The Slog: I’m obliged as always to Butch in New Mexico for sending me the
latest output from the astonishingly bright Izabella Kaminska. Here’s a
telling extract:
‘A while ago we speculated that because of the ongoing bifurcation of the eurozone market, Eonia rates could rise, and liquidity once again concentrate in core economies, as banks pay back their LTRO funds. Even if it appeared that the system could handle the repayments, banks in core economies would still be inclined to take advantage of extremely cheap negative rates available in collateral markets, so as to earn a spread on the deposit facility in a way that arguably encumbered the remaining liquidity. That would make it less available to periphery institutions.
Meanwhile, without the additional
layer of ECB liquidity in the system — which acts as a type of
system-wide insurance mechanism — periphery banks would consequently be
forced to make ever more competitive bids for Eonia funds, lifting rates
across the board.’
What Ms Kaminska is saying here, by the way, is that Draghi had no choice but to pump in more eurozone liquidity….if he wanted to avoid a rise in rates. Now fair enough, she’s writing here in the Financial Times, and in the headline she gets the key point over with commendable immediacy: ‘The ECB’s very own tapering problem’.
Also, while there’s not much attempt to critique why everyone needs liquidity and low rates in any kind of radical sense, that’s Kaminska – you can either like her or ignore her, although personally I think choosing the latter option would be to miss something important.
But the above paragraph does explain why even reasonably erudite citizens around the globe don’t begin to understand WTF is going on at the moment.
Consider these examination questions from a future economics paper:
1. ‘If bifurcation leads to an Eonia rise, liquidity will be pushed back to the core while banks pay back LTRO loans’. Discuss using examples, without reference to the rules of Mornington Crescent.
2. You are told that extremely cheap negative rates are available in peripheral markets. Should you (a) aim to encumber liquidity by earning a spread on the deposit facility, or (b) deposit half a cucumber in an escrow account, and spread the rest on thin-cut sandwiches?
3. ‘Additional liquidity layers produced a system-wide insurance mechanism, but this led to a further outbreak of acute frontal-lobe behaviour syndrome as Wall Street banking firms sought to make bets on two earwigs climbing a window-pane’. Do you agree with this view? Explain your reasons either way, with particular reference to the availability of institutional epiphany in the periphery.
I’m really making two points here. First, somewhere between this technical stuff and the anodyne inaccuracies put out by the general media today there is a yawning gap for a sort of Richard & Judy programme at the midbrow level that puts everything into helpful, plain English. It really is not that difficult in many cases. But second – and this leads on from that last ‘in many cases’ limitation – it is a sound truism in life that if reasonably intelligent people can’t understand something, then it is probably either badly designed and/or a scam.
Having derivatives and their consequences explained to me eight years ago was a trauma from which I have only partially recovered, yet in truth the bottom line on that sector is dead simple: it was a good idea when used to provide liquidity for producers ahead of payment sixty years ago, but later it was perverted, abused and salami-sliced into financial madness.
Ten years ago I sat with a regulator and two bankers as they explained to me the pros and cons of splitting retail from investment banking. The meeting lasted over four hours, and it seemed by the end of it that the only things produced were acronyms and acrimony. Yet the fundamentals of banking are easy to grasp. Citizens make and save money, for which they need current access and deposit accounts where the money can be safely kept. The bank offers them risible interest and makes outrageous charges, and the bankers then use the monies/charges income to lend to other citizens and businesses at rates vastly higher than the ones offered to savers. This enables citizens and commerce to use credit as a means of evening out the peaks and troughs of income at various times of the year, or lifestages of business development, child-rearing, house purchasing and so on.
As long as the bank has enough liquid capital to withstand sudden high withdrawals – and always lends out at rates higher than those given to depositors – the only outcome of this process will be the bank’s balance sheets becoming replete with unfeasibly huge wads of bulah.
At this point in the bank growth cycle, spivs are recruited to develop a different sort of business involving mega lending deals for the purposes of underwriting multinational expansion, takeover, merger, government overspending, third world infrastructural investment, legislator embezzlement, bourse plc launches and myriad other often pointless and incredibly risky gambits. After a few decades, boredom with this activity leads to the development of interbank marketing, wherein bankers swap pieces of worthless paper with each other to create income that differs only from the initial role in being completely pointless – and is not so much risky as suicidal for them, the economy, and the global fiscal balance.
Thus the apparent dilemma in relation to whether retail and investment banking should be separated can be solved in two words – “Yes, always” – and government/taxpayer/depositor/investor plundering to get out of a hole should not be countenanced in the investment sector under any circumstances.
But then, this would make everything too transparent, too simple, and sensibly regulated. And that in turn would make hiding behind jargobollocks impossible for all the politicians, bureaucrats, bankers, multinational CEOs, specialist hacks and media moguls gainfully engaged in the process of making them look smart and/or rich, and us bamboozled and/or poor. It is simply the three-walnut shells game writ large on a global canvas.
The technical guys and the highbrow girls need the Kaminskas, but everyone else needs something easier to understand. It is obviously the job of politicians to enforce this, but money speaks louder than duty. They don’t do anything about it, because they need both banker money and complex situations that can get everyone confused….and them off the hook.
Source
Art by WB7
‘A while ago we speculated that because of the ongoing bifurcation of the eurozone market, Eonia rates could rise, and liquidity once again concentrate in core economies, as banks pay back their LTRO funds. Even if it appeared that the system could handle the repayments, banks in core economies would still be inclined to take advantage of extremely cheap negative rates available in collateral markets, so as to earn a spread on the deposit facility in a way that arguably encumbered the remaining liquidity. That would make it less available to periphery institutions.
Meanwhile, without the additional
layer of ECB liquidity in the system — which acts as a type of
system-wide insurance mechanism — periphery banks would consequently be
forced to make ever more competitive bids for Eonia funds, lifting rates
across the board.’What Ms Kaminska is saying here, by the way, is that Draghi had no choice but to pump in more eurozone liquidity….if he wanted to avoid a rise in rates. Now fair enough, she’s writing here in the Financial Times, and in the headline she gets the key point over with commendable immediacy: ‘The ECB’s very own tapering problem’.
Also, while there’s not much attempt to critique why everyone needs liquidity and low rates in any kind of radical sense, that’s Kaminska – you can either like her or ignore her, although personally I think choosing the latter option would be to miss something important.
But the above paragraph does explain why even reasonably erudite citizens around the globe don’t begin to understand WTF is going on at the moment.
Consider these examination questions from a future economics paper:
1. ‘If bifurcation leads to an Eonia rise, liquidity will be pushed back to the core while banks pay back LTRO loans’. Discuss using examples, without reference to the rules of Mornington Crescent.
2. You are told that extremely cheap negative rates are available in peripheral markets. Should you (a) aim to encumber liquidity by earning a spread on the deposit facility, or (b) deposit half a cucumber in an escrow account, and spread the rest on thin-cut sandwiches?
3. ‘Additional liquidity layers produced a system-wide insurance mechanism, but this led to a further outbreak of acute frontal-lobe behaviour syndrome as Wall Street banking firms sought to make bets on two earwigs climbing a window-pane’. Do you agree with this view? Explain your reasons either way, with particular reference to the availability of institutional epiphany in the periphery.
I’m really making two points here. First, somewhere between this technical stuff and the anodyne inaccuracies put out by the general media today there is a yawning gap for a sort of Richard & Judy programme at the midbrow level that puts everything into helpful, plain English. It really is not that difficult in many cases. But second – and this leads on from that last ‘in many cases’ limitation – it is a sound truism in life that if reasonably intelligent people can’t understand something, then it is probably either badly designed and/or a scam.
Having derivatives and their consequences explained to me eight years ago was a trauma from which I have only partially recovered, yet in truth the bottom line on that sector is dead simple: it was a good idea when used to provide liquidity for producers ahead of payment sixty years ago, but later it was perverted, abused and salami-sliced into financial madness.
Ten years ago I sat with a regulator and two bankers as they explained to me the pros and cons of splitting retail from investment banking. The meeting lasted over four hours, and it seemed by the end of it that the only things produced were acronyms and acrimony. Yet the fundamentals of banking are easy to grasp. Citizens make and save money, for which they need current access and deposit accounts where the money can be safely kept. The bank offers them risible interest and makes outrageous charges, and the bankers then use the monies/charges income to lend to other citizens and businesses at rates vastly higher than the ones offered to savers. This enables citizens and commerce to use credit as a means of evening out the peaks and troughs of income at various times of the year, or lifestages of business development, child-rearing, house purchasing and so on.
As long as the bank has enough liquid capital to withstand sudden high withdrawals – and always lends out at rates higher than those given to depositors – the only outcome of this process will be the bank’s balance sheets becoming replete with unfeasibly huge wads of bulah.
At this point in the bank growth cycle, spivs are recruited to develop a different sort of business involving mega lending deals for the purposes of underwriting multinational expansion, takeover, merger, government overspending, third world infrastructural investment, legislator embezzlement, bourse plc launches and myriad other often pointless and incredibly risky gambits. After a few decades, boredom with this activity leads to the development of interbank marketing, wherein bankers swap pieces of worthless paper with each other to create income that differs only from the initial role in being completely pointless – and is not so much risky as suicidal for them, the economy, and the global fiscal balance.
Thus the apparent dilemma in relation to whether retail and investment banking should be separated can be solved in two words – “Yes, always” – and government/taxpayer/depositor/investor plundering to get out of a hole should not be countenanced in the investment sector under any circumstances.
But then, this would make everything too transparent, too simple, and sensibly regulated. And that in turn would make hiding behind jargobollocks impossible for all the politicians, bureaucrats, bankers, multinational CEOs, specialist hacks and media moguls gainfully engaged in the process of making them look smart and/or rich, and us bamboozled and/or poor. It is simply the three-walnut shells game writ large on a global canvas.
The technical guys and the highbrow girls need the Kaminskas, but everyone else needs something easier to understand. It is obviously the job of politicians to enforce this, but money speaks louder than duty. They don’t do anything about it, because they need both banker money and complex situations that can get everyone confused….and them off the hook.
Source
Art by WB7
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