Under What Circs Do Interest Rates Rise?

[Alan B'Stard MP]

Very interesting thanks especially in the light of talk of bank runs and how either impossible or possible it is to manage the very large cash flows required either electronically or over the counter

I find this part particularly of interest

http://www.bankofengland.co.uk/markets/paymentsystems/

"In April 1996, the UK Clearing Banks switched to a new electronic system for settling same day sterling payments. Payments are processed through the Clearing House Automated Payment System (CHAPS) individually and continuously during the day in real time. Previously, payments were processed as a single net transaction at the end of the day and exposed the settlement banks to massive losses if one of the banks were to fail."

If a bank now fails is the central bank now exposed to the losses via that banks drawing on their central bank account to enable these real time payments of reserves?

Could you or anybody else add some flesh to the mechanics of the chaps system and what happens today if a bank fails so that the safer banks actually have real assets or am i to understand that the failure becomes more quickly apparant earlier in the day so that trading of that bank stops earlier rather than banks lending to them during the course of the day they ultimately fail? I guess that must be the way it works? Can you clarify please?

Thanks once again

Not entirely sure what you are asking? Any payment by CHAPS will result in a debit from one account and a credit to the another. This is full and final settlement and no risk involved. If the balance on the account is zero - no transaction can occur - so no danger of the money not being there. It's not the most common form of payment method. It's used for things like conveyancing and exchange of contracts in house purchases.

I would suggest you do some reading around these people

http://www.apacs.org.uk/payments_industry/..._integrity.html

They are the trade association for the institutions delivering payment services to the banking industry which include net settlement system which will require a degree of risk management.

[Mr Nice]

A silly comment given that you keep telling me that banks today dont work like fractional reserve banks while confirming for me they cant lend all of their reserves because they need to retain reserves to satisfy Basle and it is evident to me you dont understand the nature of fractional reserve banking as it was practiced back in the 1970's before all the new style regs came in.

again, I have no idea where you would get an idea like that.

I've never said we don't use a system like FRB, capital adequacy ratios are fairly similar to FRB, and that is definitely what we use.

if I have ever said otherwise, please quote the post I made.

otherwise, it's frightening how you accuse me of saying things, that not only have I not said, but that i have argued the exact opposite of.

Equally amazing that people can with any honesty laugth into my face and tell and tell me they dont move the reserves around here and there in ways that create difficulties for them when there has been a crisis of being unable to access sufficient sodding reserves via a breakdown in the interbank lending market amongst known trusted counter parties!

All thru these conversations people tell me i dont understand modern banking and they dont do it that way and i am wrong and i am misguided and brainwashed and so forth.

there really was no problem with accessing reserves on the money markets.

there was a problem doing it at the super low rates that the gov wanted to maintain.

the interbank money never totally disappeared, it was always there, it just cost a lot more than people felt was good for the economy.

And finally dispite the obvious cartel (my word) or franchise (your word) like nature of the banks it is evident that they operate in a competing manner to retain reserves via the way each bank sets and operates their own individual monetary policies.

To say the banks are all operating as more or less one entity totally makes a mockery of the system that is operating and suggests that one bank like NR or Royal bank of scotlan cannot be the provider of doom and gloom to the sector as much as one bank like HSBC cannot be a provider of cheer.

It also makes a mockery of the facts that trust has been impacted between banks because neither fully knows the nature of the financial damage that exists on the others balance sheet and rumour and gossip are a powerful thing to ruin a bank when day to day operations are happening in full view of all of the participants at franchise or cartel HQ at the old lady

again, you say that I said things I have no recollection of.

you also say that the banks act like a cartel, which almost agrees with what I said, then totally deny that you would have to treat a cartel differently than a field full of totally separate players, when almost by definition you would have to treat them differently.

a chain of KFC's DO compete with each other in theory, but it is a different operation than a Burger King competing with a McDonalds.

It is a simple reality that when you simplify reality and make assumption to make things more easy to understand then you dont understand

Basicly your attitude is that you know better than me and because i sort of freek out at the way you guys are so sodding arrogant you then use that too to make a judgement against me that you know better than me

But evidently that is not fully true.

To my way of thinking reality gets revealed by the knowing of all knowledge

You dont know it all any more than me. Even if you do know stuff i dont know and Steve knows stuff i dont know. It is clearly and painfully evident that Steve has some massive gaps in his knowledge of the way banks actually operate in the real world particularly as regards the way the reserves move around.

And yet your final analysis is not to point out he is wrong but rather to say i am some kind of emotional retard who is unable to use English.

I can't know the secrets of what you mean inside your own mind, all I can go by is what you say on the forum.

and by that it seems that you are not understanding what I am saying because you have accused me several times of saying the exact opposite of what I have said, or even things that I wasn't even aware that I had spoken about at all!

though it is funny that you would accuse people of arrogance for believing that they know more than you, then go right ahead and declare that you know more than them!

but that is an aside.

as far as your language, HONESTLY, there have been times when I have gotten the feeling that I was talking to someone whos first language wasn't english, and that something was getting lost in the translation.

if that is not the case, I regret that you took it as an insult, it wasn't intended to be.

Edited April 29, 2009 by Mr Nice

[the_duke_of_hazzard]

I dunno... ask a simple question....

[A.steve]

I dunno... ask a simple question....

Are they still at it? I lost the will at a little after 3am. In my absence, there doesn't seem to have been any communication... so, I guess I've not missed much, have I?

LOL!

P.S. Yes, Alan B - RTGS is interesting, but does it help us decide if/when (base) interest rates will rise?

Edited April 29, 2009 by A.steve

[Mr Nice]

Are they still at it? I lost the will at a little after 3am. In my absence, there doesn't seem to have been any communication... so, I guess I've not missed much, have I?

LOL!

it really shouldn't be all that complicated.

mostly it highlights how little is know, and how difficult it can be to find out exactly what the process is.

there is a surprising amount of misinformation out in teh internets.

we really should almost have a sticky for it somewhere since it is something that comes up fairly often.

[A.steve]

it really shouldn't be all that complicated.

mostly it highlights how little is know, and how difficult it can be to find out exactly what the process is.

there is a surprising amount of misinformation out in teh internets.

we really should almost have a sticky for it somewhere since it is something that comes up fairly often.

Thinking from this fresher, more rested, caffeine dosed Steve is that there are a mixture of confusions (among those who are relatively bright and interested...):

• Nomenclature - this varies from central bank to central bank; from decade to decade - etc. Narrow money in the US in 2005 was M1, in the UK, it was M0 - an entirely different metric - influenced by entirely different instruments and events... for example. Where imprecise, allegedly "good enough" terminology is used, this problem is amplified.

• Over simplification - in order to make one point succinctly, simplification is desirable... but, all too often, it is assumed the simplified model (which adequately describes a single concept) was intended as a grand-unifying-theory of finance... which it was never intended to be... resulting in false extrapolations - or rejection based upon interpretations out-of-context.

• Logical errors - various kinds... most frequently people assume a statement "A implies B" contains more information than it does - for example, they might assume "B implies A" or that "A union B is the universe". In the context of simplifications, examples and inconsistent terminology, logical errors are all too easy for people to make.

Obviously, there are a few nut-cases out there with really weird ideas... but, on the whole, I've seen, the above three cover most of the problems - which are frequently more subtle than the protagonists admit.

For example, I still can't get my head around how foreign exchange works. I'm loathed to say this - as I'm sure it will prompt a tirade of simplified explanations that do not address what I'm stuck with. I understand, broadly, the mechanisms in-play... I'd like to know the relative (and absolute) scales of distinct activities which influence foreign exchange rates; I'd like to see that the distribution of activities is plausible in the context of historic foreign exchange rates; I'd like to understand the nature of the risks of foreign exchange (and saying "you risk the market moving against you" just doesn't cut it - I want to establish the universe of reasons why it might...); I'd like to know how 'lumpy' demand for a currency is smoothed out using borrowing & Forex arbitrage... etc. etc. I know Forex rates over time don't match what my mental model predicts... so, I know I need to refine my model - maybe change the weight I give to various factors which influence exchange rates.

On the original topic... all of this is relevant to the question... and more. QE is a novel development - it breaks most traditional models that predict when interest rates will rise. New credible models would definitely be helpful.

Edited April 29, 2009 by A.steve

[aliveandkicking]

Not entirely sure what you are asking? Any payment by CHAPS will result in a debit from one account and a credit to the another. This is full and final settlement and no risk involved. If the balance on the account is zero - no transaction can occur - so no danger of the money not being there. It's not the most common form of payment method. It's used for things like conveyancing and exchange of contracts in house purchases.

I would suggest you do some reading around these people

http://www.apacs.org.uk/payments_industry/..._integrity.html

They are the trade association for the institutions delivering payment services to the banking industry which include net settlement system which will require a degree of risk management.

I am referring to this text:

"In April 1996, the UK Clearing Banks switched to a new electronic system for settling same day sterling payments. Payments are processed through the Clearing House Automated Payment System (CHAPS) individually and continuously during the day in real time. Previously, payments were processed as a single net transaction at the end of the day and exposed the settlement banks to massive losses if one of the banks were to fail."

The point being that upto now i had believed that a relatively large amount of reserve settlements were delayed until close of business when the banks settled their agreed net differences at thir central bank branches they are required by the BOE to maintain and staff.

The text is suggesting that since 1996 this method has been reduced in importance to settle the bulk of daily reserve movements which accumulate by the end of the day.

The overall point being as follows:

1. The regulated banks are operating and controlling private economies between their many thousands of customers iusing their own private commercial bank money within the larger economy they form part of.

2. Each bank says that the deposit money or commercial bank money is redeemable upon demand for cash at 1:1

3. The BOE says it is operating a sound and well regulated system

4. The nightly settlements are the transparant method the BOE demands to ensure that the private banks are sound so they can be seen to be good for the reserves they are required by law to maintain to support the lending they do when they create the bulk of the countries money as private money or commercial bank money supposedly convertable 1:1 for cash

5. Wiki is telling us that chaps is handling 300 billion a day.

http://en.wikipedia.org/wiki/CHAPS

"CHAPS is used by 19 settlement banks including the Bank of England and over 400 sub member financial institutions. In its first year of operation, average daily transactions numbered 7,000 with a value of 5 billion pounds sterling. In 2004, twenty years later, average daily transactions numbered 130,000 with a value of 300 billion pounds sterling.^[1]"

So taking all of this into account i am wondering if you can help clarify what the chaps system is doing exactly precisely so that the safer banks are not exposed to the shinnigans of a bank about to go bust where the bad banks privately created money forming a significant chunk of our countries money is in fact simply mickey mouse money of no value at all prior to the failure of the bank

Does that help clarify what i am asking here?

thanks

[aliveandkicking]

QUOTE (aliveandkicking @ Apr 28 2009, 07:21 PM) you cannot lend money at all without fractional reserve if you borrow it,

while I don't necessarily disagree, I think you would be better off saying that you can't lend without LEVERAGE if you have borrowed it.

fractional reserve banking is a specific thing that might not be occurring in a modern environment.

[aliveandkicking]

the actual reserves never leave the bank, and reserves aren't kept back, they are levered against.

I added the highlight on never.

Obviously what you said was incorrect

The following conversation was mind numbing. You appeared to have no ability to read at all.

http://www.housepricecrash.co.uk/forum/ind...t&p=1850561

Edited April 29, 2009 by aliveandkicking

[A.steve]

3. The BOE says it is operating a sound and well regulated system

I don't believe you. I think they imply that the system is anything but well regulated or run.

The BoE points out that the things that are failing hideously are the responsibility of the FSA and the Treasury. They don't pretend for one second that the system is well regulated... or sound (except in the context of the remit that the Treasury imposed on the BoE.)

[Danny Deflation]

Under what circumstances will CB base interest rates _have_ to rise, and what will the warning signals of this be?

Circumstances? A Tory government. Warning signs? The Labour government imploding.

[aliveandkicking]

I don't believe you. I think they imply that the system is anything but well regulated or run.

The BoE points out that the things that are failing hideously are the responsibility of the FSA and the Treasury. They don't pretend for one second that the system is well regulated... or sound (except in the context of the remit that the Treasury imposed on the BoE.)

I dont know why you need to say to me 'i dont believe you'. That seems like some kind of accusation to me rather than just your point of view they are not saying the system is well regulated. Why do you need to be like that? Come on man!! This is supposed to be a discussion.

My point is that they have been saying for years they are well run. So that when an MP asks the governor what the hell is happening at NR with 125% mortgages back in 2004? she is told by King she does not understand modern banking. They also keep saying that nobody could have seen it coming!!

Now we are here and we all must realise there are risks for some of the banks.

And the banks feering a bank failure ask for the chaps system to be augmented to prevent i think end of day settling being so huge it risked a good bank being taken down with a bad one thru lack of knowledge of the other banks losses or perhaps trading style?

My question is about transparancy and how do the officials know the reserves are being correctly accounted for so that the bank is sound and well capitalised blah blah blah. Earlier in my life about one year ago i was led to believe that the regulators were all over the banks like a rash. Now it appears they have almost no clue what is happenign inside the very dodgy vehicles the banks like NR set up to avoid official view. Further accountancy experts agree there was no valid reason to have the sivs.

We know the regulators are saying that tighter regs are needed i think.

Meanwhile I am more interested in how you run a well run system and what methods are needed than imagining i have any control over current events.

Obviously the regulators let us down. They were shortsighted fools or they had something in mind to allow it to play out as it did.

[A.steve]

I dont know why you need to say to me 'i dont believe you'. That seems like some kind of accusation to me rather than just your point of view they are not saying the system is well regulated. Why do you need to be like that? Come on man!! This is supposed to be a discussion.

My point is that they have been saying for years they are well run. So that when an MP asks the governor what the hell is happening at NR with 125% mortgages back in 2004? she is told by King she does not understand modern banking. They also keep saying that nobody could have seen it coming!!

Now we are here and we all must realise there are risks for some of the banks.

And the banks feering a bank failure ask for the chaps system to be augmented to prevent i think end of day settling being so huge it risked a good bank being taken down with a bad one thru lack of knowledge of the other banks losses or perhaps trading style?

My question is about transparancy and how do the officials know the reserves are being correctly accounted for so that the bank is sound and well capitalised blah blah blah. Earlier in my life about one year ago i was led to believe that the regulators were all over the banks like a rash. Now it appears they have almost no clue what is happenign inside the very dodgy vehicles the banks like NR set up to avoid official view. Further accountancy experts agree there was no valid reason to have the sivs.

We know the regulators are saying that tighter regs are needed i think.

Meanwhile I am more interested in how you run a well run system and what methods are needed than imagining i have any control over current events.

Obviously the regulators let us down. They were shortsighted fools or they had something in mind to allow it to play out as it did.

The Bank of England, prior to 1997 might have said that the banks were well run and regulated... but it would not have commented once it was no-longer responsible for regulation.

I read the article in the Daily Hate about MP Gillian Shephard. If we strip away the opinion of the reporter (which is likely to be coloured by the whims of that particular tabloid) we get a rather different picture. Essentially, an MP who also runs a financial institution, asks a fundamentally dumb question of King. King - for obvious political reasons - can't give her a Daily-Mash style answer... but is forced onto the defensive. She's told that the reason that her business can be undercut by banks is because, erm, they are banks. Any intelligent person, on receiving such an answer, could work out that the issues were with Treasury policy (which Gillian should understand - being an MP and all!) and FSA regulation (which she should understand - as she runs a company regulated by them!) It is a non-story about a dippy self-interested MP who asked a stupid question... and a bile-fuelled publication looking for the most prominent scape goat on an issue it knows its readers won't understand properly.

It is the first I've heard about "augmenting CHAPS" - reference?

The bold section leaves me with no need to say "I don't believe you". I agree. Accountancy with respect to establishing reserves is crucial here... and even more so than previous discussions make out... because reserves are nothing more than excess (risk weighted, fixed) assets relative to fixed liabilities. The risk weighting is guesswork, at best. We also agree that operating a SIV should have been deemed criminal - but, obviously, the FSA and Treasury turned a blind eye while it was lining their pockets and serving their political agenda.

I've only one primary-source bit of information about the FSA... I met someone who runs a brokerage in a country pub and was introduced over beer. After a few, on mention of the FSA he seemed very resentful towards them... which seemed odd - his brokerage was (and is) successful and... at the time... I didn't know if he hated them for being too good or too bad at their job. Over time, I've leaned towards the latter. This broker (with first hand experience of regulation) made scathing (slightly inebriated) comments - though professionalism prevented him from being explicit about how the FSA upset him. As I've researched key figures at the FSA, and looked at their incentives, it has become apparent to me that it was a joke organisation... intentionally hobbled by the treasury... focusing on trivialities - while ignoring massive fraud. A grand exercise intended to divert attention away from pinning blame on the Treasury or allowing the BoE to oversee banks and ensure that they are run sensibly. A tripartite agreement is a classic game-theoretic manoeuvre to deflect blame and reduce effectiveness. The treasury were so blatant in their approach that they didn't even bother to rename the strategy before using it to reform our (broadly competent) central bank - stripping it of regulatory oversight of operational matters. It makes you wonder, doesn't it.

Edited April 29, 2009 by A.steve

[Mr Nice]

QUOTE (aliveandkicking @ Apr 28 2009, 07:21 PM) you cannot lend money at all without fractional reserve if you borrow it,

again, as I said before, while I understand (I think) what you are saying, and even agree with it in principle, you would be a LOT better off saying leverage instead of fractional reserve banking.

fractional reserve banking is a very specific thing THAT WE NO LONGER USE, so obviously there are other ways to do it besides fractional reserve banking.

capital adequacy ratios, which we do use, do a similar thing.

you CAN do it without using FRB, you can use CAR's.

I don't think you can argue with that since it is currently happening.

I really don't understand your problem.

[Mr Nice]

I added the highlight on never.

Obviously what you said was incorrect

The following conversation was mind numbing. You appeared to have no ability to read at all.

http://www.housepricecrash.co.uk/forum/ind...t&p=1850561

the reserves DON'T leave the banking system.

you are describing an event where one bank borrows reserves from another in the money markets and then lends that money DIRECTLY out to it's customers.

THAT NEVER HAPPENS (except, as I said, with cash, but AGAIN, cash transactions are so small a percentage that they can be overlooked in most cases in order to maintain confidence)

the bank borrows the reserves AND KEEPS THEM IN IT'S CENTRAL BANK ACCOUNT, and lends CREDIT based on those reserves.

When you deposit 100 cash it goes into the vault of the bank as the banks property

The bank cant use the 100 cash if it is your cash. So it owes you the banks cash. smile.gif

statements like this are exactly what I meant by it sounding like english wasn't your first language.

while I think I know what you mean, it gets pretty hard to parse.

when you deposit 100 in the bank, you LOAN the bank the use of your cash, and they LOAN you 100 in bank credit.

I'm not sure we are disagreeing about that, but the language and definitions aren't clear enough to be sure.

Edited April 29, 2009 by Mr Nice

[aliveandkicking]

again, as I said before, while I understand (I think) what you are saying, and even agree with it in principle, you would be a LOT better off saying leverage instead of fractional reserve banking.

fractional reserve banking is a very specific thing THAT WE NO LONGER USE, so obviously there are other ways to do it besides fractional reserve banking.

capital adequacy ratios, which we do use, do a similar thing.

you CAN do it without using FRB, you can use CAR's.

I don't think you can argue with that since it is currently happening.

I really don't understand your problem.

I can see what is happening now.

Todays banking is using fractional reserve banking. Yes it is.

But instead of a published reserve ratio it uses capital adequacy and what not to say how many reserves have to be retained by the bank to create a certain amount of lending

It is all the same fractional reserve banking

[aliveandkicking]

the reserves DON'T leave the banking system.

you are describing an event where one bank borrows reserves from another in the money markets and then lends that money DIRECTLY out to it's customers.

THAT NEVER HAPPENS (except, as I said, with cash, but AGAIN, cash transactions are so small a percentage that they can be overlooked in most cases in order to maintain confidence)

the bank borrows the reserves AND KEEPS THEM IN IT'S CENTRAL BANK ACCOUNT, and lends CREDIT based on those reserves.

statements like this are exactly what I meant by it sounding like english wasn't your first language.

while I think I know what you mean, it gets pretty hard to parse.

when you deposit 100 in the bank, you LOAN the bank the use of your cash, and they LOAN you 100 in bank credit.

I'm not sure we are disagreeing about that, but the language and definitions aren't clear enough to be sure.

You have a peculiar habit of lecturing me while failing to listen.

I said:

"When you deposit 100 cash it goes into the vault of the bank as the banks property

The bank cant use the 100 cash if it is your cash. So it owes you the banks cash. "

To which you erroneously reply

"when you deposit 100 in the bank, you LOAN the bank the use of your cash, and they LOAN you 100 in bank credit."

YOU DO NOT LOAN THE BANK THE USE OF YOUR CASH

The bank has no obligation to return your cash. The banks obligation is to give you THEIR CASH.

When you lend the cash to the bank the cash becomes the banks property.

I said:

"When you deposit 100 cash it goes into the vault of the bank as the banks property

The bank cant use the 100 cash if it is your cash. So it owes you the banks cash. "

Doh!!!

[aliveandkicking]

it would not lend out those reserves in the commercial market.

This is not true. It simply is not true.

If you buy a house and you buy the house from another banks customer then the bank lends you the reserves it sources from depositors retail and wholesale and passes those reserves to the other bank

This idea of yours that this is not happening is just wrong.

I realise they net up the transactions but for example CHAPS or swift or a wire method is used by the banks to settle convenancing transactions to send the money to your solicitor and the solicitor sends the money off to the other sides solicitor.

If the bank cannot lend thoses reserves to the other side it cannot complete the loan

Yes yes yes they net it all up and it is not like they do one loan a day or borrow once a day but you cannot say they are not doing this if the loan monies go to another banks customer

You are warping reality by minimising the realities of the way the banks operate.

Once again when you simplify a system you get the wrong answer and create beliefs which are not true in reality.

[aliveandkicking]

The Bank of England, prior to 1997 might have said that the banks were well run and regulated... but it would not have commented once it was no-longer responsible for regulation.

I read the article in the Daily Hate about MP Gillian Shephard. If we strip away the opinion of the reporter (which is likely to be coloured by the whims of that particular tabloid) we get a rather different picture. Essentially, an MP who also runs a financial institution, asks a fundamentally dumb question of King. King - for obvious political reasons - can't give her a Daily-Mash style answer... but is forced onto the defensive. She's told that the reason that her business can be undercut by banks is because, erm, they are banks. Any intelligent person, on receiving such an answer, could work out that the issues were with Treasury policy (which Gillian should understand - being an MP and all!) and FSA regulation (which she should understand - as she runs a company regulated by them!) It is a non-story about a dippy self-interested MP who asked a stupid question... and a bile-fuelled publication looking for the most prominent scape goat on an issue it knows its readers won't understand properly.

It is the first I've heard about "augmenting CHAPS" - reference?

The bold section leaves me with no need to say "I don't believe you". I agree. Accountancy with respect to establishing reserves is crucial here... and even more so than previous discussions make out... because reserves are nothing more than excess (risk weighted, fixed) assets relative to fixed liabilities. The risk weighting is guesswork, at best. We also agree that operating a SIV should have been deemed criminal - but, obviously, the FSA and Treasury turned a blind eye while it was lining their pockets and serving their political agenda.

I've only one primary-source bit of information about the FSA... I met someone who runs a brokerage in a country pub and was introduced over beer. After a few, on mention of the FSA he seemed very resentful towards them... which seemed odd - his brokerage was (and is) successful and... at the time... I didn't know if he hated them for being too good or too bad at their job. Over time, I've leaned towards the latter. This broker (with first hand experience of regulation) made scathing (slightly inebriated) comments - though professionalism prevented him from being explicit about how the FSA upset him. As I've researched key figures at the FSA, and looked at their incentives, it has become apparent to me that it was a joke organisation... intentionally hobbled by the treasury... focusing on trivialities - while ignoring massive fraud. A grand exercise intended to divert attention away from pinning blame on the Treasury or allowing the BoE to oversee banks and ensure that they are run sensibly. A tripartite agreement is a classic game-theoretic manoeuvre to deflect blame and reduce effectiveness. The treasury were so blatant in their approach that they didn't even bother to rename the strategy before using it to reform our (broadly competent) central bank - stripping it of regulatory oversight of operational matters. It makes you wonder, doesn't it.

The daily mail story still stacks up to me though. Northern rock were using the siv to disguise the amount of leverage they were using to generate profits. Naturally if you borrow more or less 100% of the money you lend out, you can lever by much more than if you have some significant skin in the game and you are operating in a prudent manner. See my comments about modern banking to Mr nice also to emphasise modern banking is using fractional reserve. NR was busted to buggery because of the leverage and obviously behaved in a criminal manner and king defended them.........in ignorance perhaps but is he the best the BOE can provide?

I also dont buy the idea the BOE could not regulate the banks better and it was somebody elses job. It seemed common knowledge in banking in the dieing days of the boom that something was horribly wrong but since 'we are getting paid what can you do - you may as well survive until the next bonus' I kid you not.

When i first saw a detailed desciption of a modern MBS on the calculated risk blog back in 2007 i knew that no human being could possibly understand that document in risk terms. It was just guess work wrapped up in plausability. Obviously something was horribly wrong and was just an accident waiting to happen. The fact was the wall of liquidity was an illusion, it was more or less 100% levered funds via interbank reserve lending of surplus reserves from every bank and financial outfit on the planet.

People like king have watched over these developments. Even so fundamentally i think british banking is ok or will be ok. My comment about augmenting Chaps was incorrectly said. I meant implementing chaps to reduce settlement risk back in 1996.

Back on the subject of forex i think we were talking about that before? My feeling is that your way of seeing bank reserves and the forex confusion might be related? I could not follow your confusion on Forex i recall and i cant follow what you are saying about reserves either. Reserves are just central bank money. The commercial banks create most of our money amongst the customers (private money)

The power of money in the commercial banks is that their private money is convertible to central bank money 1:1. This means when you use your deposits to buy forex the bank is converting boe money to say ECB money at the known market rate. I dont yet understand why you find this confusing. I suspect you have a blindness with the reserves related to the blindness with the forex though?

Edited April 29, 2009 by aliveandkicking

[tomwatkins]

The daily mail story still stacks up to me though. Northern rock were using the siv to disguise the amount of leverage they were using to generate profits. Naturally if you borrow more or less 100% of the money you lend out, you can lever by much more than if you have some significant skin in the game and you are operating in a prudent manner. See my comments about modern banking to Mr nice also to emphasise modern banking is using fractional reserve. NR was busted to buggery because of the leverage and obviously behaved in a criminal manner and king defended them.........in ignorance perhaps but is he the best the BOE can provide?

I also dont buy the idea the BOE could not regulate the banks better and it was somebody elses job. It seemed common knowledge in banking in the dieing days of the boom that something was horribly wrong but since 'we are getting paid what can you do - you may as well survive until the next bonus' I kid you not.

When i first saw a detailed desciption of a modern MBS on the calculated risk blog back in 2007 i knew that no human being could possibly understand that document in risk terms. It was just guess work wrapped up in plausability. Obviously something was horribly wrong and was just an accident waiting to happen. The fact was the wall of liquidity was an illusion, it was more or less 100% levered funds via interbank reserve lending of surplus reserves from every bank and financial outfit on the planet.

People like king have watched over these developments. Even so fundamentally i think british banking is ok or will be ok. My comment about augmenting Chaps was incorrectly said. I meant implementing chaps to reduce settlement risk back in 1996.

Back on the subject of forex i think we were talking about that before? My feeling is that your way of seeing bank reserves and the forex confusion might be related? I could not follow your confusion on Forex i recall and i cant follow what you are saying about reserves either. Reserves are just central bank money. The commercial banks create most of our money amongst the customers (private money)

The power of money in the commercial banks is that their private money is convertible to central bank money 1:1. This means when you use your deposits to buy forex the bank is converting boe money to say ECB money at the known market rate. I dont yet understand why you find this confusing. I suspect you have a blindness with the reserves related to the blindness with the forex though?

MBS's and CDO's had one thing in common-the rating agencies. I agree with you statement that no human being could understand them-even Warren Buffet, which is why he steered clear of them. To my mind it was pass the parcel-if it was AAA then it was OK-who cares?

What I think will come out is in relation to the CDS market. Think about it-the potential for fraud was massive. If you have 100 CDS's written on the same CDO then it is in the interest of the CDS holder that the underlying colateral goes bad (if he has multiple contracts-which is possible). If the "multiple CDS holder" gets the nod from an insider that the CDO or other derivative is a pile of sh!te then the profits are huge. Somebody profited with the AIG collapse (we know one hedge fund did that bought multiple CDS's) so it is not beyond the realms of possibility that some of the profits funnelled back to the original CDO writer (or a whistleblower).

Does this crap makes sense to anybody?

[Alan B'Stard MP]

I dont yet understand why you find this confusing. I suspect you have a blindness with the reserves related to the blindness with the forex though?

I think A.steve is really missing the duality of money and the fact that it sits on many balance sheets in both asset and liability balance sheet accounts. I get the impression that for him it is a one-dimensional object. Touch'n'feel sort of thing.

Forex seems straightforward enough to me. You have credit (commercial or central; AKA money) - you wish to sell it. You put it up for sale. Market conditions determine whether you sell or not at the price you envisage.

Edited April 30, 2009 by Alan B'Stard MP

[Mr Nice]

I can see what is happening now.

Todays banking is using fractional reserve banking. Yes it is.

But instead of a published reserve ratio it uses capital adequacy and what not to say how many reserves have to be retained by the bank to create a certain amount of lending

It is all the same fractional reserve banking

you yourself quoted that FRB hasn't been used since the 70s.

then you turn around and claim that it is still in use.

capital adequacy ratios have similar effects to freaction reserve banking, but it is a different process.

really it isn't complicated.

if you can name a specific transaction in modern banking that takes in reserves, reserves part of them and lends out the rest, I'd love to here it.

[Mr Nice]

This is not true. It simply is not true.

If you buy a house and you buy the house from another banks customer then the bank lends you the reserves it sources from depositors retail and wholesale and passes those reserves to the other bank

This idea of yours that this is not happening is just wrong.

I realise they net up the transactions but for example CHAPS or swift or a wire method is used by the banks to settle convenancing transactions to send the money to your solicitor and the solicitor sends the money off to the other sides solicitor.

If the bank cannot lend thoses reserves to the other side it cannot complete the loan

Yes yes yes they net it all up and it is not like they do one loan a day or borrow once a day but you cannot say they are not doing this if the loan monies go to another banks customer

You are warping reality by minimising the realities of the way the banks operate.

Once again when you simplify a system you get the wrong answer and create beliefs which are not true in reality.

I said that reserves never leave the banking system, not that the banks don't exchange reserves t balance themselves out.

I said that YOU as a commercial borrower will never get those reserves, YOU the commercial borrow only deal in bank credit.

again, except in the transaction where you withdrawal cash, but those aren't relevant to the system at large.

they are allowed to retain confidence in the banking system as a whole, and will likely be done away with as we evolve into a cashless society.

actually reading what I have posted instead of veering of into twitchy psychosis would have made this all clear a looong time ago.

Edited April 30, 2009 by Mr Nice

[aliveandkicking]

you yourself quoted that FRB hasn't been used since the 70s.

then you turn around and claim that it is still in use.

capital adequacy ratios have similar effects to freaction reserve banking, but it is a different process.

really it isn't complicated.

if you can name a specific transaction in modern banking that takes in reserves, reserves part of them and lends out the rest, I'd love to here it.

!!!

I was wanting to say that bog standard specified reserve fractional reserve has not been used for a long time. But it is the nature of borrowing and lending that modern banking must be fractional reserve!!

This is tedious.

The bank cannot operate for more than a few hours or minutes without taking in reserves and paying them out!!!!

The bank does not work in isolation to the rest of the economy!!!!

Money flows into one bank for a while............then to another for a while.........banks grow.....and they get smaller........they are more successfull......less successful.

A bank is like a country with a border......it has a balance of payments!!!!

The banks customers are like a region of the economy....bordering the other regions of the economy

The way you are looking at this is entirely incorrect. And so you get the wrong answer.

Edited April 30, 2009 by aliveandkicking

[aliveandkicking]

I said that reserves never leave the banking system, not that the banks don't exchange reserves t balance themselves out.

I said that YOU as a commercial borrower will never get those reserves, YOU the commercial borrow only deal in bank credit.

again, except in the transaction where you withdrawal cash, but those aren't relevant to the system at large.

they are allowed to retain confidence in the banking system as a whole, and will likely be done away with as we evolve into a cashless society.

actually reading what I have posted instead of veering of into twitchy psychosis would have made this all clear a looong time ago.

This is rediculous!!!

I have a wallet full of reserves!!!

There are vast freeking warehouses with cash in them moving around the freeking country!!!!!

You are suggesting the system works in a way where cash is meaningless.

You are wrong. Misguided. Lacking in knowledge.

Britain is a major trading nation!!! Deposits are continually flowing in and out of the country!!!!!

There is a balance of payments!!!!

If you take cash out of this system you cannot understand it properly

You are inventing a system that does not exist in reality.

"actually reading what I have posted instead of veering of into twitchy psychosis would have made this all clear a looong time ago"

Agreed. We would have known more clearly what i already realised emotionally and intuitively but could not nail down because you were lacking consistancy while sort of making sense but making no sense at all.

You dont understand how it works.

A bank is one black box. then there are the other commercial black boxes. Then the central bank.

then there are the other central banks black boxes. And the other smaller commercial black boxes.

It is like a networked computer passing numbers. One computer gathers more numbers than all of the other computers because it operates in a way that enables it to lose fewer numbers while successfully gaining other numbers. But human nature is such that success breads complacency and hungrier more lean efficient more courageous while prudent banks can eat into their market share.

Cash is the data bits via which this system operates.

You reduce cash to such low importance you cannot understand this system at all.

Edited April 30, 2009 by aliveandkicking