Recession predictions

KyussB wrote: »

You are conflating falling short of capital requirements, with falling short of reserve requirements.

If a bank fails to have enough collateral at hand, to the point that they become insolvent if they need to provide collateral to the central bank in return for their reserves being shored up - then they are insolvent, that has nothing to do with my argument about reserves - that is an issue with capital requirements, not reserve requirements...

Do not mix up capital-requirements/solvency, and shoring up reserves.

My point stands: The central bank will never fail to shore up the reserves of a bank, when asked - we can add "if the bank has enough collateral" to that if you like - but that doesn't alter my point.

This means that reserve requirements are not a restriction on lending - only capital requirements (and having to provide collateral when shoring up reserves with the central bank, just emphasizes this, it doesn't work against this point).


On bank lending:
Banks need to meet their capital requirements - those capital requirements don't "fund" the loans - the act of lending creates all of the financial assets (deposits, debts and collateral tied to them) needed to supposedly 'fund' further loans and meet capital requirements in the overall banking system.

Effectively (for the whole banking system in aggregate), the available capital for the banks to use for meeting their capital requirements, can expand as much as the economies demand for loans (within regulatory limits for giving out loans).

It is simply wrong and a major misunderstanding to compare that to outdated/wrong 'fractional reserve' i.e. 'money multiplier' theories of banking, through the use of the word 'fund' for describing this - that small semantic argument, does nothing to make the above anything like those theories.

So can bank lend if it does not have funds? Please explain how?

KyussB wrote: »

Instead of people first Saving/Depositing their money into a bank, and then the bank Loaning/Investing that saved money - the act of Loaning/Investing creates new Savings/Deposits.

A lot of textbook teach it as 'Saving leads to Investment', but it is the other way around 'Investment leads to Saving' - which overturns a lot of basic macroeconomics.

The debate above about bank 'funding', is a way to try to hold onto the 'Saving leads to Investment' point of view - when that's not how it works.

Yet again putting words in my mouth... Where have I said that saving leads to investment? I have pulled you up on a specific point which I believe you are wrong on and it has noting to do with 'Saving leads to investment'

KyussB wrote: »

The banking system in aggregate, having enough liquidity, is pretty much about being solvent - of meeting capital requirements.

If a bank is short on reserves, and needs to exchange 'eligible assets' to the central bank in order to receive reserves to meet reserve requirements - and if those 'eligible assets' are classed as allowing e.g. largely government bonds - then yes, the banking system may run into trouble if all governments are running a surplus, draining government bonds out of the system.

This both demonstrates an odd way that government surpluses are a bad thing that can cause financial instability - and it demonstrates that there is a core strong demand for government bonds for meeting reserve requirements.

Now, the central bank decides what counts as 'eligible assets' - and they aren't just going to let the banking system fail - so the central bank will just expand what is considered as 'eligible assets', e.g. expanding it to cover residential mortgages and such (financial assets created through the act of lending) - and these kinds of expansions of eligible assets have been done routinely over the last decade, through QE and the various asset purchase programs.

All of this bolsters the fact that banks are not reserve constrained, when it comes to lending - only capital constrained - and that liquidity is more of an issue with solvency and thus meeting capital requirements.

No the central bank can not just change it's 'eligible assets' and expand it to cover mortgages or some other debt. They specifically say that this is not not eligible.... instead the bank would need to use DWF or the EU equivalent and post the mortgages as collateral which in turn the bank would receive government bonds which they then could post as collateral to avail of the OSF lending facility.

Having sufficient liquidity is key to enable a individual bank to lend... yes there is sufficient liquidity in the banking system... In fact with QE there is way to much that it is causing banks issues.... But one bank can have adequate liquidity and another be short.... In such a circumstances the bank that is short will look to increase it's liquidity either via securitisation, availing of central bank asset purchase program or by offering more attractive rates to customers to entice them to move funds from the bank that is long on liquidity to their bank by paying better deposit rates. This is the funding that I am referring to that a bank needs to have in place to be able to lend if it short on liquidity.

KyussB wrote: »

Whatever way the asset swaps are structured, it's a de-facto expansion of eligible assets, undertaken through separate programs - where the separation is just a facade. It's a meaningless detail - as the central bank will not fail to shore up liquidity in the overall system - so it is irrelevant.

Individual banks may run into liquidity problems, sure - but the point stands that in the banking system overall, this is not an impediment to expanding loans, and is more of a solvency/capital-requirements concern at both an aggregate and individual bank level. I'm focusing on looking at this from the view of the overall banking system.

You seem to view liquidity as separate to capital requirements issues? I don't.

Yes I view them separately as a bank may have capital but not liquidity and vice versa that would prevent them from lending... Likewise a bank may have sufficient liquidity and capital but may not have enough stable funding to cover the lending. (When I say funding here I am talking about stable liquidity which for most banks is provided by having the sticky deposits or notice/term deposits).

A bank may even have a sufficient NSFR and capital but may still be restrained from lending due to the leverage ratio. The point that I was making is that a bank can not just undertake as much lending as it likes as all the regulation introduced since 08 have constraints on the bank.

I know you have said that there is sufficient liquidity/collateral in the total banking system but if you look back to the start of Covid there wasn't sufficient collateral in place as the central banks had been buying government bonds and the pool of bonds available in the banking system was reduced as a result and once margin calls kicked it left all the banks looking for more collateral to cover the margin calls.... This nearly brought down the whole system before the central banks stepped and fixed the problem.

KyussB wrote: »

I view all of that as a solvency/capital-requirements issue. I don't see the point in breaking that down into more and more granular issues - that only serves to obscure things. There are two general classes of issues - capital requirements and reserve requirements - and it doesn't add anything to the discussion, to break the former down into more and more detail.

This does not obscure things as all the points I mentioned need to be taken into account for a individual bank to lend. It is not just about a bank being adequately capitalised. If it was it would make banking a lot more simple and riskier.

If there is enough demand for loans and the only thing stopping the overall banking system from providing them is liquidity, the central bank will accommodate that - including by (one way or the other, obfuscated through several different programs if need be) expanding 'eligible assets' that can be swapped for shoring up reserves.

At the overall banking level yes but not at a individual bank level and banks fail at a individual level and all it takes is one bank to get into difficulty to put pressure on all other banks.

All of that leading to restating the point, that bank lending is constrained by capital requirements - it is not constrained by reserve requirements - deposits do not 'fund' loans, loans create deposits - and that ultimately the quantity of loans/money is determined from within the economy (endogenously) by demand for loans, not from outside the economy by the central bank (exogenously) - with the interest rate and regulations placed on loan issuance, tempering the demand for loans.

Yes I agree that demand for loans comes from the economy but a bank has it's risk appetite which limits who and the value of who they lend to.

At the moment consumers are not drawing down loans in fact they are paying them off which is destroying money. The banks are desperate to lend due to the amount of liquidity in the financial system but unless they take on more risk they are unable to do so as the market is saturated. The central bank can cut rates to try and drive demand but that hasn't worked for the past 4/5 years in fact you could argue that it has lead to banks being less profitable which has reduced competition as smaller banks are not able to cover the fixed costs of running a bank and have exited the market. (e.g. ulster, Kbc)

Fascinating debate folks, thank you

Revolution 1917 wrote:

Let's start from understanding that loan are not growth.

If loans aren't created, we got no money supply, which means we get no growth, which means, we d be in deep sh1t

theguzman wrote: »

We should move away from FIAT Currency back to the Gold standard or to a Dogecoin like system of finite supply. Printing money ad-infinitum forever is debt slavery and is responsible for the current boom in asset prices like property and land, people want something which is fixed and permanent, not something which is being constantly printed off and duplicated ad-infinitum, a true measure of wealth is something rare and in short supply, almost 50% of all cash and money in banks has been created out of thin air "printed" since March of 2020 at the start of the Pandemic. Inflation is starting to bite badly now and has started already in Construction and will soon filter down to groceries and other essentials.

all money is created from thin air, it always has been, long before 2020 polices where implemented, we ve in recent times, just become overly reliant on private sector created money, i.e. credit, which in turn has just created credit fueled asset booms, and subsequent busts, i.e. 08. the majority of the money supply has in fact been, and for a long time, coming from private sector financial institutions, or banks, hence the term 'credit crisis'. but since we ve been lubing the pathways to asset markets, over the last few decades, anytime money is created in either the public or private domains, its flooding straight towards these markets, driving up asset prices. private debt has in fact been causing far more significant crashes, again, 08 was primarily due to private debt accumulations globally, including here in ireland, which of course was flooding into asset markets, primarily property and land. its also important to remember, the paying off of debt, is in fact the destruction of money itself, due to the nature of its creation, commonly called 'double-entry bookkeeping'

one of the main reasons why we moved from the gold standard was to expand our economies, without which, we would have been screwed, i.e. we had to move off the gold standard, it had run its course. going back isnt possible now, you cant make debts just disappear without causing problems, and there just isnt enough gold, it would cause catastrophic economic crashes globally. its also one of the main reasons why it would be virtually impossible for a country to leave the euro group, having debts based in what would be a foreign currency upon leaving, leaving would probably lead to that countries economy crashing, potentially crashing the eu along with it, i.e. we re all stuck in this dance.

some inflation is actually required, and urgently, as we ve been also living in a low wage inflation environment for too long now, along side high asset price inflation, hence our current housing train wreck. if we dont create this inflation, all our debts become highly problematic, as we may not be able to service them, and we all know what happens when debts become unserviceable, i.e. 08! so careful what you wish for!

such predictions are impossible, humans dont have these capabilities, we may never have

tax payer supports have been critical in maintaining functionality of our economies, since there was a dramatic drop in the demand for private sector money, i.e. credit. we need to maintain running deficits for the foreseeable, to try reduce, ideally prevent, excess credit creation, i.e. pre 08 period

great question, not sure, but i suspect, not too good. i know people have been dying outside the entrances of Indian hospitals throughout this, unsure if theyve been receiving state aid, welfare etc, oxygen has also been in serious short supply in such countries, industrial oxygen been used in many cases, and a major black market of oxygen supplies is under way, so god knows whats been bought and sold there. parts of Africa have been experiencing major civil unrest, riots, looting etc etc, they probably dont receive government aid

it ll be interesting to see if the collapse of chinas evergrande have much effect in this neck of the woods!

im not so sure about that, we still have the global financial system very complexly intertwined, it ll be an interesting one to watch

completely agree, theres no better time to do these investments than now, rock on with it, it ll create jobs, and kick start the economy after all of this, bonds are the magical money tree, plough on

raising rates too fast and by too much can and does cause economic slow down, as meeting debt obligations becomes more difficult, especially private based debts, raising rates also causes people to reduce spending due to rising difficulties servicing these debts, in turn this reduces economic activities. we ve been experiencing a very low rate environment for very long now, and central banks are now effectively stuck with this, largely due to the accumulation of debt, particularly private debt, inflationary pressures are more than likely due to supply side issues, and less so on the increase of the money supply