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Banking in uncertain times

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Re: Banking in uncertain times

#81

Post by floathub »

mjdesa wrote: post #68
floathub wrote: post #55

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively corr…

> The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. It’s a necessary condition of the discounted cash flow asset pricing model. https://en.wikipedia.org/wiki/Discounted_cash_flow?wprov=sft...

Yes, a future stream of cash flows will be worth less now if interest rates rise, because the time value of money has changed. But not every asset (let alone every price) represents a future stream of cash flows.

Monetary policy could be performed by a couple of NAND gates if it were genuinely the case that any interest rates rise would necessarily lower the price of everything.

Re: Banking in uncertain times

#82

Post by konne88 »

He seems to say that the fractional reserve system is the only way society can work. But is that actually true? Quite a few banks (e.g. Brex) now allow you to keep your money in a money market fund, which invests in short term US treasuries that are protected by the full faith and credit of the US government. Importantly, in this setup, you own all the assets and the bank just acts as a custodian. And you tend to get better interest. That just seems so much saner than the bank being allowed to invest your money in risky and illiquid assets, and then we just hope that those investments don't lose too much money, or that a lot of people don't want to withdraw their money all at once.

Re: Banking in uncertain times

#83

Post by vishnugupta »

floathub wrote: post #55

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively corr…

> it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?).

As trivial as it sounds it is exactly the premise with which fed operates. Their mandate is price stability (~2% inflation) with low unemployment rate. And interest rate is a key lever they have. So yes they are going to keep rising rates until they see inflation come down to around 2%. They harp on this at every FOMC meeting[1]. They believe raising rates to around 4.75% will bring down inflation to 2%.

Will be interesting to see how it plays out.

[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...

Re: Banking in uncertain times

#84

Post by lordnacho »

floathub wrote: post #55

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively corr…

> The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off.

Of course there are instruments like interest rate derivatives where you can make money when rates rise, but he's talking about ordinary assets like bonds and equities.

The reason all prices do indeed embed an interest rate is that all future cash flows need to be valued somehow, and those values go down as interest rates go up. So your equity that (somehow) is guaranteed to pay 10c next year is worth less if interest rates go up, just like if it were a bond.

Re: Banking in uncertain times

#85

Post by bubbleRefuge »

There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Money" . In order to create loans and stay in the lending business, banks are required to have certain levels of capital.

* The Fed has control of quantity of money . No. The Fed controls the direction of interest rates via interest rate policy or simply put the Fed determines the price of money.

Re: Banking in uncertain times

#86

Post by em500 »

lukas099 wrote: post #18
pearjuice wrote: post #5

What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 and investors did not get compensated (if they didn't already cash out when they saw it coming due to inside information) but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. Why would any bank l…

Matt Levine's Money Stuff talked about this yesterday. I'll post a couple of the relevant paragraphs. > The regulators’ response to SVB — guaranteeing all depositors, but also the Fed’s Bank Term Funding Program to finance other banks’ bond portfolios at par[7] — increases the value of other banks’ optionality, which encourages them to take more risk, because their deposits are safer. (I suppose this is the real mora…

Emeritus a University of Chicago finance professor John Cochrane has been screaming for years that the whole design of more and more regulations combined with all sorts of implicit ex-post creditor insurance is structurally unstable and all but guarantees bank runs and collapses every decade or so. That the only thing that can work is much higher capital (not reserve!) requirements, i.e., a lot higher shareholder equity vs debt on the balance sheet. He mentions that existing bank regulations already number hundreds of thousands of pages, yet the regulators apparently got blindsided by duration/convexity risk which is CFA / MBA finance textbook material. Just like generals, regulators are always fighting the previous crisis.

Re: Banking in uncertain times

#87

Post by lnx01 »

542458 wrote: post #21
ascotan wrote: post #12

Earlier quoted context omitted.

desert i don't think means deserving. It comes from the latin desertus which means to "make barren or empty/forsake". I think in this context it means to have something fail or be abandoned at a critical moment.

The person you’re replying to is correct - “desert” is in some contexts an old word that’s pronounced like “dessert” but spelled with one “s” that means “the punishment that one deserves”. https://www.merriam-webster.com/words-at-play/just-deserts-o...

Also, "desert" as the present tense of "deserted". As in "All my friends have deserted me." Or, "The Sgt. Major punished the deserter."

Re: Banking in uncertain times

#88

Post by Kye »

antibasilisk wrote: post #51
Semaphor wrote: post #36

Earlier quoted context omitted.

Oh wow. I (non-native) never realized it only had one s, I always assumed it was "just desserts", as in, you are getting the dessert you deserve, after the food (the evil you did) :D

I (native) also did not realize this.

Native English speaker here too.

TWL (Today We Learned)

I always assumed it was one one of those odd manglings that gained traction, like irregardless.

Re: Banking in uncertain times

#89

Post by Der_Einzige »

floathub wrote: post #55

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?). While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively corr…

Not sure why you wrote this since nearly all prices are falling right now, directly due to interest rate hikes.

How could you conclude that an interest rate hikes wouldn't reduce all asset prices?

Re: Banking in uncertain times

#90

Post by dancingvoid »

bubbleRefuge wrote: post #85

There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Mon…

I’ll add that the reserve requirement is currently zero.

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

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