cyprus banks

[JohnRoberts]

Interesting times..

They are now wrestling about who pays to bail out these banks..

They were going to charge the depositors.

Apparently Cypress is one place where wealth goes to hide and Germany/France don't feel like bailing them out. While Putin doesn't want to either since the wealth is hiding from him...

Of course more complex than that, and still developing story... looks like they already walked back charging the small depositors 6% . Senior debt holders may get a haircut.

Looks like monday bank holiday may last all week.

JR

 

[ricardo]

http://gregpytel.blogspot.co.uk/2009/04/largest-heist-in-history.html

This BTW is Economics 101 as taught in High School.  If this is what the Financial Institutions are doing, the result is INEVITABLE.

I guess the financial whiz kids ..  I mean the trusted custodians of our savings, decided that if they called it by fancy names and obfuscated it with mumbo jumbo, they could persuade the unwashed masses that Arithmetic doesn't apply.

At least until they (the bankers) retired to the British Virgin Islands etc.

There used to be laws against this sort of thing in some countries  ...  but obfuscation works a treat to get around laws.  Sadly, no government seems interested in stopping this "to good to be true" deal.

 

[JohnRoberts]

There is a difference between fractional reserve banking and pyramid or "Ponzi" schemes, where new investments pay off earlier round investors.

In fractional reserve banking there is a confidence game of sorts, where the bank customers all trust that they can get their money back any time they want it, so they leave it in the bank and the banks puts it to work elsewhere. The government supports this "confidence" by providing insurance for the deposits, on top of the trust in the bank, the depositors have faith in their government to make them whole. But this is all legal and while I have explained before the money expansion makes the system less stable, it can provide more economic growth from this apparent creation of money/credit. This the extra growth is not free, but worthwhile and has been used in some fashion for centuries (?). 

The modern stress on some of the european banks is from buying too much government debt that was attractive because of high nominal interest rates. The regulators were happy to count them at full value on their balance sheets, but the debt market didn't agree with the values.  I won't speculate wether this was overt quid pro quo between banks and regulators, or just an IQ deficiency, but the music stopped and now Germany and france are left the only ones with with chairs in the EU but with lots of relatives looking for their help.

It's not like Germany and France are the rich uncles with money bags to hand out freely. They have cut spending at home to be prudent and eventually that frugality will generate political stress at home. 

Cyprus is interesting in the odd couple love triangle between then and Russia and Germany, while I am over simplifying this a bunch. 

JR

 

[living sounds]

http://gregpytel.blogspot.co.uk/2009/04/largest-heist-in-history.html

Very interesting, thanks!

The problem ist not fractional reserve banking, but the overleveraging that deregulation and lack of regulatory action made possible.

 

[JohnRoberts]

http://gregpytel.blogspot.co.uk/2009/04/largest-heist-in-history.html

Very interesting, thanks!

The problem ist not fractional reserve banking, but the overleveraging that deregulation and lack of regulatory action made possible.

Should the regulators have prevented the governments from over leveraging and issuing so much debt (borrowing)  that it dropped in value when their ability to repay was questioned by the market? Perhaps the regulators erred in not writing down the government debt on bank balance sheets sooner, and over valued that government debt. They had no choice after the debt cratered in public markets, and bank net worth was reviewed. It seems there was an apparent conflict of interest in that. Note: the banks often owned debt issued by other nearby countries, so there was an appearance of arms length transactions and diversification, but the common currency, linked all the debt together, making the self-interest apparent for propping up all Euro zone debt. 

Who regulates the regulators?? (answer= the markets).

The specific issue with cyprus is that it is distasteful to bail them out with the history/perception of banking a large fraction of non-EU citizen's money.

The initial strategy to impose a direct charge on the bank deposits (wealth tax), Including small depositors (6%), has shook the foundation of fractional reserve banking that depends on the depositors full confidence in the banking system that they will get 100% of their money back.  The new fear is that raising this question may cause a run on banks there and elsewhere, a new problem on top of the old problem of too much borrowing and spending.

Like I said an interesting few days for Cyprus and perhaps the broader Euro zone. But this immediate crisis IMO seems all about fractional reserve banking that is not inherently a flawed system as much as it depends on confidence in the bankers. That confidence has been shaken a little by recent behavior. I suspect they are back pedaling as fast as they can to restore that confidence. 

JR

 

[ricardo]

There is a difference between fractional reserve banking and pyramid or "Ponzi" schemes, where new investments pay off earlier round investors.

In fractional reserve banking there is a confidence game of sorts, where the bank customers all trust that they can get their money back any time they want it, so they leave it in the bank and the banks puts it to work elsewhere. The government supports this "confidence" by providing insurance for the deposits, on top of the trust in the bank, the depositors have faith in their government to make them whole. But this is all legal and while I have explained before the money expansion makes the system less stable, it can provide more economic growth from this apparent creation of money/credit. This the extra growth is not free, but worthwhile and has been used in some fashion for centuries (?).

What the article points out is that while lending out a greater proportion of savings makes the system less 'stable', it is STILL stable.

As the proportion approaches 100%, the real money supports an ever increasing but FINITE amount of funny money.

What the financial whiz kids have done is, by calling certain types of lending fancy names, they are now lending more than 100%.  When we cross that line (even by a small amount), the system becomes unstable.  Now the real money supports an INFINITE amount of funny money.  At this point, the system might as well be a 'true' Ponzi system cos that's exactly what's happening! In fact, true Ponzi might be more 'honest' cos some investors are being paid.

As the whiz kid bankers are paid according to the funny money they generate, this is good for short term profits (them).

But if ANYONE suddenly wants his money back, the whole house falls down cos the instability works both ways.

For the rest of us, we bail out (pay for) the consequences of an unstable financial system, thus guaranteeing their short term profits in the long term.  Can't possibly let the banks fold, old son.  8)

 

[Kingston]

What the article points out is that while lending out a greater proportion of savings makes the system less 'stable', it is STILL stable.

If only that fractional reserve even was concrete savings. Currently the big banks here in northern Europe are quite hostile to ordinary savings. You will not get more than about 1.5% interest. A strong message that you should really keep it in the sock as this will cover maybe a third of the current rate of inflation. It also means that someone (European Central Bank for one) is lending the big banks themselves money even cheaper than 1.5%. Actually statically saving large amounts of money at any given time is a bad choice - there are better investments - just pointing out how through taxes we are lending the banks money (bailouts, cheap interest), and not getting any service as return.

But then again, the core service of any bank these days is lending money, not storing it. Maybe someone can point out how the fractional reserve is calculated from a loan not yet paid back to the bank. Clearly a bank already writes it down as "money", even though it's really just a chunk of uncertain future.

 

[sodderboy]

You've nailed the problem there- everyone is keeping it in their sock.  Our governments have created a financial atmosphere that is hostile to moving money around, actually using it for investment or new business opportunity, so on large and small scales it is "socked-away". 

Then to create the image of markets actually doing something the governments are printing money, based on nothing but paper and ink, to the tune of 1T per year here in the states.
Mike 

 

[JohnRoberts]

There is a difference between fractional reserve banking and pyramid or "Ponzi" schemes, where new investments pay off earlier round investors.

In fractional reserve banking there is a confidence game of sorts, where the bank customers all trust that they can get their money back any time they want it, so they leave it in the bank and the banks puts it to work elsewhere. The government supports this "confidence" by providing insurance for the deposits, on top of the trust in the bank, the depositors have faith in their government to make them whole. But this is all legal and while I have explained before the money expansion makes the system less stable, it can provide more economic growth from this apparent creation of money/credit. This the extra growth is not free, but worthwhile and has been used in some fashion for centuries (?).

What the article points out is that while lending out a greater proportion of savings makes the system less 'stable', it is STILL stable.

Yes, in my judgment the current crisis in Cyprus is marginal reserve bank confidence, being threatened, by a direct tax on deposits, meaning depositors will get back $0.94 for each dollar. Thanks to the public outcry, the Cyprus government voted not to apply the direct tax. So this remains unresolved, kind of a lose-lose PR move. People don't trust the banks anymore, and they still need to raise capital. 

As the proportion approaches 100%, the real money supports an ever increasing but FINITE amount of funny money.

Perhaps, but on topic, the issue in Cyprus is the quality of the balance sheet, the bank owned too much government debt that was written down leaving the bank underfunded. it is a matter of perspective whether the issue  was too little real money reserves, or bad debt. If the debt was not bad, the regional bank regulators wouldn't force them to raise more capital to shore up their balance sheets. So I can understand your point, but see it more of a bad debt, not how much debt issue.

What the financial whiz kids have done is, by calling certain types of lending fancy names, they are now lending more than 100%.  When we cross that line (even by a small amount), the system becomes unstable.  Now the real money supports an INFINITE amount of funny money.  At this point, the system might as well be a 'true' Ponzi system cos that's exactly what's happening! In fact, true Ponzi might be more 'honest' cos some investors are being paid.

This is the nutshell explanation for the financial system collapse back in 2007/2008. One could argue that the Euro zone never really re-capitalized the banks, and tended to paper over the bank status with too easy "stress tests'. In the US we have, and still are pumping money into bank profits and balance sheets with artificially low central bank interest rates. US banks are guaranteed easy profit on the spread between what they pay for money and what they earn by lending it out. 

As the whiz kid bankers are paid according to the funny money they generate, this is good for short term profits (them).

As I said back a few years ago when discussing the credit bubble bursting, the entire world economy was buoyed up by all the easy credit that led to people spending money they really couldn't afford. This boosted economic activity throughout the entire world economy. We are still suffering the hangover from paying for those excesses, and some still haven't (yet).

But if ANYONE suddenly wants his money back, the whole house falls down cos the instability works both ways.

ANYONE can get their money back, but EVERYONE can not.. that is the magic of fractional reserve. Now this week in Cyprus, EVERYONE can only get "some" of their money back.

For the rest of us, we bail out (pay for) the consequences of an unstable financial system, thus guaranteeing their short term profits in the long term.  Can't possibly let the banks fold, old son.  8)

As we learned in 2007/8 our economies are too intertwined to just let one fall and not expect consequences. Cyprus is a rounding error for the Euro banking system total assets (I think the shortfall is only in $10B range), but Merkel has an election to worry about in a few months and it is politically distasteful to bail out a small country with a large fraction of non-member (Russian) deposits.

Like i said before this is interesting to watch, not so amusing for cypriots.

JR

 

[JohnRoberts]

What the article points out is that while lending out a greater proportion of savings makes the system less 'stable', it is STILL stable.

If only that fractional reserve even was concrete savings. Currently the big banks here in northern Europe are quite hostile to ordinary savings. You will not get more than about 1.5% interest. A strong message that you should really keep it in the sock as this will cover maybe a third of the current rate of inflation. It also means that someone (European Central Bank for one) is lending the big banks themselves money even cheaper than 1.5%. Actually statically saving large amounts of money at any given time is a bad choice - there are better investments - just pointing out how through taxes we are lending the banks money (bailouts, cheap interest), and not getting any service as return.

This is the quantitative easing , where central banks are slowly being re-capitalized with super cheap central bank money that they then lend out for slightly more. For banks to be able to pay a higher rate on deposits, they need to be earning the revenue to support paying that back out. Right now while not publicly discussed bank balance sheets are still in recovery mode, trying to make up for losses in 07/08. 

But then again, the core service of any bank these days is lending money, not storing it. Maybe someone can point out how the fractional reserve is calculated from a loan not yet paid back to the bank. Clearly a bank already writes it down as "money", even though it's really just a chunk of uncertain future.

Fractional reserve banking is an old concept and well understood. It promotes faster economic growth because it effectively creates more money (actually more credit) for the private economy to put to work. Of course this requires that the banks make good loans and  operate inside the lines.

In the consolidation of large banks into even larger banks after the 07/08 crisis we have large investment banks, merged with large depositor banks, which is contrary to conservative banking. In the US legislators and regulators are trying to undo the too big to fail super banks that they encouraged to merge together during the last crisis. Since the government is not the smarted folks in that room, it is not surprising that the legislators have not succeeded in their declared intentions (to prevent future crisis from too big to fail).

Of course maybe I'm wrong...

JR 

 

[sr1200]

So, dumb question here... if an entire country goes bankrupt, can other countries move in and buy it up like a short sale or foreclosure?  Whats the potential for another 1930's europe but done with finance instead of soldiers?

 

[JohnRoberts]

You've nailed the problem there- everyone is keeping it in their sock.  Our governments have created a financial atmosphere that is hostile to moving money around, actually using it for investment or new business opportunity, so on large and small scales it is "socked-away". 

Then to create the image of markets actually doing something the governments are printing money, based on nothing but paper and ink, to the tune of 1T per year here in the states.
Mike

Bernanke is openly trying to create a wealth effect by inflating the value of hard assets. His plan is that people will see their personal wealth improve (stocks, home values, whatever) and return to previous consumer (spending) behavior.

For an investor, the stock market is hard to ignore, I have been saying for years that this is also a generational opportunity to buy a home. Low long term interest rates and limited downside from here in home price. In fact noe it look like a bottom is in.

Inflation is understated in government measures and the only defense against inflation is convert cash into hard assets.

Business has cash but is apprehensive about investing in an anti-business climate, not to mention vast amounts held offshore to avoid US taxes.

The US economy is slowly recovering, despite the government sea anchor, but we appear doomed to low growth (2%?), Much too low growth to support the government desire to increase spending. Increasing taxes will slow economic growth even more. So there is no happy ending for current administration plans.

But we will survive this too, somehow.

JR

 

[JohnRoberts]

So, dumb question here... if an entire country goes bankrupt, can other countries move in and buy it up like a short sale or foreclosure?  Whats the potential for another 1930's europe but done with finance instead of soldiers?

Not dumb at all.. Russia is already looking at buying Cyprus energy rights (gas?) as a win-win for them. Russia want's to keep that banking facility working. it is a little bizarre to think of Russia indirectly bailing out the EU banking system, but they have self interest in protecting those bank deposits, and keeping the shady banking windows open. Smart Russian money has already shifted to other western countries, but Cyprus is still important to many. 

My original suspicion was that the russian government officially would be unsympathetic, but money talks. So interesting to watch this play out. For the record it is not a lot of money, so the question is not if, but how they get bailed out.

JR

 

[Greg]

For an investor, the stock market is hard to ignore, I have been saying for years that this is also a generational opportunity to buy a home. Low long term interest rates and limited downside from here in home price. In fact noe it look like a bottom is in.

I have discussions with my friends about this often. Low interest rates help keep prices high. If interest rates rise, which will happen, home prices will fall... because people will not have the borrowing capacity they have now. Debt is still fueling the housing market, not increased wealth derived from an increase of our nations productive capacity.

I sold my house in New Orleans last year... the buyers put 5% down on $300,000 house. If rates were 6% or 8% or god forbid >10%, there's no way I would have sold my house for that price. Their mortgage would be sky high.

I encourage my friends who do not own homes to save, save, save, and wait. The Federal Reserve cannot suppress interest rates forever. An individual with a lot of cash in a high interest rate environment is powerful and can buy at rock bottom prices.

 

[JohnRoberts]

For an investor, the stock market is hard to ignore, I have been saying for years that this is also a generational opportunity to buy a home. Low long term interest rates and limited downside from here in home price. In fact noe it look like a bottom is in.

I have discussions with my friends about this often. Low interest rates help keep prices high. If interest rates rise, which will happen, home prices will fall... because people will not have the borrowing capacity they have now. Debt is still fueling the housing market, not increased wealth derived from an increase of our nations productive capacity.

The fed and legislators have been throwing everything but the kitchen sink at the housing market, to try to prop it up. This is a central element in Bernanke's strategy to work the personal wealth effect, since home values are such a large part of so many families wealth.

While it is not logical that interest rates would stay this low even this long they have. Estimates now are that US rates won't go up until maybe 2015, and Bernanke is very clear that the interest rate increase depends on a broad economic recovery. Not just a blip up, but the appearance of a sustained up trend. (Of course the joker in the deck is that Bernanke is not likely to still be in office for years longer, so who knows what the next guy studied in college. )

Bernanke is a student of depression and the economist viewpoint is that interest rates were tightened up too soon after that causing the deep prolonged depression.

I sold my homebuilder stocks because I had already made 100% and I expect some correction. I still own some secondary companies that benefit from housing. The elephant in the room is that household creation is slowing returning as adult children move out of parents homes. Another worrisome trend is how many home sales are to hedge funds and investors, who will flip out as soon as a better asset class presents itself.

There is pent up demand, and a small interest rate increase will actually motivate some homebuyers to make the leap and lock in low mortgage rates while they still can.

This will not be a smooth road but long term trends will eventually return. Another problem is the government (and us taxpayers) are still involved in the mortgage market up to our eyeballs with Fannie and Freddie, who seem to have been overlooked by the Dodd-Frank legislation to end all financial problems for ever. They didn't even fix their primary objective (too big to fail).

I sold my house in New Orleans last year... the buyers put 5% down on $300,000 house. If rates were 6% or 8% or god forbid >10%, there's no way I would have sold my house for that price. Their mortgage would be sky high.

All housing markets are local. N.O. has lost a lot of population since Katrina, so I don't know what the local dynamics are, but generally more of a buyers market than sellers so if you get a good price, do it.

Agreed the low/no money down, silly low interest rates are hard for me to wrap my old brain around. I recall back in the '80s trying to buy a house and even though I could come up the 15% or more down payment, I couldn't get a bank to approve this veteran's application even with FHA. I guess I was too much of a risk for them (owned my own company).  Where were those bankers when we needed a little more conservative lending policy in 2007?

I encourage my friends who do not own homes to save, save, save, and wait. The Federal Reserve cannot suppress interest rates forever. An individual with a lot of cash in a high interest rate environment is powerful and can buy at rock bottom prices.

I still think we are in a generational opportunity to buy, but this is a window that will remain friendly for a while (easily several years.) I look at housing like most asset classes with an upside versus downside analysis. Housing back in 2007, had huge potential downside, and I recall begging a younger friend to be more cautious. He was on his second or third house flip out in Phoenix Az, and just told me, "trust me I know what I'm doing"...  Now after a short sale to get out from under an upside down mortgage, he is confirmed renter and in no hurry to buy.  He got married last year and my wedding gift was cash to be put to a down payment, and I suggested he put it in the stock market while waiting. The market has done well since then so I hope he listened to me this time, unlike before.

Homes should not be bought as a get rich scheme, like they were during the bubble. I would not be surprised to see home mortgage deduction scaled back for the very wealthy, as the government roots around for every drop of revenue. This will impact expensive housing (like Toll Bros), not the broader market, but it could have an effect overall.

JR

 

[Greg]

Homes should not be bought as a get rich scheme...

Well stated... I am a homeowner. I bought my first home in 2007 simply because I wanted a nice to place live. I sold that home in 2012 and moved into my wife's home after we were married. I will most likely own a home my entire life because I want to have a nice, stable place where my wife and I can live and watch our son grow up. I have no desire to "get rich" from it. I also enjoy trim carpentry so owning a home allows me to update trim, install built-ins, etc. As long as I follow my wife's "one project at a time" mantra, she puts up with the noise and dust and let's me build away.

Cheers.

 

[living sounds]

Business has cash but is apprehensive about investing in an anti-business climate,

Well, the real problem is lack of demand. Too many consumers have lived above their means and are now spending less, and unimployment is of course still high almost everywhere.

This would be the time for countries like the US to finally stimulate growth with large-scale governernment investments, as successfully implimented after the Great Depression (wartime spending and high taxes were part of the deal, of course). The government in many countries can currently borrow at historically low interest rates, this would create demand and get the motor going again. But politically the wrong thinking still prevails.

And since this will come up - the buget deficit is not an issue right now, it has been much higher before and can be dealt with when the economy is running again. The current path of austerity only leads to reduced growth and hardship. Some inflation would be good, especially for countries like Spain or Greece which this way could adjust wages relative to countries like Germany and become more competitive again without leaving the Euro.

Nobel price winning economist Paul Krugman lays it out very well in his recent book, highly recommended.

 

[JohnRoberts]

Business has cash but is apprehensive about investing in an anti-business climate,

Well, the real problem is lack of demand. Too many consumers have lived above their means and are now spending less, and unimployment is of course still high almost everywhere.

This is a pretty old debate, but one more time for the cheap seats.

yes the economy is flat .. <2% growth here, less elsewhere. The dollar is strengthening at the moment (good house in crappy neighborhood) so I expect exports to be down, and growth may come is lower than 2%.

BUT... you can''t create real sustainable private sector growth with public sector stimulus spending. This might seem to make sense to politicians without a solid foundation in business or how things work, but this forum should be pretty well grounded.

Economic growth is not about consumers having some positive mental attitude... Economic growth comes from CREATING NEW WEALTH, like from new business startups  making new products. Uli with his X-32 digital console is creating new wealth. Yet another government BS spending programing just diverts wealth from the private sector and creates more debt. Growing the size of government is not growing the economy.

I equate stimulus spending with priming the pump... if you prime the pump with a trillion gallons of water, it may look to the uninformed like they got a trillion gallons out of the well, but they just created a trillion gallon debt that must be paid back..

Central bankers got into the bad habit of using short term stimulus to smooth the dips between economic business cycles, and they started to believe their own BS.. All that short term stimulus did was prevent a few of the weakest businesses from contracting, lots of stimulus just creates more bad economic behavior and makes us all weaker.

This would be the time for countries like the US to finally stimulate growth with large-scale governernment investments, as successfully implimented after the Great Depression (wartime spending and high taxes were part of the deal, of course). The government in many countries can currently borrow at historically low interest rates, this would create demand and get the motor going again. But politically the wrong thinking still prevails.

been there done that,, we spent trillions of stimulus and our debt has grown dramatically in last few years.

And since this will come up - the buget deficit is not an issue right now, it has been much higher before and can be dealt with when the economy is running again.

Short term budget deficits are not a long term problem, but unless you correct structural issues (like low growth), spending borrowed money is just delaying the inevitable, and increasing debt that must be paid back... Deficits are OK with 5-7% growth, 0-2% over years look out. 

Ding ding ding... "When the economy is running again".  That all important growth does not come from government borrowing and spending. if it did Greece would be bailing out Germany. 

The current path of austerity only leads to reduced growth and hardship.

You can not borrow and spend your way out of debt..  It would be really nice if we could. The piper always gets paid eventually. 

Some inflation would be good, especially for countries like Spain or Greece which this way could adjust wages relative to countries like Germany and become more competitive again without leaving the Euro.

Inflation is coming for better or worse... good for high debt nations so they can pay back using cheap euros.

Nobel price winning economist Paul Krugman lays it out very well in his recent book, highly recommended.

John Roberts with no awards, does not agree... I cite the last 4 years as evidence.

JR

PS I suspect many in government want more spending, it is the easiest hammer in their tool box to use, and helps them get re-elected,,, they are very short term about actual cost/benefit, we need to fix long term structural problems, not an easy fix.

 

[ricardo]

This would be the time for countries like the US to finally stimulate growth with large-scale governernment investments, as successfully implimented after the Great Depression (wartime spending and high taxes were part of the deal, of course).

Govts. are subject to EXACTLY the same arithmetic that governs Bank Lending, Ponzi schemes, funny money etc.  They need real money too.  The deposits are called taxes.  If they lend/spend more than 100% then the same instability happens.

This is all High School Economics 101.  Right from Adam Smith's "Wealth of Nations" and Ricardo (alas no relation)

 

[JohnRoberts]

This would be the time for countries like the US to finally stimulate growth with large-scale governernment investments, as successfully implimented after the Great Depression (wartime spending and high taxes were part of the deal, of course).

Govts. are subject to EXACTLY the same arithmetic that governs Bank Lending, Ponzi schemes, funny money etc.  They need real money too.  The deposits are called taxes.  If they lend/spend more than 100% then the same instability happens.

This is all High School Economics 101.  Right from Adam Smith's "Wealth of Nations" and Ricardo (alas no relation)

I read the "wealth of nations" a few years ago and it was a pretty dry read, but the historical presentation of cause and effect is compelling. Worth the read for any with time to kill. Or having trouble falling asleep.

JR