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Lyn Alden sounds like an expert but never worked in the financial industry. Either that makes the reports clever outside view or misleading detail of someone wh

by rr888 4y ago

Lyn Alden sounds like an expert but never worked in the financial industry. Either that makes the reports clever outside view or misleading detail of someone who doesn't really understand it. My money is on the latter.

OscarCunningham 4y ago
Was there a particular part you were suspicious of?
- CraigJPerry 4y ago
  Not the OP but there’s quite a few parts of the article are misleading. For example: >> That serves as the source of financing for banks I think they meant to say funding but regardless it’s wrong either way. A bank doesn’t use deposits to fund/finance loans it makes. A bank is licenced to create money from nothing in order to originate loans. This loan making activity is not constrained by deposits (money stored at the bank by other customers) nor by reserves (special money that cant be spent in the economy and is stored in the commerical bank’s account at the central bank). There are legal controls that mean loan making activity is constrained by a bank’s capital (this is what Basel I, II, III etc are all about). The definition of capital is very particular and complicated but a fair summary could be it’s the money invested in the bank by shareholders. Higher capital requirements increase shareholder risk and decrease public risk. the author goes on to write the following without seeming to notice the incongruence: >> Bank of America (BAC) as an example, they have $3.051 trillion in assets and $2.778 trillion in liabilities (simplifying) BAC has issued $3tn loans but only has $2.7tn in deposits - so what did the author think they meant by “financing”? To be clear the story here with BAC is more complicated than just loans and deposits but in the interests of not writing a wall of text… >> Liabilities of the Federal Reserve consist mainly of bank deposits this is unfortunate wording, it makes it sound like deposits by you or me. The money stored at the fed by commercial banks is different than dollars or pounds; its “reserves”. You can’t spend reserves in the economy like you can with normal money. >> If a central bank loses its independence, and for example a president can tell the central bank to do whatever he wants, then a country has basically lost its guardrails against hyperinflation I think this is a reference to Turkey and mis-understanding the bigger picture. Specifically the fact that hyperinflation is partly a function of money supply (and partly a function of money velocity) and that money supply is increased in two ways: commercial banks issuing loans (as above this is constrained by capital requirements) and secondly by expansionary fiscal policy - that is the government spending into the economy to consume on its own behalf. Neither of these is guard trailed by monetary policy. NB: fiscal policy = government, monetary policy = central bank. I think this comment is getting long enough, i’ll wrap it up there.
  - r3trospek 4y ago
    I stopped reading the article the second i read: "That serves as the source of financing for banks" which is two paragraphs in. Your comments are spot on. What I don't understand is how its possible for people to still get these things wrong.

by rr888 4y ago

OscarCunningham 4y ago

Was there a particular part you were suspicious of?

CraigJPerry 4y ago
Not the OP but there’s quite a few parts of the article are misleading. For example: >> That serves as the source of financing for banks I think they meant to say funding but regardless it’s wrong either way. A bank doesn’t use deposits to fund/finance loans it makes. A bank is licenced to create money from nothing in order to originate loans. This loan making activity is not constrained by deposits (money stored at the bank by other customers) nor by reserves (special money that cant be spent in the economy and is stored in the commerical bank’s account at the central bank). There are legal controls that mean loan making activity is constrained by a bank’s capital (this is what Basel I, II, III etc are all about). The definition of capital is very particular and complicated but a fair summary could be it’s the money invested in the bank by shareholders. Higher capital requirements increase shareholder risk and decrease public risk. the author goes on to write the following without seeming to notice the incongruence: >> Bank of America (BAC) as an example, they have $3.051 trillion in assets and $2.778 trillion in liabilities (simplifying) BAC has issued $3tn loans but only has $2.7tn in deposits - so what did the author think they meant by “financing”? To be clear the story here with BAC is more complicated than just loans and deposits but in the interests of not writing a wall of text… >> Liabilities of the Federal Reserve consist mainly of bank deposits this is unfortunate wording, it makes it sound like deposits by you or me. The money stored at the fed by commercial banks is different than dollars or pounds; its “reserves”. You can’t spend reserves in the economy like you can with normal money. >> If a central bank loses its independence, and for example a president can tell the central bank to do whatever he wants, then a country has basically lost its guardrails against hyperinflation I think this is a reference to Turkey and mis-understanding the bigger picture. Specifically the fact that hyperinflation is partly a function of money supply (and partly a function of money velocity) and that money supply is increased in two ways: commercial banks issuing loans (as above this is constrained by capital requirements) and secondly by expansionary fiscal policy - that is the government spending into the economy to consume on its own behalf. Neither of these is guard trailed by monetary policy. NB: fiscal policy = government, monetary policy = central bank. I think this comment is getting long enough, i’ll wrap it up there.
- r3trospek 4y ago
  I stopped reading the article the second i read: "That serves as the source of financing for banks" which is two paragraphs in. Your comments are spot on. What I don't understand is how its possible for people to still get these things wrong.