Dangerous Economic Misconceptions

[_w_]

Aye, that's NIRP. It's not printing money or cheer leading HPI though.

BTW, the idea behind NIRP (on savings) is something I agree with - we have too many people hoarding savings, without a risk of loss. As credit is the other side of the debt coin, without those savings being spent, the debts can't be retired. I may not agree with Sceppy's preferred implementation, but I agree with the reasoning.

EDIT: sp

It is the latest I can specifically remember as I soon avoided reading his posts to avoid getting wound up.

I really don't think I need to add much to his last post which says it all. The boy was on a mission:

I shall return under a new name once you are all thoroughly discredited by the implosion of the condems idiotic recovery plan and most of you are out of work and have burned through your STR funds, and my various other predictions have been vindicated.

...

LOL LOL LOL.

[interestrateripoff]

Jesus H Christ

Haven't you realised yet that all economics is just guesswork and that NO ONE really understands what is going on.

If two professors of economics disagree then my opinion is just as likely to be correct as theirs is, or even

God forbid - yours

Yep it's all guesswork, there are far too many variable to make any sort of accurate prediction. Human beings are just too unpredictable.

Still it's fun trying to guess.

[Dorkins]

BTW, the idea behind NIRP (on savings) is something I agree with - we have too many people hoarding savings, without a risk of loss. As credit is the other side of the debt coin, without those savings being spent, the debts can't be retired. I may not agree with Sceppy's preferred implementation, but I agree with the reasoning.

Who are you to tell anybody they have too much saved? It's their money, they can do what they like with it. Nobody is being forced to take on debts, and if they want to 'retire' them all they need to do is pay them back (or default). I am tired of people like you thinking they know what's best for everybody else. That is the real root cause of our economic problems: a self-important elite that thinks it has all the answers.

[Traktion]

Who are you to tell anybody they have too much saved? It's their money, they can do what they like with it. Nobody is being forced to take on debts, and if they want to 'retire' them all they need to do is pay them back (or default). I am tired of people like you thinking they know what's best for everybody else. That is the real root cause of our economic problems: a self-important elite that thinks it has all the answers.

You completely misunderstand the point.

Debt creates credit. Credit is used as savings. If the debt goes bad, the savings should also go bad (in the form of bank failure). The debt is the asset, the savings are the liabilities. They have to balance.

As savings in a bank are an investment yielding a return based on the risk of debt not being repaid, they should not be guaranteed. Risk has to be correctly appropriated by the bank failing (taking 'savings' with it), a centrally organised NIRP (IMO, too authoritarian, but I can see the aim) or something like LPB which spreads the risk by way of savings being equity in the loans themselves (which may or may not be repaid).

It's not a case of thinking I know best, it is a matter of understanding how the system works. Banking isn't risk free and using the taxpayer to bailout savers (which is a big reason why the banks were saved) is swamped with moral hazard. Why should some young potential FTB be paying more tax so that some cash rich chap can keep his savings, which were at risk all along?

As debt and credit are two sides of the same coin, how can those in debt repay it, if the money they need to do so is being hoarded as savings? It's impossible. The more savers hoard, the more defaults there will be, the more bailouts there will be; until the money which savers were so keen to hoard, will be worth far less than when they started hoarding OR the government stops the bailouts and the savers take a haircut (bank failure).

BTW, when you put money in the bank, it is no longer your money. It is a liability for the bank to repay you that amount, when you request it. If you're unhappy with this, withdraw it and keep it somewhere safe. Better still, spend it on some hard assets (take your pick) and let the people in debt have a chance of paying it down. If you don't, don't bloody moan when another bout of QE arrives; without it, you may have lost all of your savings already.

On the longer term picture, demographics are changing (post baby boomers) and this will make it increasingly difficult to repay debts.

Which is why I agree with Septicus on the reasoning why a sort of NIRP is needed. I'd much rather have equity based banking (like Limited Purpose Banking), where risk is ever present and always reflected leading to a natural free market haircut for some, than a one haircut fits all, for a number of reasons. The reasoning behind it remains similar though.

EDIT: grammar

Edited September 8, 2010 by Traktion

[Authoritarian]

As savings in a bank are an investment yielding a return based on the risk of debt not being repaid, they should not be guaranteed. Risk has to be correctly appropriated by the bank failing (taking 'savings' with it), a centrally organised NIRP (IMO, too authoritarian, but I can see the aim) or something like LPB which spreads the risk by way of savings being equity in the loans themselves (which may or may not be repaid).

LPB sounds like another complex financial product, i.e the type of thing that's been blamed for causing the financial meltdown. Terms like 'equity' 'yield' 'limited purspose' and 'risk' will just bemuse a public that want a simple and fuss free savings account, the sort of thing they already have.

If this was a great idea then it would already have taken the market by storm, there are good reasons why this hasn't happened.

I know (otherwise sensible normal) people that don't even understand how ISA's work! Not fully anyway, and LPB will just seem too risky. People pay the banks to shoulder the risk for them, which seems like a sensible approach to me.

As debt and credit are two sides of the same coin, how can those in debt repay it, if the money they need to do so is being hoarded as savings? It's impossible. The more savers hoard, the more defaults there will be, the more bailouts there will be; until the money savers were so keen to hoard, will be worth far less than when they started hoarding OR the government stops the bailouts and the savers take a haircut (bank failure).

Bailouts are a political problem that can only be solved at the ballot box, they're not a technical banking issue.

Just look at the big pension funds that have been bailed out over the years, they had nothing to with FRB but they're getting their free cash nonetheless. The same thing could easily happen with LPB if there was enough pressure on the government i.e a load of boomers' savings was at stake.

LPB won't stop bailouts.

Edited September 8, 2010 by Chef

[Dorkins]

You completely misunderstand the point.

Debt creates credit. Credit is used as savings. If the debt goes bad, the savings should also go bad (in the form of bank failure). The debt is the asset, the savings are the liabilities. They have to balance.

As savings in a bank are an investment yielding a return based on the risk of debt not being repaid, they should not be guaranteed. Risk has to be correctly appropriated by the bank failing (taking 'savings' with it), a centrally organised NIRP (IMO, too authoritarian, but I can see the aim) or something like LPB which spreads the risk by way of savings being equity in the loans themselves (which may or may not be repaid).

It's not a case of thinking I know best, it is a matter of understanding how the system works. Banking isn't risk free and using the taxpayer to bailout savers (which is a big reason why the banks were saved) is swamped with moral hazard. Why should some young potential FTB be paying more tax so that some cash rich chap can keep his savings, which were at risk all along?

As debt and credit are two sides of the same coin, how can those in debt repay it, if the money they need to do so is being hoarded as savings? It's impossible. The more savers hoard, the more defaults there will be, the more bailouts there will be until the money savers were so keen to hoard will be worth far less than when they started hoarding OR the government stops the bailouts and the savers take a haircut.

BTW, when you put money in the bank, it is no longer your money. It is a liability for the bank to repay you that amount, when you request it. If you're unhappy with this, withdraw it and keep it somewhere safe. Better still, spend it on some hard assets (take your pick) and let the people in debt have a chance of paying it down. If you don't, don't bloody moan when another bout of QE arrives; without it, you may have lost your savings already.

On the longer term picture, demographics are changing (post baby boomers) and this will make it increasingly difficult to repay debts.

Which is why I agree with Septicus on the reasoning why a sort of NIRP is needed. I'd much rather have equity based banking (like Limited Purpose Banking), where risk is ever present and always reflected leading to a natural free market haircut for some, than a one haircut fits all, for a number of reasons. The reasoning behind it remains similar though.

Ah I see, sorry. Your thinking is a lot more nuanced than I gave you credit for. I still disagree with you though!

I think the trouble with the idea that ordinary savings should be treated like sophisticated financial products in which investors shop around for a yield:risk measure that suits them is that it massively overestimates ordinary people's thought processes when they save money. Ordinary people are not sophisticated investors with the time and ability to look at bank balance sheets and calculate the likelihood of defaults. If you put them in a situation in which they are expected to do that, the real sophisticated investors like Goldman Sachs will quickly find a way to eat them for lunch.

Personally I would like to see the government create a class of fully-funded, inflation-proof, zero return investment which ordinary people could invest in without the need for guarantees. We could call it money. If the central bank stopped printing more of it and creating inflation which savers need to constantly battle against, people could just hold pounds (even physical banknotes) when they wanted to transfer consumption from now into the future. Want to retire for 15 years on half your current income? Just work for 45 years, saving an average of one sixth of your pay each year. Job done. Want to make riskier investments for higher potential returns like lending money to people through mortgages and credit cards, or playing the stock market? Up to you, but any losses belong to you. If you lose it all, you will just have to rely on the state pension.

Sound money could mean debtless savings and no need for government guarantees or sophisticated behaviour from unsophisticated investors.

[Traktion]

LPB sounds like another complex financial product, i.e the type of thing that's been blamed for causing the financial meltdown. Terms like 'equity' 'yield' 'limited purspose' and 'risk' will just bemuse a public that want a simple and fuss free savings account, the sort of thing they already have.

If this was a great idea then it would already have taken the market by storm, there are good reasons why this hasn't happened.

I know (otherwise sensible normal) people that don't even understand how ISA's work! Not fully anyway, and LPB will just seem too risky. People pay the banks to shoulder the risk for them, which seems like a sensible approach to me.

Actually, mutual funds now represent 30% of the US financial market. This has been growing slowly for decades and they didn't have problems coping with the banking crisis.

Telling everyone that FRB isn't risky and that savings are guaranteed is the reason why people use it, not because of its implicit security. All investments are risky, even a high street bank.

Bailouts are a political problem that can only be solved at the ballot box, they're not a technical banking issue.

Sure, but then people may lose most of their savings on collapse, depending on how easily it was liquidated.

Just look at the big pension funds that have been bailed out over the years, they had nothing to with FRB but they're getting their free cash nonetheless. The same thing could easily happen with LPB if there was enough pressure on the government i.e a load of boomers' savings was at stake.

LPB won't stop bailouts.

The risk is ever present and reflected in LPB. It doesn't stop bailouts being given (nothing can), but the price of the fund would just fall in a crisis, rather than hitting the buffers; it's the sharp changes (ie. bank failure, lost savings, panic) which gives the loudest calls for bailouts, not a gradual change in value.

LPBs wouldn't go bankrupt, require costly and lengthy liquidations either (as FRBs do) - the market would just value the funds as it likes and life would go on.

FRB is a bailout magnet unfortunately. You can argue that the politicians shouldn't bail them out, but they will, for the sake of votes and pressure from their banking buddies.

[Authoritarian]

I think the trouble with the idea that ordinary savings should be treated like sophisticated financial products in which investors shop around for a yield:risk measure that suits them is that it massively overestimates ordinary people's thought processes when they save money. Ordinary people are not sophisticated investors with the time and ability to look at bank balance sheets and calculate the likelihood of defaults. If you put them in a situation in which they are expected to do that, the real sophisticated investors like Goldman Sachs will quickly find a way to eat them for lunch.

Exactly! If the experts have little grasp of what's going on in this area, as they've demonstrated with the credit crunch then the average punter has little hope. The big boys ended up making money out of the disaster because they were able to advise governments over the world what to do, a get out that the little guy doesn't have.

Even that dipstick Martin Lewis pushed Internet based Icelandic bank accounts just weeks before the whole thing went down, not to mention Kent County Council, who had £50m tied up in it. If these guys consistently get it wrong then it corners average people into making decisions that they're not capable of making.

Edited September 8, 2010 by Chef

[Traktion]

Ah I see, sorry. Your thinking is a lot more nuanced than I gave you credit for. I still disagree with you though!

I think the trouble with the idea that ordinary savings should be treated like sophisticated financial products in which investors shop around for a yield:risk measure that suits them is that it massively overestimates ordinary people's thought processes when they save money. Ordinary people are not sophisticated investors with the time and ability to look at bank balance sheets and calculate the likelihood of defaults. If you put them in a situation in which they are expected to do that, the real sophisticated investors like Goldman Sachs will quickly find a way to eat them for lunch.

Personally I would like to see the government create a class of fully-funded, inflation-proof, zero return investment which ordinary people could invest in without the need for guarantees. We could call it money. If the central bank stopped printing more of it and creating inflation which savers need to constantly battle against, people could just hold pounds (even physical banknotes) when they wanted to transfer consumption from now into the future. Want to retire for 15 years on half your current income? Just work for 45 years, saving an average of one sixth of your pay each year. Job done. Want to make riskier investments for higher potential returns like lending money to people through mortgages and credit cards, or playing the stock market? Up to you, but any losses belong to you. If you lose it all, you will just have to rely on the state pension.

Sound money could mean debtless savings and no need for government guarantees or sophisticated behaviour from unsophisticated investors.

We have this already though - it's cash (ie. coins and notes), as I think you were suggesting.

But people don't want to look after cash right, as they want it kept safe somewhere else, have access to ATMs, PDQs, cards etc, right? That's where 'narrow' banking comes in and it's something that both LPB and the Proposed BoE Act are pushing for, in different flavours. A place where you pay a fee (it's a service, remember) for your money to be kept securely, while having normal ways to access it.

Mervyn King has suggested that this is a way forward, giving the nod towards LPB as a mechanism for this. Indeed, up until the 70s (IIRC), post office accounts were essentially narrow banks, only investing in government bonds (which are essentially 'money'). EDIT: About 30% of the money supply was held in these accounts too.

However, as most 'money' is actually credit, with a debt waiting to be repaid by it, arguably traditional money commodities are better as savings for the economy (as credit is spent buying said commodity, helping debt be repaid). They are also immune to governments printing up new money. The downside is that they may fluctuate and you need to liquidate them to pay bills in Sterling (which is why I suggested being allowed to pay taxes in some of these).

Some people want safety, some people want returns balanced by risk. Our current universal banking model promises both the former and the latter, which is impossible without taxpayer bailouts or printing. That's the root of the problem with the current banking system.

P.S. You would still get calls for non-narrow FRB banks to be bailed in a crisis because of those caught out. LPB sidesteps it by allowing people to sell or hold their investment at any time. You can't stop the government bailing out funds, but it would be an easier argument (against) to win as it wouldn't be one big failure of a bank.

Edited September 8, 2010 by Traktion

[Traktion]

Exactly! If the experts have little grasp of what's going on in this area, as they've demonstrated with the credit crunch then the average punter has little hope. The big boys ended up making money out of the disaster because they were able to advise governments over the world what to do, a get out that the little guy doesn't have.

Even that dipstick Martin Lewis pushed Internet based Icelandic bank accounts just weeks before the whole thing went down, not to mention Kent County Council, who had £50m tied up in it. If these guys consistently get it wrong then it corners average people into making decisions that they're not capable of making.

Then people should stick to cash mutuals, narrow safe banks (ie. full reserve accounts) or stick the cash under the bed or whatever. Banking is risky and no amount of talk will get around that.

Edited September 8, 2010 by Traktion

[Authoritarian]

Actually, mutual funds now represent 30% of the US financial market. This has been growing slowly for decades and they didn't have problems coping with the banking crisis.

So if 100% of their savings were tied up in mutuals they wouldn't have experienced a crash? I don't think so, have you heard of the savings and loans crisis that the U.S endured not that long ago?

The savings and loan crisis of the 1980s and 1990s (commonly referred to as the S&L crisis) was the failure of 747 savings and loan associations (S&Ls aka thrifts). A Savings and Loan is a financial institution in the United States that accepts savings deposits and makes mortgage, car and other personal loans to individual members - a cooperative venture known in the United Kingdom as a Building Society. The ultimate cost of the crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the US government via a financial bailout under the leadership of George H.W. Bush—that is, the US taxpayer provided the funding for the bailout, either directly or through charges on their savings and loan accounts and increased taxes[1]—which contributed to the large budget deficits of the early 1990s.

link

Telling everyone that FRB isn't risky and that savings are guaranteed is the reason why people use it, not because of its implicit security. All investments are risky, even a high street bank.

Nobody has been saying this, not before the crunch anyway. It was a bit of a revelation to find out that my savings were guaranteed to the tune of £30k a few years back. I expect very few people knew about this, but they used the banking system anyway. This is becasue banks are actually very good at managing their risks, but they cannot be expected to compensate for the gov'ts policy of making real estate very expensive.

The risk is ever present and reflected in LPB. It doesn't stop bailouts being given (nothing can), but the price of the fund would just fall in a crisis, rather than hitting the buffers; it's the sharp changes (ie. bank failure, lost savings, panic) which gives the loudest calls for bailouts, not a gradual change in value.

Just as the value of people's savings would fall aswell in a crisis. If banks were liquidated then savers would receive anything from 0-100p in the £. These savings products are as risky as each other, it depends on where the money is invested.

LPBs wouldn't go bankrupt, require costly and lengthy liquidations either (as FRBs do) - the market would just value the funds as it likes and life would go on.

So if somebody on the other side of LPB defaults there's no comeback? I.e they won't be asked to payback what they owe?

It makes it sound like more of a risk to me, banks will try and claim the money back because it's in everybody's interest, that's why we have liquidation proceedings.

FRB is a bailout magnet unfortunately. You can argue that the politicians shouldn't bail them out, but they will, for the sake of votes and pressure from their banking buddies.

Then you accept that exactly the same thing will happen with LPB.

Edited September 8, 2010 by Chef

[Dorkins]

We have this already though - it's cash (ie. coins and notes), as I think you were suggesting.

But people don't want to look after cash right, as they want it kept safe somewhere else, have access to ATMs, PDQs, cards etc, right? That's where 'narrow' banking comes in and it's something that both LPB and the Proposed BoE Act are pushing for, in different flavours. A place where you pay a fee (it's a service, remember) for your money to be kept securely, while having normal ways to access it.

Mervyn King has suggested that this is a way forward, giving the nod towards LPB as a mechanism for this. Indeed, up until the 70s, post office accounts were essentially narrow banks, only investing in government bonds (which are essentially 'money').

However, as most 'money' is actually credit, with a debt waiting to be repaid by it, arguably traditional money commodities are better as savings for the economy (as credit is spent buying said commodity, helping debt be repaid). They are also immune to governments printing up new money. The downside is that they may fluctuate and you need to liquidate them to pay bills in Sterling (which is why I suggested being allowed to pay taxes in some of these).

Some people want safety, some people want returns balanced by risk. Our current universal banking model promises both the former and the latter, which is impossible without taxpayer bailouts or printing. That's the root of the problem with the current banking system.

P.S. You would still get calls for non-narrow FRB banks to be bailed in a crisis because of those caught out. LPB sidesteps it by allowing people to sell or hold their investment at any time. You can't stop the government bailing out funds, but it would be an easier argument (against) to win as it wouldn't be one big failure of a bank.

Yes we have cash, but cash in 2010 is not a great investment because the central bank is constantly working to destroy its value. This forces people into savings accounts with inflation-matching interest rates, and of course the money in savings accounts is lent out by the bank to others with all the risks of default and need for government guarantees that we have been talking about.

What do savers want most? Is it positive real returns, or is it just for their savings to hold their real value through time? People have become so inflation-habituated over the last several decades that it's difficult for them to separate these two things in their minds anymore. I'd argue that what savers really need is a safe place to hold their money, not yet another sophisticated investment product. There's no need for a new model of banking which rearranges the distribution of credit-debt risk, just stop destroying the value of cash and people will be able to hold this risk- (and return-) free. You could even turn the state pension into a mandatory cash-only fund (topped up by government if you are very poor).

And yes, there is physical gold, but unfortunately none of us are paid in gold or do our shopping in gold, and the gold:pound exchange rate fluctuates wildly over time.

If the central bank stopped creating new pounds they would stop losing value and there would be no need for gold. The central bank could stop printing tomorrow. No need for structural reform, a new legislative framework, nothing. Just give people the option of risk free savings and tell them if they want to make riskier investments that's their problem. At the moment they have no choice but to be forced into risky investments because the central bank is determined to slowly destroy the pound.

[interestrateripoff]

Nobody has been saying this, not before the crunch anyway. It was a bit of a revelation to find out that my savings were guaranteed to the tune of £30k a few years back. I expect very few people knew about this, but they used the banking system anyway. This is becasue banks are actually very good at managing their risks, but they cannot be expected to compensate for the gov'ts policy of making real estate very expensive.

Where do you get the impression from banks are very good at managing risks?

In Talebs black swan he cites the case that in 1982 the US banking system lost more in one year than it had accumulatively made ever because they misunderstood the risks.

As for who is to blame it's a bit of a circular argument depending on where you join the circle will influence your opinion on who is to blame more. Govt's certainly didn't create CDO's etc... nor did they force anyone to buy them, although clearly in the US the govt created massive incentives for the banks to lend against property and there was huge short profits to be made from taking the bet and as we have so far seen very little risk to the actual large banks that profited.

[tomandlu]

Confirmation bias is very dangerous, never listen to anyone especially when you see conformation of your own bias.

I agree with this, so I'm going to ignore it.

[Traktion]

So if 100% of their savings were tied up in mutuals they wouldn't have experienced a crash? I don't think so, have you heard of the savings and loans crisis that the U.S endured not that long ago?

link

Of course they would have experienced the crash - the value of their investments would have gone down. Whether they wanted to liquidate and crystallise the loss or hold is up to the individual.

Nobody has been saying this, not before the crunch anyway. It was a bit of a revelation to find out that my savings were guaranteed to the tune of £30k a few years back. I expect very few people knew about this, but they used the banking system anyway. This is becasue banks are actually very good at managing their risks, but they cannot be expected to compensate for the gov'ts policy of making real estate very expensive.

Which is very much part of the problem. People forget about banking crisis because they happen infrequently. They think the risk must be less and pile into FRB. When it blows up, you end up with massive liquidations or bailouts.

LPB constantly reflects the risk in the changing market price of the fund. In a crisis, this value may plummet if risk was misread, but it doesn't mean the fund has to force liquidation like a bank does. LPB mutual fund shares would just be worth whatever the market dictated at the time, which can be more or less than the purchase price.

Just as the value of people's savings would fall aswell in a crisis. If banks were liquidated then savers would receive anything from 0-100p in the £. These savings products are as risky as each other, it depends on where the money is invested.

You have the cost and inconvenience of the liquidation to cope with though. Liquidations are notoriously expensive, which is a common criticism of Austrian school economics. If you can avoid the liquidation then you remove one of the problems with letting the market readjust.

So if somebody on the other side of LPB defaults there's no comeback? I.e they won't be asked to payback what they owe?

It makes it sound like more of a risk to me, banks will try and claim the money back because it's in everybody's interest, that's why we have liquidation proceedings.

I'm not sure where you got that idea from - people can and would be chased for non-payment as they are now.

Liquidations are needed once the bank can no longer cover their liabilities, if assets have gone bad. With LPB, you just get a negative return on your investment if assets go bad, so there is no need to liquidate.

Then you accept that exactly the same thing will happen with LPB.

You wouldn't be presented with a chance of systemic failure if some LPB funds devalue - it is part of their design to cope with this. Therefore, the calls for bailouts would be less shrill.

Edited September 8, 2010 by Traktion

[Authoritarian]

Where do you get the impression from banks are very good at managing risks?

In Talebs black swan he cites the case that in 1982 the US banking system lost more in one year than it had accumulatively made ever because they misunderstood the risks.

As for who is to blame it's a bit of a circular argument depending on where you join the circle will influence your opinion on who is to blame more. Govt's certainly didn't create CDO's etc... nor did they force anyone to buy them, although clearly in the US the govt created massive incentives for the banks to lend against property and there was huge short profits to be made from taking the bet and as we have so far seen very little risk to the actual large banks that profited.

Most people's day to day experiences of the banking system tends to enforce the idea that they're fairly good at risk management. I've never known anyone to have severe problems with banking, i.e not being able to withdraw savings, the most common complaints tend to be about charges, which hit the headlines a couple of years back leading to widespread refunds, or poor customer service. Which is easily resolvable, just switch providers.

The caveat in my statement above included the housing market, the tax system (which bankers have nothing to do with) creates an economy that is deeply unstable; it leads to real estate booms and busts. The bankers can only follow the politicians' lead, if gov't wants a mircale economy where everyone can make ££££'s from property then there's little the bankers can do. If I was a banker I'd be incredibly p!ssed off about it all, being used as a scapegoat for gov't incompetence.

Edited September 8, 2010 by Chef

[Injin]

Most people's day to day experiences of the banking system tends to enforce the idea that they're fairly good at risk management. I've never known anyone to have severe problems with banking, i.e not being able to withdraw savings, the most common complaints tend to be about charges, which hit the headlines a couple of years back leading to widespread refunds, or general poor customer service. Which is easily resolvable.

The caveat in my statement above included the housing market, the tax system (which bankers have nothing to do with) creates an economy that is deeply unstable; it leads to real estate booms and busts. The bankers can only follow the politicians' lead, if gov't wants a mircale economy where everyone can make ££££'s from property then there's little the bankers can do. If I was a banker I'd be incredibly p!ssed off about it all, being used as a scapegoat for gov't incompetence.

True enough.

They should be blamed for being such massive fraudsters, not the governments socially engineered housing ****** up. (Which they halped finance using their FRB frauds, but nm that.)

Edited September 8, 2010 by Injin

[Traktion]

Yes we have cash, but cash in 2010 is not a great investment because the central bank is constantly working to destroy its value. This forces people into savings accounts with inflation-matching interest rates, and of course the money in savings accounts is lent out by the bank to others with all the risks of default and need for government guarantees that we have been talking about.

What do savers want most? Is it positive real returns, or is it just for their savings to hold their real value through time? People have become so inflation-habituated over the last several decades that it's difficult for them to separate these two things in their minds anymore. I'd argue that what savers really need is a safe place to hold their money, not yet another sophisticated investment product. There's no need for a new model of banking which rearranges the distribution of credit-debt risk, just stop destroying the value of cash and people will be able to hold this risk- (and return-) free. You could even turn the state pension into a mandatory cash-only fund (topped up by government if you are very poor).

And yes, there is physical gold, but unfortunately none of us are paid in gold or do our shopping in gold, and the gold:pound exchange rate fluctuates wildly over time.

If the central bank stopped creating new pounds they would stop losing value and there would be no need for gold. The central bank could stop printing tomorrow. No need for structural reform, a new legislative framework, nothing. Just give people the option of risk free savings and tell them if they want to make riskier investments that's their problem. At the moment they have no choice but to be forced into risky investments because the central bank is determined to slowly destroy the pound.

I agree with almost all of what you are saying. Indeed, people used to hold much of their money in the Post Office narrow banks, due to a mistrust of banks. The government repaid this by letting inflation rip in the 70s, giving these careful savers bloody noses and losses on their non-indexed bonds. Unfortunately, we can't trust the government not to turn to inflation time and time again to cover their or their mates' mistakes.

That's not to say narrow banking isn't a good idea - I think it would be a step in the right direction. I just think while ever bank failures are mostly due to black swan type events, a lot of people will be caught out (and demand bailouts, printing etc). If demographic changes result in more loans going bad than (EDIT: the returns from the) good, we will be having regular liquidations over the next few decades too, which isn't ideal.

Edited September 8, 2010 by Traktion

[TwoWolves]

quite, that's why I'm here.

So if this bias evaporates does that mean you cease to exits?

The crux of our problem is that the people that have the most influence on our economic lives suffer considerable bias and an indefatigable belief that they are far more in control of events than they really are. All our efforts can only be to try and stay one step ahead of these mad-men.

I seem to recall seeing your position shift from time to time.

[Traktion]

Most people's day to day experiences of the banking system tends to enforce the idea that they're fairly good at risk management. I've never known anyone to have severe problems with banking, i.e not being able to withdraw savings, the most common complaints tend to be about charges, which hit the headlines a couple of years back leading to widespread refunds, or poor customer service. Which is easily resolvable, just switch providers.

The caveat in my statement above included the housing market, the tax system (which bankers have nothing to do with) creates an economy that is deeply unstable; it leads to real estate booms and busts. The bankers can only follow the politicians' lead, if gov't wants a mircale economy where everyone can make ££££'s from property then there's little the bankers can do. If I was a banker I'd be incredibly p!ssed off about it all, being used as a scapegoat for gov't incompetence.

Or stocks in the great depression... You make it sound like property prices are the only thing which can cause bank failures, which isn't true.

You can't stop banks from thinking they have found a new risk free way to make money, only to trip up a few decades later because it wasn't true.

Basal regulations, deposit guarantees, government tax incentives have all lead up to this crisis. Without a combination of all three, I doubt we would be in as big a mess.

Get people to sign contracts when they open an account, stipulating who owns the money, whether it will be loaned out and the risks it entails etc and people can choose. I don't want to force people not to use FRB or to have to use LPB or whatever. While people are easily mislead by the banks, while the government cheer leads from the sideline, we're going to have repeat performances.

[Dorkins]

I agree with almost all of what you are saying. Indeed, people used to hold much of their money in the Post Office narrow banks, due to a mistrust of banks. The government repaid this by letting inflation rip in the 70s, giving these careful savers bloody noses and losses on their non-indexed bonds. Unfortunately, we can't trust the government not to turn to inflation time and time again to cover their or their mates' mistakes.

Yes, the ultimate problem is how to impose discipline on those who control the money supply. Institutional reforms can help, but in the end there is no substitute for vigilance. Sadly I think it will take another bout of hyperinflation in a developed country to convince the world that strict control of the money supply is even a good thing. Japan? It's like getting an occasional booster shot to remind your immune system that there is such a thing as typhoid.

[South Lorne]

If you put them in a situation in which they are expected to do that, the real sophisticated investors like Goldman Sachs will quickly findI think the trouble with the idea that ordinary savings should be treated like sophisticated financial products in which investors shop around for a yield:risk measure that suits them is that it massively overestimates ordinary people's thought processes when they save money. Ordinary people are not sophisticated investors with the time and ability to look at bank balance sheets and calculate the likelihood of defaults. a way to eat them for lunch.

...ordinary 'investors' were greedy enough to switch savings into high yielding Icelandic Banks' Deposit Accounts....anyone should at least understand 'higher the yield the greater the risk' without having to read balance sheets ....greed is the leveller ....

Edited September 8, 2010 by South Lorne

[Dorkins]

...ordinary 'investors' were greedy enough to switch savings into high yielding Icelandic Banks' Deposit Accounts....anyone should at least understand 'higher the yield the greater the risk' without having to read balance sheets ....greed is the leveller ....

"The higher the yield the greater the risk" isn't even true. It's perfectly possible to have higher yields with low risks, in which case you have a really great business, or you might have low yields with massive risk, like BTL in 2007. High yields and high risks usually, but not always, go together. The trick is to find the cases where others have overestimated the risks or underestimated future yields.

But in the specific case of the Icelandic banks, such is the dangers of deposit insurance, where the government bears all risk. The government could get out of the deposit insurance game if it stopped inflating the currency.

[Authoritarian]

Or stocks in the great depression... You make it sound like property prices are the only thing which can cause bank failures, which isn't true.

Systematic bank failures and recessions are always caused by land market boom busts, the official explaination never admits this of course, but the evidence is there if academics care to look. The 1973 'oil crisis' would have culminated in a crash whatever OPEC did, because just a few months before the economy nosedived due to bad real estate loans.

The American Savings and Loans scandal of the 80's and 90's was real estate driven.

The ERM crisis occured during the recession which was caused by the real estate market tanking.

The Japanese super crash and lost decade was a consequence of land speculation.

The Scandinavian banking crisis was just another real estate boombust.

The credit crunch; exactly the same as all of the above.

I don't trust offical acounts of the great depression by well meaning individuals, they've proven beyond doubt they have neither the data or the knowledge to get to the root cause of the bust. Maybe it was caused by the stock market, but it seems a little far fetched given the reported severity of the crash.

You can't stop banks from thinking they have found a new risk free way to make money, only to trip up a few decades later because it wasn't true.

The rise in real estate prices allows banks to lend more under the belief that they're covered with the value of their assets. And they are, until the soaring costs of home ownership strangles the economy and wrecks the financial system. Banks and individuals alike are reacting to an absurd situation that is government perpetuated, taking risks is rational given the rules of the game.

Basal regulations, deposit guarantees, government tax incentives have all lead up to this crisis. Without a combination of all three, I doubt we would be in as big a mess.

We can alter the banking system to prevent it from lending people money (i.e Basel regulations), but that deosn't solve the problem. It puts extra restrictions on the economy that wouldn't be needed if we treated land like the other two factors of production.

Get people to sign contracts when they open an account, stipulating who owns the money, whether it will be loaned out and the risks it entails etc and people can choose. I don't want to force people not to use FRB or to have to use LPB or whatever. While people are easily mislead by the banks, while the government cheer leads from the sideline, we're going to have repeat performances.

People like to pass risks onto the banking system though, as they're the professionals. I expect that the public would much rather place their savings in the hands of bankers than invest in risky funds with a larger upside but more chance of losing the lot.

LPB has been proven to fail with the S&L crisis in the U.S, banks failed and this was blamed on a lack of regulation, and when governments reduced regulation they were blamed again for causing the mess. The same would happen with LPB, it would never be right because it's addressing the symptoms rather than the virus itself.

Edited September 8, 2010 by Chef

[Traktion]

Systematic bank failures and recessions are always caused by land market boom busts, the official explaination never admits this of course, but the evidence is there if academics care to look. The 1973 'oil crisis' would have culminated in a crash whatever OPEC did, because just a few months before the economy nosedived due to bad real estate loans.

The American Savings and Loans scandal of the 80's and 90's was real estate driven.

The ERM crisis occured during the recession which was caused by the real estate market tanking.

The Japanese super crash and lost decade was a consequence of land speculation.

The Scandinavian banking crisis was just another real estate boombust.

The credit crunch; exactly the same as all of the above.

I don't trust offical acounts of the great depression by well meaning individuals, they've proven beyond doubt they have neither the data or the knowledge to get to the root cause of the bust. Maybe it was caused by the stock market, but it seems a little far fetched given the reported severity of the crash.

Speculation in anything which you think can only go up is dangerous, whether it's property, stocks or tulip bulbs.

The rise in real estate prices allows banks to lend more under the belief that they're covered with the value of gtheir assets. And they are, until the soaring costs of home ownership strangle the economy and wrecks the financial system. Banks and individuals alike are reacting to an absurd situation that is government perpetuated, taking risks is rational given the rules of the game.

"The rise in stock prices prices allows banks to lend more under the belief that they're covered with the value of gtheir assets. And they are, until the soaring costs of stock ownership strangle the economy and wrecks the financial system. Banks and individuals alike are reacting to an absurd situation that is government perpetuated, taking risks is rational given the rules of the game."

Land is just another bubble. It is an obvious and common one, but not the only one. The dot com boom/bust was another recent one. It looks like bonds may be the next, according to some.

We can alter the banking system to prevent it from lending people money (i.e Basel regulations), but that deosn't solve the problem. It puts extra restrictions on the economy that wouldn't be needed if we treated land like the other two factors of production.

The Basal system dictated that property was low risk, reinforcing the problem. It's not about stopping money being borrowed, it's about not incorrectly defining risk levels then being surprised when it blows up.

People like to pass risks onto the banking system though, as they're the professionals. I expect that the public would much rather place their savings in the hands of bankers than invest in risky funds with a larger upside but more chance of losing the lot.

LPB doesn't remove the option to ask a professional for advice. It just means that if the professionals gets it wrong, the taxpayer isn't on the hook and/or banks may fail.

LPB has been proven to fail with the S&L crisis in the U.S, banks failed and this was blamed on a lack of regulation, and when governments reduced regulation they were blamed again for causing the mess. The same would happen with LPB, it would never be right because it's addressing the symptoms rather than the virus itself.

It looks like you're comparing apples with oranges. A cursory look at the S&L crisis shows they had deposit guarantees and the deposits were guaranteed by the government. This is very different to owning equity in a mutual fund, which has no predefined cash value, never mind a government guarantee.