We are in the middle of a bear market for risk assets, and the key question is trying to figure out what turns this around. My argument is that it is going to be very difficult to read the entrails of market chart patterns, pandemic data, and policy responses to time the bottom. However, if one is not attempting to be a hero forecaster, one key thing to look for is a the resumption in corporate bond issuance. (This is the primary credit market; the secondary market is trading of existing bonds among investors. Pretty much all market data and colour is based on the secondary market.) My feeling is that policy makers are either going in the right direction (or are being dragged by the private sector), so policy uncertainty is becoming less of an issue. Instead, we are stuck more with the hard scientific question as to the effectiveness of social distancing, as well as medical treatments....Bond Economics
Primary Credit Market Is Key
Brian Romanchuk
9 comments:
We’re in a bear market for risk assets because the Fed has been increasing the amount of non risk assets... and bank capital is fixed
In 2008 the Fed caused that reduction in risk assets by doing the same thing they just did ie adding 100s of $b of non risk assets to banks (Reserves) it didn’t bottom until Treasury added an additional $350b in new capital to the banks (Tarp) to cover the additional non risk assets the Fed added...
And you morons call that a “bailout!”... LOL!!!
Here I’ll put it in figurative terms so maybe you people understand it analogy:
That would be like shooting someone in the head and then performing brain surgery on them to save their life and then say “hey! I saved your life!”
If you resort to figurative language you have to have the knowledge to use it in a way that it actually enlightens the issue at hand.
It’s good that you try though. Don’t feel bad about this particularly poor attempt.
Thanks for your comments. This seems essential to understand. Could you point to some sources that explain this in detail
I understand reserves increases assets, but don't they also increase liabilities?
This has all been explained in previous comments but that was some time ago. So I will summarize the basics.
Reserves exist only as entries on the central bank's spreadsheet, although vault cash also counts toward banks's reserve balances. But vault cash is obtained from the central bank by exchange reserves for it. Reserves are created by 1) government spending through the Treasury and 2) central bank lending against collateral, generally Treasury securities. In both cases reserves are liabilities of the central bank on its spreadsheet, which constitutes the interbank payments system for settlement. Reserves are settlement instruments and are sometimes called settlement balances. "Settlement balances" better accounts for their function than "reserves."
They are used by members of the payments systems to 1) settle with government, e.g. tax payments, and 2) for interbank settlement among member banks of the system.
Reserves are liabilities of the central bank and assets of those who hold them in their reserve accounts at the central bank. They have no function outside the payments system run by the central bank for members to settle accounts after netting.
A primary function of the central bank is making sure that the payments system it administers always clears. The central bank must ensure sufficient reserves are available for this.
The central bank injects reserves into the payments system to provide liquidity for settlement. This is done either by the central banks buying Treasuries, and doing repo with the member banks. (Only governments and financial institutions, chiefly banks, have access to the payments system and hold reserve balances as assets at the central bank).
There is rampant misunderstanding of the function of central banks to ensure that the payments system always clears by providing liquidity to member banks in good standing. This is not "free money," and nothing gets spent in the economy unless it results from fiscal operations that must be appropriated by the legislature. However, the Fed is authorized by Congress to pay interest on reserves and this is fiscal, adding to non-government net financial assets in aggregate.
This is somewhat complicated to explain in a comment but its implications are important. Understanding this requires basic knowledge of the principles of money & banking and accounting. The best book on money and banking is by MMT economist Eric Tymoigne and it is free. It includes both the government system run by the central bank and commercial banking. This involves two different sets of books, the central bank's spreadsheet and commercial banks spreadsheets.
http://neweconomicperspectives.org/money-banking
While MMT is chiefly about fiscal, it is highly recommended to become familiar with monetary, too.
Tymognie never addresses leverage other than CAR...
MMT doesn’t address any of this highlighted from recent Fed statement:
“Since the global financial crisis of 2007-2008, U.S. bank holding companies have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers. The largest firms have $1.3 trillion in common equity and hold $2.9 trillion in high quality liquid assets. The >>>>>>>U.S. banking agencies have also significantly increased capital and liquidity requirements, including improving the quality of regulatory capital, raising minimum capital requirements, establishing capital and liquidity buffers, and implementing annual capital stress tests.<<<<<<<<<
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