Top Diaries

Writing crap mortgages and then rehypothecating crap, which formed the basis of the bubble based on US real estate would fall under Keynes' "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done" caveat and is definitely not recommended Keynesian economic policy. The fact that Keynes used hyperbolic arguments in certain situations, such as a debt-deflation death spiral, does not mean he advocated such policies be applied in any and all circumstances.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 27th, 2013 at 11:17:42 AM EST
[ Parent ]

Re: Merkel Does The Devil's Work (4.00 / 4)

The problem here is that her model of banking is entirely conventional and she has a lot quantity of money thinking going.
That might cause problems in the unlikely case they ever get to enact policy.

by generic on Tue Aug 27th, 2013 at 01:58:06 PM EST
[ Parent ]

And it doesn't seem likely that she would even have a chance to do anything anyway.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 27th, 2013 at 03:43:08 PM EST
[ Parent ]

It will be interesting to see where she is in ten years' time.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 28th, 2013 at 01:52:56 AM EST
[ Parent ]

The FDP?

Finance is the brain [tumour] of the economy

by Carrie (migeru at eurotrib dot com) on Wed Aug 28th, 2013 at 01:54:06 AM EST
[ Parent ]

Re: Merkel Does The Devil's Work (4.00 / 3)

If, in 10 years' time, it's big enough to float her boat.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 28th, 2013 at 02:32:23 AM EST
[ Parent ]

She's basically saying bank lending is reserve constrained, not equity constrained.

Finance is the brain [tumour] of the economy

by Carrie (migeru at eurotrib dot com) on Tue Aug 27th, 2013 at 04:14:28 PM EST
[ Parent ]

Is not that the case in the Euro-zone?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 28th, 2013 at 11:38:54 AM EST
[ Parent ]

Why do you say that?

Finance is the brain [tumour] of the economy

by Carrie (migeru at eurotrib dot com) on Wed Aug 28th, 2013 at 11:41:21 AM EST
[ Parent ]

Isn't that the formal mechanism the Fed uses with US banks? They can make a loan in excess of their reserves, but they have to be able to get the reserves shortly to meet the reserve requirement and that has some small cost.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 28th, 2013 at 11:49:44 AM EST
[ Parent ]

How is that different from what the ECB does?

by generic on Wed Aug 28th, 2013 at 12:03:35 PM EST
[ Parent ]

Operationally: The ECB extends (over)collateralized loans to banks against unimpeachable collateral (read: Treasury issue). The Fed buys and sells assets of unimpeachable soundness (read: Treasury issue).

In practice: The Fed uses a cruder tool than the ECB, but the Fed uses its tool with much greater skill. The outcome is practically indistinguishable.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 28th, 2013 at 02:22:46 PM EST
[ Parent ]

Reserves are a fraction of deposits, not of loans.

Finance is the brain [tumour] of the economy

by Carrie (migeru at eurotrib dot com) on Wed Aug 28th, 2013 at 12:05:47 PM EST
[ Parent ]

And deposits are liabilities.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 28th, 2013 at 12:12:06 PM EST
[ Parent ]

And reserves are assets.

Finance is the brain [tumour] of the economy

by Carrie (migeru at eurotrib dot com) on Wed Aug 28th, 2013 at 12:32:15 PM EST
[ Parent ]

That is only an operational constraint if your central bank likes to crash your banking system.

Which the ECBuBa uses as a strategic threat to usurp the power of democratically elected parliaments, but not something they have ever actually done for real.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 28th, 2013 at 12:18:20 PM EST
[ Parent ]

And there are also equity capital requirements along with rules as to what counts in tiers, Basel I & II. So it would seem that banks have both reserve and capital requirements, with the capital requirements being the usual rub, as the Central Bank can supply reserves at will at a price, but should the Central Bank, for whatever reason, not supply the reserves that could make a given bank insolvent overnight. Wouldn't they normally 'resolve' that bank rather than not supplying reserves?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 28th, 2013 at 12:45:17 PM EST
[ Parent ]

And there are also equity capital requirements along with rules as to what counts in tiers, Basel I & II.

Yes, and those are binding.

but should the Central Bank, for whatever reason,

Then the ATMs will stop working until parliament finds itself a new central banker. Which, depending on how far parliament has its head up its ass, may be before or after the angry mob who now cannot spend their wages to buy food finds itself a new parliament.

not supply the reserves that could make a given bank insolvent overnight. Wouldn't they normally 'resolve' that bank rather than not supplying reserves?

Illiquid, not insolvent. The bank will only become insolvent after they distress sell assets to cover their liquidity requirements.

But sane central banks never deliberately create bank runs on their own banking system like that. Partly because it's a game of musical chairs: All liquidity comes, in the final analysis, from the central bank. So if the central bank withdraws enough liquidity from the system that a bank must fold due to liquidity requirements, then (at least) one bank will fold when the music stops... and it may not be the bank the CB wanted to kill.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 28th, 2013 at 02:19:59 PM EST
[ Parent ]

The central bank supplies reserves to preserve the payments system. It has no choice, bank resolution is a fiscal action.

Finance is the brain [tumour] of the economy

by Carrie (migeru at eurotrib dot com) on Wed Aug 28th, 2013 at 02:53:14 PM EST
[ Parent ]