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If I am, then this is a fucking brilliant tool for the Fed to use to control the banks, yet, at the same time, is going to be extremely expensive for taxpayers
Why would it be extremely expensive? The money inside of the Fed is not 'the tax payers' Its literally a guy on some computer screen allocating computer numbers to some other guys account. At the end of the year if the Fed finds itself at a profit it sends that profit to the Treasury. But otherwise, if tomorrow everyone and their mom demand that the Fed pay of their debt [the way some people who dont understand how central banking works keep worrying China will act] then the Fed will do so via a few key strokes.
..... And it failed pretty hard during the crisis for some reason, because it should have been able to help curb the effects of the housing bubble a lot better than it appears to have.
The problem is that Chairman Greenspan and Bernanke do not believe you can spot a bubble until its too late.
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On October 26 2012 13:22 TheRabidDeer wrote:Show nested quote +On October 26 2012 13:17 JonnyBNoHo wrote:
Banks aren't lending their excess reserves for two main reasons.
1) There isn't enough demand for loans. Some people borrowed too much before the crisis and so they are preoccupied paying that debt back. Other people don't want to borrow when they are unsure if they will be able to pay it back due to a crummy economy. Businesses could borrow more but don't see the economy as strong enough to justify large expansions.
2) Banks got burned badly with foreclosures - hundreds went bust - and they don't want to repeat past mistakes. So now they are being ultra-careful with who they lend to. While not a bad thing necessarily, it does mean that fewer loans will be made.
Now why is the Fed still printing money? Because printing money will make money cheaper - interest rates will fall and entice people and businesses to borrow more. So a $200K mortgage that doesn't work at 5% works when the mortgage rate falls to 3% both from the perspective of the homeowner and the bank. I can understand a lower demand for loans, so did the government simply over-correct? Or did the government misappropriate the money by giving it to banks instead of finding other uses for it? Also, arent rates low enough? They are below 3% now for a 15 year. Show nested quote +On October 26 2012 13:18 Impervious wrote:On October 26 2012 13:09 TheRabidDeer wrote:On October 26 2012 13:04 Djzapz wrote:On October 26 2012 13:00 TheRabidDeer wrote:On October 26 2012 12:56 Djzapz wrote:
I was writing but then it occurred to me that this kind of looks like a homework thread. I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice. Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode. Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right? EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +Gonna give that a quick read, thanks  What interest? How can they collect interest when that money is doing absolutely nothing while kept in reserve? Banks collect a .25% interest on all reserves.
Let me see if I can take a crack at putting this into simple terms.
Start with a simple model. The world is has people and one bank. The world has $100 and 1 person starts with it all. Required reserves are 10%. Assume the bank always lends out the all that it can. Thus the person with the money starts by putting their money into the bank. What happens? The bank keeps 10%, lends out $90, someone uses that to pay for something, the person who then receives the $90 puts that into the bank, the bank then lends out $81, etc etc.
So now the question is, how much money does the world have? Well you can say $100, but how much is in circulation? It turns out to actually be $100 + $90 + $81 + ..., a whole lot more than $100! This effect is known as the money multiplier.
Now we fall back to understand the real model. Notice that this shows us that if you have a given amount of cash, you have A LOT more in the banks. That's a given, and the assumption that the money will end up in the banks is pretty much true because most businesses and households will put their money in a bank. But what assumption can be violated? Well, banks will not always lend out what it can. Reasons for this were already discussed in this thread and you can think of more.
So now think about what happens when the mortgage crisis hits. Banks start lending out less money meaning more reserves. This means that the multiplier falls. Instead of going $100 + $90 + $81 ..., you're going $100 + $50 + $25 + ...! This decreases the money in circulation by a large amount, and so money is pumped into the economy not to cause inflation, but counteract the deflation that could be caused by a large decrease in the money multiplier. However, notice that by putting a lot of money into the economy, a lot of money will go to bank reserves if they are not entirely lending.
So this is one factor of the problem. Another factor is how financial institutions work. Most of the money is brought into the economy by the government buying bonds of financial institutions. How else are you going to efficiently pump money into the economy at any given moment? If you want to do it through construction you have to keep finding projects or something of this sort whereas this avenue is always open, predictable, and the Fed has the jurisdiction to do it this way (that doesn't mean other ways, like tax cuts and funding of public projects, are not available, just different). So this also puts money into banks... who are not lending.
But anyways, from the multiplier you already see that if you pump money in any other way, the banks will still get a lot of the money into reserves.
So there. Other people gave answers as to why the amount of reserves went up, and here's an introduction into what happens when the bank reserves increase and the money multiplier decreases.
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Qualifications first: I work for a major bank as a credit analyst in the Corporate Banking division. Should anyone find out which bank, the opinions expressed here are my own (I <3 HR).
Quantitative easing is only a magnifying factor in this situation. With QE, the Fed prints money and buys assets from banks, which only affects the reserve ratio (Bank assets (loans, bonds, etc.) / Funds held in reserve) by removing some bank assets from their balance sheets, not by forcing the banks to reserve more money. Actually, the Fed wants the opposite outcome: for banks to lend this freshly printed cash to businesses to kickstart a weak recovery.
Sadly, the opposite is happening. Banks turn around and deposit the liquidity (cash, in this instance) back into the fed to be held as reserves. There are three major causes:
1) Say what you will about banks, but the people running them are not stupid, and they're still human. CEOs, credit officers, and portfolio managers saw what happened during the financial crisis, and they understand that it was caused by a culture of unchecked risk-taking. Underwriting standards were weak, due diligence was a tall stack of paper you stuck in front of the compliance officer to appease him, and all of the incentives were geared towards doing more deals rather than smart deals. After the crisis, underwriting standards were increased drastically, due diligence reached the level it should have been at pre-crisis, and the bankers who still had jobs entered the shitstorm. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
Now, I may be the first person to say this aloud (and sincerely), but bank executives are people, too. They, too, are subject to irrational decision making based on anecdotal evidence and imagined threats. Our chief credit officer won't even look at a handful of industries because of situation X that happened with company Y and lost us Z million dollars.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Wow, this is turning into an essay. I'll stop now. Here's to hoping the posts below me don't scapegoat one individual or some piece of legislation.
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On October 26 2012 14:17 rackdude wrote:Show nested quote +On October 26 2012 13:22 TheRabidDeer wrote:On October 26 2012 13:17 JonnyBNoHo wrote:
Banks aren't lending their excess reserves for two main reasons.
1) There isn't enough demand for loans. Some people borrowed too much before the crisis and so they are preoccupied paying that debt back. Other people don't want to borrow when they are unsure if they will be able to pay it back due to a crummy economy. Businesses could borrow more but don't see the economy as strong enough to justify large expansions.
2) Banks got burned badly with foreclosures - hundreds went bust - and they don't want to repeat past mistakes. So now they are being ultra-careful with who they lend to. While not a bad thing necessarily, it does mean that fewer loans will be made.
Now why is the Fed still printing money? Because printing money will make money cheaper - interest rates will fall and entice people and businesses to borrow more. So a $200K mortgage that doesn't work at 5% works when the mortgage rate falls to 3% both from the perspective of the homeowner and the bank. I can understand a lower demand for loans, so did the government simply over-correct? Or did the government misappropriate the money by giving it to banks instead of finding other uses for it? Also, arent rates low enough? They are below 3% now for a 15 year. On October 26 2012 13:18 Impervious wrote:On October 26 2012 13:09 TheRabidDeer wrote:On October 26 2012 13:04 Djzapz wrote:On October 26 2012 13:00 TheRabidDeer wrote:On October 26 2012 12:56 Djzapz wrote:
I was writing but then it occurred to me that this kind of looks like a homework thread. I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice. Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode. Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right? EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +Gonna give that a quick read, thanks What interest? How can they collect interest when that money is doing absolutely nothing while kept in reserve? Banks collect a .25% interest on all reserves. So now think about what happens when the mortgage crisis hits. Banks start lending out less money meaning more reserves. This means that the multiplier falls. Instead of going $100 + $90 + $81 ..., you're going $100 + $50 + $25 + ...! This decreases the money in circulation by a large amount, and so money is pumped into the economy not to cause inflation, but counteract the deflation that could be caused by a large decrease in the money multiplier. However, notice that by putting a lot of money into the economy, a lot of money will go to bank reserves if they are not entirely lending. Right.
When Lehman went bankrupt, it didnt just freeze out its own assets. There many many many hedge funds who held their money in Lehman and who found themselves unable to access that money because of the bankruptcy process. This caused them to either themselves go bankrupt, which removed more money from the system, or to sell whatever assets they could get a hold off and sell them into a failing market, not only hurting themselves but also hurting anyone else who was on mark-to-market accounting.
So yes, the basic point of the crisis was that in 2007 there was in theory 100 dollars and then following the Lehman bankruptcy the world found itself with 50 dollars. And yet it needed that full 100 to keep the economy running smoothly.
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Aggregate Expenditure
1. Consumption Expenditure, households buy goods and services from firms (abbreviated C)
2. Investment Expenditure, firms buy good and servers from other firms (abbreviated I)
3. Government Expenditure, government buys goods and services from firms (abbreviated G)
Fiscal Policy
1. Government purchases of goods and services, if G increases then => Aggregate Demand (abbreviated AD) increases
2. Taxes (on income, not business profits), if taxes increase => C decreases => AD decreases
Monetary Policy (controlled by the Federal Reserve)
1. Money Supply (MS for short), when MS increases => C and I increase => AD increases
2. Interest rate, Interest rate increase => C and I decrease => AD decreases
That's like, all I remember from macro.
I was under the impression that printing more money (increasing the money supply), although it can stimulate an economy, is terrible in the long run, and never a good idea. Interest rates being decreased (I think?) is the first option they would take. If that's the case then why are they printing money, or do they have to do it at a constant rate in order to keep lost cash in check?
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On October 26 2012 14:11 Sub40APM wrote:Show nested quote +..... And it failed pretty hard during the crisis for some reason, because it should have been able to help curb the effects of the housing bubble a lot better than it appears to have. The problem is that Chairman Greenspan and Bernanke do not believe you can spot a bubble until its too late.
I don't think that's giving proper credit to what had happened. Interest rates were low to stop the recession the recession that followed the dot com bust and the post-9/11 recession, they started creeping up but the low interest rates of those times set in to cause the housing bubble. To say it was just plain negligence or conspiracy is overlooking many of the details that many smart people were looking over, what it really comes down to is little differences in the numbers leading to big differences in the long run.
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On October 26 2012 12:58 RenSC2 wrote:
I don't work at any of the big banks. I would guess they are having a hard time finding good loans to place all their excess reserves into. That may be part of the reason why they got so aggressively into sub-prime lending in the first place. They kept holding onto more and more money for their clients, but couldn't find enough qualified borrowers to profit from. So they started adding in sub-prime borrowers. Now, they've gotten burned (and maybe regulated) into not lending out to sub-prime borrowers, but they still have a crap ton of people wanting the big banks to hold onto their money.
The banks have nowhere profitable to put that money, so the banks are just holding onto their reserves.
Perfect answer. This actually isn't that complicated.
The other issue your reply raises: why they (banks) got so aggressively into sub-prime lending, I think has another key component. Investment banks,between 2000 and 2007 drastically increased the market for 'collateralized debt obligation'. They would buy the sub prime mortgages (debt), and package them (securitize) into a huge group of debt called a CDO, which they could not only sell, but buy insurance from AIG on whether they could sell it.
I think that it's kind of fucked up that the field of economics has such a specialized vocabulary that it keeps most people out of the conversation.
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On October 26 2012 14:20 contraSol wrote:
Qualifications first: I work for a major bank as a credit analyst in the Corporate Banking division. Should anyone find out which bank, the opinions expressed here are my own (I <3 HR).
Quantitative easing is only a magnifying factor in this situation. With QE, the Fed prints money and buys assets from banks, which only affects the reserve ratio (Bank assets (loans, bonds, etc.) / Funds held in reserve) by removing some bank assets from their balance sheets, not by forcing the banks to reserve more money. Actually, the Fed wants the opposite outcome: for banks to lend this freshly printed cash to businesses to kickstart a weak recovery.
Sadly, the opposite is happening. Banks turn around and deposit the liquidity (cash, in this instance) back into the fed to be held as reserves. There are three major causes:
1) Say what you will about banks, but the people running them are not stupid, and they're still human. CEOs, credit officers, and portfolio managers saw what happened during the financial crisis, and they understand that it was caused by a culture of unchecked risk-taking. Underwriting standards were weak, due diligence was a tall stack of paper you stuck in front of the compliance officer to appease him, and all of the incentives were geared towards doing more deals rather than smart deals. After the crisis, underwriting standards were increased drastically, due diligence reached the level it should have been at pre-crisis, and the bankers who still had jobs entered the shitstorm. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
Now, I may be the first person to say this aloud (and sincerely), but bank executives are people, too. They, too, are subject to irrational decision making based on anecdotal evidence and imagined threats. Our chief credit officer won't even look at a handful of industries because of situation X that happened with company Y and lost us Z million dollars.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Wow, this is turning into an essay. I'll stop now. Here's to hoping the posts below me don't scapegoat one individual or some piece of legislation.
I more or less agree with this. Banks realise that not understanding risk properly is bad. They dont want to loan out all the cash the fed is printing because there is nowhere smart to lend it at the moment.
It will change, but it may take time.
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On October 26 2012 14:20 contraSol wrote:
. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
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On October 26 2012 14:20 contraSol wrote:
3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Interesting, I never really did consider the uncertainty due to potential regulation or the crisis in the EU as factors. What if the government actually did work and outlined a long term plan? That should ease tensions a little, right?
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On October 26 2012 14:25 rackdude wrote:Show nested quote +On October 26 2012 14:11 Sub40APM wrote:..... And it failed pretty hard during the crisis for some reason, because it should have been able to help curb the effects of the housing bubble a lot better than it appears to have. The problem is that Chairman Greenspan and Bernanke do not believe you can spot a bubble until its too late. I don't think that's giving proper credit to what had happened. Interest rates were low to stop the recession the recession that followed the dot com bust and the post-9/11 recession, they started creeping up but the low interest rates of those times set in to cause the housing bubble. To say it was just plain negligence or conspiracy is overlooking many of the details that many smart people were looking over, what it really comes down to is little differences in the numbers leading to big differences in the long run.
Conspiracy? No I dont think it was that. Negligence? Definitely on the part of the New York Fed, the SEC, and Congress for passing the 'commodity trading modernization act' of 2000.
But specifically Greenspan actually said that Central Banks cannot identify bubbles. And remember when Bernanke said that in 2007 subprime was contained? From his perspective, as an academic, it was contained because how could a tiny tiny tiny aspect of the bond market, less than 60 billion, affect the entire economy? What the Fed guys didnt seem to understand, maybe because they all came straight from academia to the Fed instead of doing a stint on a trading floor of a major bank, was how pervasive repos have become as a funding source and how pervasively deep junk that was masking as 'AAA' came to dominate the banks' balance sheets.
But the really strange thing is that their own data gathering shows the bubble: http://research.stlouisfed.org/fred2/graph/?g=bXo
Look at that credit bubble after 2000
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On October 26 2012 14:28 Sub40APM wrote:Show nested quote +On October 26 2012 14:20 contraSol wrote:
. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I. with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans. Show nested quote +
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
I highly doubt IBD is doing any better. All of my friends that work in Barclays, Deutsche, Credit Suisse, Macquarie, and Morgan Stanley have been bitching non stop for the past year about their non existent bonuses and I know Goldman pays below market rate so they can't be making anything either.
Now that I think about it, their industry pay on a hourly basis doesn't surpass a fast food worker's without bonuses...
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On October 26 2012 14:38 yandere991 wrote:
Now that I think about it, their industry pay on a hourly basis doesn't surpass a fast food worker's without bonuses...
Interesting. pay structure of low-level financiers motivating level of risk-aversion...
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Its actually really simple, after the collapse of housing market (selling houses to people who couldn't afford it with money LOANED from banks) in addition to low interest rates (making loaning money not as rewarding) banks are very cautious.
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with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
The big bonuses absolutely do go to traders/ibankers. But, cuts in compensation expenses find their way to lowly credit analysts. My number may be lower, but relative to my (already much lower) base pay, it still hurts.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
Most of our larger portfolio companies can get paper at 3-6% these days, but still hold on to bank revolvers at the very least for some flexibility in their capital structure. The HY world is stupid right now... shadow banks are gonna make a killing.
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On October 26 2012 14:38 yandere991 wrote:Show nested quote +On October 26 2012 14:28 Sub40APM wrote:On October 26 2012 14:20 contraSol wrote:
. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I. with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates. I highly doubt IBD is doing any better. All of my friends that work in Barclays, Deutsche, Credit Suisse, Macquarie, and Morgan Stanley have been bitching non stop for the past year about their non existent bonuses and I know Goldman pays below market rate so they can't be making anything either. Now that I think about it, their industry pay on a hourly basis doesn't surpass a fast food worker's without bonuses...
Thats okay. They are all bravely hoping that they'll stick it through, get to that sweet sweet promised land of private equity. I guess I dont blame them though, being a banker has social cache and its a nice pre-set path that most people like in life.
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On October 26 2012 14:46 contraSol wrote:Show nested quote +
with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
The big bonuses absolutely do go to traders/ibankers. But, cuts in compensation expenses find their way to lowly credit analysts. My number may be lower, but relative to my (already much lower) base pay, it still hurts. Show nested quote +
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
Most of our larger portfolio companies can get paper at 3-6% these days, but still hold on to bank revolvers at the very least for some flexibility in their capital structure. The HY world is stupid right now... shadow banks are gonna make a killing.
Ya, I understand. My point is though that there is a difference between having a revolver as another risk mitigation tool and needing bank loans to actual run your business. With the HY the way it is, with company balance sheets rich with cash, and with hiring anemic to terrible I argue that only a really terrible corporation finds itself in a position that it needs bank credit.
This is a bit outdated but as you can see in the Atlanta Fed's small business survey, most small business do not have a hard time finding credit. They just dont need it because the demand isnt there. http://macroblog.typepad.com/macroblog/2010/05/how-discouraged-are-small-businesses-insights-from-an-atlanta-fed-small-business-lending-survey.html
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On October 26 2012 14:20 contraSol wrote:
Qualifications first: I work for a major bank as a credit analyst in the Corporate Banking division. Should anyone find out which bank, the opinions expressed here are my own (I <3 HR).
Quantitative easing is only a magnifying factor in this situation. With QE, the Fed prints money and buys assets from banks, which only affects the reserve ratio (Bank assets (loans, bonds, etc.) / Funds held in reserve) by removing some bank assets from their balance sheets, not by forcing the banks to reserve more money. Actually, the Fed wants the opposite outcome: for banks to lend this freshly printed cash to businesses to kickstart a weak recovery.
Sadly, the opposite is happening. Banks turn around and deposit the liquidity (cash, in this instance) back into the fed to be held as reserves. There are three major causes:
1) Say what you will about banks, but the people running them are not stupid, and they're still human. CEOs, credit officers, and portfolio managers saw what happened during the financial crisis, and they understand that it was caused by a culture of unchecked risk-taking. Underwriting standards were weak, due diligence was a tall stack of paper you stuck in front of the compliance officer to appease him, and all of the incentives were geared towards doing more deals rather than smart deals. After the crisis, underwriting standards were increased drastically, due diligence reached the level it should have been at pre-crisis, and the bankers who still had jobs entered the shitstorm. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
Now, I may be the first person to say this aloud (and sincerely), but bank executives are people, too. They, too, are subject to irrational decision making based on anecdotal evidence and imagined threats. Our chief credit officer won't even look at a handful of industries because of situation X that happened with company Y and lost us Z million dollars.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Wow, this is turning into an essay. I'll stop now. Here's to hoping the posts below me don't scapegoat one individual or some piece of legislation.
i work in the trading division of a top investment bank and yeah, pretty much this! these days it is a little less about generating pnl and more about managing risk. manage risk first, look for return generating opps second.
On October 26 2012 14:38 yandere991 wrote:Show nested quote +On October 26 2012 14:28 Sub40APM wrote:On October 26 2012 14:20 contraSol wrote:
. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I. with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates. I highly doubt IBD is doing any better. All of my friends that work in Barclays, Deutsche, Credit Suisse, Macquarie, and Morgan Stanley have been bitching non stop for the past year about their non existent bonuses and I know Goldman pays below market rate so they can't be making anything either. Now that I think about it, their industry pay on a hourly basis doesn't surpass a fast food worker's without bonuses...
i work for one of the banks you named (albeit in trading) and across the board, even at mid-markets and top boutiques, bonuses are still getting paid out, even to all of my friends who are 1st years. not sure what "non existent" means to your friends, maybe like 75% of base salary instead of 95%++? because that's what i know a lot of 1st/2nd years are getting, and from what i've heard (depending on the culture of the bank) it's still a sweet deal for 3rd year analysts/associates. goldman just recently announced that they're overhauling their entire analyst program so i can't comment on that as i don't know too much. i mean bonuses are definitely getting slashed, but to say that they are disappearing is being a bit overdramatic (unless you are only in it for the money, which, okay, to be fair, 90%+ of people get into banking solely for the monetary compensation, so i don't really have any moral defense for that). trading is a little different as our bonuses are more geared towards pnl, but yes we are getting cut as well.
hourly compensation without bonus for IBD just barely beats out a fast food job (assuming fast food workers are getting paid minimum wage in the US), with bonus makes it a little better, but really this only applies to 1st through 3rd years as they are the ones putting in 100+ hour weeks every week of the year. for kids starting out in banking it's all about delayed gratification.
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On October 26 2012 14:34 TheRabidDeer wrote:Show nested quote +On October 26 2012 14:20 contraSol wrote:
3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets. Interesting, I never really did consider the uncertainty due to potential regulation or the crisis in the EU as factors. What if the government actually did work and outlined a long term plan? That should ease tensions a little, right?
That would usher in a new golden age. Sadly, I think the best we can hope for is a series of steps, clearly outlined one at a time, pointing to a vague goal describable in soundbyte form. Then again, maybe I'll be less cynical after election season.
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In the course of a conversation with a friend, I did my best to understand Quantitative Easing through an Austrian perspective. This was the fruit of that labor and I did my best to convey what I learned using a simple vocabulary. So for whatever it's worth, here you go:
It's true that without "money" the economy would stagnate (bartering is relatively inefficient). But just what" money" is and how it's "value" is determined is, in essence, the entire point at stake because in the case of QE, you have an institution creating, out of thin air, something that is supposed to have value. Unfortunately it can't do this. Yes, it can create the money. But no, it can't create actual values. To understand why it can't do this, you've got to recognize that the only reason markets exist is because things that have value are not free. Anything that's free is not on the market (who would buy something that's free?) Anything that's not free cannot be be magically created, for example, by punching numbers into a computer at the fed. Elaborating on this fact is the bulk or my reply below.
I'm going to start the bulk of my reply by focusing on your conclusion proper. First, if you want me to accept as true your claim that growth in the money supply is necessary for economic growth then you need to explain why that's true (You don't provide an argument, you just state your conclusion). You'll also need to explain why the fed doesn't "print" a trillion-trillion dollars right now to "grow" the economy at a great rate. Finally, in order to differentiate a policy difference between printing 600 billion and a trillion-trillion dollars, you'll need to at least lay out the justification behind the basic methodology used to formulate the "correct" amount of dollars to fabricate.
It seems to me that my task is much easier because my view of what causes growth in an economy is simpler: economic growth is nothing but the result of more profit for the same or less effort. Period (e.g., a hoe, a plow, a tractor in relationship to growing food). My view recognizes that -demand- is, of course, the driver of an economy (because without demand there's no point to any kind of effort), but that supply is the primary indicator of what level of demand (read, consumption) can be satisfied. In my view, any market distortion that leads individuals (and institutions) to believe they can consume more than they -actually- can is problematic. And that's precisely what QE does. How so?
First I'm going to give you a very basic explanation of how QE distorts the market and then I'll give illustrate this with a concrete example.
QE reduces the rate of interest. The problem is that the rate of interest, before government intervention, reflects something real: consumer time preference. If the participants of a market are more eager to save than to consume, then there will be a surge in the amount of savings available. This surge will mean that the rate of interest at which those savings can be loaned out will go down. On the other hand, if the participants of a market of more eager to consume than save, then there will be less savings available for loans and investments and, thus, the interest rate on these loans and investments will be high. The problem is that the fed QE'ing does not fundamentally change the time-preference of the market participants. Thus, surface level change in the interest rate (due to the increase in the money supply) doesn't actually reflect the preferences of the consumers. The result of the incongruity between the rate of interest and the -actual- time preference of market participants is a destructive, inefficient boom-and-bust. This boom-and-bust occurs because investors are relying on the new interest rate for information about consumer preferences when, in fact, they are not getting information about consumer preferences but, instead, are only getting information about immediate changes in the money supply. In short, QE is economically destructive.
To concretely illustrate this process, I'll use your example of the factory. You agreed with me that banks get the money first. The "expectation" is that the banks will invest the new money into new productive enterprises. And this, I believe, is where you should already be suspecting something fishy. Why?
Remember, the fed did not create any new -actual- value. They typed a number into a computer and -bingo- that number became dollars. Obviously you'll agree that the fed could not design a factory in a drawing program on a computer (you know, the kind of program with a "pencil" and a "spray paint" can), print it out and then hope for the factory to magically appear. So how is it that the fed typing in a number and then sending some of those numbers over a wire is going to create a real-life factory?
Well, in essence, QE allows those who first touch the money to be able to build the factory at a reduced price because they've access to the money first (before market prices are able to rise in response to the increased money supply). It's this reduced price, and only this reduced price, that makes the construction of the factory (or whatever venture) economically viable. It has to be this way because if the factory was economically viable -before- the QE, then why did the QE need to happen in order to cause the factory to be built?
Now, critical to your position is the view that once the factory is completed, then it will begin producing goods and, thus, grow the economy. This conclusion is the problem because it focus is too narrow and, as a result, omits the destructive effects caused by the construction of this factory.
The -reason- the factory wasn't profitable before QE was because of the aggregate demand of the consumers in relationship to their income. That is, they may have wanted, say, a newer and bigger flat-screen, but they couldn't -afford- it or weren't willing to choose the flat-screen over -other- values they wanted (house, car, cell phone, shoes, whatever). What the QE has done, though, is make flat-screens cheaper (I'll just stick with the idea that it's a flat-screen factory but it applies to whatever factory you like) because it reduced the price of the factory (via the power of newly created money -before- the market reflects the increase in the money supply via increased prices). At this new, cheaper price, more consumers are likely to choose flat-screens than otherwise would have.
But what else results because of these new, cheap flat-screen tvs? Well, relative to the decrease in the price of flat-screens, other goods are now that much more expensive. Why? Well, if the flat-screen factory was to be built then the materials and the labor had to be bid for on the market. And this means every other are of the market had to pay relatively more for that material and labor. Which means that the prices of goods -other- than flat-screens will go up. So QE has resulted in more flat-screens being produced but, at the same time, less monitors, calculators or whatever else the market would have used those materials and labor for.
Even if this were the end of the consequences of QE, it should be enough to advise against it. That is, why not let consumers dictate what the market produces and not give any institutions an unfair access to newly crated money. Unfortunately, the consequences don't stop here.
Now that more people are buying flat-screens (because of their reduced price) instead of, say, cell phones, a cell-phone factory is no longer profitable (because people are spending their money on flat-screens instead of cell phones). So now the cell-phone factory has to shut down. All the workers get laid off and they must be retrained to build flat-screens.
Further, other individuals and businesses may see the new flat-screen factory churning out tvs and selling them for a profit (a profit made possible by the discounted rate of the capital goods used to create those flat screens). They assume that price//demand relationship for flat screens exists in relationship to the real preferences of consumers (not the discounted-price//demand relationship that -actually- allowed the "profitable" construction of the flat-screen factory), and thus they conclude that they too will be able to profit of the construction of a flat-screen factory. So there is a rush to build flat-screen factories (with a correlating rise in the wages of those that build and work at the factories and the materials used in the production, which means a correlating rise in the price of all those other goods, which means a relative amount of factory closings because of the increased cost of production of, say again, cell phones). Now other investors are seeing the "value" of flat-screen factories as rising. So perhaps they put their money into that area of the market as well. And so on. This is the formation of a bubble.
It's only until the prices in the market reflect the newly created money from the QE does the -real- demand for flat screens become apparent. And it's when this real demand becomes apparent (via decreased demand for flat-screens caused by less willingness to buy flat-screens because of the increased prices [and thus less money to spend on flat screens] of a wide variety of other goods on the market) that the uselessness (read, inefficiency) of the newly constructed flat-screen factories becomes apparent. This is the bust.
And in my understanding, this is precisely what happened in the housing market in the early 2000s. And -this- is why QE (and other interest rate manipulation) is destructive.
Sources:
http://mises.org/journals/scholar/Thornton13.pdf
http://mises.org/journals/qjae/pdf/qjae9_4_4.pdf
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EPT![[image loading]](http://i.imgur.com/CKJKT.jpg)
