The last events of pumping ever more money into the financial system seems to have revealed how it works and why banks are still making profit despite the economic gloom.
The lending with loan to deposit ratio above 100% cleared the capital reserves out of cash causing the liquidity crisis. It appears that the heist is continued. This time government is giving money to banks only to borrow (the same money) from them at the costs later. As a result banks are making money and pay taxes. This is used as a false argument that banks, in the shape as they are, are good for the economy making profit despite economic gloom. It all looks like an organised scam as these are bogus profits.
This cycle of getting taxpayers further into debt also has an exponential growth like lending with loan to deposit ratio above 100%. With base slightly above 1 (i.e. 1% - 2% - 3% interest) it will increase at first slowly. But it is a time bomb as at some point it will start accelerating very rapidly.
The bankers’ bonuses are the ultimate insult. It is like paying a burglar for doing your home. Although emotive, it is financially of little significance to the system. In reality there is a risk of a complete break-up of the public finances as this taxpayers robbing scam is a pyramid which may reach a tipping point and collapse leaving the country with unrepayable debt. Then only hyperinflation, on a Weimar Republic or Zimbabwe scale, could balance the financial books of the country.
Bankers' bonuses are causing a lot of apoplexy right now and this is not surprising but they are only a pimple on the face of the problem. Government policy is to blame, at least in the US and the UK, because they have ducked hard choices in favour of bailing out the old, rotten system. History will look back and see these as the last deparate days of an ancien regime - printing money to throw at a bloated and useless financial sector before it all unravels.
ReplyDeleteAdvoco, thanks for reading my blog. Government policy is as much to blame for the current financial crisis as for any other common criminality. So I agree: they are to blame. But financiers and bankers who peddled pyramid schemes are first and foremost to blame. They should be banged up and their wealth confiscated. Dealt with like any other common criminals.
ReplyDeleteBest
Greg
You seem to indicate that QE involves the Banks lending the governments money back to them at higher lavels of interest. I'm not sure I specifically understand this mechanism, could you expand? Thanks.
ReplyDeleteayupmeduck: I think it is the case and I would like experts from the City (who are keen readers of my blog) to comment authoritatively. The basic example of QE:
ReplyDelete1. The BoE prints money and then buys from the banks “assets which are difficult to value” at a certain price. In practice these are worthless assets. (Please read: “UK government officially confirmed it does not have a clue about the size of the liquidity hole” - http://gregpytel.blogspot.com/2009/10/uk-government-officially-confirmed-it.html) This operation imitates open market operations on the healthy market. The difference is that with open market operations BoE is buying assets on the market competing for the price with other players, whilst with QE BoE is buying worthless junk that nobody is interested in buying.
2. Then, having got cash through QE mechanism, banks are buying guilts that government sells to them in order to finance budget deficit.
In summary: through QE the government gives banks money for nothing and then the government borrows the same money back from the banks at interest to finance its spending. It is a counterpart of the arrangement whereby you were selling your neighbour a half full dried tin of paint from your garage, only to lend him the same money back at the interest. No wonder banks are making money despite the financial crisis.
Thanks for reading my blog. Please spread the link to it around if you think it is worth it.
Merry X-mas
Greg
I considered the two operations, the Asset Protection Scheme (ASP) and the Quantative Easing, as two separate operations. There are costs for the ASP participants, the so called "first loss", but even those would be realized only at some future date.
ReplyDeleteIn summary though, I take your point and looking at the two schemes together is very helpful as it makes it quite clear that the "trade" made by the banks is one which is impossible for them to lose. Certainly in the short-term, and perhaps even in the longer term, the "trade" makes huge profits for the banks. And these profits are then shared out with the "traders" as bonuses.
I am not certain but I think my observation may also apply to APS. When government is protecting the banks assets, they are able to lend more than otherwise they would have been. So they are buying government bonds? Not sure, and will be grateful if somebody could comment.
ReplyDeleteHmmmm. I'm not convinced that QE works as you say. Certainly the banks can make easy money out of QE but they cannot sell "junk" to the BoE. Under QE the BoE priamrily buys Gilts. These are not "assets which are difficult to value". The BoE may buy some commercial paper, but not much. It's under the ASP, or the Special Liquidy Scheme, where the real junk gets sold to the taxpayer.
ReplyDeleteRegarding QE: I wrote what I believe was reported in the news. There is also an indirect proof that my thinking is correct:
ReplyDelete“If BoE were buying with newly printed money from commercial banks papers (i.e. “assets”, financial instruments, etc) which were worth something (i.e. paying the market price), then commercial banks could have sold these papers on the market at that price to somebody else. In other words no QE by BoE would be needed. QED”
I think your comments about Special Liquidity Scheme are correct.
Any comments will be appreciated.
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