erablogdotcom — Bank income and spending

One of the most common difficulties many people encounter in understanding the mechanics of the financial system lies in their failure to understand the difference between stocks and flows.

erablogdotcom

Bank income and spending

Peter J. Wallison — Why are we still separating banking and commerce?

What could go wrong with allowing big business to generate the unit off account "out of nothing" in addition to banks?

The push is on to erase the line between banking and fintech.

The American Banker
Why are we still separating banking and commerce?

Peter J. Wallison, senior fellow at the American Enterprise Institute and former general counsel of Treasury between 1981 and 1985

Dirk Ehnts — Why I am a horizontalist

Once upon a time, there was a discussion about interest rates set by banks. Do banks:

1. increase interest rates when they face a specially large demand or
2. set interest rates and then ignore the demand for loans

The first position is called the verticalist position, the second the horizontalist.…

econoblog 101
Why I am a horizontalist
Dirk Ehnts | Lecturer at Bard College Berlin

Howard Yu — What Wall Street’s Obsession With Blockchain Means for the Future of Banking

Anyone who sends money abroad knows how inconvenient it is. Banks take days, sometimes weeks, to clear payments, and they collect a hefty fee in between. And God forbid, when errors occur, money vanishes into thin air. “Banking now is like sending a letter—you send it [and] you don’t know if it reached [its destination],” observed Chris Larsen, CEO and co-founder of Ripple, a San Francisco-based startup. His vision is simple: Money transfer should be like sending an iMessage, where you immediately know if and when it arrives. It’s a bold, disruptive idea for sure, but it’s a vision eagerly embraced by heavyweights on Wall Street.…

No-brainer.

Fortune
What Wall Street’s Obsession With Blockchain Means for the Future of Banking
Howard Yu | professor of strategic management and innovation at IMD

Tony Wikrent — Michael Lewis: The Book That Will Save Banking From Itself

During my visit with Jon last month, we both agreed that Michael Lewis is one of the best USA writers living. Here is partial list of some of Lewis's books:

• Liar's Poker: Rising Through the Wreckage of Wall Street (1989)
• Moneyball: The Art of Winning an Unfair Game (2003)
• The Blind Side: Evolution of a Game (2006)
• The Big Short: Inside the Doomsday Machine (2010)

The Big Short was the basis of the movie Jon reviewed here a couple months ago; I reviewed the book back in June 2011.

Since the article below was written by Lewis, I overcame my grave misgivings, and decided to post it here. It is a rather detailed review of a recent book by the former governor of the Bank of England (2003-2013) Mervyn King. The books is entitled The End of Alchemy: Money, Banking, and the Future of the Global Economy, and it presents King's argument that nothing has fundamentally altered the financial system's stupidity, greed, and appetite for high-payoff risks, then King's detailed proposal for what governments and financial regulators should do before the next crisis inevitably hits. 

Normally, I do not believe that highly technocratic financial discussions conduce to furthering an enlightened public discourse. Frankly, such discussions are usually a steaming pile of bovine manure. But now that it appears that our sole choice for USA President is Trumpillary, it seems very likely that the best we can hope for in terms of forcing the banksters to behave civilly is exactly the sort of proposal King is putting forward.…

Good read.

real economics
Michael Lewis: The Book That Will Save Banking From Itself
Tony Wikrent

BIS 20May/Andrew G Haldane: The Great Divide

Speech the dichotomy between insider and outsider perception of banking and finance. Outsiders think they are all crooks. May be the public has been listening to Bill Black.

BIS
20May/Andrew G Haldane: The Great Divide

Reno Berkeley — Banking Expert Who Exposed Savings & Loan Corruption Joins Sanders Campaign

An expert in banking corruption and finance has joined the Bernie Sanders campaign. William K. Black, an associate professor at the University of Missouri-KC, is Bernie Sanders’ new economic advisor. Black was one of the central figures in exposing and prosecuting corruption in the savings and loan crisis from the late 1980s and mid-1990s. His addition to the Sanders campaign brings important knowledge in laws pertaining to finance and banking.…

Inquisitr.com

Banking Expert Who Exposed Savings & Loan Corruption Joins Sanders Campaign

Reno Berkeley

Eric Schliesser — When the Financial Insiders tell you the accounting numbers are (ahhh) made out of thin air

Parsing Emilios Avgouleas and Charles Goodhart on the noble lie about finance and accounting.

Fourth, the reason why they think it's problematic that "published accounting valuations" are not stable is not because, say, all risk models are, thereby, based on epistemic mirages, but, rather, what needs to be prevented is that "the general public" starts the doubt the integrity of published valuations. That is to say, the public needs to stay in the dark about the truth about these numbers (because if the public loses confidence we risk more extensive crises). If keeping the shoddiness of accounting secret from the public serves the public's genuine good, one may call this a a species of Platonic noble lies. But other terms also spring to mind.

Digressions&Impressions
When the Financial Insiders tell you the accounting numbers are (ahhh) made out of thin air
Eric Schliesser | Professor of Political Science, University of Amsterdam’s (UvA) Faculty of Social and Behavioural Sciences

Bill Mitchell — Iceland’s Sovereign Money Proposal

In Part 1, I briefly outlined the Sovereign Money System proposal (SMS) advanced by the Icelandic government as a way forward in banking reform. I also demonstrated that the banking collapse in Iceland in 2008 could hardly be seen as being caused by the banks having the capacity to create credit. 

Much more was in play including the fact that banks had stopped behaving as banks and were serving the doubtful aspirations of their owners rather than any notion of public purpose. While the Icelandic report claims that the commercial bank lending destabilised the growth cycle in Iceland the reality is that it was other factors that led to the explosion of their balance sheets. The money supply did expand faster than “was required to support economic growth” but that is because the financial system was deregulated and the banksters and fraudsters were allowed to serve their own interests and compromise the national interest. As we will see that sort of duplicity can be reigned in with appropriate structural regulation without scrapping the capacity of the private banks to create credit.

In this Part 2, I consider some of the mechanics of the SMS and argue that essentially we cannot get away from the fact that a central bank always has to fully fund a monetary system. If it tries to restrict funds yet maintain private bank lending then recession would surely follow and interest rates would rise beyond the control of the central bank. I also provide some ideas on where more fundamental monetary system reform is currently needed.

Bill Mitchell – billy blog

Iceland’s Sovereign Money Proposal – Part 1

Iceland’s Sovereign Money Proposal – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Human Aggregates Everywhere Are Constrained Primarily By Confusing Derived Numerals With Real Feedback Signals

(Commentary posted by Roger Erickson)


Human Aggregates Everywhere Are Constrained Primarily By Confusing Derived Numerals With Real Feedback Signals

So why DID the moronic population start pounding it's aggregate head on it's aggregate fiat? :(

More to the point, how will we stop, and then keep future generations from starting it up yet again?

Steve Keen — What Is Money And How Is It Created?

 Augusto Graziani, an Italian Professor of Economics, who died early last year ... understood what money is because he posed and correctly answered a simple question: how does a monetary economy differ from one in which trade occurs by barter?

Forbes
What Is Money And How Is It Created?
Steve Keen

Don Quijones — Bank President to Spanish Judge: Making Me Pay for My Crimes Would Send “Message of Uncertainty to Markets”

This would be hilarious if it weren't so outrageous.

It's a variant of the financial oligarchy's threat to blow up the world economy if they aren't allowed to do as they please, which Lloyd Blanfein tells us is "doing God's work."

Raging Bull-Shit
Bank President to Spanish Judge: Making Me Pay for My Crimes Would Send “Message of Uncertainty to Markets”
Don Quijones

See also

New Economic Perspectives
Iceland’s Supreme Court Upholds Jail Sentences of Four Banking Executives
William K. Black | Associate Professor of Economics and Law, UMKC

Tass — Russian Church trying to attract regional governors to setting up Orthodox Christian bank

The chief of Moscow Patriarchate’s department for communications between the Church and Society, Vsevolod Chaplin, has called on the governors of the Belgorod, Kemerovo and Pskov regions, the constituent republic of Mariy-El and the Stavropol territory to take part in the setting up of the Orthodox Christian financial system and an Orthodox Christian bank, Izvestia daily said on Tuesday.…

“The main distinctive feature the Orthodox Christian bank will have is that it won’t issue loans or open deposits,” he said. “Its main objective will be to act as a mediator between Orthodox investors. Hopefully, the Orthodox bankers will offer to form the banking capitals on the basis of gold in the future.” 

Absence of interest rates should become the main principle and asset of an Orthodox banking institution. The concept proposed by Chaplin says bonuses from investments in joint projects should depend on the profitability of an enterprise. 

Along with this, the future Orthodox bank will be forbidden to engage in any operations not aimed at creating the real public wealth or to provide funding for the spheres standing at variance with the ethical principles of Russian Orthodoxy, like gambling, tobacco production, seductive entertainments, the activities related to drugs and so on, Chaplin’s letters say.

Tass
Russian Church trying to attract regional governors to setting up Orthodox Christian bank

We Need Public Trust (And Scalable Verification Methods), Not Just Public Institutions

(Commentary posted by Roger Erickson)




In ongoing discussion with friends at the Public Banking Institute, we often return to a state of talking past one another.

It's obviously my fault. Trying to think ahead always seems to come across as opposition - especially if articulated clumsily. At least initially.

Guess I really do need more practice at saying "Yes, And" instead of "No, But."

It's not enough to think .... one needs to constantly PRACTICE all the arbitrary hand-shaking protocols too, just to effectively communicate with all parts of your own, diversifying electorate.

Does the following help?

Some of my PBI friends (not all) get so involved in local projects that they tend to forget about the implications of national policy.

I am NOT dismissing anything about Public Banking. In fact, I couldn't agree more. There should be many more Public Banks, at every level. Nationalize TBTJ mega-banks. "State-alize" many regional banks, and "County-ize" & "City-ize" many local banks. It's necessary.

That still won't be enough to restore our cultural agility. Not now, and not ever.

I am trying to think ahead, and consider why Public Banking will always be necessary but not sufficient. There are further issues that must be included in the mix. That's why I keep bringing up the "3i's" of contingency management.

Impact;
In-Flight;
Instigators.
...If you don't address all 3, simultaneously, you can't win (excepting luck).

That advice applies not just to current frictions, but also to our own future actions, and selves.

So one obvious implication sticks in my mind. No amount of practice at local tactics (or regional strategy) replaces interleaved attention to national policy. That's just common sense. The inverse is also true, of course. We need both, not either in isolation.

You cannot tell from the presence of public banks alone whether a public is ceding national policy space to NeoLiberal ideologues.

The archetypical Public Bank, the state Bank of North Dakota has had zero impact opposing the slow return of NeoLiberal national fiscal policy the past 80 years. There's no evidence that they even tried!

Meanwhile, the Federal Reserve, for example, is a Public Bank. Heck, Congress is a Public Institution too. 

None of that means that any public institution is immune to being co-opted by Control Frauds. 

Foxes will always seek to be appointed to head local, regional and national Hen Houses. Our need isn't just for more hen houses - which we always need. We ALSO need continuously evolving methods for keeping our own foxes under control.

Plus, those new methods must be more scalable than previous and current methods.

So I'm always thinking of ways to have our public banks AND our national policy too. To me, that's the minimal challenge worth pursuing. Otherwise, you're saying "No class war or Control Frauds in local politics, but they are ok in national government." Lots of luck with that approach.

That is not setting our sights high enough.

The root issue is trust (AND to verify).

If we can't trust private enterprise to run all banks, what can we trust private enterprise to run? Garbage collection? Police Departments? Our MICC?

If we want institutions we can trust, regulate the damn industries!

The root solution is regulatory methods.

What we really want is evolving methods for maintaining Public Regulation ... of all industry sectors, and all components, private or public. That timeless logic is the only way I see how to tackle our exponentially rising organizational tasks.

"More is Different" - it sure is. So how do growing human populations manage more of themselves?

By always bridging FROM current-scale methods TO our emerging, larger-scale behaviors, with NEW METHODS ... that's how. In plain words, that means by ALWAYS thinking ahead, and NOT just on what we're already working on today.

Every 50 years or less, we have a wholly new scale of organizational issues. Issues that today's methods and institutions won't adequately address.

How will we regulate all our emerging, scale-dependent activities?

Not by micromanaging every discipline, but by instilling subtle, new methods allowing us to continuously regulate distributed TRUST, and thereby cultural resiliency. The key issue is to constantly improve the quality (including tempo) of decision-making that is always increasingly distributed.

We can't do that by scaling up committees, or micromanaging existing processes.

Take the ancient example of siRNA allowing micro-regulation of massively larger genomes, and thereby eventually enabling massively multi-cellular species, eventually called Eukaryotes (e.g., humans). We couldn't have evolved just by having more "public" proteins. That's like expecting to put enough police cars on the streets to enforce all traffic laws. That approach - regulating self with more self - just won't scale.

Similarly, stages of larger-scale human culture were possible only after invention of language, writing and other miniaturized, "scalable" technologies.

Again. Self-regulation of more self, by micro-management WITH more self, just doesn't scale.

Replacing self-regulation with ingenious micro-regulation technology allows us to have our "more" and organize it too. All we need from our growing population is their feedback, not distributed-regulation with their actual selves.

Take the same principle applied to Blue Collar policing. The breakthrough method for retaining trust in police is public verification, i.e., not only adding more layers of "Public Policing" but adding miniature lapel-cameras to every cop on the beat.

Face it. We'll never trust enough of our accountants and bankers - public or private - until they wear lapel-cameras too, or something analogous.

What we're doing now is never enough, because there'll be more of everything tomorrow, and more is always different, because interdependencies that are insignificant at one scale eventually become significant - or overwhelming - at another scale.

Ancient cathedral builders learned that, the hard way. So do all people in all professions, ... but never fast enough.

Achieving Public Regulation comes down to inventing subtle new methods for monitoring key portions of increasingly distributed decision-making, so that we can maintain alignment across our growing electorate, and retain trust in ourselves.

There are always more insanely great things our aggregate can achieve .. but only if we invent ways to trust and verify the aggregate utility of our own, distributed actions.

Or regulate.

Ajay Shah — Have Indian banks been underpricing corporate loans?

Time to start paying attention to India.

Ajay Shah's blog
Have Indian banks been underpricing corporate loans?
Ajay Shah | Professor, National Institute for Public Finance and Policy, New Delhi

Warren Mosler — Comments on crude pricing, the economy, and the banking system

I assume everyone here reads Warren's blog but if you don't, this is an important post not only for understanding current events but also Warren's thinking.

The Center of the Universe
Comments on crude pricing, the economy, and the banking systemWarren Mosler

"Bail-in" is the new buzz word in banking. This means you as a depositor.

According to an International Monetary Fund paper titled “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions”:

[B]ail-in . . . is a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution.

The language is a bit obscure, but here are some points to note: 

• What was formerly called a “bankruptcy” is now a “resolution proceeding.” The bank’s insolvency is “resolved” by the neat trick of turning its liabilities into capital. Insolvent TBTF banks are to be “promptly recapitalized” with their “unsecured debt” so that they can go on with business as usual. 
• “Unsecured debt” includes deposits, the largest class of unsecured debt of any bank. The insolvent bank is to be made solvent by turning our money into their equity – bank stock that could become worthless on the market or be tied up for years in resolution proceedings. 
• The power is statutory. Cyprus-style confiscations are to become the law.
• Rather than having their assets sold off and closing their doors, as happens to lesser bankrupt businesses in a capitalist economy, “zombie” banks are to be kept alive and open for business at all costs – and the costs are again to be to borne by us.

Wait. It gets worse.

The Latest Twist: Putting Pensions at Risk with “Bail-Inable” Bonds

Web of Debt
New G20 Rules: Cyprus-style Bail-ins to Hit Depositors AND Pensioners
Ellen Brown

Also

Bill Mitchell – billy blog
The Cyprus confiscation becomes the model for bank insolvency
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

The True View of Nature of Money (1948) - video

The True View of Nature of Money (1948)
h/t Stephanie Kelton

Don't 'bank' on that econ textbook

If I had a dollar for every time an economist says something wrong about the modern economy, I'd be able to buy up an entire economics department (a-la Koch brothers).

In many of my previous posts in this blog, I've detailed how economists chronically misunderstand debt, deficits, interest rates, inflation, and trade. But so far I've ignored what is probably the biggest gaping hole of knowledge in the economics profession: the retail banking system. There is almost a laughable difference between the way economists explain banking, and the way that people who actually work in banking know how the system operates.

Economists remain wedded to very outdated, stylized views of banking that ceased to exist a long time ago. The overly simplistic money multiplier is perhaps the most inaccurate of these views. You've probably heard an economist describe banks as special kinds of private businesses that take money from savers/depositors, and recycle that money back into the economy through lending. This is called 'fractional reserve banking', which, like competent leadership of the Washington Redskins, has not existed for decades.

Banks have a very important role in the US economy. The government has empowered them with the ability to make loans based on creditworthiness and public need. In the simplest terms, modern US banks are credit allocation utilities, and serve as our conduits into the federal government's payment system.  Our modern economy would not exist without either of these facilities, especially the payments system. If you have ever used cash, check, debit, or ACH to acquire a good or service, then you have used the federal government's payment system. This payment system consists of wires between banks, which allows the deposits of difference banks to clear at par (face value). For example, if a customer of Bank A writes a $100 check to a customer of Bank B, then $100 is debited from Bank A's dollar account at the Federal Reserve, and credited to Bank B's dollar account at the Federal Reserve. Just like we have tubes and wires for water, sewer, cable, phone and internet, banks are tubes and wires for money. And just as competition among utilities leads to bad outcomes (duplicative infrastructure and poor service), competition among bankers for lower and lower lending standards leads to other bad outcomes (financial crises).

When it comes to lending, this is the arrangement: The federal government allows licensed banks to create an infinite amount of money out of thin air, and charge interest on it. The federal government also allows the liabilities created by individual banks to clear at par with each other, via the interbank payment system (Fedwire), and insures these liabilities (through the FDIC). Depending on the temperament of the bankers, and the state of the economy, banking can be a very easy and profitable enterprise. For example, in the old days of basic S&L banking, people used to joke about the "3-5-3 rule." Bankers would take in deposits at 3% interest, make mortgages at 5% interest, and be on the golf course by 3pm.

In exchange for these privileges, banks have to comply with the regulations that the federal government writes for them. These regulations can be roughly grouped into three categories: prudential (protecting the safety and soundness of the banks themselves), consumer protection (protects consumers from being ripped off by banks, mainly through disclosure requirements), and a group of rules called the 'Bank Secrecy Act', which prevent money laundering, and allow government agencies to monitor and track potential terrorists.

When a US bank makes a loan, the loan officer simply keystrokes a new deposit into an account. So when banks lend, they create their own liabilities, which themselves are not US dollars. This bank money is denominated in US dollars, and is cleared by US dollars, but it is not US dollars. This is crucial to understanding the banking system. Only the US government can create a US dollar, which is its own distinct liability. Banks cannot create US dollars, since dollars are not their liabilities. Banks create bank money, which are their own liabilities. So while bank lending does create new money, it does not create new US dollars. Only deficit spending from the US federal government can create new US dollars. Therefore, the amount of US dollars in the world does not change as the result of bank lending. When a bank orders cash to fill its ATM, its dollar account at the Federal Reserve is debited by the same amount of cash as it receives. The size of this Federal Reserve account is not affected by lending. This is the same account that is used to maintain reserve requirements and make payments to other banks on behalf customers.

For example, if you get a $250,000 home loan at Wells Fargo, you receive $250,000 in your Wells Fargo checking account. This money is your asset, and the bank's liability. In exchange, the bank creates the mortgage, which is their asset and your liability. This is called dual-entry accounting, and is the best way to understand modern banking. When you pay off the mortgage, this process happens in reverse. The deposits created by the loan are destroyed, and the mortgage disappears. Both your and the bank's liability vanish once the mortgage is paid off in full.

Banks are not part of the private sector, since they could not exist without the Federal Reserve System and deposit insurance provided by the FDIC (to say nothing about how the Fed and Treasury rescued the banking system in 1933, 1991, and  2008/9 -plus every time the FDIC puts a failing bank into conservatorship). Banks also do not recycle your deposits into loans. In modern times, banks are infinitely funded, and only rely on deposits as one source of liquidity. This bloody brilliant paper and a video from the Bank of England (the central bank of the UK) confirms exactly what I am saying here.

As members of the Federal Reserve System, banks can always get the reserves they need to meet reserve requirements, from the federal funds market, the discount window, or overdrafts. Since the Fed itself mandates these reserve requirements, the Fed also always provides the reserves necessary for these requirements to be met. Since we are no longer under a gold standard, the Fed does not have to worry about its liabilities (reserves/dollars) being called in for gold, and can therefore flexibly create/lend these reserves as necessary to meet the requirements it imposes. As the requirer and monopoly issuer of these reserves, the Fed always provides them in infinite amounts, but at certain and variable prices which are voted on by the Federal Open Market Committee. This price of these reserves is what people usually refer to as 'interest rates.'

Note that reserve requirements are entirely different from capital requirements. Reserve requirements are about setting monetary policy. Capital requirements are prudential measures intended to maintain the safety and soundness of the banking system.

At its core, retail banking is a simple activity, with best practices that are well known and established. Like other utilities, it should be a boring and marginally profitable enterprise. The US used to have such a simple, sound banking system in the five decades after the Great Depression. Then, when a fever of deregulation took over in the 1980's, banking was unleashed into the wild, rapacious, and highly profitable business of rent extraction that it is today.

If you've reached the end of this blog, congratulations! You now have a better understanding of the banking system than many economists. Now feel free to use that overpriced textbook as kindling or to even out a wobbly chair.

Ann Pettifor — Central Banking, State Capitalism, and the Future of the Monetary System

Weekend reading

PRIME
Central Banking, State Capitalism, and the Future of the Monetary System
Ann Pettifor, First published on the CFA Institute website