[davelj]

[quote=jstoesz]

“There are three kinds of lies: lies, damned lies, and statistics” You can spin a web based on selective stats, but let us deal with the real question here. There is no debating that there is a difference in the rich and poor, that much is obvious.

Why/how is it that ALL rich people have gotten all their money off the backs of the 99? Did all rich people get that way through ill gotten gains?

Furthermore, even if you can show that some rich people have screwed over the lower classes, how do you then justify government confiscation and redistribution as a moral solution? Do you not think that many rich people have provided an incredible service to their employees and deserve the money they have made, by providing gainful and productive employment for many? By what grounds do you justify confiscating money from those with proper earned gains? Because they simply have more money then you? That is hardly a moral justification. [/quote]

On the one hand I sympathize with your arguments as they are superficially compelling. But there are two big problems with your general position.

First – and we can thank Nassim Taleb for his analysis here – you assume that most wealthy people earned their wealth purely as a result of hard work, and that – conversely – most poor people ended up in their position because they were unwilling to work hard. That is, luck – or “randomness” – did not play a major role in either. This is demonstrably false. In fact, a huge part of anyone’s success (or lack thereof) can be attributed to randomness. Now, I will agree with Reagan’s observation that “the harder I worked, the luckier I got,” but luck plays a big role in anyone’s outcome. If you were to pick a group of highly successful people and write down all of the things they did to become successful, you’d be able to find a much larger group of people who did all of those same things and did NOT reach the same level of success. Again, Nassim Taleb has done the world a favor by debunking the notion that many successful people hold that they “achieved it all by working hard and taking risks.” Sure, working hard and risk-taking are critical components of success… but the economic backyard is FILLED with folks who are smart, hardworking and took risks… who are wholly unsuccessful. The difference between these two groups is – to a meaningful (although not entire, of course) extent – the result of luck.

[A thought experiment. There are 6.5 billion people on the planet. The vast majority of them were born into abject poverty. Half of the world’s population lives on less than $3/day and other than survival these folks have very few prospects in their lives. Now, look around yourself and tell me how much your “hard work” has played into your ultimate success relative to everyone else on this planet. Answer: not much. You were born into a situation in which “success” – as we define it – was achievable. Most people on the planet do not have that luxury.]

Second – What good is a world that is “morally fair” (to paraphrase your words) if that world is too dangerous to live in? That is, you don’t want to redistribute to the poor because “they don’t deserve it.” OK, fine. Let’s not quibble over morality and what folks deserve. Would you support redistribution if not doing so would result in a world in which your person is in great physical danger (because the folks that are “poor” decide to take from the rich by “pure” force). Personally, I’d rather redistribute if it keeps the masses at bay, regardless of any “moral” notions about “fairness.”

So, again, I sympathize with your (essentially) libertarian ideas here. I held similar views once myself. But I don’t think they hold up to close scrutiny or the practical realities of living in a large society with disparate economic outcomes.

[davelj]

[quote=earlyretirement]

I remember several years ago telling everyone and their brother to sell short all the banks and bond insurers and financial companies.

I had several clients that worked at Lehman Bros (LEH). I even told many of them why I was shorting the company they worked at and how I believed it would go under. We always just agreed to disagree on the future of LEH and the market.

They kept going on and on how it would never happen and the sad thing is many of them had most of their net worth tied up in LEH stock. Many of them kept buying on the way down “averaging down”. I ended up short selling LEH into bankruptcy.
[/quote]

Please also tell us about the financials that you shorted which survived and subsequently doubled and tripled. It defies reason that LEH was the only one you placed a bet on. Inquiring minds and all…

[davelj]

This has been discussed to death, most recently in…

http://piggington.com/interest_rates_and_house_prices

[davelj]

Just 5 minutes ago everything sped up to normal speed and functionality… bizarre.

[davelj]

[quote=SD Realtor]Dave I think it could be argued that the relationship between housing prices and salaries for a given region would alter the formula you put forth. For the most part I would agree with that formula for most of the country however I think it doesn’t hold up as well for areas with distorted prices. For proportional price hikes the buyers pool shrinks more rapidly in the distorted regions especially as lending standards tighten up.[/quote]

All of that may be true – I don’t disagree. There will always be regional variations for various reasons. I was just pointing out how the math works for the *average* home (think St. Louis). Interest rates don’t move in a vacuum – they are highly correlated with overall price inflation movements over the long term, and inflation has in the past always been highly correlated with changes in overall rents… but that doesn’t mean that this relationship will necessarily hold when and if rates start rising again…

[davelj]

The issue for housing prices vis-a-vis interest rates is the degree to which rents increase along with interest rates (which eventually reflect the general level of price inflation). If rates rise meaningfully more than rents then housing prices will fall. If rents rise more or less as much as interest rates then housing prices will be largely unaffected even if rates rise (see the 70s and early-80s for an example of this).

If the value (V) of a perpetual stream of cashflows (CF) is denoted by:

V=CF/(R-G)

where R is the interest rate and G is the growth in the cash flows, you can see that if G (re: rents) is increasing at the same rate as R (rates)… the denominator stays the same and the value is unchanged even as rates rise.

So, the issue of the impact of higher interest rates on housing prices must be discussed in the context of the degree to which rents follow the general level of inflation (the latter will drive interest rates).

[davelj]

[quote=Nor-LA-SD-GUY2]The Norwegian rain joke
“An American visits Oslo on business. After two weeks, he stops a small boy in the streets and asks: ‘Hey sonny, does it ever stop raining here?’The boy looks at him and replies, ‘I don’t know, sir. I’m only 11.'”
But seriously, I wonder if they would take me back, it’s only been three generations.[/quote]

I think the businessman in that joke is probably visiting Bergen as opposed to Oslo… but the point remains similar.

Another popular Norwegian joke (or saying): “Spring was on a Thursday last year.”

[davelj]

I lived in Norway for about six months back in the mid-90s with my girlfriend at the time who was Norwegian. To generalize, the Norwegians are a very disciplined, thoughtful group. I spoke to a lot of people in Norway about The Petroleum Fund and I never met anyone who thought the government wasn’t doing the right thing by managing the oil revenues for the future through this fund. (I interviewed for a job with the fund – they didn’t hire me.) I think there are several factors that allow for this fund to exist: (1) Norwegians are highly educated – even at the median – and generally think long-term, (2) they haven’t had many government scandals, so they generally trust government more than a lot of other countries, and (3) Norway has a very small, fairly homogenous population where the average person is maybe only two degrees of separation between most everyone else in the country, so there’s a lot of solidarity among the population. Norway feels like a very large family.

Now, contrast these three factors with the U.S. This sort of thing would never fly here. As a people, we’re culturally incapable of supporting it.

[davelj]

[quote=ucodegen][quote davelj]First problem: the only reason a bank has to hold back a percentage of its assets as “reserves” (or, my preference, “liquidity”) is because those reserves are there to ensure adequate liquidity for depositors. In the example above, you assume no deposits, therefore no reserves would be necessary. So we’ve got a fundamental misunderstanding to rectify before moving forward.[/quote]
As I mentioned, I drastically simplified it.. maybe too much. As I was going down the path to try to describe why a bank would require more fed money than their ‘market cap’, I realized that if I threw a lot of stuff in, I loose the ‘banks are making a mint off the loan’ people, so I had to isolate the description to the bare minimum to show what would happen. [/quote]

It goes beyond “simplification” – your accounting’s incorrect. You clearly don’t understand what a bank’s balance sheet looks like or what’s required to increase leverage.

[quote=ucodegen]
The initial all ‘paid in capital’ could also be the starting/founding position for a bank before the doors open. – so at this point I’m done. I am not going to continue this game of yours.[/quote]

It’s not a game. You started this whole discussion and I’m trying to help you reduce your confusion. But if you don’t want to continue the discussion it’s perfectly alright by me.

[quote=ucodegen]
You have the floor, you can decide to show an accurate rendition that average people could follow, or continue to try to berate me on this public forum. What you decide to do probably reflects more on you than me.[/quote]

I’m not berating you. And I’ll be happy to show “an accurate rendition that average people could follow”. But first you have to admit that you don’t know what you’re talking about, which you’re resisting in the extreme.

[davelj]

[quote=ucodegen][quote davelj]Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down.[/quote]I wasn’t trying to get into a c**k fight here. I ‘yielded the floor’ to allow you to post the accurate rendition. [/quote]

You brought the issue up in the first place – not me – and explained it rather incorrectly, and in a manner of detail that suggested that you clearly thought you knew what you were talking about.
[quote=ucodegen]
This is ridiculous considering that you are taking me more to task than people who were claiming that the banks are making a mint off of the fed loans.[/quote]

I’d addressed this issue before in a previous post so I didn’t see any reason to repeat myself.

[quote=ucodegen]
I don’t know what your real point is here.. but here goes (unfortunately this posting interface doesn’t allow me to create tables.) REMEMBER: I did not say what those assets were from…

Cash & Equivalents = 100M(paid in capital, undivided earnings)
Securities
Loans
Other Assets

Total Assets = 100M

Deposits
Fed Borrowings
FHLB Borrowings
Other Liabilities

Total Liabilities
Common Equity = 100M

[/quote]

Ok, the bank you’re beginning with here is unlike the bank you described in your original post, which was as follows (I quote):

“Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve)”

First problem: the only reason a bank has to hold back a percentage of its assets as “reserves” (or, my preference, “liquidity”) is because those reserves are there to ensure adequate liquidity for depositors. In the example above, you assume no deposits, therefore no reserves would be necessary. So we’ve got a fundamental misunderstanding to rectify before moving forward. (Moreover, if you’re not going to fund yourself with deposits… why bother going through the hassle of getting a bank charter at all? The only value of being a bank is the ability to raise deposits insured by the FDIC.)

So, start with a bank that looks like the one you described originally: one that would require 20% of its assets to be held in “reserves.” This should take less than 2 minutes, but you will need to make assumptions about each individual line item of assets and liabilities. This is simple – don’t worry, I’ll be able to follow it. But remember, you gotta have deposits… or you don’t need reserves.

[davelj]

[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]

Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.

Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.

So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.

So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.

And then we can get to the role of the Fed’s banking activities.

[davelj]

[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]

Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.

Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.

So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.

So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.

And then we can get to the role of the Fed’s banking activities.

[davelj]

[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]

Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.

Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.

So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.

So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.

And then we can get to the role of the Fed’s banking activities.

[davelj]

[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]

Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.

Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.

So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.

So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.

And then we can get to the role of the Fed’s banking activities.

[davelj]

[quote=ucodegen][quote=DomoArigato]I’m not surprised that you are a supporter of one of the two major parties (Republican), because you are clearly clueless. JPM didn’t lend out that $390 billion. They just turned around and put it in Treasuries risk-free. Fractional-reserve lending has nothing to do with the massive bailouts the criminal banksters received.[/quote]
And you don’t belong to one or another of those two parties? We currently have a two party system here.. so there is not much choice beyond the two parties. I do wish the Independent party would field someone reasonable.

You also forgot “reserve” in “fractional reserve” banking. Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. The problem is that when things turn upside down, you are on heavy leverage. You now have 100mil in liquid assets in hand, 500mil in liabilities, but those loans are now sour and are worth lets say 250mil (probably less).

Your previous position was 100mil(reserve) +500mil(on held loans) – 500mil(obligations in the form of loans where you as a bank borrowed( for a net total of 100mil => meeting your reserve requirement of 20%.

Your current net position is 100mil(reserve) + 250mil(in held soured loans) – 500mil(obligations where you as a bank borrowed), for a net total of negative 150mil and not able to meet your reserve requirements. The net reserve you had, vaporized with the collapse of the housing ponzi.

To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension.. something has to offset the diff and re-establish balance and reserve. 250mil has to come from somewhere. Remember that previously their net worth was 100mil. This is how the loans from the fed end up being bigger than the previous market cap which is ‘net’ related. The ‘re-established’ reserve HAS to be held in safe securities, ie treasuries or cash (looking at the current gold rush, might have been better to be in gold than treasuries – though unwinding a gold commodities position of that size could be problematic).[/quote]

First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic. You are profoundly confused as to how a bank uses its balance sheet to make money and what it’s capable of doing vis-a-vis leveraging its equity to create loans. Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits. Contemplate these issues in the context of the discussion.

I apologize for being rude, but… I get irritated when people start blabbing (with such confidence!) about stuff about which they are clearly profoundly misinformed. And to be clear, this is not the realm of opinion – it’s basic accounting.

[quote=ucodegen]
PS: The situation is even nastier than I showed above.. I am just oversimplifying to make it easier to diagram/explain. By the way, the only treasuries that are currently yielding 3% or more are 20 and 30 year. There is a risk in holding such treasuries when rates go back up. Current yields are 1Mo=0%, 3Mo=0.01%, 6Mo=0.02%, 1Yr=0.09%, 2Yr=0.20%, 3Yr=0.33%, 5Yr=0.94%, 7Yr=1.52%, 10Yr=2.19%, 20Yr=3.13%, 30Yr=3.54%
[/quote]

Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.

[Author]

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