MrBeach on CR:
I'm beginning to see the method to their madness as well.
History
- 2008 - banking system collapsed.
- Immediate and full government guarantees hold the system together while a rescue plan is developed.
- Rescue options: a) Nationalize (CR hattip: pre-privatize) or b) Support the banks.
- Oligarchs pressure Obama to choose B.
- Sham stress tests give green light to banks AS IS.
- Government officials state they will not allow another Lehman. Banks are now a protected class.
- Mark to market changes preserves bank balance sheets from further losses.
- QE + ZIRP reduce cost of capital drastically.
- Banks go from near death both financially and politically to green shoots.
- Stimulus gooses spending
Present
- Banks are making little money on their core loan books.
- Banks making lots of money on trading.
- Banks looking to make loans to the best prospects.
The Hope
- As banks feel confident of their earnings power, they will begin to lend more widely
The Doomer Fear
- Recovery is not sustainable without government stimulus.
- As stimulus fades, recovery will slide.
- Currency risk.
- Bond market risk.
Rebuttal/comments from:
Wisdom Speaker (, ) wrote MrBeach wrote:
2008 - banking system collapsed.
Immediate and full government guarantees hold the system together while a rescue plan is developed.
Rescue options: a) Nationalize (CR hattip: pre-privatize) or b) Support the banks.
If you believe Koo's slides (and I find them very reasonable), Exhibit 16 makes it clear that the choice (b) was driven by the lack of private credit demand. We couldn't have been Swedish if we'd tried.
Government officials state they will not allow another Lehman. Banks are now a protected class.
Except that individual banksters should not have been protected. We were supposed to decapitate before we recapitalized them.
Banks are making little money on their core loan books.
Banks making lots of money on trading.
At the expense of the rest of us!
Banks looking to make loans to the best prospects.
[...]
As banks feel confident of their earnings power, they will begin to lend more widely
You have to look on the demand side of the credit markets as well, though. There just isn't as much demand for credit as there used to be. (There's still some, but on the margins not so much. Remember the old saw: "to get a loan, you must first prove you don't need it"? It's now true again. Unfortunately, those that don't need credit, don't want it. Those that need it and want it, are too risky to lend to!)
The Doomer Fear
Recovery is not sustainable without government stimulus.
As stimulus fades, recovery will slide.
Currency risk.
Bond market risk.
Koo's talk makes it clear that the government will borrow to replace the missing private credit demand, to prevent GDP from crunching downward too quickly. I don't think we need additional stimulus packages at this point, the intrinsic federal deficit is probably enough.
Currency risk is minimal (except vis-a-vis China) since most other countries are in the same pickle and those that aren't, are dependent on trade with those who are. No one can afford to revalue much.
Bond market risk is minimal - see Exhibit 24. People are trending away from being credit-seekers to being debt-averse. Since demand for credit has been crushed and supply of credit far outstrips demand now. A key demographic: the Boomers have to save to retire and the only one willing to borrow more is Uncle Sam. But Uncle Sam will be stabilized against trying to borrow too much, because the government cannot afford its debts if interest rates rise much.
Inflation risk is nonexistent except if we run into the Grecian endgame and people shift over to a Misean crack-up-boom mentality...
MrBeach's rebutt back:
MrBeach () wrote
Wisdom Speaker wrote:
Except that individual banksters should not have been protected. We were supposed to decapitate before we recapitalized them.
I have accepted it. It is not a rock that I can move.
At the expense of the rest of us!
See above.
There just isn't as much demand for credit as there used to be.
As confidence returns (however questionable the catalyst), people will return to their free spending ways. Instant gratification is a way of life. As we well know, prudence is not rewarded. Auto sales are returning for example. I'm seeing people return to buying homes in the Bay Area as well as the Westside of Los Angeles.
Koo's talk makes it clear that the government will borrow to replace the missing private credit demand, to prevent GDP from crunching downward too quickly.
Agreed and understood.
Currency risk is minimal
Agreed - except if we see a black swan event somewhere in Europe or Asia.
Does this mean we have new normal? Wisdom Seeker-san?
