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I would caution people to not have a false sense of security ("generals tend to fight the last war" and all that). Two important places where banks, particularl

I would caution people to not have a false sense of security ("generals tend to fight the last war" and all that). Two important places where banks, particularly central banks, currently do NOT look safer: A. Bond market liquidity, especially in places where negative interest rates have been adopted [1][2]. B. In times of crisis, bail-ins can still happen [3]. These two issues go hand-in-hand and will probably cause a lot of trouble in the financial system going forward. [1] https://www.armstrongeconomics.com/world-news/central-banks/bank-of-japan-the-bond-crisis/ https://www.armstrongeconomics.com/world-news/central-banks/... [2] https://www.armstrongeconomics.com/products_services/socrates/liquidity-crisis/ https://www.armstrongeconomics.com/products_services/socrate... [3] https://www.bloomberg.com/quicktake/bail-in https://www.bloomberg.com/quicktake/bail-in

caprese 7y ago
in what sense? bail-in's don't burden public coffers and would target disdain at the 1 company that was overlevered, instead of politicians are you referring to the safety of your deposits? because that is different than causing trouble for the financial system
- joeyrideout 7y ago
  In the sense that Main Street may end up paying for Wall Street's mistakes again. It happened in southern Europe already this decade. If bond market liquidity dries up, the average consumer's uninsured deposits will take a hit. People start to horde cash and the economy suffers.
  - fwip 7y ago
    Does the average consumer have uninsured deposits?
    - dmoy 7y ago
      If we're talking about bank deposits in the US, no. The median household has drastically less than 250k total
      - denimnerd42 7y ago
        it's 250k per account so.. no one should have uninsured deposits
        Mirioron 7y ago
        But if the system collapses, what's the chance of actually getting the value of your money back?
        JamesBarney 7y ago
        Pretty good. Its insured by an entity that can literally print money.
        Mirioron 7y ago
        Yes, but if they print money then your $100k will be worth less than $100k. This is why I asked about value. People saved to buy an apartment towards the end of the Soviet Union. When the Soviet Union collapsed they could barely afford a car for the saved money.
        cm2187 7y ago
        You don’t need for the financial system to collapse for inflation to eat into these deposits. Even target inflation (about 2%) eats these low yielding deposits over the long term. And the never ending increase of public debt will result in high inflation at one point. My point being that if you have $250k in savings, it probably shouldn’t sit and melt on a savings account.
        JamesBarney 7y ago
        Usually a bank run will involve people hoardong money, and run away inflation is caused by people spending money as quickly as they get it.(is a rapid increase in money velocity and the other a rapid decrease). So these two forces should counteract each other.
    - metanoia 7y ago
      On paper, no. We're all insured by the FDIC/NCUA up to $250k per institution (or account? I forget). In reality, I think the systemic risk means everyone has deposits on the line as the FDIC can't cover multiple bank failures.
      - JamesBarney 7y ago
        If there were multiple bank failures the treasury would loan the FDIC as much money as needed to cover it.
        caprese 7y ago
        under what provision? pure discretion? has this ever been tested? in 2008-2010 the FDIC got on the phone and brokered sales of smaller banks to large banks, specifically because they needed to do their part to stave off disaster with their thin credit line. Congress didn't ask them to do this, they just got on the phone because they had live capitalization ratio data.
caprese 7y ago
is the european government bond market really having a liquidity issue? corporate and munis were never liquid basically anywhere. bagholders still get payouts from the borrower, so unless they default which hasn't happened yet, people still make a profit. the maturities and monetary policy are such that they can just rollover to a new issuance in the future so it isn't clear that there is really any near term issue that money injectors can't manage, AT LEAST FROM the things you mentioned. I could think of other things but I'll leave you to come up with the succinct argument
- joeyrideout 7y ago
  Bond market liquidity isn't the same as defaults. It just means that the ECB is having trouble finding buyers for their bond paper as their QE program ends. This points towards a gap down in bond prices and a gap up in interest rates. Defaults will come after. EDIT: The key distinction I'm trying to make is the difference between solvency (debt repayment ability) and liquidity (in a market, the bid-ask spread or whether you can actually transact).
  - caprese 7y ago
    Yeah, I didn't conflate these concepts. Back to the question: Why do you think there is a problem when the ECB can hold bonds till maturity? Central banks have an infinite time horizon, they are upgraded sovereign wealth funds. The issuers themselves can just rollover and create new bonds when their old bonds are reaching maturity, if they haven't paid them all off yet. This is commonplace. If they fail at having enough revenue or getting investor appetite for a new issuance then they default. There are criticisms possible about central bank behavior, but as far as stability to the financial system what problem do you think there is? Central banks haven't been in the habit of actually unwinding their portfolios into an illiquid market, and their large bond holdings can just be repaid by the issuer.
    - joeyrideout 7y ago
      Sorry, upon re-reading you did not conflate the two. My understanding is that there are few or no private bids for bonds at current interest levels. As you probably know the ECB recently announced an end to QE. Rolling over debt at an interest rate set by the private market is not sustainable. So, the ECB is somewhat trapped. They either renew QE or expose themselves to very high servicing costs set by private buyers. Hopefully that's clear as mud? Maybe I m missing something.

caprese 7y ago

in what sense? bail-in's don't burden public coffers and would target disdain at the 1 company that was overlevered, instead of politicians are you referring to the safety of your deposits? because that is different than causing trouble for the financial system

joeyrideout 7y ago
In the sense that Main Street may end up paying for Wall Street's mistakes again. It happened in southern Europe already this decade. If bond market liquidity dries up, the average consumer's uninsured deposits will take a hit. People start to horde cash and the economy suffers.
- fwip 7y ago
  Does the average consumer have uninsured deposits?
  - dmoy 7y ago
    If we're talking about bank deposits in the US, no. The median household has drastically less than 250k total
    - denimnerd42 7y ago
      it's 250k per account so.. no one should have uninsured deposits
      - Mirioron 7y ago
        But if the system collapses, what's the chance of actually getting the value of your money back?
        JamesBarney 7y ago
        Pretty good. Its insured by an entity that can literally print money.
        Mirioron 7y ago
        Yes, but if they print money then your $100k will be worth less than $100k. This is why I asked about value. People saved to buy an apartment towards the end of the Soviet Union. When the Soviet Union collapsed they could barely afford a car for the saved money.
        cm2187 7y ago
        You don’t need for the financial system to collapse for inflation to eat into these deposits. Even target inflation (about 2%) eats these low yielding deposits over the long term. And the never ending increase of public debt will result in high inflation at one point. My point being that if you have $250k in savings, it probably shouldn’t sit and melt on a savings account.
        JamesBarney 7y ago
        Usually a bank run will involve people hoardong money, and run away inflation is caused by people spending money as quickly as they get it.(is a rapid increase in money velocity and the other a rapid decrease). So these two forces should counteract each other.
  - metanoia 7y ago
    On paper, no. We're all insured by the FDIC/NCUA up to $250k per institution (or account? I forget). In reality, I think the systemic risk means everyone has deposits on the line as the FDIC can't cover multiple bank failures.
    - JamesBarney 7y ago
      If there were multiple bank failures the treasury would loan the FDIC as much money as needed to cover it.
      - caprese 7y ago
        under what provision? pure discretion? has this ever been tested? in 2008-2010 the FDIC got on the phone and brokered sales of smaller banks to large banks, specifically because they needed to do their part to stave off disaster with their thin credit line. Congress didn't ask them to do this, they just got on the phone because they had live capitalization ratio data.

caprese 7y ago

is the european government bond market really having a liquidity issue? corporate and munis were never liquid basically anywhere. bagholders still get payouts from the borrower, so unless they default which hasn't happened yet, people still make a profit. the maturities and monetary policy are such that they can just rollover to a new issuance in the future so it isn't clear that there is really any near term issue that money injectors can't manage, AT LEAST FROM the things you mentioned. I could think of other things but I'll leave you to come up with the succinct argument

joeyrideout 7y ago
Bond market liquidity isn't the same as defaults. It just means that the ECB is having trouble finding buyers for their bond paper as their QE program ends. This points towards a gap down in bond prices and a gap up in interest rates. Defaults will come after. EDIT: The key distinction I'm trying to make is the difference between solvency (debt repayment ability) and liquidity (in a market, the bid-ask spread or whether you can actually transact).
- caprese 7y ago
  Yeah, I didn't conflate these concepts. Back to the question: Why do you think there is a problem when the ECB can hold bonds till maturity? Central banks have an infinite time horizon, they are upgraded sovereign wealth funds. The issuers themselves can just rollover and create new bonds when their old bonds are reaching maturity, if they haven't paid them all off yet. This is commonplace. If they fail at having enough revenue or getting investor appetite for a new issuance then they default. There are criticisms possible about central bank behavior, but as far as stability to the financial system what problem do you think there is? Central banks haven't been in the habit of actually unwinding their portfolios into an illiquid market, and their large bond holdings can just be repaid by the issuer.
  - joeyrideout 7y ago
    Sorry, upon re-reading you did not conflate the two. My understanding is that there are few or no private bids for bonds at current interest levels. As you probably know the ECB recently announced an end to QE. Rolling over debt at an interest rate set by the private market is not sustainable. So, the ECB is somewhat trapped. They either renew QE or expose themselves to very high servicing costs set by private buyers. Hopefully that's clear as mud? Maybe I m missing something.