Wednesday, March 15, 2023

Banking in Finanically Buggered Times

This is basically cope. "It's totes okay that our financial system is based on fraud and/or armed robbery." Actually crimes are bad tho. 

That said I hadn't previously appreciated how severely buggered normal folk get from a drastically overleverged "asset" market.
Let's do that: in a debasing central-bank currency regime, the thing to do is have as much debt as possible, because the wealth-value of the debt is going down as fast as the central bank feels safe to put it down. You want to spend the worthless paper money on real assets and hold those instead. In other words, you want to leverage as hard as it is legal to do.
When interest rates go down, you can afford to leverage harder.
In other words all this "asset" demand is in fact demand for savings. They wanted money, but there was only supply of toilet paper, so they got complicated. 

Problem: assets have objective prices, roughly equal to their construction cost + interest rate * construction time. All this demand for assets creates new assets which have no purpose except to be held as hedges against the debased currency. In other words, supply vastly exceeds real demand.

Which means if interest rates go up and savers have to deleverage, these "assets" are revealed to be worthless. Nobody wants them. Making them was a waste of effort. There's a massive economic shock. 

Ultimately, if money is outlawed and only toilet paper is allowed, savers have to buy toilet paper one way or another. As in, imagine literally buying toilet paper futures and having warehouses full of sanitary textiles. Nobody needs to wipe their ass that much. 

When "asset" prices go down, basically what's happening is even more debasement, meaning even more inflation. When the Fed debases dollars, it steals from everyone who holds dollar-denominated "assets." When the assets go down, more of this theft is revealed, and everyone who has a 401(k) holds these "assets." But the factories still work. The wealth is still there, but regular folk (feel) they no longer have the money to demand them. Either the factories make stuff for someone else, or the economic shock causes companies to fire the labour they can no longer afford, meaning the factories in fact stop working. 

Either the toilet paper factories are now selling to some other country, or the warehouses full of toilet paper put the TP factories out of business, because they can't compete with the piled-up inventory that nobody wants anymore.
The labour is still there. The labour is valuable. It's now malinvested (i.e. unemployed) because someone was playinig silly buggers with the price system. (And idiot Americans were accepting worthless USD and therefore letting them.) 

Of course once the economy "recovers" then more effort must be wasted re-building the defunct TP factories after the warehouses are cleared of the TP glut. 

Turns out the reason price controls are bad is because it's fraud. Fraud is bad actually. 

Communism always makes you poor. 


A recession is a Communist country realizing its faked targets were not in fact met and having to come to terms with its real-world poverty. Normally in an unequal way which favours the politically connected. 

Note that 2008 ZIRP was known to be addictive in 2008 due to the fact rate hikes after ZIRP cause issues isomorphic to these issues. It seemed likely that, despite being a terrible idea as I'll mention below, the Fed would stay on ZIRP forever or until America collapses. Remember this every time Patio is all like, "but who could have seen this coming."

And then they went and printed 60% of existing money in like two years for ncov bailouts.

So anyway let's destroy the Communism simp point by point.

>"Why are banks failing?"

Because they lost their pimp. If their pimp was still around they would be bailed out instead of being allowed to fail. It's just Lehman Brothers all over again.  


>"People have a great desire for there to be a narrative here; for a bank failure to require stupidity or malfeasance or ideally stupid malfeasance."

Innumeracy. Doesn't matter if folk do or don't have a desire, what matters is yeah you have to do very stupid things for a bank to fail. However, given the American financial system I suppose it is indeed normal and +EV for banks to be run such that they risk failure all the time.
The bank sees even more incentives to be as leveraged as possible than regular citizens do, since they can legally counterfeit as long as they have a debtor to counterfeit for. 

When interest rates go up folk default on their loans, and then the semi-savvy depositors panic at the "failing" bank and leave, which leads to a cascading customer/market failure. 


>"when interest rates rise, all asset prices must fall. This is both almost a law of nature"


It's leverage and the fact asset demand is in fact monetary demand. 

When interest rates go up you can't afford to leverage as hard and have to sell assets to pay off the interest. This makes "asset" prices go down.

This is why you don't price-fix interest rates if your goal isn't to bugger the economy until it develops septic anal fissures. 

Note that Paul Volcker put the prime rate over 20%, to 21.5%. This lead to a recession, as per the toilet paper warehouse dynamic. This also caused all the normally malinvested companies, who make returns on leverage lower than the real interest rate, go out of business immediately instead of 15 years later. Meaning Volcker, by letting interest rates rise to the market rate, directly caused 90s prosperity. 

The ZIRP policy since 2008 has been guaranteeing poverty for quite some time. Double-dip recession as the malinvested companies become so bad they can't even beat an interest rate 20% lower than the real rate. 

Meanwhile a bunch of production is used to create "assets" which nobody wants, as per the toilet paper warehouse. Imagine all that labour was instead put to useful ends.

Note that in the real world, a bunch of "assets" are stock in these malinvestment companies, which simply go out of the money when interest rates go up. Bonus round!

Get fucked, bitches!

>"This was the most aggressive hike in rates since World War II"

At best incredibly misleading. Volcker did 21.5% in 1981 which was, last I checked, after WWII. Maybe he did +4x the current rate less aggressively in some sense. Oh, good. That makes Patio [not a liar], does it?

The worst thing about liars is that they confuse themselves. They get high on their own supply. 

>"That is a loss no less real than if money had been loaned out to borrowers who defaulted."

But wait, do the factories still work? Is there still stuff? The actual wealth still exists, it's only counters of wealth that are being affected. The money wasn't real in the first place. It was stolen, counterfeit money.

>"Was this because the banks invested in poor credit? No."

Yes. They literally didn't do the accounting.

Let's imagine folk running a bank could actually lose money from a bank failure. How do you avoid it? Under a Fed regime, you have to account for the fact the Fed is going to change the rates. In other words, when the Fed sets rates to 0, you still have to account as if the rate is at least 5%, because the Fed will suddenly and unpredictably put the rates up. 

Fed rate hikes are not some out-of-context left-field disaster. They've happened before. More than once, even, I think. Your strategy has to include them. 

Banks go out of business because they make more money in the short term if they don't include it, and the bank officers can consolidate their gains before the Fed hikes rates. They put your skin in the game instead of their own.

And you keep letting them for some reason, instead of e.g. buying BTC.

The 401(k) is not a benefit, it is an attack, and you need to secure yourself against it.

Unless you're a slave and enjoy getting whipped, I guess. In which case yes max out your local tax-deferred stock scheme using leverage! Remember to put all your eggs in one basket!

>"So if you held ten year bonds and interest rates went up 4% in a year, your ten year bonds are down, hmm, somewhere in the 35%ish range."

Banks did not include a "what if our bond reserves dropped by a third" fork in their investment strategy. Or rather they did, and it was: "Get bailed out." And the "what if we don't get bailed out" fork was, "¯\_(ツ)_/¯ not my money, if I can't go work at someone else's bank ten minutes later, I guess I'll retire? 🤔"

For some reason when it's legal to run a bank like this, they fail a lot. And likewise when voters are stupid enough to bank with banks that are run like this. 

Given your own risk tolerance profile, would you buy a bond if the price could fluctuate by a third, unpredictably, whenever the Fed manager happens to have a tummyache and a bad morning can session?
I'm pretty sure nobody else would buy them either. Not if they were spending their own money.

>“Why do banks buy exotic assets with lots of letters in the name, like MBS from GSE? Why can’t they just do banking? Like, make regular loans to real people and businesses with income to service them? That would surely solve this, right?”

>'It would not."

It really would.
While admittedly the posed question is inarticulate, Patio is deliberately exploiting this bad articulation to suppress premises.

If banks had to loan their own money, instead of counterfeiting fake money, yes there would be no problem.
If supply of leverage was linked to the supply of money through like accounting, instead of linked to the interest rate primarily through psychology, then the supply of leverage would be severely restricted and thus the price of leverage would be enormous.
Meaning only a small fraction of "assets" would be bought on leverage. And folk who were bad at it - who dropped leverage when interest goes up - would regularly become destitute, instead of all having to pull back in symphony with the Fed conductor. 

Note: this is not "Capitalism." This is Communism through fancy financial instruments. Direct command-economy Communism probably would be better, except that there are a few fragments of Capitalism stuck in corners here and there. 

>"Bank deposits are much more complicated products than they are believed to be."

It's almost like fractional reserve is a crime or something. It's weird how legalizing a crime causes problems, isn't it? So complicated.

>"Banks engage in maturity transformation, in “borrowing short and lending long.” Deposits are short-term liabilities of the bank; while time-locked deposits exist, broadly users can ask for them back on demand. Most assets of a bank, the loans or securities portfolio, have a much longer duration.

>Society depends on this mismatch existing. It must exist somewhere.

Yes, society depends on burglary.
Sure it does.


>The alternative is a much poorer and riskier world

Pure self-serving lies. 

The alternative is a much poorer world for burglars, sure. In fact the Dutch ran a 100% hard-money economy for about a century circa the 1600s and became the most prosperous country in Europe as a result.  

What if pauperizing burglars is a good thing. Wow, who could have conceived of this.

>"which includes dystopian instruments that are so obviously bad you’d have to invent names for them."

Only if we assume the burglars have to be kept in the money.
Otherwise we can simply consult Dutch history books for the names they used.

Financial crooks don't seem to realize, but money is not wealth. Money is a counter. The factories can still make paperclips no matter what dodgy speculators are doing to the measuring stick. 

>"Take an exploding mortgage, the only way to finance homes in a dystopian alternate universe."

...or you could build the home you can afford, rather than financing them? Folk did it for like 9,400 years. 

>"It’s like the mortgages you are familiar with, except it is callable on demand by the bank" 

Lie. Normal mortgages exist just fine without fractional reserve, you just have to charge market interest rates, as in 15±8%

Which is why you buy a home after earning the money for it, rather than before. What an amazing idea. What if banks were about holding your money safe, instead of loaning it out on incredibly risky ventures? (In other words, what if Patio wasn't deliberately misunderstanding the question?)

>"But it is important that, from a bank’s perspective, the dominant way people bank sometimes explodes. That asymmetry is the mismatch."

...unless you don't reserve fractionally. Then it doesn't. 

What if Moldbug was 100% right and maturity mismatch is just fraud. What if fraud is bad tho.

>"We expect banks to manage this risk, and we expect society to tolerate it (and sometimes cover the bill for it), because exploding mortgages are worse than this risk."

What a cunt.

So, fun fact, mortgages are a red queen race. The housing market sees a higher supply of money than the economy as a whole, meaning money is worth less when you buy housing than if you buy anything else. To get the same house you could have afforded if mortgages were illegal, now you have to take out a large mortgage. Originally Americans responded by buying smaller houses, so a nice Conquest Third Law effect. Allowing mortgages made houses and the house market shrink. American lawmakers responded by outlawing crime-suppression. Now the only way to get away from criminals and other shitty neighbours is to buy a house so expensive they can't afford to live nearby. 

Everyone mortgage-maxxes. Everyone is in a much more expensive house than they normally would have been in (debatably larger - might even be the same size) but with the exact same neighbours, who were all forced to do the same thing. This then forces the marginal house-buyer to mortgage-max because Americans refuse to, you know, allow crime suppression again, meaning regular normal houses are full of criminals.

Developers, of course, can afford lavish lobbying groups, because they spend your inflated house-money in the relatively-deflated rest-of-the-economy. What a coincidence.
See also: student loans. 

Primarily America's problem is that it's a crime-positive society. You should be able to respond to persistent noise problems by just shooting the bastard, and likewise someone would have shot up the Fed a long time ago. Central bankers aren't people and killing them isn't homicide.

The factories can still make paperclips no matter what dodgy speculators are doing to the measuring stick. 

If you bought your house with cash instead of a loan, it doesn't matter what weird crud the banks get up to. Your house will still keep the rain off.  

Banks are extremely prone to weird dodgy crud, but Americans still keep buying houses with loans. 

>"Banks are institutions designed to exist over timelines longer than interest rate cycles."

Oh he isn't a cunt he's a troll. Clown tells a joke. 


>"This implies certain assets of theirs will always be underwater and certain assets of theirs will always be “worth more than we paid for them.”" 

Um, lol, I guess.
So banks deliberately hold underwater assets which they need to sell to cover deposits, when they'll be the most underwater precisely when deposits are most likely to be called. 

This is allegedly sober, smart, and grownup.

>"This isn’t entirely because management prefers to keep its head in the sand."
>"Finance is an industry with many smart people in it. The same goes for regulatory agencies."

low-key kek

>"We do not expect the footnote to swallow the bank, and that is an important update to our model of the world."

I guess he really doesn't know about 1981? Within living memory is way too long ago for "very smart" people whose heads aren't in the sand.

Or maybe they're just criminals and America sucks because crime is legal.


>"The losses banks have taken on their assets are real. They already happened. They are survivable if banks remain liquid."

Reminder that factories still produce stuff. If there was enough stuff before the crisis, there's still enough stuff after the crisis.

The "losses" happened precisely because the gains that produced them weren't real. 

America has been in recession since 2008 at the latest. There was no recovery. This is merely an economic shock as a result of fanciful fraudulent accounting suddenly being forced to match reality.

Moldbug: zombie banks. They were insolvent for a long time, but still allowed to operate. Most likely this will continue. Some of the most-rotted banks will be allowed to collapse on the ground and moan pitifully. The rest will have the duct tape across their mouth renewed and basically carry on.

Just with another dose of inflation-driving bailouts.

>"We recently went through that cycle faster than we thought possible with regards to a bank which responsible people considered very safe."

They were extremely wrong and therefore, empirically, not responsible. They were children playing with fire, at best.

More accurately Patio knows quite well that the genuinely smart folk in finance knew that "very safe" meant cracked out and driving a car with a wobbly wheel on a ragged steering column with one hand. It was a very relative term.

Patio is just a liar.

>"I believe that narrative to be face-saving, but it is what The System currently is messaging as the truth, so let’s accept it for now."

Clown's jokes are improving. Mid kek.
Straussian way to say, "I've considered the fact this might all be bullshit. Again. Like it was in 2008." Just remember not to consider it yourself, peon.

>"Anyone could have made a killing if they put two and two together even a week ago."

Everyone put 2 and 2 together decades ago, it's hard to see which particular deadly blow will cause actual death. They happen so often.

After the Fed rates spikes is too late. Everyone already knows stuff is in the shitter - you can't sell "early," it's already not early. To make money on this you have to predict how Jerome Powell's bowel movements are going.

Anyway the correct thing after the Fed rate hikes is to angle for bailout. If you do short-selling stuff you look like a speculator and everyone loves to dunk on speculators, because they tend to be rich.

>"Prior to the FDIC et al’s decision to entirely back the depositors of the failed bank, the amount of coverage that the deposit insurance scheme provided depositors was $250,000 and the amount it afforded someone receiving a paycheck drawn on the dead bank was zero dollars and zero cents.

>This is not a palatable result for society. Not politically, not as a matter of policy, not as a matter of ethics."

Wow gee this "spend money you don't own" system is so great, eh guys?
I mean, who doesn't love systemic risk?
Crime is so awesome!

Americans were apparently like, "Every large fortune is due to a crime, so to service the American dream, let's all become criminals."
Obviously the problem of poverty is that there aren't enough broken windows. Just smash some stuff, you'll get rich in no time. Or at least your "community" will, which is why you need "communism." 

Unlike that dirty "Capitalism" nonsense that stops you from smashing windows. Killjoys.


>"What would happen if my bank were to go into receivership this weekend?"

What would happen if we were to obsess about the particular form this double-dip recession would take, rather than note it's part of a pattern where you, the depositor, get poor? 

Whether you get poor because your bank fails or not is kinda irrelevant. 

What's relevant is whether you have to sell your house and move into the high-crime neighbourhood before the criminals have to sell their house and move into the slum.


>"The system has worked very well"

Communism and recessions are awesome. Don't try to resist crime, that's bad.

>"That resolution is a much worse resolution than the one the system typically obtains and it would have affected many more people than is typical. This may be, if not the new normal, a new concerning potential recurring pattern during uncertain times."

It's almost like America is a failing Empire or something. Nothing will improve. Everything will get worse. Stuff will be stable for a time until a new support breaks under the stress, causing a small crisis, a small panic. Punctuated equillibrium.

>"Nightmares for systemic stability might be utterly non-events for you personally."

We all almost died, but it's okay, we didn't. Go ahead and status quo. Don't worry your pretty little head about it.

Though, counterpoint: Greece recently had much more serious banking issues than this, and nobody starved to death. Something would indeed be done. 

It's just that you can expect a serious double-dip recession, as foretold by economic shock theory.

>"The banking system is well-regulated, resilient, and strong. "



Well, it would be more funny if I hadn't heard this joke a million times already.

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