FRED if the Banks bad loans are the Fed's Assets?

[ASH]

Re: FRED if the Banks bad loans are the Fed's Assets?

Banks would have to pay out 100% of the interest owed, but only in aggregate, not all at once.

Thanks for the clarification. That is what I meant to imply.

[Sharky]

Re: FRED if the Banks bad loans are the Fed's Assets?

You got it exactly. The only way that there is not a mismatch is if the "bank" spent every dime it made in interest profit in the economy at large on services the 'borrowers" could provide. Which would mean no bonuses, increased capital, dividends, corporate savings,...etc,etc. It would have to be a non-profit enterprise. Which will not ever happen in a profit seek financial entity. Hence there will always be a compounding mismatch at the rate of the average interest rate on outstanding loans in the system.

Another way banks can "spend" their earnings back into the economy is to distribute them to shareholders as dividends.

The banks essentially end up with $100 worth of the debtors future labor. Banking is good work if you can get it, especially when it is backed by Uncle Sam!

That's the nature of a loan:

1. The borrower puts up some collateral against borrowed principle
2. The bank creates new money for the loan and accepts the risk that the loan may not be paid back (in the event of default, the bank's capital is reduced)
3. The borrower pays the bank interest on the created money in exchange for them assuming the risk of loss
4. The bank measures the probability of repayment based on the borrower's past history and their predicted future income stream: the interest and principle payment become a lien on the borrower's future income
5. If the bank screws up too badly, the defaults fall onto the public, by way of the FDIC or other interventions

[lsa420]

Re: FRED if the Banks bad loans are the Fed's Assets?

ASH,

You got it exactly. The only way that there is not a mismatch is if the "bank" spent every dime it made in interest profit in the economy at large on services the 'borrowers" could provide. Which would mean no bonuses, increased capital, dividends, corporate savings,...etc,etc. It would have to be a non-profit enterprise. Which will not ever happen in a profit seek financial entity. Hence there will always be a compounding mismatch at the rate of the average interest rate on outstanding loans in the system.

The interest on a loan is due first and foremost, The bank will NOT let you pay principle if there is outstanding interest and/or fees due. I work at a bank, trust me. You don't think we would let you win do you? Although there are couple of things you can do to reducing the pound of flesh the bank takes and drastically reduce your marginal effective interest rate on your loan. Some are more time consuming than others.

Ash actually is is worse..." ....If the bankers spent the interest payments in a way that the borrowers could earn, there's no quantity of money problem -- but if bankers re-loan the money, there is a "remainder" problem baked into the cake?"
If the banker re-loans the money; It compounds twice, once at the rate of the original interest amount(logarithmically declining as it is paid)plus the rate of interest on the principle of the new loan. Till a new loan is made to pay off the interest on the the loan that had to be taken out the pay the interest on the original loan. Infinite exponential expansion of said bank credit, The currency will give out first , so it is not exactly infinite, but that is a flaw of where mathematics and the real world intersect.

If you look at the Feds charts for regular bank reserves you will see that they were pretty much pegged at 40 billion for decades, even though there was a massive increases in lending from said banks. How did they do this, one might ask? The lent out the interest(and increased the rate) that they received from there current loan book, leveraging their current loan book for more loans and interest, so they could lend even more. But then they hit the 20% debt service limit and thing started to come unglued shortly there after.

But overall we got into this mess so fast by removing usury law. If you have a fractional reserve banking system with compounding interest, then bankruptcy is eventually assured. The only thing that affects the time frame of the bankruptcy is the rate of interest charged on loans. The lower the interest rate the longer the time frame to a final crackup and vise versa.

Good stuff guys. Thanks for all of your comments.

So Jacob, with your comments in mind, where does that leave the banking sector currently? How much of an increase in rates would be necessary for the "crackup"? I'm thinking not much? Could be ugly in a couple of years.

[jacobdcoates]

Re: FRED if the Banks bad loans are the Fed's Assets?

Good stuff guys. Thanks for all of your comments.

So Jacob, with your comments in mind, where does that leave the banking sector currently? How much of an increase in rates would be necessary for the "crackup"? I'm thinking not much? Could be ugly in a couple of years.

it leaves banks and me in particular..screwed. When the pitchforks come I don't think they will listen about how I'm the poor bastard whose job it is to try to enforce the rules at the bank as best he could. The increase in rates came 40 years ago with the removal of usury laws, allowing banks to increase the rate of interest they charge on loans, management then recycled that increased interest into new loans(justification for bonuses..AKA "we grew the bank assets by X billions of dollars, aren't we super."). The consequence are the wealth disparity, inflation, declining demand(non-debt funded), and growing govt deficits. I think the financial crisis was the first part of the crack up. Who knows if there will be a soft reset or a hard one or how long it will take.

[Jay]

Re: FRED if the Banks bad loans are the Fed's Assets?

it leaves banks and me in particular..screwed. When the pitchforks come I don't think they will listen about how I'm the poor bastard whose job it is to try to enforce the rules at the bank as best he could. The increase in rates came 40 years ago with the removal of usury laws, allowing banks to increase the rate of interest they charge on loans, management then recycled that increased interest into new loans(justification for bonuses..AKA "we grew the bank assets by X billions of dollars, aren't we super."). The consequence are the wealth disparity, inflation, declining demand(non-debt funded), and growing govt deficits. I think the financial crisis was the first part of the crack up. Who knows if there will be a soft reset or a hard one or how long it will take.

As long as the neofeudal wealth disparity crew remains in charge, the potential for a hard landing is in place. A softer landing is possible with debt forgiveness and wage increases.

[jacobdcoates]

Re: FRED if the Banks bad loans are the Fed's Assets?

I agree, but that won't happen with the derisive political culture in this county. Most people have picked a side and forgot how to be an american and human being first.

[derelict54]

Re: FRED if the Banks bad loans are the Fed's Assets?

Good thread peeps.

The treasury is there to redistribute the funds, and in a shared capitalist society it normally would. However the tax cuts for the corporations and wealthy has left the wealth distribution top heavy, Furthermore allowing of tax shelters for private equity and hedge funds has left the treasury impotent. Unfortunately, the true faults of fiat capitalism as you described previousy, mainly compounding interest and the ponzi of the next borrower paying the interest of the previous borrower relies on a well rounded middle class and a slow and steady increasing money supply. It also relies on Capitalism's self defeating mechanism of canabalism (anti trust laws) keeping its own destructive force in check.

We have a partially tipped water tower now that has been propped up by Bernanke's 13 trillion scaffolding.

When the bottom borrowers are shut off from credit, and wages are unable for them to pay their interests, eventually bankruptcy will extinguish money supply and along with poverty social unrest will occur. Now as stated previously by Minsky the best solution would to give jobs or money directly to the lower class, so they could extinguish their debts through payoffs of both principal and interest. This would further be beneficial to the system by extinguishing the source of what would become bad debts that has been spliced thirteen times into other securities and sold throughout the system. Lastly if done properly would allow for social stability. A great way to do it, would be to send out an equal share to each taxpayer. If 10k goes out to each taxpayer, it may only be .01% of a wealthy persons annual income, but may be 30% of a poor persons annual income, acting as wealth redistribution. Furthermore that money in the hands of the poor would go either to extinguishing what would be bad debts or directly to food and services. And the ruling elite would have a tough time arguing that they were left out of the entitlement program like they argue against digging potholes. Minsky proposed minimum wage jobs provided by the government, but that the capitalist elite would not approve.

Thus on could argue a shared capitalism between socialim and capitalism is the most sound social order.

However in a political environment where the ruling class owns the taxing authority (and redistribution mechanism) The US treasury and legislature, you end up with this top down patchwork that patches benefits some bondholders and screws others, helps some debtors and screws others.

Further complicating matters is that the private equity and hedge funds slosh around chasing yields from sector to sector creating damaging bubbles.

Eventually either political will of the lower class will push the water tower over by gaining control/redesigning the wealth redistribution OR capitalism by its fundamental flaw of canabalism through top heavy monopoly/oligopoly will lead to a collapse of the water tower.

Eventually at last, finally the water spills out onto the barren desert below and finally we may see those green shoots.

Unfortunately for Americans we may go through dark ages, where the rich mearly sit or their wealth (like today) or hyperinflation (reset) through capital flight, or one before the other. Unfortunately afterwards, we may very well find out that many of our ruling elite have not even a scratch much less felt a reset as they have been safely overseas in a Swiss Bank betting against the dollars demise all along. I know the rich are buying up property like mad in search of their future rents post reset.

Sorry bout the ramble, therapeutic in troubling times.

[ThePythonicCow]

Re: FRED if the Banks bad loans are the Fed's Assets?

The interest on a loan is due first and foremost, The bank will NOT let you pay principle if there is outstanding interest and/or fees due. I work at a bank, trust me.

That's only because (short of causing a penalty) banks don't charge interest on interest, but they do charge interest on principle. So they want the outstanding principle kept as high as possible as long as possible.

None of that has much to do (in my view, but I'm a cow, not a banker) with money supply and flows. A dollar from a lender to his bank is a dollar either way. Banks are just doing their corporate duty to maximize that cash flow.

[ThePythonicCow]

Re: FRED if the Banks bad loans are the Fed's Assets?

I agree, but that won't happen with the derisive political culture in this county. Most people have picked a side and forgot how to be an american and human being first.

It's divisive too .

[Jay]

Re: FRED if the Banks bad loans are the Fed's Assets?

I agree, but that won't happen with the derisive political culture in this county. Most people have picked a side and forgot how to be an american and human being first.

Fomenting division is such a simple plan, but it has been working for the power players for centuries.

[thriftyandboringinohio]

Re: FRED if the Banks bad loans are the Fed's Assets?

1. The borrower puts up some collateral against borrowed principle
2. The bank creates new money for the loan and accepts the risk that the loan may not be paid back (in the event of default, the bank's capital is reduced)
3. The borrower pays the bank interest on the created money in exchange for them assuming the risk of loss
4. The bank measures the probability of repayment based on the borrower's past history and their predicted future income stream: the interest and principle payment become a lien on the borrower's future income
5. If the bank screws up too badly, the defaults fall onto the public, by way of the FDIC or other interventions

Hmmm. In point 2, the bank creates money by writing a number in two places (in a ledger book and on a slip of paper the size of a check) and then worries about the risk that it may "lose" the money it just conjured out of thin air, for free? And charges interest as a profit to compensate for that risk?

"The process by which banks create money is so simple that the mind is repelled."
- Economist John Kenneth Galbraith

"[W]hen a bank makes a loan, it simply adds to the borrower's deposit account in the bank by the amount of the loan. The money is not taken from anyone else's deposit; it was not previously paid in to the bank by anyone. It's new money, created by the bank for the use of the borrower."
- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report

[jacobdcoates]

Re: FRED if the Banks bad loans are the Fed's Assets?

No need to be sorry. Although I think you are thinking of the worst case scenario. The bank have to lend otherwise the money supply will not increase and the system will decay as the math dictates it will, the Fed and UST can only delay it as they are currently doing. The real solution which I think you got it right is real income gains for the lower 50% of the income bracket. How this is accomplished will effect it's effectiveness. Some people may call this socialism or redistribution, but I think a better way of looking at it is to think of it as a check on greed and the abuse of people by those in power. Sorry for the run on paragraph, posting from my itouch.

[BillBoard]

Re: FRED if the Banks bad loans are the Fed's Assets?

Ok, so I am an idiot since my last post didn't make any sense.

Let us see if I understand this business of money and banking in pictures -


There is a market with goods and services:

But these consumers do not have any money to buy the above goods and services:

Well, since there is NO MONEY, the first step would be to create it.

$

But who would be trust worthy enough to create the money?

Hmmm....?

How about this guy? A banker:



OK, so we have a banker but still NO MONEY.

Ah! The Banker needs a client to create Money -

Enter the Borrower -

[BillBoard]

Re: FRED if the Banks bad loans are the Fed's Assets?

The Banker checks the Borrower out and sees that the Borrower has assets to pledge for the Money that is going to be created -

The Borrower signs a Promissory Note which begins the Money creation process:



Once the Promissory Note is signed, the Banker enters the amount of the Loan into his Ledger -




Since this is the Modern Age, the Ledger is Computerized -




Alright! The Money has been created and Technically placed into circulation.

But before we continue, let us ponder some points.

At what point did the SUM Amount of the Promissory Note became Money?

At what point in time did the SUM Amount became a Loan?

Could the Borrower default on the Promissory Note through no fault of his own?

[ASH]

Re: FRED if the Banks bad loans are the Fed's Assets?

Ok, so I am an idiot since my last post didn't make any sense.

Actually, the stuff you said about the laborer's fixed costs of housing, etc., echoed some ideas from The Wealth of Nations pretty closely.

The latter part of your post reminded me of substitution in the calculation of CPI (i.e. "prices" aren't regarded as changing if consumer behavior changes to adjust standard of living downward).

I felt like we were leaving you hanging, not commenting on that post, but I couldn't think of anything intelligent (or otherwise) to say in response.