Thursday, January 20, 2011

Banks Report More Signs of Stability and Growth

NEW YORK (AP) -- "Americans are starting to get their household finances in order. In an encouraging round of earnings reports, major banks say fewer mortgages are going bad, credit card defaults are down and more people are paying the bills on time.

One of the nation's largest consumer lenders, Wells Fargo, said Wednesday that 29 percent fewer loans went bad in the last three months of 2010 than the year before. And late payments on loans considered likely to default declined for the first time since 2008. Late payments on credit cards issued by Bank of America, JPMorgan Chase and Citigroup also improved at a record pace at the end of last year, according to an analysis by Barclays Capital. The reports are a sign that Americans are feeling more comfortable about their finances. 

"There are signs of stability and growth," said JPMorgan CEO Jamie Dimon.

The bank news comes after a holiday shopping season in which spending was the strongest since 2006, and auto sales grew 11 percent last year, the first gains since 2005. Taken together, the spending indicators are the "strongest showing for consumers since the peak years of the last expansion," and signal that the economy is "near a threshold of self-sustaining growth," analysts at Citi Investment Research & Analysis said in a report earlier this month."

HT: Steve Bartin

45 Comments:

At 1/20/2011 9:52 AM, Blogger morganovich said...

the benefits of this are not spread evenly.

the house of dimon has had a great crisis, but citi is still a train wreck with profits dropping and mostly being produced through accounting gimmickry.

 
At 1/20/2011 10:10 AM, Blogger VangelV said...

"There are signs of stability and growth," said JPMorgan CEO Jamie Dimon.

It must be true. If Jamie Dimon can't see a problem it is obvious that there isn't one on the horizon. After all, this is the great genius who has managed to get JPM's stock to go up by around 20% since he took over as CEO seven years ago and who was not fooled by the housing bubble.

 
At 1/20/2011 11:13 AM, Blogger PeakTrader said...

Many people assumed the $750 billion in TARP was a bad idea. However, the U.S. government will recover almost all the TARP funds (including interest).

There should've also been a $750 billion tax cut (or $5,000 for the 150 million workers at the time) to jolt the economy. U.S. households would've paid-down or paid-off high-interest rate debt first (e.g. credit cards), to increase their monthly incomes, and strengthen the banking system, and consumed the "excess" assets and goods, to spur production and maintain employment.

U.S. households would've paid taxes instead of received unemployment benefits, from the higher level of employment, which would've resulted in lower budget deficits, and a higher level of output would've improved living standards.

Significant tax cuts worked under Kennedy in '61, Reagan in '81, and Bush in '01. Unfortunately, Obama rejected a proven track record by providing weak tax cuts (roughly $13 a week), huge spending increases, and more regulation, along with attacking businesses and the rich, which were almost the opposite policies of Reagan, and achieved almost the opposite results.

 
At 1/20/2011 11:19 AM, Blogger morganovich said...

vangel-

i think you are being a little hard on jamie.

he has done better over the last several years than any other major consolidated financial services co in the US.

the contrast to vikram's total wipeout is pretty stark.

unlike MS and GS, JPM is back to pre crisis stock levels. (though GS is getting close)

compared to his peers and even to companies like GE or BA or most of the big US cos, his "flat over the last 5 years" is a significant accomplishment.

i hate the whole financial sector as an investment, but if i had top pick one guy at a major firm, i'd pick jamie ant JPM.

 
At 1/20/2011 11:52 AM, Blogger Walt G. said...

I like good news, but aren't the people who managed to get through the recession with their finances intact the strong ones who are driving the current results up? You can't default on a mortgage you don't have because the house was foreclosed earlier or make a late payment on a credit card that was closed during an earlier bankruptcy. There's a reason longevity tables have higher life expectancies as age increases instead of from birth. The life expectancy of an 84-year-old is not 78. Isn’t this good news now just a natural reality of the earlier bad news?

 
At 1/20/2011 12:45 PM, Blogger Che is dead said...

Many people assumed the $750 billion in TARP was a bad idea. However, the U.S. government will recover almost all the TARP funds (including interest).


TARP was a bad idea. And while the government may recover the portion of TARP funds used to prop up favored financial institutions, it will not recover all of the funds used to bail out the UAW. Most of that money is lost. Many people forget that TARP funds were forced on financial institutions that did not need or request them. The rest was used to save politically connected, or "too big to fail" institutions. In a rational world, those institutions would have been liquidated using the past savings and loan workout as a model. GM and Chrysler should have been forced into bankruptcy, their assets awarded to their creditors and bondholders and their union contracts declared null and void. That would have allowed them to restructure and emerge as more competitive and potentially profitable. The continuing existence of the UAW only insures that they will be at the threshold of insolvency once again in the near future.

 
At 1/20/2011 12:58 PM, Blogger PeakTrader said...

Che, it wasn't just a few poorly managed banks or firms that had problems, it was a systemic problem that affected the U.S. financial industry.

How would you feel if the entire U.S. banking system failed, e.g. from a massive run on the banks, and the country fell into a deep depression?

 
At 1/20/2011 1:41 PM, Blogger morganovich said...

TARP as originally proposed was a much better plan.

purchase of assets by the fed is a good and proper role.

a central bank ought to be there to be the lender of last resort to prevent liquidity shortfalls from locking up the economy. such lending ought be asset based and at considerable rates of interest.

this has the massive advantage of helping the illiquid but not the insolvent.

the problem with the equity investment structure that pelosi et all forced onto tarp is that it makes ZERO distinction between illiquid and insolvent which means that huge amounts of money get poured down the freddie, fannie, AIG, and citi rat holes when those institutions needed to be broken up and sold.

TARP was a very worrying perversion of the proper role of the fed and a dangerous abrogation of investing discipline.

had the fed acted as the bank of england did, we'd already be in the black with better outcomes for the market. the S+L bailout worked that way and made PILES of money for the federal government.

che-

i agree with you about GM etc. using asset backed lending would have prevented them from being included on the bailout list.

the move of TARP from asset based lending to "equity injection" was the move from disciplined finance to special interest pork. i actually heard nancy brag about that at a dinner in SF and how she took wall st money to defend unions.

 
At 1/20/2011 2:06 PM, OpenID Sprewell said...

The justification for forcing some banks to take TARP money at the time, was so that there wouldn't be bank runs on the ones who really needed it, if you only lent to them and everybody knew exactly who they were. All in all, that's worked out well, the problem is that there are idiot Democrats who now claim that the TARP money "saved" all the banks that took it. I agree that non-bank auto firms should have been pushed into bankruptcy. I believe the AIG plan has been to break up and sell it all along; of course, fannie/freddie and citi are good candidates for the same. Not sure how circumspect the Bank of England was, but I'm sure they only had that option cuz the UK govt was nationalizing failing banks: I'll take Fed loans instead, thank you very much. ;) The big shame about the paid-off Bush TARP loans is that the money hasn't been returned to taxpayers or used to pay down debt, my understanding is that Obama is just using it for further spending.

 
At 1/20/2011 2:34 PM, Blogger morganovich said...

sprewell-

my point about the BOE is that they bought bank assets as opposed to making equity injections.

so, rather than buying citibank stock, the fed should have bought citibank mortgage assets etc. such purchases at distressed prices made the fed a fortune during the S+L crisis while still preventing a systematic failure.

any bank can become illiquid. if you loan out even 1% of your deposits to long term borrowers, a run on your bank can make you illiquid.

the beauty of using asset sales to fun liquidity is that it automatically distinguishes the banks with a timing mismatch but plenty of good assets from those whose assets cannot cover their obligations.

nationalization should not be necessary under such a system as the failures of insolvent banks would be cushioned through asset purchases and the actual shortfalls would be greatly lessened to the point where the system can absorb them or that the remaining assets (like book of business, retail locations, etc make it worth the while of private actors to buy. (as in the S+L crisis)

best, this asset based lending caused the insolvent firms to go away, removing them and their practices from the market. imagine how much better off we would be if this had been done to GM etc the first time they were bailed out.

the rationale that everyone had to take tarp to provide reputational support is just spin.

the good firms were forced to take tarp so that there would be repayments from them that came reliably and soon (with profits). it was a PR stunt to make TARP look like it was working and a tax on the strong firms. it did not prop up anyone's relative reputation. the whole street knew who was in trouble and who wasn't. it didn't fool anyone who mattered.

i feel for AIG as they were, by and large, a well run firm that was taken down by one group of traders that wrote the entire CDS market early on at 20bp, providing a 500:1 levered loss when bonds defaulted.

they had no idea what they were doing, and AIG management didn't have any idea either. it's a shame to see a firm destroyed that way, but that's why the number one inviolable rule of investing is "never trade anything you do not understand"."

the important codicil is never to let anyone who works for you do it either.

 
At 1/20/2011 3:18 PM, Blogger VangelV said...

Many people assumed the $750 billion in TARP was a bad idea. However, the U.S. government will recover almost all the TARP funds (including interest).

I doubt that the government will ever recover $750 billion of purchasing power back.

There should've also been a $750 billion tax cut (or $5,000 for the 150 million workers at the time) to jolt the economy. U.S. households would've paid-down or paid-off high-interest rate debt first (e.g. credit cards), to increase their monthly incomes, and strengthen the banking system, and consumed the "excess" assets and goods, to spur production and maintain employment.

There should be no corporate or personal income tax. Period. To make the US strong again the government needs to cut 90% of its employees and repeal most laws that intervene in what should be voluntary transactions.

U.S. households would've paid taxes instead of received unemployment benefits, from the higher level of employment, which would've resulted in lower budget deficits, and a higher level of output would've improved living standards.

You ignore the fact that when the local, state, and federal government use up $42 out of every $100 earned and when unfunded liabilities are more than 10 times GDP there is no way out but default.

Significant tax cuts worked under Kennedy in '61, Reagan in '81, and Bush in '01.

Yes they did. But at that time government was a much smaller part of the economy and the US was a net lender. That is no longer the case. Today you need to cut taxes and gut the bureaucracy at the same time.

 
At 1/20/2011 3:39 PM, Blogger VangelV said...

i think you are being a little hard on jamie.

he has done better over the last several years than any other major consolidated financial services co in the US....


Jamie did what was best for him but he screwed investors who have nothing to show for taking the risks in what in an industry that is permitted to print money out of thin air. While he is a very good problem solver in terms of managing systems Dimon is totally incapable of seeing the bigger macro picture and assessing the risks for his company. That is why he has done very little for shareholders and has been a failure when it comes to generating real returns.

 
At 1/20/2011 3:40 PM, Blogger VangelV said...

Che, it wasn't just a few poorly managed banks or firms that had problems, it was a systemic problem that affected the U.S. financial industry.

How would you feel if the entire U.S. banking system failed, e.g. from a massive run on the banks, and the country fell into a deep depression?


The system is a racked designed to transfer wealth from workers and savers to the hands of the banks. It should be ended, not bailed out.

 
At 1/20/2011 3:42 PM, Blogger VangelV said...

...purchase of assets by the fed is a good and proper role.

Why should workers, savers, and the taxpayers save the Fed's private owners?

 
At 1/20/2011 3:46 PM, Blogger VangelV said...

a central bank ought to be there to be the lender of last resort to prevent liquidity shortfalls from locking up the economy. such lending ought be asset based and at considerable rates of interest.

The Fed is there to protect the big money firm that own it and run it, not to save the economy or the consumer. It is a cartel and as such has no idea what the market rate of interest would be in its absence. The fact is that the Fed is just another example of central planning and is no more capable than all previous central planning efforts. The USD is on the brink as are all other fiat currencies. Buy food, agricultural land, gold, silver and energy companies. Run from the currencies each time they rally because you will not get many opportunities to protect yourself that are as good as the ones that we have seen in the past few years.

 
At 1/20/2011 5:43 PM, OpenID Sprewell said...

Morganavich, the Fed is sitting on $1 trillion in mortgage-backed securities, so they did buy a lot of assets. I suspect they will lose money on that purchase, far from making anyone a fortune, though I don't expect the losses to be huge, say 5-25%. And the whole reason Bernanke flooded the banks with reserves is so that liquidity would never be the issue. I think the fear isn't really liquidity though, but that a run of bank failures caused by insolvency would depress prices enough to cause further insolvencies. The S&L response that you're trumpeting led to a lot of failed banks, a lot more than this time. Bernanke's supposed fear is that banks are different, that removing the insolvent ones from the market causes real effects downstream, because it's not easy to put those financial intermediaries back together again. Certainly that rationale doesn't apply for GM. I'm not sure what the best approach is, but I'm all for letting more firms fail.

Not sure I buy your "just spin" argument about TARP, they really need the money from such a short-term loan? I would think the bad PR from more TARP loans would outweigh the good PR from paying it off quickly, but all PR arguments are flighty. Maybe you all knew who the bad TARP firms were on Wall Street, but perhaps it was aimed at heading off bank runs by Main Street. Not sure I feel anything for AIG: my understanding is that the traders booked record profits selling those CDSs and the dummy management didn't bother looking into what risks they were taking on for those profits. However, if they were really so widely intertwined in the economy because of their insurance and other divisions, not sure I'm against the govt taking them over the way they did for a longer-term, more orderly selloff.

 
At 1/20/2011 7:49 PM, Blogger Che is dead said...

... it was a systemic problem that affected the U.S. financial industry. How would you feel if the entire U.S. banking system failed ...



Yeah, yeah, yeah. The world was coming to an end. I thought that the settlement of the CDS's associated with the Bear Stearns and Lehman Brothers bankruptcies was supposed to bring on the Apocalypse? There will always be people claiming that unless the taxpayer bails them out, it's all over for the rest of us. Bullshit. Once the government steps in the "run" is over, and the liquidation can begin. Where's Washington Mutual?

 
At 1/20/2011 8:17 PM, Blogger PeakTrader said...

It seems, some people believe deep depressions once in a while are good for a country:

"The Panic of 1907 was a financial crisis that almost crippled the American economy. Major New York banks were on the verge of bankruptcy and there was no mechanism to rescue them until Morgan stepped in personally and took charge, resolving the crisis.

Treasury Secretary George B. Cortelyou earmarked $35 million of federal money to quell the storm but had no easy way to use it. Morgan now took personal charge, meeting with the nation's leading financiers in his New York mansion; he forced them to devise a plan to meet the crisis.

The crisis underscored the need for a powerful mechanism, and Morgan supported the move to create the Federal Reserve System."

 
At 1/20/2011 8:29 PM, OpenID Sprewell said...

Che, I don't believe the Bear CDSs ever paid out, because technically they never went bankrupt. ;) As for Wamu, I believe the Fed stepped in to force a sale there, as they were on the verge of going under because of an actual bank run.

 
At 1/20/2011 9:43 PM, Blogger VangelV said...

Morganavich, the Fed is sitting on $1 trillion in mortgage-backed securities, so they did buy a lot of assets. I suspect they will lose money on that purchase, far from making anyone a fortune, though I don't expect the losses to be huge, say 5-25%.

While anything is possible in nominal terms, when it comes to purchasing power, there is no chance that the Fed will be looking at losses as small as 25%. The mortgages that it bought were non-performing and in many cases there may be no clear link to the title. The Fed acted to save its private owners and has managed to avoid the ultimate collapse of their shares for the time being. But the crisis is still here and the currency is even more vulnerable than it used to be.

And the whole reason Bernanke flooded the banks with reserves is so that liquidity would never be the issue.

Liquidity was not the issue. Solvency was. By buying the bad assets the Fed has transferred the bad paper to its own balance sheet and has backed the currency by non-performing loans.

 
At 1/20/2011 9:46 PM, Blogger VangelV said...

"The crisis underscored the need for a powerful mechanism, and Morgan supported the move to create the Federal Reserve System."

The Fed was created to transfer wealth to the big New York banks. So far it has done that very well as it has managed to destroy the purchasing power of the USD by inflating the money supply, a process that made the banks very wealthy. The problem now is that the currency is on the ropes and there is no easy way out of the corner that the central banks find themselves in.

 
At 1/20/2011 10:27 PM, Blogger morganovich said...

v-

"Jamie did what was best for him but he screwed investors who have nothing to show for taking the risks in what in an industry that is permitted to print money out of thin air"

aren't you pretty much blaming the skipper for the massive storm that hit?

the whole fleet got damaged, many were sunk.

i'm not claiming that i like financial as an investment, but given the difficulty of navigating the markets as they unfolded, jamie did better than anyone. be very careful attempting to dismiss him as a fool or as lacking in insight.

i doubt you can muster much of a case for either.

 
At 1/20/2011 10:31 PM, Blogger morganovich said...

v-

regarding the fed, you are confusing what should be and what is (though i think you exaggerate significantly).

a central bank makes money acting as a mender of last resort. they are not "spending taxpayers money", they are lending against collateral at attractive rates, or at least that is what they should be doing.

that makes the whole process self sustaining and profitable.

again, this is why they need to lend against assets, not make equity investments.

 
At 1/20/2011 10:37 PM, Blogger VangelV said...

aren't you pretty much blaming the skipper for the massive storm that hit?

It was his job to see the storm coming. He did not do a very good job of it and hurt his shareholders while he pulled in massive compensation packages. If we could see the housing bubble coming shouldn't he have seen it?

i'm not claiming that i like financial as an investment, but given the difficulty of navigating the markets as they unfolded, jamie did better than anyone. be very careful attempting to dismiss him as a fool or as lacking in insight.

I never said that he was a fool. He did what the incentives suggested that a rational person would do and got involved with an asset class that was in a bubble because that was where the money was. He got rich while the investors got burned. That does not make him the fool but it certainly casts doubt on the intelligence of the sheep that bought his shares.

 
At 1/20/2011 10:41 PM, Blogger morganovich said...

sprewell-

buying some MBS's is not the point (and how many were freddie and fannie)?

the problem arose when the government started making equity investments collateralized by nothing.

the failed banks in the S+L crisis were a GOOD thing. that ought to be the price of insolvency. the assets were broken up, found new owners, and the system was fine. rather than being an argument against the handling of the S+L crisis, it is an argument FOR it. we needed more failures this time.

regarding the "spin" argument, first off, i heard this directly from pelosi's own mouth. you have to understand that very little of what is actually going on in DC ever gets reported at all. if you live outside the beltway, you just never hear this stuff.

second, do you really think it enhanced anyone's credibility especially as the firms that didn't want TARP squawked about it very publicly? can you honestly say that GS taking money made you or anyone feel any better about citibank?

i just cannot find even a shred of evidence or sense in the idea that making the whole industry take loans makes it look better than a few guys doing it, especially if you kept the rest of the money in reserve against need.

is it really credibility enhancing to a system to push money where it is not needed as opposed to keeping it in reserve to use where it is?

 
At 1/20/2011 10:46 PM, Blogger VangelV said...

a central bank makes money acting as a mender of last resort. they are not "spending taxpayers money", they are lending against collateral at attractive rates, or at least that is what they should be doing.

The CBs counterfeit by creating money out of thin air. By doing so they rob workers and savers of purchasing power and transfer that purchasing power to the banking system. And when the central banks buy bad debt with those newly printed dollars they are backing the currency with sub-prime mortgages and other crappy paper. That causes the purchasing power of that paper to go down even faster and taxpayers take the hit once again.

I suggest that you actually think about money and monetary theory because you are ignoring some obvious issues that are material in this debate.

that makes the whole process self sustaining and profitable.

There is no doubt that counterfeiting is very profitable for those that can create purchasing power out of thin air. But it is not good for savers who see their purchasing power eroded over time.

again, this is why they need to lend against assets, not make equity investments.

They are creating money out of thin air. You don't see a problem with that?

 
At 1/20/2011 10:57 PM, OpenID Sprewell said...

Well, Vange, between your prediction of the Fed taking huge losses, mine of mild to average losses, and Morganovich seeing healthy gains, we certainly have the spectrum covered. ;) Now let's see who guessed right. Last month, I asked someone who works at a large investment firm what he thought the losses would be and he said nobody outside the Fed knows the quality of the MBSs, though he certainly assumed there would be losses and not gains. The Fed's claim is that the crisis would be worse without this move, so while the crisis is certainly still here now, a worse crisis is the position you have to argue against, not no crisis. Of course liquidity was an issue for many banks, particularly in the face of a bank run, but I actually think the liquidity-solvency divide is not very useful a lot of the time. If a bunch of banks collapsed and triggered disinvestment, it's possible for GDP and asset prices to fall for a decade. In that environment, lots more banks would become insolvent as real estate and other asset prices keep falling. The same way greed and irrational exuberance cause these silly bubbles, I could see fear and irrational melancholy causing a sustained bear market.

We're always going to need some institution like the Fed to act as a shock breaker, like JP Morgan did before the Fed. I'd just prefer if these banks of last resort were completely private, sort of like how Geico sells reinsurance to insurance firms today, and we had more of them competing with each other. btw, the Fed has not backed any currency with MBSs yet, only reserves, the theory being they can sell those MBSs back when the market recovers and quickly and easily pull those purely electronic reserves back out, passing the losses along to the Treasury and hence to taxpayers. Their claim is that by socializing those losses in that way, they saved the taxpayer greater losses from a prolonged recession caused by numerous bank failures.

 
At 1/20/2011 11:26 PM, OpenID Sprewell said...

Morganovich, $1 trillion is more than "some MBSs," that's something like 10-15% of the entire residential mortgage market. ;) No idea who the Fed bought from, your Fannie/Freddie bailout theory certainly makes sense. I'm not arguing that more bank failures was bad necessarily- I said I didn't know but generally favor more failures than we had ;) - and I tried to make clear that I was stating Bernanke's position that financial intermediaries are tough to reassemble, ie the closed bank has many good workers with very valuable skills that might not get put to use after the bank is closed. I wasn't sure exactly what you heard Nancy say; at first I thought you meant you just heard the bit about protecting the unions. Besides I'm sure she's fairly ignorant about how all this bank stuff works anyway. ;)

I'm not sure why you're so against the reputational argument: do you honestly think a sizable majority of the banks' depositors kept track of who protested TARP and who didn't? The forced investment was explained beforehand as a way to avoid bank runs on the ones that really needed it. If you think that rationale is just spin, what's the alternative you're offering: that the govt wanted the interest from that short-term loan and the PR from demonstrating the banks could pay it off, which was made more likely by including banks who didn't need it in the first place?

 
At 1/21/2011 3:55 AM, Blogger PeakTrader said...

The goal of the Fed is maintaining sustainable economic growth, through price stability, because economic boom-bust cycles are suboptimal, both in the boom and bust phases (which cause periods of strain or slack utilizing resources).

The Fed has improved smoothing-out both short-term and long-wave business cycles, since the Great Depression, which has raised living standards at a faster rate.

 
At 1/21/2011 9:50 AM, Blogger morganovich said...

sprewell-

the amount of the MBS's isn't the issue. also recall that the first $500bn in 11/08 was all just GSE paper that the government was already on the hook for. so was much of the rest of it.

this makes the arguments about 25%+ losses ridiculous. if 75% of it is guaranteed by the federal government, the rest would have to go to ZERO just to hit 25% and that assumes that the fed paid par, which they did not. do not confuse defaults with losses in the case of guaranteed debt.

this was just a politicized fed cleaning up the federal mess, not a lender of last resort pricing assets and providing liquidity. it is an example of just how bad the GSE idea was, not of the proper functioning of a central bank. look at the BOE for an example of a good way to profitably run such a policy.

the 750bn in equity injections is what i am objecting to. i find your idea that the distinction between illiquid and insolvent is "not useful" incredibly troubling. it's not only useful, but critical. it's how you cull the stupid out of the market and distribute their assets to those who will use them better. if you remove that mechanism from the market, you'll get rapid repeats of the stupidity. witness the big 3 automakers...

nancy is dumb like a fox. her economic ideas are very questionable (and i find her politics despicable) but she is a consummate politician and utterly ruthless. she knew exactly what she was doing in forcing TARP to invest through equity and to force it upon the unwilling.

the pols all knew how unpopular tarp would be, and they wanted a steady stream of early repayments as well as the profits they would produce.

i find the reputation argument flawed because it doesn't make any sense. if the object was to make all the banks look equal, why was the same pressure that was exerted to make banks take money not also exerted to keep them from complaining loudly and publicly about having to take it? clearly, the administration was not above some severe arm twisting at that point.

so why would they force they to take money to make all the banks look the same then sit by while they publicly undid that perception by complaining about it? it's a totally senseless policy. the "equality" created was immediately undone on the morning news.

further, it was not really retail runs that were the problem. these were very small and focused at a few institutions. GS, MS, etc don't even take retail deposits. how does shoring them up mean anything at all to the banking public?

the real issue was counterparty risk and the street not wanting to trade with one another, especially OTC. the brokers themselves were not fooled by making GS take money too.

 
At 1/21/2011 10:03 AM, Blogger morganovich said...

vangel-

before you head off into another of your semi informed dogmatic goldbug rants, perhaps you should take your own advice and think about this issue for a moment.

for the fed to buy or lend against a bond does not "create" money in any permanent sense.

if they buy $1 million in bonds from you, that was still M3. they take it out of circulation. sure, M1 goes up in the short run but broader money is flat in terms of what is in circulation. then, as the bond is paid off, that money can also be retired taking M1 back down as well.

it's just a timing issue, but the net effect on money supply over the life of the bond could well be negative if the fed retires the funds associated with interest payments as well rather than having them in the public domain.

you are confusing policy and mechanism.

there is nothing about that mechanism of asset purchases that requires the permanent printing of money or "counterfeiting" as you so over-dramatically term it,
it can even be deflationary in the long run.

it depends upon how it is executed.

 
At 1/21/2011 11:07 AM, Blogger VangelV said...

Now let's see who guessed right...

How can you do that so early in the game? The Fed's balance sheet is still loaded up with crap paper that has no market for it unless it wants to sell at a massive discount. No claims of profit can be made until the paper has matured and been paid off or sold. We are a long way from there.

...The Fed's claim is that the crisis would be worse without this move, so while the crisis is certainly still here now, a worse crisis is the position you have to argue against, not no crisis.

But there is still a crisis. The housing market will remain down for at least another two or three years and unemployment will stay high. We still have zombie banks and manufacturers taking market share away from sound players who did not make the same errors as they did. By keeping the fools alive the Fed has weakened the economic system and prolonged the crisis. Had liquidation taken place we would now be off and running with a strong economy that has shed the shackles that bound it to the parasite class. Instead of letting the parasites get wiped out the Fed ensured that they got big fat bonuses as the average taxpayer is still in trouble.

Of course liquidity was an issue for many banks, particularly in the face of a bank run, but I actually think the liquidity-solvency divide is not very useful a lot of the time.

As I said, the problem was solvency. Had all those loans been good there would not have been any crisis because there was lots of liquidity around. The problem was that the insolvent banks could not get anyone to loan them money. Liquidation of bad banks is not a bad thing but a necessary cleansing process.

If a bunch of banks collapsed and triggered disinvestment, it's possible for GDP and asset prices to fall for a decade.

No. You get a sharp decline that wipes away those that made bad decisions. The assets would go into the hands of those that were prudent and did not make reckless bets that required a taxpayer bailout if they went wrong. Houses would not disappear because they would be sold at more appropriate prices. Without the Fed's meddling people who saved their money but could not afford a home would finally be able to own one if they chose to. Politicians would find that they could no longer afford to keep bribing public sector unions and hand out huge compensation packages that were well above market value. The unskilled would find that they had to take responsibility for developing their own skill sets or have to settle for jobs whose compensation rate was set by the market.

Instead of letting the markets work the Fed chose to go the way of Hoover/FDR and post 1990 Japan. Instead of a sharp correction followed by a rapid recovery we now have a period of stagnation that will last for decades. That is not good for us or our children.

 
At 1/21/2011 11:14 AM, Blogger VangelV said...

We're always going to need some institution like the Fed to act as a shock breaker, like JP Morgan did before the Fed.

We don't need anyone to call the shots and transfer wealth from workers and savers to the pockets of politically connected cartel members.

I'd just prefer if these banks of last resort were completely private, sort of like how Geico sells reinsurance to insurance firms today, and we had more of them competing with each other.

You just contradicted many of your previous arguments. If such an institution were to be private it would develop in the market without government mandates or regulations.

btw, the Fed has not backed any currency with MBSs yet, only reserves, the theory being they can sell those MBSs back when the market recovers and quickly and easily pull those purely electronic reserves back out, passing the losses along to the Treasury and hence to taxpayers.

This is not true. The Fed issues money that can only be exchanged by what it holds in its reserves. That used to be USTs. Now it is a little bit of USTs and lots of trash paper dumped by the Wall Street banks. This means that your money is backed by mortgages given to people with bad credit who don't have the income to make the payments and repay the principal.

Their claim is that by socializing those losses in that way, they saved the taxpayer greater losses from a prolonged recession caused by numerous bank failures.

These are the same guys who claimed that there was no housing bubble and who believe that food and fuel should not be counted when measuring price inflation. If you believe them and invest accordingly you deserve the losses that you get. And there will not be anyone to bail you out as the Fed bailed out the bankers.

 
At 1/21/2011 11:42 AM, Blogger VangelV said...

The Fed has improved smoothing-out both short-term and long-wave business cycles, since the Great Depression, which has raised living standards at a faster rate.

First, the Fed's money printing in the late 1920s helped create the 1929 market crash. It helped Hoover and FDR turn a contraction into a Great Depression. Second, it has been creating booms and busts all along the way. It helped Johnson/Nixon finance a land war in Asia by expanding the money supply. By doing so it created the stagflation of the 1970s. In the 1980s it helped bail out a number of failing banks that lent to South American dictators who could not pay them back. It kept intervening to prop up stock markets by lowering rates and by doing so allowed the government to lower the duration of its outstanding debt while the banks made a killing from the spreads and their bond portfolios. It blew a great bubble because of its injections to fight Y2K disruptions. It followed that up by blowing a bubble in real estate in order to mitigate the damage caused by the bursting of the IT bubble. Now we sit with a massive bubble in sovereign bonds but any actions by the Fed are likely to make things worse. Which is why the Fed is afraid and does not know what to do.

The next bubble to burst will be in the muni market. That will be followed by one in sovereigns. And that bubble will bring to light the folly of counterfeiting and central banking. Hopefully, the damage will be swift and the liquidation will be allowed to take place. If not, you will see rioting in the streets for a long period of time and your country will not be the same again.

 
At 1/21/2011 11:50 AM, Blogger VangelV said...

for the fed to buy or lend against a bond does not "create" money in any permanent sense.

Whey they print money to buy a bond the Fed is creating money. There is no other way to put it. They get to collect interest on this 'loan' and when the bond is retired the money goes out of existence. But if bonds were simply retired the banking system would collapse so the debt has to keep growing to feed the monster. The Fed will step in and buy new bonds that will be for a greater amount that will cover the interest that it will collect. The banks, happy knowing that they can keep the game going make loans out of thin air out of money that they do not hold in reserves. And the game keeps going. In the process the banks got a lot richer while savers and workers became poorer. But ultimately the system cannot be sustained because it demands more and more money to be created and that will make some people nervous. They will take out loans and hedge their wealth by buying real things that the banks can't create out of thin air. Eventually there will be massive price inflation and rates will go up. At that time many of the loans created out of thin air will become impaired and there will be a massive crisis that cannot be solved by kicking the can down the road again. That is the time that the currency will die and that political turmoil will create a lot of difficulty for people who never took steps to protect their holdings.

 
At 1/21/2011 1:54 PM, Blogger morganovich said...

"But if bonds were simply retired the banking system would collapse so the debt has to keep growing to feed the monster"

this is categorically untrue. again, you mistake policy for mechanism.

the bonds being retired have already been out of circulation. the fed gets paid back, and the loop is closed. the broad aggregate money supply that goes away from that was offset buy the original cash injection.

on what basis can you claim that this causes a collapse or that these is and inherent "monster to feed"?

"The Fed will step in and buy new bonds that will be for a greater amount that will cover the interest that it will collect."

this is pure conjecture and again is a policy critique. if the fed buys the bond at rates that are sufficiently punitive, why would any banks want to play this game?

the whole cycle of ever inflating balance sheet you describe is pure conjecture and based upon the faulty notion that the fed retiring debt would destroy the financial system. it is also a repeatedly a policy critique masquerading as an assesment of systemic flaws.

to answer ideas about the proper role of a well functioning central bank with anecdotes about bad policy is not a valid comparison.

at best, you could argue that the proper role of a bank is not achievable because the people running it will become inevitably politicized, (which is a rich field for debate) but there have been some longstanding examples of effective central bank management. (bundesbank, singapore, etc)

all the federal reserve problems you identify seem based on the fed acting as a guarantor of demand, which i completely agree is the wrong role for the bank and a disastrous idea for any federal agency.

 
At 1/21/2011 2:14 PM, Blogger morganovich said...

v-

"How can you do that so early in the game? The Fed's balance sheet is still loaded up with crap paper that has no market for it unless it wants to sell at a massive discount. No claims of profit can be made until the paper has matured and been paid off or sold. We are a long way from there. "

conservatively 75% of the MBS's held by the fed are guaranteed by the federal government through freddie, fannie, ginnie etc. (including the whole first $500bn tranche)

this makes that much of the portfolio essentially the same as a US treasury (albeit with unknown maturity).

if the fed paid an average of .85 to face on their purchases, then you would only suffer a 10% loss on notional if 100% of the non guaranteed bonds defaulted instantly and never paid interest.

if the GSE portfolio only lasts 3 years at an average of 5% interest before completely defaulting to the government, you break even even with universal default and zero interest payments from all non guaranteed loans.

can you seriously paint me a future scenario that is worse than that?

that portfolio, held to maturity, is all but certain to make money.

i have no idea where you are getting these 25%+ loss figures.

barring US federal default, they are pretty much impossible if you hold the portfolio to maturity.

 
At 1/21/2011 2:26 PM, Blogger VangelV said...

the bonds being retired have already been out of circulation. the fed gets paid back, and the loop is closed. the broad aggregate money supply that goes away from that was offset buy the original cash injection.

on what basis can you claim that this causes a collapse or that these is and inherent "monster to feed"?


Simple. The money that was created has to be paid back to the Fed. But given the fact that it collected interest on the loan there isn't enough cash to pay for both the principal and the interest.

Then there is issue of the fractional reserve banking. When the money is paid back to the Fed it comes out of circulation and shrinks reserves in the system. That makes it impossible to service the loans that were created out of thin air when new money was deposited with the banks.

That is the problem; the entire game is a scam that requires that the Fed keep printing more money. If it does not, the house of cards that is the fiat based fractional reserve banking system collapses as the currency and the banks get wiped out.

 
At 1/21/2011 3:20 PM, Blogger morganovich said...

v-

so you are arguing that the fed owning bonds is deflationary, precisely as i did. this seems to be antithetical to your argument that this causes rampant money supply growth. if the fed owns bonds and retires the payments on them, it is a net drain of money from the system. you have just made my point for me and contradicted your own.

the principal repayment is neutral. the fed is just getting back money it already injected.

the interest payments reduce money supply if they are sterilized, but such sterilization is at the fed's discretion, so they can keep money supply neutral quite easily.

"When the money is paid back to the Fed it comes out of circulation and shrinks reserves in the system. That makes it impossible to service the loans that were created out of thin air when new money was deposited with the banks."

but the money is the same money that the fed injected into the system before. the net effect is zero on principal, and interest expenses can be re injected into the system in such a way as to be neutral as well (by funneling fed surpluses into government spending or tax cuts).

there is nothing in any of this that requires the fed to keep printing more money nor anything that destabilizes banks or the banking system.

you keep repeating that assertion without providing any mechanism that backs up your claims.

 
At 1/21/2011 7:54 PM, Blogger VangelV said...

conservatively 75% of the MBS's held by the fed are guaranteed by the federal government through freddie, fannie, ginnie etc. (including the whole first $500bn tranche)

The federal government is broke and running deficits. It can't pay back the Fed for all of its useless paper unless it gets the Fed to buy its newly issued bonds with newly printed money. If you can't see a problem with that there may be a problem with your understanding of reality.

this makes that much of the portfolio essentially the same as a US treasury (albeit with unknown maturity).

Ironically, you may be right. USTs are not much better than the lousy mortgage backed paper that the Fed is holding. In fact, USTs may be worse because they are not backed by anything other than fiat money that is printed by the Fed. At least the lousy mortgage paper is backed by a few houses that may find a buyer eventually.

if the fed paid an average of .85 to face on their purchases, then you would only suffer a 10% loss on notional if 100% of the non guaranteed bonds defaulted instantly and never paid interest.

You are still confused. The federal government has no money to pay the Fed for its crappy holdings. And I am willing to argue that voters will not stand bailing out the Fed by paying more in taxes. That leaves the Fed printing more money to buy back its own bad paper. That is Wiemar territory.

 
At 1/21/2011 8:04 PM, Blogger VangelV said...

can you seriously paint me a future scenario that is worse than that?

Yes. The USD loses half its purchasing power and the Fed takes a huge real loss even if it gets back all of its money. The voters get pissed off and there are riots in the streets. Or the USD dies just like all fiat currencies do and the US slides into developing country status as it can't afford to invest in productive capital. Food prices explode. Energy costs go up. Gold and other commodities go way up.

that portfolio, held to maturity, is all but certain to make money.

I think that only someone who has no clue about economics can think this. The Fed is holding paper that is not generating the promised cash flows as mortgage holders default and abandon houses. (Or are allowed to keep their houses by the courts.) The Fed has to write down the value of those failed loans. There is no way for a bankrupt US that is running trillion dollar deficits to pay the Fed for its losses.

Foreign creditors, realizing that the USD is backed by bad mortgages hedge their holdings. Countries make arrangements to use currencies other than the USD to pay for oil, food, and real goods that they trade with each other. Demand for the USD falls and marginal American users have to make do with far less oil than they use today. Their consumption drops off even as people in countries with strengthening currencies see their purchasing power and consumption increase substantially.

In my scenario gold goes over $1,800 within 18 months and food prices explode. While the USD may get propped up by a troubled Euro its purchasing power declines significantly.

 
At 1/21/2011 8:09 PM, Blogger VangelV said...

i have no idea where you are getting these 25%+ loss figures.

I paid attention to the commentators and traders. The banks tried to sell the paper and in some cases were being offered less than 35 cents to the dollar. The Fed bought the paper at par. Most of the paper had bids of under 50 cents to the dollar.

barring US federal default, they are pretty much impossible if you hold the portfolio to maturity.

What maturity? The loans are bad and won't be paid back. Congress has no money to pay back the Fed and the voters will not let it bail out the Fed. The Fed will wind up printing money to buy GSE bonds that it will use to buy back its own bad paper from itself. But the GSE bonds will not have a market so the Fed will be stuck pretending that it has something of value as it plays its accounting games even as it tries to justify to Ron Paul why those game have to be played.

 
At 1/21/2011 8:14 PM, Blogger VangelV said...

so you are arguing that the fed owning bonds is deflationary, precisely as i did. this seems to be antithetical to your argument that this causes rampant money supply growth. if the fed owns bonds and retires the payments on them, it is a net drain of money from the system. you have just made my point for me and contradicted your own.

No. When the Fed buys bonds it prints money that gets deposited in the banking system. That is inflationary.

the principal repayment is neutral. the fed is just getting back money it already injected.

No. In theory the notes that were printed to buy the bonds get extinguished when the bonds mature. That is not neutral. And the money that is withdrawn to pay back the Fed requires many loans to be called by the banks that received deposits when the bonds were sold and the money was spent. The leverage in a fractional reserve system works both ways.

 
At 1/21/2011 8:44 PM, Blogger VangelV said...

but the money is the same money that the fed injected into the system before. the net effect is zero on principal, and interest expenses can be re injected into the system in such a way as to be neutral as well (by funneling fed surpluses into government spending or tax cuts).

When the Fed injected money in the system rates went down. Entrepreneurs believed that the lower rates signaled the willingness for the public to save so they chose to invest in higher order capital goods. They got the 'money' from the banks, which created nine dollars or more of credit for each new dollar that the Fed created. If that money is retired when the bonds come due there is a contraction of credit that will drive rates higher and the entrepreneurs out of business. The Fed knows this so it keeps buying new bonds with the money. But it also has to create new money to account for the interest that it collects. So the money supply grows.

The problem is that money is not capital. When rates are lower than they would be given the savings/consumption preferences of individuals there is malinvestment and the entrepreneurs who were counting on having the resources to complete their projects find that there isn't enough to finish the job. That means that the malivestments have to be written down and that the economy has to contract.

But the Fed no longer tolerates contractions. It prints and prints and prints. And at first things look OK because the early stages of inflation do not look too bad. But all of the money injections begin to make a big difference because the money is created out of thin air.

Early on, nobody can tell the difference between a real dollar that has been earned and saved, invested, or spent and one that was created by the Fed that day. Because they can't tell the difference workers, savers, and investors believe that the new new dollar is the same as the old ones. But more dollars chasing the same goods cause prices to go up. Initially people do not understand what is happening but with time they figure it out. Some early movers hedge their holdings by buying things that the Fed can't create out of thin air. But as others notice the price action and use their newly borrowed cash to enter the game the music stops and all hell breaks loose as the money dies.

Right now the USD is looking a lot like the Mexican Peso of old. If you are lucky it will only lose about 75% of its purchasing power before the serious slide is ended and Americans are forced to adjust to the new reality. But there is time yet for the USD to suffer the fate of the Dinar or the reichsmark.

 
At 1/22/2011 12:33 AM, OpenID Sprewell said...

Morganovich, you're off by a year but this article says the entire MBS purchase was from Fannie/Freddie. I hadn't heard about that at the time, but your point about losses is moot: either way it's the federal govt paying for it. Not sure why you think it was a political cleanup when you think the govt will eventually make a profit off those same MBSs. As for liquidity, obviously those $1 trillion in newly created reserves will provide it if necessary. The reason insolvency is not always that relevant is that there are sometimes overly pessimistic markets that undervalue the bank assets. If banks mark to market and are then forced to liquidate, that can cause a vicious cycle where everything starts going down, the converse of the bubble we just saw. Obviously automakers should go bankrupt, we're only talking about banks here.

You have yet to articulate Pelosi's master plan by forcing the TARP investments on banks, despite my repeatedly asking you what your alternative rationale is. Early repayment of short-term profits, that's it? Complaining from the banks isn't necessarily that meaningful because anyone can complain, including those who actually needed it. Just put up a show, you're not in court. ;) Obviously not all the TARP recipients took retail deposits but GS and MS only took around 3% of the funds. Most of the money went to depository institutions. Obviously counterparty risk was a huge problem but if you believe some sort of cash infusion was necessary, it hardly matters whether it was done through buying assets or equity. Your notion of Fed money creation not adding to M3 is wrong, as bonds are not counted in M3.

 

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