To follow up on my earlier post - it may seem obvious that the correct time for bank regulators
to seize a bank is just before it goes insolvent (think WAMU, for example). That does still happen
to smaller banks. Unfortunately, when a bank gets big enough, that becomes problematic, while
at the same time, the more levered, or even insolvent a big bank is, the more money it makes.
What to do? They think they have found the answer:
http://www.zerohedge.com/news/2016-02-10/negative-rates-are-dangerous-oecd-chair-warns-our-entire-system-unstable
“And I think the politicians find it convenient to believe that the central banks have it all under control. But it’s not true,”
“Nevertheless, European experience does point to the merits of less austerity as opposed to more. I particularly think that there are many countries, maybe Portugal is part of this, where there should be a lot more government money spent on infrastructure: the US, Germany, Canada, and the UK would certainly be included.”
“The answer to insolvency is not simply to print more money – it may get you out of the problem in the short-run but it simply makes it worse and worse over time. At some point, maybe where we are now, you truly get to the end of a line. You see that what you have been doing is just a short term palliative that is actually making the disease worse.”
“I think there are a lot of grounds to believe that depreciation works less well than it used to. First, in Greece we know that wages have come down a lot. But the country is characterized by such a degree of oligopoly and rent-seeking that all that’s happened is that profit margins have gone up. As a result, there’s no signal coming through prices to get a change in resource allocation from non-tradables to tradables.”
“My number one fear? That’s the same as asking me where it will start. When you view the economy as a complex, adaptive system, like many other systems, one of the clear findings from the literature is that the trigger doesn’t matter; it’s the system that’s unstable. And I think our system is unstable. Where could it start? Who knows, I’d probably say China but I have no idea and nobody has any idea.”
Hmmmm ... they had no problem stuffing money into the pockets of the rich, and now?
http://www.zerohedge.com/news/2016-02-11/war-cash-central-banks-survival-campaign
“To make this clear, I like to paraphrase a famous (and good) quote from Alan Greenspan, back from 1966, during his Ayn Randian days: The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.”
“Negative interest rates mean that your bank account shrinks day by day, automatically. Your $1000 in January becomes $950 by December. And where does that money go? To the banks, of course, and to the government. They syphon your money away, drip by drip, and there’s nothing you can do about it. This accomplishes several things for them at once:”
http://www.zerohedge.com/news/2016-02-10/here-exchange-left-stunned-janet-yellen-looking-deer-headlights
“And since we doubt that Janet would chose a legacy of being the first Fed Chairman thrown in jail, even if it is not that far below a legacy of totally mangling the Fed's attempt at renormalizing rates at a time when the entire world was careening into a recession, we expect absolutely no cooperation by the Fed in this ongoing criminal matter.”
Sooooo ... blow $Trillions in academic experiments and the world is at your feet, but a hint to a hedge fund
could land you in jail ... Got it! Gotta love Central Banking :-)
Topic: Unrestricted Banking and Problem Banking - page 6. (Read 9763 times)
I'm writing this after reading some loose thinking on banking practices, and because it
may become relevant later this year. I've seen "fraud" and "deception" used as if they
meant the same thing, and sometimes the difference is important.
Companies are supposed to be structured with a clear separation of debt and equity.
If you own equity, you are a part owner of the company, and if the company fails,
you lose your money. Theoretically, if a company fails, the debts should be repaid
to the creditors in full because running a ponzi scheme is illegal, to take the concept
to extremes. For most companies, the creditors, usually banks, will make very sure
that the company remains solvent, ie that the value of the equity is greater than zero.
When things look shaky the creditors will ask for collateral against the company's debts.
So, continuing to trade, and drawing a salary while knowing that the debt cannot be
repaid, that is fraud. Selling a dud company to sophisticated investors, that is
deception.
Banks, for historical and other reasons, are somewhat different. Bankruptcies happen.
A model bank in bankruptcy is intended to still have some excess assets above that
needed to repay creditors, implying that common equity is entirely wiped out, and
there should never be an expectation that depositors (creditors) could lose any money.
Clearly, the average depositor is unlikely to be able to any of the TBTF banks and
both ask and receive collateral on concern that all is not going well with that bank's
business. Indeed, bank regulation seems to be constructed to ensure that the
public is unaware of the true state of the bank until well after the fact, if the facts
of 2008 are anything to go by.
An interesting side effect of cryptocurrencies could be to make the bank's balance
sheets both transparent and current, if the contents of their blockchains were
publicly accessible. Now, there's a thought.
may become relevant later this year. I've seen "fraud" and "deception" used as if they
meant the same thing, and sometimes the difference is important.
Companies are supposed to be structured with a clear separation of debt and equity.
If you own equity, you are a part owner of the company, and if the company fails,
you lose your money. Theoretically, if a company fails, the debts should be repaid
to the creditors in full because running a ponzi scheme is illegal, to take the concept
to extremes. For most companies, the creditors, usually banks, will make very sure
that the company remains solvent, ie that the value of the equity is greater than zero.
When things look shaky the creditors will ask for collateral against the company's debts.
So, continuing to trade, and drawing a salary while knowing that the debt cannot be
repaid, that is fraud. Selling a dud company to sophisticated investors, that is
deception.
Banks, for historical and other reasons, are somewhat different. Bankruptcies happen.
A model bank in bankruptcy is intended to still have some excess assets above that
needed to repay creditors, implying that common equity is entirely wiped out, and
there should never be an expectation that depositors (creditors) could lose any money.
Clearly, the average depositor is unlikely to be able to any of the TBTF banks and
both ask and receive collateral on concern that all is not going well with that bank's
business. Indeed, bank regulation seems to be constructed to ensure that the
public is unaware of the true state of the bank until well after the fact, if the facts
of 2008 are anything to go by.
An interesting side effect of cryptocurrencies could be to make the bank's balance
sheets both transparent and current, if the contents of their blockchains were
publicly accessible. Now, there's a thought.
Sometimes, you take a break, get back, and find that all your problems are somehow solved.
Yeah, right. Then some months later, you find that all the things you once worried about were
artfully concealed, and it is now too late to put a fix in. We are not quite there yet.
If you have been paying attention, metals are various fractions of their all time highs of recent
years, and oil is perhaps a quarter of its price in mid 2014, depending. There should be
bankruptcies in progress now. That's how prices recover. The strong devour the weak.
So all the problems are somehow solved? The magic of technology has quadrupled the flow
of oil and of metal without increasing costs? Probably not. The US$ exchange rates have
more than doubled since mid 2014? Clearly not. And if not what?
Leap forward a year or two, with recession, and with low oil and low metal prices. Then comes
a point where mining companies can no longer pretend to be viable, even with unlimited
financial support from their bank. At that point, their bank's solvency may be at risk, even
with not-so-hidden subsidies from their central bank. Think sub-prime II. And this is more than
just one bank, especially if the economy is now in recession, if the strength of the currency
continues. And, just like the miners and the oilers can be kept on life support by their banks,
their banks can be moved onto life support by their central bank and the big banks.
Why do this? you might ask. I'll mention that in this situation a few will decide the fate of the
many. There could be other reasons, inertia, for example, or just having financial crisis as a
business model.
This way, you get two years of throwing fiat money after bad, more malinvestment, and good
opportunities extinguished in exchange for transfers of wealth and power. After that, it gets
worse.
Yeah, right. Then some months later, you find that all the things you once worried about were
artfully concealed, and it is now too late to put a fix in. We are not quite there yet.
If you have been paying attention, metals are various fractions of their all time highs of recent
years, and oil is perhaps a quarter of its price in mid 2014, depending. There should be
bankruptcies in progress now. That's how prices recover. The strong devour the weak.
So all the problems are somehow solved? The magic of technology has quadrupled the flow
of oil and of metal without increasing costs? Probably not. The US$ exchange rates have
more than doubled since mid 2014? Clearly not. And if not what?
Leap forward a year or two, with recession, and with low oil and low metal prices. Then comes
a point where mining companies can no longer pretend to be viable, even with unlimited
financial support from their bank. At that point, their bank's solvency may be at risk, even
with not-so-hidden subsidies from their central bank. Think sub-prime II. And this is more than
just one bank, especially if the economy is now in recession, if the strength of the currency
continues. And, just like the miners and the oilers can be kept on life support by their banks,
their banks can be moved onto life support by their central bank and the big banks.
Why do this? you might ask. I'll mention that in this situation a few will decide the fate of the
many. There could be other reasons, inertia, for example, or just having financial crisis as a
business model.
This way, you get two years of throwing fiat money after bad, more malinvestment, and good
opportunities extinguished in exchange for transfers of wealth and power. After that, it gets
worse.
Placeholder for definitions
Restricted investment accounts are thus somewhat similar to mutual funds, but unlike the latter they are not vested in a separate legal entity The bank's obligation is to pay holders of unrestricted PSIAs their contractual shares of any profit from the investment of their funds
https://www.sprottmoney.com/blog/big-banks-caught-using-credit-default-swaps-to-destroy-nations.html
"Readers were presented with a detailed explanation of the tag-team of fraud which made possible such extreme manipulation of interest rates. It begins with manipulation of the credit default swap "market," a crooked book-making operation where the "bookies" taking the bets not only place most of the bets themselves, they also adjudicate on any disputes on the settlement of bets. More pure fraud ."
"Just to pay the interest on its debt (to the same, Big Bank crime syndicate), the U.S. government would have to begin by shutting down the entire government, and disbanding the U.S. military, in order to bring spending down to zero. Then it would have to double everyone's taxes in order to come up with the full payments to the parasitic bankers. And then, in a few weeks, the U.S. economy would totally collapse - just as Greece's economy did in 2011."
"We have more unequivocal evidence showing that this "probe" is a cover-up, and not a bona fide investigation. It starts with another headline ."
Nothing to see here, move along. In other news, Citibank gets sued re fiduciary responsibility for
toxic mbs and other securities sold 2005-2008. Just the cost of doing business.
What was that business model? remind me?
"Readers were presented with a detailed explanation of the tag-team of fraud which made possible such extreme manipulation of interest rates. It begins with manipulation of the credit default swap "market," a crooked book-making operation where the "bookies" taking the bets not only place most of the bets themselves, they also adjudicate on any disputes on the settlement of bets. More pure fraud ."
"Just to pay the interest on its debt (to the same, Big Bank crime syndicate), the U.S. government would have to begin by shutting down the entire government, and disbanding the U.S. military, in order to bring spending down to zero. Then it would have to double everyone's taxes in order to come up with the full payments to the parasitic bankers. And then, in a few weeks, the U.S. economy would totally collapse - just as Greece's economy did in 2011."
"We have more unequivocal evidence showing that this "probe" is a cover-up, and not a bona fide investigation. It starts with another headline ."
Nothing to see here, move along. In other news, Citibank gets sued re fiduciary responsibility for
toxic mbs and other securities sold 2005-2008. Just the cost of doing business.
What was that business model? remind me?
Just an update to say that things may be moving faster than I had expected.
On the positive side, the number of people starting to ask questions is
growing. Thoughts in the direction of "Financial crisis as a business model"
are starting to appear.
On the positive side, the number of people starting to ask questions is
growing. Thoughts in the direction of "Financial crisis as a business model"
are starting to appear.
"Everybody has a plan until they get punched in the mouth" - Mike Tyson explains that
you are how you react to events.
An economist might express that thusly - here's the end of Hayek's Nobel prize speech:
"The recognition of the insuperable limits to his knowledge ought indeed to teach
the student of society a lesson of humility which should guard him against becoming
an accomplice in men's fatal striving to control society - a striving which makes him
not only a tyrant over his fellows, but which may well make him the destroyer of a
civilisation which no brain has designed but which has grown from the free efforts of
millions of individuals."
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/hayek-lecture.html
It seems that lately, TPTB plans have been getting punched in the mouth - Syria,
Ukraine, Egypt, Afghanistan and others. Despite these setbacks, TPTB keep coming back
for more.
Conspiracy theorists suggest that all this is some sort of master plan to run the world
under one government. This belongs with some other ideas that a four year old child
if asked, would tell you that it just won't work.
Unfortunately, at the moment, I have to add Bitcoin to the list of great ideas with
fundamental flaws. And, that's a big problem. By itself, bitcoin will not scale well
enough to replace fiat currencies when the banking systems break, and if there is no
alternative, civilisations will have to live with the consequences of the failures of
their financial systems.
Bitcoin is vilified by bankers and governments whose own faults are orders of magnitude
greater, some as specifically identified in earlier posts in this thread. We should not
allow our recognition of these faults to blind us to the limitations of Bitcoin, nor
to restrain efforts to produce viable alternative cryptocurrencies of greater utility.
Most recently, there are suggestions that all digital currencies should be suppressed.
That would be tantamount to banning encryption, but that kind of totalitarian
thought will not easily be turned aside.
I began this thread by suggesting that we need better adjectives and a clearer
understanding of their meaning to better discuss banking and related financial
services. I hope I have moved your thoughts on this and on Bitcoin a little
further on. Cryptocurrencies need to be moved to the next level to attract the trust
that money currently enjoys, and there is not that much time left.
In an earlier post, this:
"This emerging nonlinear structure forces the system to take, or "collapse" to, one of
its multiple possible realisations, which means that those realisations, actually and
unceasingly replacing one another in a dynamically random, or "chaotic," order are
dynamically symmetric among them, while they always differ in their detailed, partially
irregular structure."
It seems likely that the structure will become more loosely coupled as empire collapses.
The number of viable system states will as a consequence fall significantly, and
transmission across parts of the financial network may become impossible without
significant external effort. As an extreme example, the bitcoin blockchain in the east
could differ from the blockchain in the west. Today, such change seems highly unlikely,
but in fifteen or twentyfive years from now?
To move to where we need to be we need to clearly know where we are now, and to be able
to discuss changes in a way that is easily understood. That's easier said than done.
you are how you react to events.
An economist might express that thusly - here's the end of Hayek's Nobel prize speech:
"The recognition of the insuperable limits to his knowledge ought indeed to teach
the student of society a lesson of humility which should guard him against becoming
an accomplice in men's fatal striving to control society - a striving which makes him
not only a tyrant over his fellows, but which may well make him the destroyer of a
civilisation which no brain has designed but which has grown from the free efforts of
millions of individuals."
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/hayek-lecture.html
It seems that lately, TPTB plans have been getting punched in the mouth - Syria,
Ukraine, Egypt, Afghanistan and others. Despite these setbacks, TPTB keep coming back
for more.
Conspiracy theorists suggest that all this is some sort of master plan to run the world
under one government. This belongs with some other ideas that a four year old child
if asked, would tell you that it just won't work.
Unfortunately, at the moment, I have to add Bitcoin to the list of great ideas with
fundamental flaws. And, that's a big problem. By itself, bitcoin will not scale well
enough to replace fiat currencies when the banking systems break, and if there is no
alternative, civilisations will have to live with the consequences of the failures of
their financial systems.
Bitcoin is vilified by bankers and governments whose own faults are orders of magnitude
greater, some as specifically identified in earlier posts in this thread. We should not
allow our recognition of these faults to blind us to the limitations of Bitcoin, nor
to restrain efforts to produce viable alternative cryptocurrencies of greater utility.
Most recently, there are suggestions that all digital currencies should be suppressed.
That would be tantamount to banning encryption, but that kind of totalitarian
thought will not easily be turned aside.
I began this thread by suggesting that we need better adjectives and a clearer
understanding of their meaning to better discuss banking and related financial
services. I hope I have moved your thoughts on this and on Bitcoin a little
further on. Cryptocurrencies need to be moved to the next level to attract the trust
that money currently enjoys, and there is not that much time left.
In an earlier post, this:
"This emerging nonlinear structure forces the system to take, or "collapse" to, one of
its multiple possible realisations, which means that those realisations, actually and
unceasingly replacing one another in a dynamically random, or "chaotic," order are
dynamically symmetric among them, while they always differ in their detailed, partially
irregular structure."
It seems likely that the structure will become more loosely coupled as empire collapses.
The number of viable system states will as a consequence fall significantly, and
transmission across parts of the financial network may become impossible without
significant external effort. As an extreme example, the bitcoin blockchain in the east
could differ from the blockchain in the west. Today, such change seems highly unlikely,
but in fifteen or twentyfive years from now?
To move to where we need to be we need to clearly know where we are now, and to be able
to discuss changes in a way that is easily understood. That's easier said than done.
Just to dispel any thoughts of paranoia or persecution, I'm stating that I'm doing
my best to avoid judgement of particular nations, banks, and economies. Some stories
are easier to access than others, and that leads to bias. YMMV.
http://www.theguardian.com/business/2014/feb/03/anglo-irish-executives-irish-banking-crisis
"Three leading figures in the defunct and disgraced Anglo Irish Bank - Sean FitzPatrick,
Pat Whelan and William McAteer - will each face 16 charges of unlawfully providing
financial assistance to individuals for the purpose of buying shares in Anglo Irish
in 2008."
Think about that for a few moments.
Then think about company share buybacks. And then about incentives for company
executives whose remuneration is tied to the price paid for share in the stock market.
Company share buybacks are legal, because a legal route exists, and because that
route is transparent, it is reasonable to suppose that market manipulation is near
zero. I'll guess you're comfortable with that.
Suppose the money for the share buyback comes from a subsidiary of the Company.
Still comfortable? What if the Subsidiary is only partially owned by the Company?
And if the Subsidiary is wholly owned by a group of Companies, all of whom have
their shares bought by the Subsidiary? Still comfortable?
What if the Subsidiary is the country's Central Bank, and its owners are the major
in-country Banks? Think that cannot happen?
http://www.zerohedge.com/news/2015-03-25/bank-japans-10-trillion-equity-portfolio-not-large-says-bank-japan
"So after buying 35 billion yen worth of shares yesterday, the BoJ now owns 2% of
the entire market and looks set to square off against GPIF (which, as we noted last
week, is set to move aggressively into stocks at the implicit urging of the BoJ and
the explicit urging of PM Abe) in a battle to become the single largest holder of
Japanese equities. Here's more:"
This is not the place to go into QE and its impact on markets in detail, nor the
variations on a theme played out by the ECB, the FED, the BoE, and the BoJ. It's
kinda like that myth of a "trickle down economy" that stimulates growth by flowing
money from the very wealthy to the masses, except it works in reverse.
This video is perhaps the best exposition of how QE is supposed to work:
https://www.youtube.com/watch?v=d1Mug1EPaAo (skip the first 6 minutes)
There's just one technical hitch. What happens to all the grossly inflated assets
and to those "sterilised" reserves when the next implosion begins, and bankruptcies
happen? Unless, of course, we are on a "permanently high plateau".
Suppose the worldwide interest rate hit 50% tomorrow. Too Scary? Well, late last year
Russia hit 17%, so maybe 20% is a good figure to work with. Impact: All the interest
rate swaps (derivatives) betting against high interest rates get crushed; The bond
market folds in on itself, eg, 10 year bonds should fall to around 20% of face value;
and mortgage backed securities could become, for investment purposes, worthless.
Government paper would not be far behind.
That's called asset price deflation, and it could happen well before western interest
rates reach 20%. There would be winners and losers in the financial sector, with losses
likely socialised. Capital investment would be immediately curtailed, together with
other economic activity, providing a race to be bottom between production and wages.
I'm predicting that production will shrink faster than wages. That particular path
leads eventually to hyperinflation, but obviously, to get there you have to pass
through 20% interest on loans, and through "stranded assets" - production capacity
that has no functioning markets.
https://www.youtube.com/watch?v=j4SRsGn14PI - Someone will have to explain why the
machines cannot be turned back on.
And no, hyperinflation is not going to happen tomorrow, nor next month, nor even next
year - we would finish better off if it did happen that way - that's the end, and this
turning is barely begun. I'm not alone in thinking there is a precipice out there
somewhere:
https://www.youtube.com/watch?v=Pc-q7D35tpE
Meanwhile I'll be shocked, shocked when I read that this "assistance" is legal.
my best to avoid judgement of particular nations, banks, and economies. Some stories
are easier to access than others, and that leads to bias. YMMV.
http://www.theguardian.com/business/2014/feb/03/anglo-irish-executives-irish-banking-crisis
"Three leading figures in the defunct and disgraced Anglo Irish Bank - Sean FitzPatrick,
Pat Whelan and William McAteer - will each face 16 charges of unlawfully providing
financial assistance to individuals for the purpose of buying shares in Anglo Irish
in 2008."
Think about that for a few moments.
Then think about company share buybacks. And then about incentives for company
executives whose remuneration is tied to the price paid for share in the stock market.
Company share buybacks are legal, because a legal route exists, and because that
route is transparent, it is reasonable to suppose that market manipulation is near
zero. I'll guess you're comfortable with that.
Suppose the money for the share buyback comes from a subsidiary of the Company.
Still comfortable? What if the Subsidiary is only partially owned by the Company?
And if the Subsidiary is wholly owned by a group of Companies, all of whom have
their shares bought by the Subsidiary? Still comfortable?
What if the Subsidiary is the country's Central Bank, and its owners are the major
in-country Banks? Think that cannot happen?
http://www.zerohedge.com/news/2015-03-25/bank-japans-10-trillion-equity-portfolio-not-large-says-bank-japan
"So after buying 35 billion yen worth of shares yesterday, the BoJ now owns 2% of
the entire market and looks set to square off against GPIF (which, as we noted last
week, is set to move aggressively into stocks at the implicit urging of the BoJ and
the explicit urging of PM Abe) in a battle to become the single largest holder of
Japanese equities. Here's more:"
This is not the place to go into QE and its impact on markets in detail, nor the
variations on a theme played out by the ECB, the FED, the BoE, and the BoJ. It's
kinda like that myth of a "trickle down economy" that stimulates growth by flowing
money from the very wealthy to the masses, except it works in reverse.
This video is perhaps the best exposition of how QE is supposed to work:
https://www.youtube.com/watch?v=d1Mug1EPaAo (skip the first 6 minutes)
There's just one technical hitch. What happens to all the grossly inflated assets
and to those "sterilised" reserves when the next implosion begins, and bankruptcies
happen? Unless, of course, we are on a "permanently high plateau".
Suppose the worldwide interest rate hit 50% tomorrow. Too Scary? Well, late last year
Russia hit 17%, so maybe 20% is a good figure to work with. Impact: All the interest
rate swaps (derivatives) betting against high interest rates get crushed; The bond
market folds in on itself, eg, 10 year bonds should fall to around 20% of face value;
and mortgage backed securities could become, for investment purposes, worthless.
Government paper would not be far behind.
That's called asset price deflation, and it could happen well before western interest
rates reach 20%. There would be winners and losers in the financial sector, with losses
likely socialised. Capital investment would be immediately curtailed, together with
other economic activity, providing a race to be bottom between production and wages.
I'm predicting that production will shrink faster than wages. That particular path
leads eventually to hyperinflation, but obviously, to get there you have to pass
through 20% interest on loans, and through "stranded assets" - production capacity
that has no functioning markets.
https://www.youtube.com/watch?v=j4SRsGn14PI - Someone will have to explain why the
machines cannot be turned back on.
And no, hyperinflation is not going to happen tomorrow, nor next month, nor even next
year - we would finish better off if it did happen that way - that's the end, and this
turning is barely begun. I'm not alone in thinking there is a precipice out there
somewhere:
https://www.youtube.com/watch?v=Pc-q7D35tpE
Meanwhile I'll be shocked, shocked when I read that this "assistance" is legal.
bank is a prehistoric tales : old money from people (or spend money from people and create more when they loose).
credit is not necessary provide by bank at the futur world ... enterprise and factory can provide credit to customers.
it's not new ... and it's more fairplay.
like Bitcoin.
credit is not necessary provide by bank at the futur world ... enterprise and factory can provide credit to customers.
it's not new ... and it's more fairplay.
like Bitcoin.
A couple of sub-plots before I get to finish. Something (not) completely different . .
https://www.youtube.com/embed/tS_Xbfl03mc (Monty Python + 1929 + economics)
Derivatives. "Financial Weapons of Mass Destruction". Buffet's comment was engendered
by a realisation that it was no longer possible to accurately evaluate bank balance
sheets because the risks brought by derivatives were unknowable. Today, the nominal
value of the world's derivatives is some $600Tn. To paraphrase a prominent economist,
derivatives do not matter because we have bet against ourselves? Well, anything $600Tn
in size matters. These are concentrated in JPM, HSBC, RBS, MS, CA, GS, DB, and a few
others. A quick calculation will suggest that even a modest counter-party risk would
prevent a market in derivatives from functioning - a 2% risk premium is unaffordable.
Forget LTCM and Black-Scholes - IMHO there is no good way to price derivative risk.
The Lehman Bros bankruptcy brought some of the legal issues into sharp focus, even
though the bankruptcy is still playing out and the wheels of the law grind slow. Thus
not too long ago, the banks took the opportunity to cement derivatives into place
near the top of the payout queue when bank assets are in liquidation. They couldn't
and wouldn't price counter-party risk into the derivatives so they want to pass the
risk onto those least able to assess and carry the risk.
You, poor fool, may have placed your money in a bank. The bank now views you as a
liability. If "your" bank is one of the above mentioned, they will check to see that
any withdrawal or transfer you make of _their_ money is going to a worthy cause. Such
as supporting their gambling habit in the banks casino, generally known as the
derivative market. If bankruptcy is declared you get "promoted" from a liability to
the status of an unsecured creditor. Whoopee! You get to queue close behind a whole
bunch of institutions, with "your" bank's gambling buddies closest to the trough.
It doesn't have to be this way. Derivative contracts could be cancelled on entering
bankruptcy, but guess what? Well, my guess is that this would crush the derivatives
market. And would the world be a better place for that?
Just in case you haven't grasped the play here, consider this. Somewhere there is a
casino, exclusive to all but a dozen owner-members. They play roulette, with a
special rule for zero. When the ball falls into that zero, the member with the
nearest bet gets a bailout, and the others divide up the losing bets. Guess who
placed the losing bets? Everybody who isn't a member. That's not an exact analogy,
but close enough.
https://www.youtube.com/embed/tS_Xbfl03mc (Monty Python + 1929 + economics)
Derivatives. "Financial Weapons of Mass Destruction". Buffet's comment was engendered
by a realisation that it was no longer possible to accurately evaluate bank balance
sheets because the risks brought by derivatives were unknowable. Today, the nominal
value of the world's derivatives is some $600Tn. To paraphrase a prominent economist,
derivatives do not matter because we have bet against ourselves? Well, anything $600Tn
in size matters. These are concentrated in JPM, HSBC, RBS, MS, CA, GS, DB, and a few
others. A quick calculation will suggest that even a modest counter-party risk would
prevent a market in derivatives from functioning - a 2% risk premium is unaffordable.
Forget LTCM and Black-Scholes - IMHO there is no good way to price derivative risk.
The Lehman Bros bankruptcy brought some of the legal issues into sharp focus, even
though the bankruptcy is still playing out and the wheels of the law grind slow. Thus
not too long ago, the banks took the opportunity to cement derivatives into place
near the top of the payout queue when bank assets are in liquidation. They couldn't
and wouldn't price counter-party risk into the derivatives so they want to pass the
risk onto those least able to assess and carry the risk.
You, poor fool, may have placed your money in a bank. The bank now views you as a
liability. If "your" bank is one of the above mentioned, they will check to see that
any withdrawal or transfer you make of _their_ money is going to a worthy cause. Such
as supporting their gambling habit in the banks casino, generally known as the
derivative market. If bankruptcy is declared you get "promoted" from a liability to
the status of an unsecured creditor. Whoopee! You get to queue close behind a whole
bunch of institutions, with "your" bank's gambling buddies closest to the trough.
It doesn't have to be this way. Derivative contracts could be cancelled on entering
bankruptcy, but guess what? Well, my guess is that this would crush the derivatives
market. And would the world be a better place for that?
Just in case you haven't grasped the play here, consider this. Somewhere there is a
casino, exclusive to all but a dozen owner-members. They play roulette, with a
special rule for zero. When the ball falls into that zero, the member with the
nearest bet gets a bailout, and the others divide up the losing bets. Guess who
placed the losing bets? Everybody who isn't a member. That's not an exact analogy,
but close enough.
The rational response to an imminent Seneca Cliff and a power law failure distribution
would likely be to break the system up into smaller, dissimilar pieces, and where
possible, to limit the buildup of the equivalent of flammable undergrowth or snowpack,
as appropriate, for natural power-law catastrope-driven systems. That would ensure
at worst, graceful progressive collapse that could be managed within the wider world.
I'm wondering if what you're talking about is similar to US banking in the 19th century. By a legal quirk the state-bank alliance could only form at the level of individual states. Financial busts were frequent and painful because individual states tended not to have the fire power to bail out failed banks. But by the same token, as opposed to countries like Canada and Australia which took after the centralized British system, financial leverage as a whole was minimized over the long term.
I theorize that this last bit was what enabled the US to be a prime candidate for the next global monetary hegemon, once the state-bank alliance went national at the founding of the Fed, after British cumulative leverage looked set to force Britain out of that position.
The financial system tends to concentrate risks in the biggest banks. The smaller banks
are forced to merge, and if weak, have to re-capitalise. Smaller stronger banks face
competition, and hence tend to increase leverage and risk. I may be an unwanted
consequence that the Stress Tests expose the margins of safety of smaller stronger banks
and thus encourage risk-taking and leverage. The effect is to move the herd toward the
precipice, except that this precipice tends to move in the wrong direction in times
of crisis.
It is as if random slabs of material placed on a table are gradually formed into
dominoes of various sizes, then aligned and linked together. Linking the banks together
only provides safety from individual errors of judgement and localised shocks. But if the
table is gradually tilted, then a catastrophic collapse can and will happen.
Thank you for providing this insight. This reminds me of the way I throw casual clothing over the back of a armchair. The more clothes I pile on, ironically, the more stable the pile seems to be, since the friction between the pieces tends to hold the smaller pieces together. But as I pile more and more on, eventually, this very benefit turns instantly into my worst enemy as I can only watch helplessly as the whole pile collapses onto the floor at lightning speed.
The malinvestment is leaking into the real economy as corporate entities use cheap
credit and divert profits to buy back shares instead of investing in research and
development of new products. They do this because the real economy is in trouble.
Cheap money should theoretically drive investment in distant horizon projects like
nuclear fusion, large scale electricity generation, and development of resources
such as oil-fields. Instead it accumulates in the arteries of the financial system,
waiting for the heart attack to occur.
Absolutely true. But I submit that, under a totally healthy system, what constitutes good investment would be determined by the market place. Any state involvement, either at the micro level ("industrial policy") or macro level (monetary policy) causes malinvestment, simply because centralized authorities have no way to respond properly to all the nuances of supply and demand across the economy, in the way that price signals working under free markets can.
The problem, of course, is that malinvestment is addictive. If it causes demand to be unstable, all that the centralized authorities can do is to support demand via macro loosening, or else great pain will ensue. But such loosening only causes more malinvestment, and the cycle continues.
A great example of malinvestment would be all the expensive restaurants in New York that cater to investment bankers (who, we must admit, get rich from what is ultimately a public subsidy.)
If you are a Central Bank, last week's post was not good news. It suggests that, in
the first place, Central Banks should have been killed off in the 1940's because they
were clearly unable to "do what it says on the tin." It turns out that there are a
couple of things that Central Banks excel at:
* Moving wealth from savers into Government (and banker) pockets *
* Creating debt to fund "wars" [5] *
It takes two to tango, and banks have always had a symbiotic relationship to their
government. Maybe Central banks and their regulators have learned from history and
from recent publications. Who knows? maybe they can learn something from that new kid
on the block cryptocurrencies, maybe when they realise this threatens their domain
their minds will be wonderfully concentrated. There again, maybe not.
The rational response to an imminent Seneca Cliff and a power law failure distribution
would likely be to break the system up into smaller, dissimilar pieces, and where
possible, to limit the buildup of the equivalent of flammable undergrowth or snowpack,
as appropriate, for natural power-law catastrope-driven systems. That would ensure
at worst, graceful progressive collapse that could be managed within the wider world.
Instead, Central Banks have undertaken "Stress Tests" with the intention of primarily
reassuring depositors that it is safe to keep their money in a bank, that taxpayers
need not worry about more bailouts, that risk is low for bond investors, to identify
banks that have excessive exposure to risk, and those banks that need more capital. The
astute will note that these goals are both mutually exclusive and avoid scrutiny of some
of the real risks in the system.
The financial system tends to concentrate risks in the biggest banks. The smaller banks
are forced to merge, and if weak, have to re-capitalise. Smaller stronger banks face
competition, and hence tend to increase leverage and risk. I may be an unwanted
consequence that the Stress Tests expose the margins of safety of smaller stronger banks
and thus encourage risk-taking and leverage. The effect is to move the herd toward the
precipice, except that this precipice tends to move in the wrong direction in times
of crisis.
It is as if random slabs of material placed on a table are gradually formed into
dominoes of various sizes, then aligned and linked together. Linking the banks together
only provides safety from individual errors of judgement and localised shocks. But if the
table is gradually tilted, then a catastrophic collapse can and will happen.
The point of concern for such a system is not only the damage such a collapse will
cause, but also that where government intervenes to support particular banks, and in
a situation where every bank is at risk of bankruptcy, the choice of which bank lives
and which bank dies is both somewhat arbitrary and also subject to the vagaries of the
political process.
As ever within the Banking System, the seeming order is something of an illusion. The
ZIRP [6] policies enacted over an extended number of years have created structures that
would, under normal interest rate policy, quickly collapse. More on these later.
The malinvestment is leaking into the real economy as corporate entities use cheap
credit and divert profits to buy back shares instead of investing in research and
development of new products. They do this because the real economy is in trouble.
Cheap money should theoretically drive investment in distant horizon projects like
nuclear fusion, large scale electricity generation, and development of resources
such as oil-fields. Instead it accumulates in the arteries of the financial system,
waiting for the heart attack to occur.
[5] "war" is used here in its loosest sense, including merely the abrogation of the
normal checks, safeguards, and balances provided by the legal structures to
totalitarian authorities.
[6] ZIRP is another propaganda scam. They haven't banned usury.
the first place, Central Banks should have been killed off in the 1940's because they
were clearly unable to "do what it says on the tin." It turns out that there are a
couple of things that Central Banks excel at:
* Moving wealth from savers into Government (and banker) pockets *
* Creating debt to fund "wars" [5] *
It takes two to tango, and banks have always had a symbiotic relationship to their
government. Maybe Central banks and their regulators have learned from history and
from recent publications. Who knows? maybe they can learn something from that new kid
on the block cryptocurrencies, maybe when they realise this threatens their domain
their minds will be wonderfully concentrated. There again, maybe not.
The rational response to an imminent Seneca Cliff and a power law failure distribution
would likely be to break the system up into smaller, dissimilar pieces, and where
possible, to limit the buildup of the equivalent of flammable undergrowth or snowpack,
as appropriate, for natural power-law catastrope-driven systems. That would ensure
at worst, graceful progressive collapse that could be managed within the wider world.
Instead, Central Banks have undertaken "Stress Tests" with the intention of primarily
reassuring depositors that it is safe to keep their money in a bank, that taxpayers
need not worry about more bailouts, that risk is low for bond investors, to identify
banks that have excessive exposure to risk, and those banks that need more capital. The
astute will note that these goals are both mutually exclusive and avoid scrutiny of some
of the real risks in the system.
The financial system tends to concentrate risks in the biggest banks. The smaller banks
are forced to merge, and if weak, have to re-capitalise. Smaller stronger banks face
competition, and hence tend to increase leverage and risk. I may be an unwanted
consequence that the Stress Tests expose the margins of safety of smaller stronger banks
and thus encourage risk-taking and leverage. The effect is to move the herd toward the
precipice, except that this precipice tends to move in the wrong direction in times
of crisis.
It is as if random slabs of material placed on a table are gradually formed into
dominoes of various sizes, then aligned and linked together. Linking the banks together
only provides safety from individual errors of judgement and localised shocks. But if the
table is gradually tilted, then a catastrophic collapse can and will happen.
The point of concern for such a system is not only the damage such a collapse will
cause, but also that where government intervenes to support particular banks, and in
a situation where every bank is at risk of bankruptcy, the choice of which bank lives
and which bank dies is both somewhat arbitrary and also subject to the vagaries of the
political process.
As ever within the Banking System, the seeming order is something of an illusion. The
ZIRP [6] policies enacted over an extended number of years have created structures that
would, under normal interest rate policy, quickly collapse. More on these later.
The malinvestment is leaking into the real economy as corporate entities use cheap
credit and divert profits to buy back shares instead of investing in research and
development of new products. They do this because the real economy is in trouble.
Cheap money should theoretically drive investment in distant horizon projects like
nuclear fusion, large scale electricity generation, and development of resources
such as oil-fields. Instead it accumulates in the arteries of the financial system,
waiting for the heart attack to occur.
[5] "war" is used here in its loosest sense, including merely the abrogation of the
normal checks, safeguards, and balances provided by the legal structures to
totalitarian authorities.
[6] ZIRP is another propaganda scam. They haven't banned usury.
If everybody knows the crap game is crooked, but they still play because it is the
only game in town, is still fraud? Well yes, but that's not the point. I could go
on to explain the technical difference between bank insolvency and bank illiquidity,
but it really doesn't matter.
only game in town, is still fraud? Well yes, but that's not the point. I could go
on to explain the technical difference between bank insolvency and bank illiquidity,
but it really doesn't matter.
The authorities make sure mainstream money and finance are the only game in town. Either that, or you gamble or barter. Bitcoin happens to be allowed (for what I believe is an ulterior motive, which I won't elaborate here,) but the process shows how much power the elites enjoy. Among the allowed competition, including gold, the authorities make sure dollars and Treasuries still look like the only safe assets to the average person.
Why? Because, to misquote President Bush, when this sucker goes down, it will not
matter if a bank is solvent, liquid, illiquid or insolvent. What will matter is the
advice the politicians get, and for that they will rely on their regulators and their
Central Bank - who are owned by? probably the competitors of the bank under scrutiny.
It actually makes more sense to seize a solvent bank because the good assets can
shore up other banks and the bad assets can be passed to the taxpayer to make good.
But I've skipped ahead a week or so. More next week.
Historically, the expropriation of banks by the political elites has been a "risk" and a hurdle against forming the state-bank alliance. E.g. I believe it happened in Mexico. In the modern West, the central banks seem to have stamped this out.
Hindsight, it seems to me, is vastly overrated. I have learned that two people can
look at exactly the same facts and take totally opposed positions. I can only state
that a superficial inspection leads me to the following views:
* Prior to 1929 the US economy had the advantage of rising productivity, especially
agricultural productivity, and a more than adequate supply of crude oil. This led to
a strong dollar, and made US produce expensive compared to other nations.
* In 1929, things that could no longer continue, stopped. That left a residue of excess
debt, ponzi financing, other risky investment, and fraud. These elements were
sufficiently large, and in combination with depressions in other nations, to create
an economic depression over most of continental North America. The US economy
would continue to contract until trust was restored in the financial system.
* The discovery of a supergiant oil-field containing some 5 billion barrels of oil
restored economic confidence and activity in several States. It also created at least
the expectation of $5Bn worth of collateral within the financial system and allowed
the creation and circulation of further monies by fractional reserve accounting.
This drove the stabilising of the Stock market in 1932 via a form of ponzi financing,
and the DJIA first bottomed at 50, then rose to 80. (BTW 5 billion barrels of oil at
2011 $100 per barrel prices is $500Bn - of the same order as TARP).
* While the above was in progress a form of currency war was ongoing. Gold was
shipped to Europe in the years prior to 1933, and in 1934, the US$ was significantly
devalued against gold, and hence against the rest of the world's currencies.
Immediately after the devaluation, gold was shipped from Europe to the USA.
This moved 40% of the claims on wealth from the pockets of US savers to the pockets
of prior recipients of US government spending, and was a de facto default on its
debts.
* There is no convincing evidence that any of the post 1929 government or Fed Reserve
polices had any long-term effect on the US economy, except for the seizure of gold
and the 1933 devaluation of the dollar.
The lessons to learn from 1929? Be aware that the gold you and your fathers
deposited at your banks has become the property of the banks Central Bank, which
eventually hands it on to your Treasury and public into ownership. Real estate
investment especially and common company shares are the last things you want to own
in a depression. If you want to find your way out of depression, finding the newest,
world's-biggest-ever oil-field in your backyard is a good start. Were the lessons
learned? or were they merely a barrier to profits?
look at exactly the same facts and take totally opposed positions. I can only state
that a superficial inspection leads me to the following views:
* Prior to 1929 the US economy had the advantage of rising productivity, especially
agricultural productivity, and a more than adequate supply of crude oil. This led to
a strong dollar, and made US produce expensive compared to other nations.
* In 1929, things that could no longer continue, stopped. That left a residue of excess
debt, ponzi financing, other risky investment, and fraud. These elements were
sufficiently large, and in combination with depressions in other nations, to create
an economic depression over most of continental North America. The US economy
would continue to contract until trust was restored in the financial system.
* The discovery of a supergiant oil-field containing some 5 billion barrels of oil
restored economic confidence and activity in several States. It also created at least
the expectation of $5Bn worth of collateral within the financial system and allowed
the creation and circulation of further monies by fractional reserve accounting.
This drove the stabilising of the Stock market in 1932 via a form of ponzi financing,
and the DJIA first bottomed at 50, then rose to 80. (BTW 5 billion barrels of oil at
2011 $100 per barrel prices is $500Bn - of the same order as TARP).
* While the above was in progress a form of currency war was ongoing. Gold was
shipped to Europe in the years prior to 1933, and in 1934, the US$ was significantly
devalued against gold, and hence against the rest of the world's currencies.
Immediately after the devaluation, gold was shipped from Europe to the USA.
This moved 40% of the claims on wealth from the pockets of US savers to the pockets
of prior recipients of US government spending, and was a de facto default on its
debts.
* There is no convincing evidence that any of the post 1929 government or Fed Reserve
polices had any long-term effect on the US economy, except for the seizure of gold
and the 1933 devaluation of the dollar.
The lessons to learn from 1929? Be aware that the gold you and your fathers
deposited at your banks has become the property of the banks Central Bank, which
eventually hands it on to your Treasury and public into ownership. Real estate
investment especially and common company shares are the last things you want to own
in a depression. If you want to find your way out of depression, finding the newest,
world's-biggest-ever oil-field in your backyard is a good start. Were the lessons
learned? or were they merely a barrier to profits?
If everybody knows the crap game is crooked, but they still play because it is the
only game in town, is still fraud? Well yes, but that's not the point. I could go
on to explain the technical difference between bank insolvency and bank illiquidity,
but it really doesn't matter.
Why? Because, to misquote President Bush, when this sucker goes down, it will not
matter if a bank is solvent, liquid, illiquid or insolvent. What will matter is the
advice the politicians get, and for that they will rely on their regulators and their
Central Bank - who are owned by? probably the competitors of the bank under scrutiny.
It actually makes more sense to seize a solvent bank because the good assets can
shore up other banks and the bad assets can be passed to the taxpayer to make good.
But I've skipped ahead a week or so. More next week.
only game in town, is still fraud? Well yes, but that's not the point. I could go
on to explain the technical difference between bank insolvency and bank illiquidity,
but it really doesn't matter.
Why? Because, to misquote President Bush, when this sucker goes down, it will not
matter if a bank is solvent, liquid, illiquid or insolvent. What will matter is the
advice the politicians get, and for that they will rely on their regulators and their
Central Bank - who are owned by? probably the competitors of the bank under scrutiny.
It actually makes more sense to seize a solvent bank because the good assets can
shore up other banks and the bad assets can be passed to the taxpayer to make good.
But I've skipped ahead a week or so. More next week.
"The entire system is wrong."
It's one thing to realise that, demonstrating the internal workings is a challenge.
It's one thing to realise that, demonstrating the internal workings is a challenge.
A generalized but rigorous statement of the way the system works is that the values of financial assets (including money) are artificially supported by state power. The purpose is to benefit the political and financial elites who issue these assets. But since this over-values the assets, and since the incentives for the elites are to maximize the issuance, the assets have always become so over-valued that the elites eventually have no choice but to allow them to crash. When that happens, the pain from economic contraction is borne by the public as a whole.
Banks supply the financial knowhow to help this process along by creating innovative assets that the public might believe in, however temporarily, and by creating extra (artificial) demand for the base assets issued by the state, i.e. money and public debt. Their reward for their part in this enterprise is a public guarantee of their debt, in one way or another.
The bank deposit was one of the classic innovations in financial assets. Even before deposit insurance, deposits were effectively propped up by the public by allowing supposed competitors to collude and rescue each other when a bank got into trouble. (Thus removing a major device of market discipline.) Deposits were further propped up by the gold standard, which ensured that it became disadvantageous for savers to hold gold which was non-interest-bearing, while still living under the inflation due to asset issuance, while the state supports for assets held.
The central bank's real purpose is to ensure the survival of this partnership by making sure neither side jeopardizes it by gorging. For example, if some top politician happens to decide to issue too much debt, the central bank can refuse to promise to print money to support it. Individual banks can be kept in line by regulation and by witholding the implicit promise to bail them out.
This recent article on the US 1929 depression includes background information for those
still awake :-)
http://www.zerohedge.com/news/2015-10-28/why-friedmanbernanke-thesis-about-great-depression-was-dead-wrong
still awake :-)
http://www.zerohedge.com/news/2015-10-28/why-friedmanbernanke-thesis-about-great-depression-was-dead-wrong
There's no ultimate difference between commercial bill discounting and "open market operations," in the larger sense that both amount to intervention by central banks to support the value of debt artificially. Due to the lack of public awareness even in democracies, central banks have really only served the financial and political elites. What this means is that the incentives for the elites, in both cases, result in financial asset inflation, leading to malinvestments, distortions, pain and long-term economic decline.
It's probably no accident that every bill discounting regime eventually "degenerated" into open market operations.
In theory, Banking is used for deposits, and the provision of, and repayment of,
loans whereby the business transactions normally exceed the Bank's ability to
repay all deposits at any given time.
But in reality Bank is just for saving money with small amount of interest per year. Surely we got any benefit feature like ATM, Credit Card and many other.
And about "Unrestricted Banking", i think all bank 'hope' their will got more and more money from all their clients.
Because Banking can invest that money in a lot place. While client just feel comfort to see number on their Bank Book.
loans whereby the business transactions normally exceed the Bank's ability to
repay all deposits at any given time.
But in reality Bank is just for saving money with small amount of interest per year. Surely we got any benefit feature like ATM, Credit Card and many other.
And about "Unrestricted Banking", i think all bank 'hope' their will got more and more money from all their clients.
Because Banking can invest that money in a lot place. While client just feel comfort to see number on their Bank Book.
Banking: The acceptance of deposits, and the provision of, and repayment of,
loans whereby the business transactions normally exceed the Bank's ability to
repay all deposits at any given time.
loans whereby the business transactions normally exceed the Bank's ability to
repay all deposits at any given time.
Interesting how fraud is essentially baked into this definition. This is not a slight on your work, just an observation that the modern state of banking is so warped that failure to balance assets against liabilities is simply assumed.
"The entire system is wrong."
It's one thing to realise that, demonstrating the internal workings is a challenge.
This medium, a series of text messages, supports a logical but narrow structure.
(And it's all produced from the left side of the brain)
It is easy to get sidetracked and then it gets messy. Sometimes it is worthwhile
when a relevant article gets published, even if it's TLDR material.
This recent article on the US 1929 depression includes background information for those
still awake :-)
http://www.zerohedge.com/news/2015-10-28/why-friedmanbernanke-thesis-about-great-depression-was-dead-wrong
Four points omitted that might usefully be included:
* A mathematical outline of processes driving the boom and bust
* A comment on the oil industry and related capital flows
* The role that gold played internationally before and after 1933, and its domestic costs
* The relationship of US domestic banks vs their foreign counterparts
Those omissions aside, I am in broad agreement with larger argument. This was a depression
driven by financial mismanagement, both before and after the crash.
It's one thing to realise that, demonstrating the internal workings is a challenge.
This medium, a series of text messages, supports a logical but narrow structure.
(And it's all produced from the left side of the brain)
It is easy to get sidetracked and then it gets messy. Sometimes it is worthwhile
when a relevant article gets published, even if it's TLDR material.
This recent article on the US 1929 depression includes background information for those
still awake :-)
http://www.zerohedge.com/news/2015-10-28/why-friedmanbernanke-thesis-about-great-depression-was-dead-wrong
Four points omitted that might usefully be included:
* A mathematical outline of processes driving the boom and bust
* A comment on the oil industry and related capital flows
* The role that gold played internationally before and after 1933, and its domestic costs
* The relationship of US domestic banks vs their foreign counterparts
Those omissions aside, I am in broad agreement with larger argument. This was a depression
driven by financial mismanagement, both before and after the crash.
This is a neat and innovative conceptual framework for modern banking, but banking is only half of our core modern problem.
The other half is the government. The real reason why the debts of "private" banks are implicitly guaranteed by the state, which then under-regulates the banks, is that the political elite has an incentive to allow banks to take risks with taxpayers' money. If banks didn't dream up innovative assets that savers might buy into, however temporarily, the inflationary effects of public debt (issued by politicians) would expose the weaknesses of the system, and eventually threaten the issuance of public debt from which politicians receive "free" political capital.
The core modern reality is that banks and the state ally with each other to jointly take wealth from the rest of the economy. The banks contribute innovation and financial know-how, while the state supplies the power required to prop up financial assets. The central bank's real role is to guarantee the survival of this partnership institutionally.
So, from a long-term point of view, we can basically kiss "good banking regulation" goodbye. The entire system is wrong.
The other half is the government. The real reason why the debts of "private" banks are implicitly guaranteed by the state, which then under-regulates the banks, is that the political elite has an incentive to allow banks to take risks with taxpayers' money. If banks didn't dream up innovative assets that savers might buy into, however temporarily, the inflationary effects of public debt (issued by politicians) would expose the weaknesses of the system, and eventually threaten the issuance of public debt from which politicians receive "free" political capital.
The core modern reality is that banks and the state ally with each other to jointly take wealth from the rest of the economy. The banks contribute innovation and financial know-how, while the state supplies the power required to prop up financial assets. The central bank's real role is to guarantee the survival of this partnership institutionally.
So, from a long-term point of view, we can basically kiss "good banking regulation" goodbye. The entire system is wrong.
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