall Street voluntarily giving up the goose that has laid so many dollar-filled eggs for 100 years. I think they will kill the economy before they give up control, especially since widespread bankruptcies and foreclosures taking place under the present regime would put huge swaths of U.S. property in their hands. It is very much a heads they win, tails you lose situation.

As for 2019, they might as reasonably have given a date of fiver. If you look at L1, it is very clear that all QE has done for the last five years is prevent the bottom from falling out completely while encouraging an astonishing amount of malinvestment via the corporate and federal sectors. So, I anticipate more of the same until the household sector defaults begin, which should set off the third, and more serious, stage of the financial crisis.

Timing? I don’t do timing. How will the crisis be resolved? I don’t know. These things cannot be known until they happen. All we can know for certain is that the present course of credit disinflation and substitution of private debt for public debt is not going to continue indefinitely, since it would result in the complete socialization of the national economy by 2030.

Hawks and doves at the Fed

Female managers tend to seek consensus, and it looks as if we can be certain that Yellen will have whatever organizational support she requires to keep the Fed’s monetary policy as expansionary as possible.  Notice that she is considered to be even more dovish than Helicopter Ben. And one of the newcomers, Kocherlakota, is arguably even worse.  In 2011, he claimed that the Federal Reserve didn’t cause the housing bubble, and worse, that he was “agnostic” with regards to what did cause it.

So, we not only have Tweedledim at the Fed, but Tweedledimmer voting to support her futile attempts to print credit in 2014.

Mailvox: what could possibly go wrong?

GV writes to observe that the USA is about to experiment with an economic application of Hultgreen-Curie Syndrome:

I was listing to the radio when I heard the news that Janet Yellen would be named the next fed chair.  I went online to confirm this story and found this news story by NBC News.

It appears you were right about what you wrote in your blog post on 9/16/2013 entitled The job no one wants.  You wrote that you assumed it would be Janet Yellen.  It’s funny how the link to the NBC news story talks about her being the first women to head the central bank and some of her accomplishment but it leaves out the quote you put at the end of that blog post were she said the following;

 “For my own part I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.”
– Janet Yellen, 2010

With someone like that in charge what could possibly go wrong.

Christine Lagarde at the IMF and Janet Yellen at the Fed. This should be an interesting test of whether putting women in charge will make it all better. I wouldn’t mind being wrong, for all of our sakes, but I’m not terribly sanguine about the probabilities here.

Ambrose Evans-Pritchard summarizes: “So there we have it. The next chairman of the Fed is going to track the labour participation rate. Money will stay loose.”

Enforcing Obamacare

It never occurred to me to imagine that the federal government
wouldn’t enforce its fines for failure to engage in required economic
activity with its usual bag of tricks, including seizing bank accounts and placing property liens:

If true, the implementation of Obamacare is going to be a whole lot more draconian than Americans have been led to believe. 

“I actually made it through this morning at 8:00 A.M. I
have a preexisting condition (Type 1 Diabetes) and my income base was
45K-55K annually I chose tier 2 “Silver Plan” and my monthly premiums
came out to $597.00 with $13,988 yearly deductible!!! There is NO
POSSIBLE way that I can afford this so I “opt-out” and chose to continue
along with no insurance.

“I received an email tonight at 5:00 P.M. informing me
that my fine would be $4,037 and could be attached to my yearly income
tax return. Then you make it to the “REPERCUSSIONS PORTION” for
“non-payment” of yearly fine. First, your drivers license will be
suspended until paid, and if you go 24 consecutive months with
“Non-Payment” and you happen to be a home owner, you will have a federal
tax lien placed on your home. You can agree to give your bank
information so that they can easy “Automatically withdraw” your
“penalties” weekly, bi-weekly or monthly! This by no means is “Free” or
even “Affordable.””

The federal government has consistently denied that any
fines pertaining to Obamacare non-compliance could be seized from bank
accounts, despite reports last year that the IRS had hired 16,500 new agents to harass citizens who attempt to evade the new law.

The
system is breaking down, and it appears to be breaking down
increasingly fast. Once people stop paying their Obamacare fines, how
long will it be before they stop paying other taxes? And using the
banking system as an enforcement device for the sake of compliance is
more likely to break the banking system than it is to allow this
expansion of the tax system to function as envisioned.

More gasoline

With the flames threatening to die down, Ben Bernanke decides to pour more on the fire:

The Federal Reserve has decided against reducing its stimulus for the
U.S. economy, saying it will continue to buy $85 billion a month in
bonds because it thinks the economy still needs the support. The Fed said in a statement Wednesday that it held off on tapering
because it wants to see more conclusive evidence that the recovery will
be sustained. Stocks spiked after the Fed released the statement at the end of its two-day policy meeting.

(laughs) Apparently the Fed lost their nerve when they saw stocks plunging in anticipation of the end of QE IV. The Fed knows deflation and credit collapse is lurking right around the corner and they are desperately attempting to stave it off. What they think will save them, I don’t know, but we appear to be rapidly approaching a potentially critical nexus with prospective war in Syria, yet another debt ceiling showdown with the Republicans running the risk of looking even more foolish than they usually do when they cave for a third straight year, and the possibility of a Hultgreen-Curie scenario at the Fed.