Changes in the money supply

[william the wie]

Banking is a middleman activity. Since the development of dependable mail service in the 1700s and even more so since the invention of the telegraph and telephone the cost of information has been going down. Middlemen use the costs of gaining and processing information to make a profit. So banks as middlemen should be in the process of being squeezed out.

Pretty much everybody knows the above facts but it still came as a shock to me in reading up on the meltdowns of the past 50-60 years to run across the following facts:

right after WWII (according to James Dimon as quoted in "Last Man Standing") that banks accounted for 60% of banking activity but only 20% now.

The securitization of debt which began in the 70s is an effect of profit margin squeezes. Insurance companies, trust funds, foundations and newer ideas such as hedge funds and money markets have been taking market share from the banks at a steady 1.2% a year growth rate for probably a couple of centuries.

Federal financial regulation has focused on this steadily shrinking industry since the 1790s.

What are the dimensions of this problem?

 

[loosecannon]

what is the problem?

 

[william the wie]

The fed is operating on the principle that the banks they supervise are the banking system and that is how they managed to shut down the shadow banking and caused meltdown in 2008. Shutting down 80% of a market because you never managed to figure out that it exists is what the Fed brought us.

 

[Paulie]

The fed is operating on the principle that the banks they supervise are the banking system and that is how they managed to shut down the shadow banking and caused meltdown in 2008. Shutting down 80% of a market because you never managed to figure out that it exists is what the Fed brought us.

Sometimes you're vague to the point of frustration.

Can you elaborate on what you're talking about for us laymen who aren't privy to the Fed's behind the scenes actions?

 

[william the wie]

80% of the bubble was financed by insurance companies, pension funds, money markets and the like. For example most hedge funds that used Lehman Brothers as clearing broker out of its London office could not get their trades cleared under British law until Nomura securities bought that operation out of US bankruptcy court days later. That was the proximate cause of the 2008 stock market collapse as US equity collateral was sold in job lots to cover margin calls for money sitting in LB's customer escrow accounts.

 

[Paulie]

80% of the bubble was financed by insurance companies, pension funds, money markets and the like. For example most hedge funds that used Lehman Brothers as clearing broker out of its London office could not get their trades cleared under British law until Nomura securities bought that operation out of US bankruptcy court days later. That was the proximate cause of the 2008 stock market collapse as US equity collateral was sold in job lots to cover margin calls for money sitting in LB's customer escrow accounts.

I get what you're saying now.

 

[loosecannon]

80% of the bubble was financed by insurance companies, pension funds, money markets and the like. For example most hedge funds that used Lehman Brothers as clearing broker out of its London office could not get their trades cleared under British law until Nomura securities bought that operation out of US bankruptcy court days later. That was the proximate cause of the 2008 stock market collapse as US equity collateral was sold in job lots to cover margin calls for money sitting in LB's customer escrow accounts.

but that doesn't make those "insurance companies, pension funds, money markets" banks, or even providers of banking services.

Hell I would be happy if the banks were just banks and didn't dabble in underwriting derivatives or acting as a clearing house for other equity operations.

What definition of "banking" are you relying on?

 

[william the wie]

80% of the bubble was financed by insurance companies, pension funds, money markets and the like. For example most hedge funds that used Lehman Brothers as clearing broker out of its London office could not get their trades cleared under British law until Nomura securities bought that operation out of US bankruptcy court days later. That was the proximate cause of the 2008 stock market collapse as US equity collateral was sold in job lots to cover margin calls for money sitting in LB's customer escrow accounts.

but that doesn't make those "insurance companies, pension funds, money markets" banks, or even providers of banking services.

Hell I would be happy if the banks were just banks and didn't dabble in underwriting derivatives or acting as a clearing house for other equity operations.

What definition of "banking" are you relying on?

Those who accumulate other people's capital and invest it: AIG, Citigroup, Berkshire Hathaway and other insurance companies are the nation's biggest banks. The various famous foundations Ford, Rockerfeller, Gates and various others are the financial angels at the bleeding edge of research. The Harvard, Yale and Stanford trusts pick up the big ticket illiquid items that no one else can legally touch. There may have been as many as 20 companies that had more than 1 T in financial assets under management in January 2008 and there are still some left but not as many. You may call them bond funds, insurance companies or what have you but as far as I am concerned anyone who gets more than 0.1% compensation for running 1T in capital is a bank.

 

[asterism]

Banking is a middleman activity. Since the development of dependable mail service in the 1700s and even more so since the invention of the telegraph and telephone the cost of information has been going down. Middlemen use the costs of gaining and processing information to make a profit. So banks as middlemen should be in the process of being squeezed out.

Pretty much everybody knows the above facts but it still came as a shock to me in reading up on the meltdowns of the past 50-60 years to run across the following facts:

right after WWII (according to James Dimon as quoted in "Last Man Standing") that banks accounted for 60% of banking activity but only 20% now.

The securitization of debt which began in the 70s is an effect of profit margin squeezes. Insurance companies, trust funds, foundations and newer ideas such as hedge funds and money markets have been taking market share from the banks at a steady 1.2% a year growth rate for probably a couple of centuries.

Federal financial regulation has focused on this steadily shrinking industry since the 1790s.

What are the dimensions of this problem?

Perhaps the migration of finance away from banks is in response to the increased regulations, and that the regulations really don't regulate but instead micromanage.

We need oversight, not increased micromanagement.

 

[william the wie]

Jamie Dimon head of JPM says the exact same thing.

 

[loosecannon]

80% of the bubble was financed by insurance companies, pension funds, money markets and the like. For example most hedge funds that used Lehman Brothers as clearing broker out of its London office could not get their trades cleared under British law until Nomura securities bought that operation out of US bankruptcy court days later. That was the proximate cause of the 2008 stock market collapse as US equity collateral was sold in job lots to cover margin calls for money sitting in LB's customer escrow accounts.

but that doesn't make those "insurance companies, pension funds, money markets" banks, or even providers of banking services.

Hell I would be happy if the banks were just banks and didn't dabble in underwriting derivatives or acting as a clearing house for other equity operations.

What definition of "banking" are you relying on?

Those who accumulate other people's capital and invest it: AIG, Citigroup, Berkshire Hathaway and other insurance companies are the nation's biggest banks. The various famous foundations Ford, Rockerfeller, Gates and various others are the financial angels at the bleeding edge of research. The Harvard, Yale and Stanford trusts pick up the big ticket illiquid items that no one else can legally touch. There may have been as many as 20 companies that had more than 1 T in financial assets under management in January 2008 and there are still some left but not as many. You may call them bond funds, insurance companies or what have you but as far as I am concerned anyone who gets more than 0.1% compensation for running 1T in capital is a bank.

OK you are talking about investment banks, not banks. Investment banks are only banks in the respect that they take depositors money and gamble with it without FDIC coverage.

Commercial banks are the actual banks, and Glass Steagal prohibited them from gambling with depositors funds. While Gramm–Leach–Bliley burned that firewall.

So maybe the answer is a restoration of Glass-Steagal.

 

[william the wie]

Investment banks are in fact banks. There have been no pure commercial banks in decades at least since 1984 when Continental Illinois was nationalized by Reagan. They are not truly viable in fact, not in the modern economy. Borrowing short and lending long requires access to the London and Tokyo capital markets, loan securitization and other non-commercial bank services to survive on the profit margins the shadow banks leave on the table. Traditional banking is dying because it is too easy to access capital.

Since you like posting in the economics section presumably you too have seen those ads for micro-loan brokers: "Finance a sewing machine for Maria in Guatemala" At a nominal interest rate of 12-36% that is doing quite well by doing good. Am I either going to help a widow feed her children or make that kind of return at my local bank? What do I need a bank for? Does my local bank fulfill any financial, social or moral need of mine better than a non-bank.

 

[loosecannon]

Investment banks are in fact banks. There have been no pure commercial banks in decades at least since 1984 when Continental Illinois was nationalized by Reagan. They are not truly viable in fact, not in the modern economy. Borrowing short and lending long requires access to the London and Tokyo capital markets, loan securitization and other non-commercial bank services to survive on the profit margins the shadow banks leave on the table.

OK, so you are saying that the carry trade broke the banking business. Fine enough. This is a fully unsustainable model since all it does it usher in an era of deflationary traps.

 

[loosecannon]

Investment banks still are not banks. They are private equity funds.

 

[asterism]

Jamie Dimon head of JPM says the exact same thing.

I think we both got that idea from Sandy Weill.

 

[asterism]

Investment banks are in fact banks. There have been no pure commercial banks in decades at least since 1984 when Continental Illinois was nationalized by Reagan. They are not truly viable in fact, not in the modern economy. Borrowing short and lending long requires access to the London and Tokyo capital markets, loan securitization and other non-commercial bank services to survive on the profit margins the shadow banks leave on the table.

OK, so you are saying that the carry trade broke the banking business. Fine enough. This is a fully unsustainable model since all it does it usher in an era of deflationary traps.

Please forgive me if you have explained this before, but what do you (specifically you) mean by "deflationary traps?" It's a bit of a catchphrase.

 

[asterism]

Investment banks are in fact banks. There have been no pure commercial banks in decades at least since 1984 when Continental Illinois was nationalized by Reagan. They are not truly viable in fact, not in the modern economy. Borrowing short and lending long requires access to the London and Tokyo capital markets, loan securitization and other non-commercial bank services to survive on the profit margins the shadow banks leave on the table. Traditional banking is dying because it is too easy to access capital.

Since you like posting in the economics section presumably you too have seen those ads for micro-loan brokers: "Finance a sewing machine for Maria in Guatemala" At a nominal interest rate of 12-36% that is doing quite well by doing good. Am I either going to help a widow feed her children or make that kind of return at my local bank? What do I need a bank for? Does my local bank fulfill any financial, social or moral need of mine better than a non-bank.

Speaking of micro-loan brokers, borrowing short and lending long only requires access to foreign (or any) market on a large scale. Prosper.com is an alternative. Traditional banking is dying because it's inefficient.

 

[loosecannon]

It is a lessor degree of deflationary spiral. Much like Japan since 1990. they don't fall headlong into deflationary spiral, but they teeter at the edge forever.

I use the classic definition:

Google

 

[william the wie]

The entire internet is deflationary. With optic fiber DSL you don't need no blinking cable, with an ereader you don't need no bookstore or bookshelves and for that matter even street walkers have moved to the web why should banking be any different?