221–230 of 246 posts
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You are wrong. Striking how many HN commentators are so often confident and yet wrong in their assumption that everything is about the US.
It's easy to see why many commentators on a US company's forum would make said assumptions.
Unless youre talking more broadly, in which case this is the internet. Do Tik Tok videos have to assume everyone is Chinese?
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Was he really that wrong? Isn't a bond just another debt instrument? It's not obvious to me, that there is any fundamental difference between the operations that both comments describe.
While the effects may be similar, they are fundamentally different mechanisms. Also, this statement is incorrect: > Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything. The Fed does in fact set interest rates and that decision directly impacts rates all down the line to mortgages and local loans. Intervening in the bond market is another tool that…
A central bank doesn't directly set interest rates for your mortgage.
It can set rates at which it will lend to other banks, which in turn influences the rates banks will offer to mortgage borrowers, but this isn't necessarily so, see for example 2008.
Of course there are more contracts directly tied to the central bank rates, but thats just formalising the thing thats supposed to happen anyway.
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It's not a fantasy scenario that we need to speculate about. Currencies collapse all the time, just pick any country and it has happened to them within the past 200 or even 100 years. There's millions of people alive right now who avoided having their life savings destroyed by having foreign currency or bullion or both.
I'm not disagreeing with that part; I grew up in Russia in the 90s, where, if you had any significant amount of money, you'd have a dollar or euro account, and ideally both. This provides security against currency collapse, yes; but if the government decides to be actively confiscatory, it doesn't really help, unless their plan is particularly poorly designed.
If we're talking about digital foreign currency, it's a matter of having that money in a foreign bank account, where your government can't touch it. Everybody should have some or most of their money in foreign bank accounts, otherwise you're practically begging your government to ruin you.
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It's easy to see why many commentators on a US company's forum would make said assumptions.
Theres not much about the forums that makes it Y combinator specific. Unless youre talking more broadly, in which case this is the internet. Do Tik Tok videos have to assume everyone is Chinese?
The Finnish central bank is called the “Bank of Finland”
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While the effects may be similar, they are fundamentally different mechanisms. Also, this statement is incorrect: > Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything. The Fed does in fact set interest rates and that decision directly impacts rates all down the line to mortgages and local loans. Intervening in the bond market is another tool that…
I think you're talking past each other. A central bank doesn't directly set interest rates for your mortgage. It can set rates at which it will lend to other banks, which in turn influences the rates banks will offer to mortgage borrowers, but this isn't necessarily so, see for example 2008. Of course there are more contracts directly tied to the central bank rates, but thats just formalising the thing thats supposed…
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Canada (and other places) never had a reserve requirement, and they are doing fine. Reserve requirements are mostly bullshit anyway. What you want is for banks to have enough loss absorbing capital. Reserves are almost meaningless.
What is the difference between a reserve and loss absorbing capital?
About loss absorbing capital: companies usually finance themselves from two sources equity and debt. (Normal companies get their debt from their bank, or they issue bonds. Banks get some of their debt in the form of deposits.)
To give an example, supposed you have 2 billion dollars lying around, and you start a bank. You take another 8 billion dollars in debt (say as deposits), and you use that to make 10 billion dollars of loans and other investments.
If you investments gain in money, you keep the profit. Your accountant will count it as an increase in your capital, from 2 billion to, say, 3 billion. Basically, capital is just what's left of your assets after you subtract all your debt.
If your investments lose money, your capital shrinks. Say your investments are now worth only 9 billion dollars, but you still have 8 billion in deposits. Then you only have 9 - 8 = 1 billion in capital left.
There's never any money in the vault, ie no reserves, in our example. When a depositor wants their money, you sell some of your investments to cover that. As long as your total investments are worth more than your total deposits, this is fine.
(For convenience, real world banks keep some reserves around even when not legally required, so they can satisfy withdrawal requests directly, instead of having to sell some investments for every little withdrawal request.)
Obviously, the more capital cushion your bank has the larger a decline in the value of your investments you can absorb as losses, before your depositors and other creditors need to get nervous.
Back in Scotland's free banking era, when financial regulation was very light, banks over there routinely kept around a third of their total balance sheet as equity and two thirds as debt.
Today because of all the regulation we have accumulated and especially the too-big-too-fail expectations, banks need to be forced to even keep around 8% of their balance sheet as equity.
(It doesn't help that interest on debt can be paid with pre-tax money, but return on capital (ie dividends) comes largely out of post-tax money. So debt is cheaper.)
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What is the difference between a reserve and loss absorbing capital?
In a practical sense - reserves can’t be spent in the economy but you could withdraw your capital (accepting the impact on banking operations that would have) and use it to buy something. They’re different types of money. Reserves are only good for exchange by a few institutions and the central bank. In a “model” sense for want of better phrasing that eludes me right now… One is infinite (via the discount window for…
So you take all the investments that the bank has made (loans, but also their brand value, the office buildings they own and operate in, etc) and subtract all the deposits and outstanding bonds etc, and what's left over is their capital.
Another related way to measure that is to look at total market capitalisation. (But market cap makes economic sense, that's not the definition of loss absorbing capital that's used in the regulations.)
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> We don’t have fractional reserve in the USA, the UK, Aus etc and haven’t had for a number of years at this point. What do you mean by that?
https://www.federalreserve.gov/monetarypolicy/reservereq.htm EDIT hmm that doesn’t link directly to the relevant FAQ: “Why did the Federal Reserve reduce reserve requirement ratios to zero percent? For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy i…
Btw, banks still keep plenty of reserves around. See https://fred.stlouisfed.org/series/TOTRESNS for the US.
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> We don’t have fractional reserve in the USA, the UK, Aus etc and haven’t had for a number of years at this point. What do you mean by that?
Not GP, but there are two senses in which I think it could be meant: - Currency no longer has to be backed by some fraction of shiny objects, - Banks do not need to arrange CB reserves before making loans -- they make loans and then secure the needed CB reserves.
Btw, in the US there's lots and lots of bank reserves: https://fred.stlouisfed.org/series/TOTRESNS
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Theres not much about the forums that makes it Y combinator specific. Unless youre talking more broadly, in which case this is the internet. Do Tik Tok videos have to assume everyone is Chinese?
“The Fed” is the US Federal Reserve The Finnish central bank is called the “Bank of Finland”