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The Crash of ’87, from the Wall Street Players Who Lived It

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Re: The Crash of ’87, from the Wall Street Players Who Lived It

#151

Post by misja111 »

RobertoG wrote: post #129
rwmj wrote: post #93

Earlier quoted context omitted.

> Holding cash, after all, is just withholding wealth from being productive. Unless you're literally storing notes under your bed, your bank is lending out your money to someone.

"Unless you're literally storing notes under your bed, your bank is lending out your money to someone." Banks don't lend deposits. It seems that it's one of those fallacies that never die. Maybe, because it's in the textbooks. "[..]reserve requirement does not act as a binding constraint on banks’ ability to lend and consequently their ability to create money. The reality is that banks first extend loans and then loo…

From your quote: "..and then look for the required reserves later."

Banks are required to have certain reserves. It's true that they can already lend money while they are still looking for the required money to refill their reserve. But they will have to fill up their reserve at some point, and for that they need money, otherwise they will have to stop lending.

So it is not a fallacy that banks are lending deposits and it's not so strange that this is in the textbooks.

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#152

Post by misja111 »

nradov wrote: post #102
rwmj wrote: post #93

Earlier quoted context omitted.

> Holding cash, after all, is just withholding wealth from being productive. Unless you're literally storing notes under your bed, your bank is lending out your money to someone.

That might have been true long ago but with fractional reserve lending this linkage is effectively severed. The bank usually isn't lending out your money. The total amount a bank can lend out is constrained more by regulatory requirements and its invested capital than by the balance of customer savings/checking/CD accounts.

It's true that the lending amount of a bank is heavily constrained by regulatory requirements. But that doesn't mean that banks are not lending your deposited money to someone else.

Consider two banks in the same country, so having to comply with the same reserve requirements. The reserve requirements are defined as a percentage of the amount on the banks's deposit account at the central bank. So the bank which can transfer an extra deposit to this acount is the one which is able to lend more money.

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#153

Post by Lost_BiomedE »

AnimalMuppet wrote: post #113
Lost_BiomedE wrote: post #81

Earlier quoted context omitted.

Safe bet: cash. Speculative bet: put options.

It seems to me that holding the stock but buying put options is not speculative; it's merely buying insurance. Why do you regard it as speculative? Or were you referring to selling put options?

Buying naked puts. It is like shorting but very leveraged and must be timed.

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#154

Post by tekp2 »

misja111 wrote: post #152
nradov wrote: post #102

Earlier quoted context omitted.

That might have been true long ago but with fractional reserve lending this linkage is effectively severed. The bank usually isn't lending out your money. The total amount a bank can lend out is constrained more by regulatory requirements and its invested capital than by the balance of customer savings/checking/CD accounts.

It's true that the lending amount of a bank is heavily constrained by regulatory requirements. But that doesn't mean that banks are not lending your deposited money to someone else. Consider two banks in the same country, so having to comply with the same reserve requirements. The reserve requirements are defined as a percentage of the amount on the banks's deposit account at the central bank. So the bank which can t…

And what, would you say, is the current legally mandated "reserve requirement" in the US?

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#155

Post by RobertoG »

misja111 wrote: post #151
RobertoG wrote: post #129

Earlier quoted context omitted.

"Unless you're literally storing notes under your bed, your bank is lending out your money to someone." Banks don't lend deposits. It seems that it's one of those fallacies that never die. Maybe, because it's in the textbooks. "[..]reserve requirement does not act as a binding constraint on banks’ ability to lend and consequently their ability to create money. The reality is that banks first extend loans and then loo…

From your quote: "..and then look for the required reserves later." Banks are required to have certain reserves. It's true that they can already lend money while they are still looking for the required money to refill their reserve. But they will have to fill up their reserve at some point, and for that they need money, otherwise they will have to stop lending. So it is not a fallacy that banks are lending deposits a…

Banks can get reserves three ways:

-From deposits. -In the interbank market, where banks with excess reserves lean to bank that need reserves. -From the Central Bank.

The Central Bank always lend the necessary reserves. A different issue is if that would be a good business for the bank.

The point is that the quantity a bank can lend it's not limited by deposits as the normal narrative imply.

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#156

Post by eru »

pm90 wrote: post #122
aswanson wrote: post #112

Earlier quoted context omitted.

Thats one thing that hasnt been studied enough, I suspect. Huge amounts of capital from 401ks alone may have more effect on the market valuations than actual value creation. There is just so much money chasing a return, increasing constantly.

This might be an unpopular opinion on this forum, but one of the best ways to reduce the money supply seems to be more taxation right? This is why I don't get why Republicans seem so hell bent on tax cuts... we already have so much money going around. Better take it out, fund healthcare and education and reasonable welfare systems.

Only if you don't spend the money taken in via taxation.

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#157

Post by eru »

pm90 wrote: post #139
RobertoG wrote: post #125

Earlier quoted context omitted.

If you fund healthcare and education you are putting the money out again. -When you tax and spend, you are redistributing, but the final quantity is the same. -When you tax but don't spend, you are reducing demand in the economy by making worse the people with money. -When you don't tax and don't spend in public services (austerity), you are reducing demand in the economy by making worse the people without money. Tha…

Great comment. I guess I should have clarified my statement since I meant redistribution, when talking about taxing and spending on healthcare/education. I guess the argument on the merits of redistribution is the fundamental difference b/w democrats and republicans.

I don't think that's the fundamental difference. It's more down to different tribal identities, and any correlation with differences in policies is contingent.

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#158

Post by eru »

Lost_BiomedE wrote: post #153
AnimalMuppet wrote: post #113

Earlier quoted context omitted.

It seems to me that holding the stock but buying put options is not speculative; it's merely buying insurance. Why do you regard it as speculative? Or were you referring to selling put options?

Buying naked puts. It is like shorting but very leveraged and must be timed.

I wonder if you turn writing naked puts into something like value investing?

Figure out from fundamental what you think is a decent value for the stocks in question, then write puts for that strike price.

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#159

Post by eru »

Meegul wrote: post #92
PatientTrader wrote: post #87

Crashes are actually great for the middle class. The value of the dollar increases as prices come down. Homes, land, property, etc all become cheaper during crashes. This "bull market" is the actual "crash." All its doing is depleting the value of your money

This is only partially true. It ignores the job losses that result from the fall in capital available to firms. Additionally, anyone owning equities, which should be most of the middle class although I'm aware this isn't the case, will see their wealth decrease. I'd argue that the only people who benefit from crashes are those with large amounts of cash assets, which is generally not how you should be holding your we…

Nah, for an individual cash is an asset, but from an economy-wide perspective cash is free: the government literally prints the stuff for pennies on the hundred-dollar.

Any stable demand for cash by the general public can be accommodated without any real economic costs.

(But there are real economic costs for when that demand is changing, and the central bank don't adjust properly. Interestingly, that's mostly a problem of monopolized note issue. Free banking systems with competing note issuers adapt easier to changes in demand for notes.)

Re: The Crash of ’87, from the Wall Street Players Who Lived It

#160

Post by eru »

rwmj wrote: post #93
Meegul wrote: post #92

Earlier quoted context omitted.

This is only partially true. It ignores the job losses that result from the fall in capital available to firms. Additionally, anyone owning equities, which should be most of the middle class although I'm aware this isn't the case, will see their wealth decrease. I'd argue that the only people who benefit from crashes are those with large amounts of cash assets, which is generally not how you should be holding your we…

> Holding cash, after all, is just withholding wealth from being productive. Unless you're literally storing notes under your bed, your bank is lending out your money to someone.

Even putting your money under the mattress doesn't make a difference: as long it's a stable amount economy-wide, the central bank can just print enough cash to make up for that amount under mattresses. Cash is free to make.
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