Saturday, 26 November 2016

"This is like trying to predict earthquakes or hurricanes, they don't happen very often"

From the BBC:

… Neel Kashkari, president of the Federal Reserve Bank of Minneapolis is proposing an alternative that may be more in line with Donald Trump's way of thinking. He believes that banks should be forced to massively increase their capital reserves (1) - the amount of cash they are obliged to keep in hand for the day when everything goes wrong at once.

Currently, US banks need to keep 6% of what are known as their risk-weighted assets, a formula that values their their loan book, in cash. Under the so-called "Minneapolis Plan", Mr Kashkari wants banks to significantly increase this ratio to up to 38%.

Neel Kashkari says [existing] measures to prevent another bank meltdown don't go far enough:

"My highest focus is making sure we don't have another financial crisis where the banks get into trouble and they have to turn to the taxpayers," he told BBC World Service. We've looked at the history of financial crises - this is like trying to predict earthquakes or hurricanes, they don't happen very often.(2)

"And if you look at financial crises all around the world, that's the level of capital that we need to reduce the chance of a future crisis to as low as 10% over the next century."

1) The word "reserves" is largely meaningless in this context as it can mean quite different things. "Cash" is as crystal clear as you can get.

2) He can't have been looking hard enough, there has a been a banking crisis in the USA every 18 years or so since the early 19th century, interrupted only by the second world war (and the mid-cycle dip in the 1973-1989 cycle). The cycles in most other countries in the world have now synchronised with the US cycle (i.e. the last full one was 1989-2007). And these cycles always go hand in hand with land price bubbles; you can't have a land price bubble without a credit bubble - a credit bubble will always go into higher land prices.

So as ever, the question is, is he deliberately lying or is he stupid?


Physiocrat said...

Banking crises are as predictable as eclipses of the sun and moon, which also run to a 19 year cycle, as does the ancient Hebrew calendar.

Coincidence or what?

James Higham said...

Orchestrated crises in other words, e.g. 1857 in the U.S. by the future JPM.

Mark Wadsworth said...

Phys, coincidence. Or possibly not but does it matter?

JH, semi-orchestrated. The bankers are knowingly reckless during the bubble phase (cashing in their lovely bonuses out of thin air) and then they ask for lots of lovely taxpayer handouts when it goes bust (taking smaller but still outrageous bonuses), so for them, the whole thing is a win-win.

Demetrius said...

But earthquakes and hurricanes do happen often. It is predicting exactly where when and how big is the tricky bit except that there will be some more often in the same locales. As someone who checks out earthquakes daily it is surprising how many there are. As for hurricanes the National Hurricane Center in the USA does a fine job.

Lola said...

MW I think Mr Kashkari is just confusing 'reserves' with 'cash'. I thought banks 'reserves' were cash - held in their own vaults and as deposits with central banks (or other banks?). Haven't they also been 'allowed' to hold other things as 'cash' and therefore qualify as 'reserves'? e.g. sovereign debt?

Bayard said...

"So as ever, the question is, is he deliberately lying or is he stupid?"

There's none so blind as them that don't want to see. My vote goes for self-deception.

Mark Wadsworth said...

L, the point is that in accounting or banking terms "reserves" can mean two quite opposite things.

It can mean "retained profits" which is on the "financed by side" or it can mean a particular class of assets on the assets side ("we have plenty of cash in reserve").

One bank could be financed 100% by shareholder's funds and retained profits and not have a penny in spare cash. It has plenty of reserves but no reserves (of cash).

Another bank could have all its assets in cash but actually be insolvent. That has no reserves but plenty of reserves (of cash).

B, yes that is the most likely explanation. To tell a lie convincingly, it helps if you believe it.

Lola said...

From wiki ( )

Re Bank Reserves.

"In relation to bookkeeping, the term is a misnomer. Reserves are ordinarily part of the equity of the company and are therefore liabilities. Bank reserves, on the other hand, are part of the bank's assets. In a bank's annual report, bank reserves are referred to as "cash and balances at central banks". ?

I don't see how a bank could have 'all its assets in cash'. Surely 'assets' are the loans it makes?

What am I missing?

Derek said...

Quite right, Lola. My understanding is that banks don't have oodles of cash lying around. Instead they use the cash to buy bonds, gilts or other assets. But the understanding is that these must be highly liquid assets that can be sold for cash at a moment's notice. And that is generally true.

Until there is a crisis of some sort at any rate. At which point the central bank usually has to step in as "the lender of last resort" to provide literal trucks of cash if necessary.

Mark Wadsworth said...

L, good, wiki says the same as I do.

Of course banks would be daft to have ALL their assets in cash, but there's no law against it. AS D adds, for these purposes, govt bonds count as "cash".

D, agreed.

Dinero said...

Despite the wording of the article the term is not capital reserves it is capital ratio, and its not cash , its the value of the assets over and above the liabilities divided by the assets.

Lola said...

MW. D. OK. That's what I thought.

Apropos of which, when the Euro was launched, I recall it being said that since the Euro was A Very Good Thing and everyone would super wealthy and solvent and all the same as each other, as far as EU banking regulators were concerned holding, say, Greek Sovereign debt was as good for commercial bank reserve/capital reasons as holding say, German Sovereign debt.

And that's one of the places all the trouble started.

DBC Reed said...

The trouble didn't start in Europe but in the US no recourse mortgage market.Why don't the I'm a Beleavers mention this?

Lola said...

DBCR. It stared both here and there. In the US the villains of the piece were a combination of the Fed, the Government Sponsored Enterprises of Fanny Mae, Freddie Mac and Ginnie Mae, Clinton's anti red lining interventions, greedy banks, bad brokers etc and over here Brown's FSMA2000, The EU, B of E failures (although they were hamstrung by FSMA 2000), the absolutely useless FSA, greedy bankers and brokers etc.

DBC Reed said...

@L You haven't mentioned George Bush who doubled his negative reputation by then starting the Iraq War for no reason (no WMDS).An American article such as "Bush Drive for homeownership fueled housing bubble" Dec 2003 is fairly typical of the American reaction. Bush had spent years pushing banks and savings and loans into risky housing finance especially to "minority communities". Googling George Bush White House home loans can often throw up some of his original "booster" talk from this period, some of which bore the White House imprimatur until quite recently, after which it began to disappear.
I should think that the colossal damage to the world banking system was done during "The Big Short" period in the States and this spread over here and in Europe as bankers could no longer trust American financial instruments not to have been corrupted by unsecuritised home loans.Gordon Brown probably did help save the system from Wall Street Crash# 2 but nobody is going to admit it.