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The Great Bailout - how it works?

humbolt said:
Right, but I'm mentioning inflation, and not a recession. I don't think any inflation matters at all right now, but the relief package may cause some of it, depending on how long the economy is dormant.
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Well, we're heading into a deep recession, so things that one can expect in a recession are relevant. Demand drops, prices drop. The only "inflation" we are likely to see is a very temporary jump in the price of toilet paper. Pretty much everything else is going to suffer from lack of demand.

When you think about the government spending, remember that it's there to fill a void, not add to the normal amount of spending. Same with the dollars - demand for loans is going to go down, so there will be a void to fill.
 
imagep said:
How is it inflationary?

My concern is that we may have some inflation, but that is due to manufacturing plants shutting down, making supply tighter.
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Inflation is an increase in the supply of money. Printing money is inflationary.
 
2BInTO said:
Inflation is an increase in the supply of money. Printing money is inflationary.
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of course, this presupposes a stable velocity of money which i think is quite reasonable- people need to buy food.
 
JohnfrmClevelan said:
Not necessarily. In most recessions/depressions, you are fighting to keep prices from falling, due to the lost demand.

When we suffer recessions/depressions, it's normally because of a larger-than-normal failure of private sector debt, and debt failures tend to spider out into more debt failures, markets are affected, jobs are lost, etc. In 2008, there were larger-than-expected failures from a lump of super-high risk mortgages; those losses affected bank capitalization, people lost homes, home values dropped, people lost jobs, etc. In 1929, it was, I believe, excessive trading on margin that grew into a giant problem.

This one started for different reasons, but the result will be the same. A few sectors went from 100 to zero overnight, while other sectors remain in business at pretty much normal levels. Either way, a large number of people won't be able to pay rent, and a large number of businesses won't be able to service their debt, so debt failures will again spider out and cause havoc.

The lesson (hopefully) learned from 2008 is that it is cheaper, more effective, and also more humane if the government just steps in and pays the bills for a while, rather than trying to rebuild wrecked sectors later. If an employee is paid to stay home, and a business (say, a restaurant) is given money that it would have earned in normal times, then the only thing missing is people sitting down to eat. If I normally pay you to mow my lawn, then I pay you even when you don't, it's all the same to the economy - as long as you don't take another job in the meantime. The grass can be cut later.

Bank-created money is going to decrease, as fewer loans are taken out and other loans fail, so government-created money is going to fill a void. When this is all over, I expect that banks will have less debt and more reserves on their asset side. It will be a bit of a debt jubilee, if the government does this correctly, and keeps people afloat, instead of concentrating on paying businesses. That was the mistake made in 2008.
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First, I think it is relatively accepted that the GFC was the result of a liquidity crisis emanating from a collateral SCARE. The whole sub prime mortgage narrative was just a deflection to main street and the source of a great movie script.

Second, by rebuild sectors you mean pick winners to bailout. Right? Yeah, that was wrong, especially without significant covenants- that is not capitalism. Hopefully, that doesn't happen again. And hopefully, the lesson learned is that quantitative easing does not work- it's not a money supply problem.

Lastly, if you have fewer loans why would you have more reserves? Loans increase the money supply increases mandated reserves and vice versa, this is the money multiplier.
 
2BInTO said:
Lastly, if you have fewer loans why would you have more reserves? Loans increase the money supply increases mandated reserves and vice versa, this is the money multiplier.
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I wanted to clear this one up first, so I took your questions out of order.

You would have more reserves simply because the Fed attacks liquidity problems by increasing reserves; that, plus I expect some significant government payments to the private sector, which also increases reserves.

Loans don't dictate the number of reserves anymore. They did before 2008, when the Fed was using bond interest to set the overnight rate ceiling, which called for a thin layer of excess reserves. Now, since QE, we have tons of excess reserves. Also, the "money multiplier" is a myth. QE should have demonstrated that. Banks can't just "multiply up" money based on reserves; it's the demand for loans, from creditworthy borrowers, that determines the amount of lending.

2BInTO said:
First, I think it is relatively accepted that the GFC was the result of a liquidity crisis emanating from a collateral SCARE. The whole sub prime mortgage narrative was just a deflection to main street and the source of a great movie script.
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Well, where do you think that liquidity crisis started?

Banks stopped lending because the drop in the value of MBSs left them undercapitalized. And the drop in value was for good reason - a higher-than-anticipated rate of defaults, due to a bolus of no-docs and other crap mortgages that were failing. The Fed fixed both problems by buying MBSs with reserves.

2BInTO said:
Second, by rebuild sectors you mean pick winners to bailout. Right? Yeah, that was wrong, especially without significant covenants- that is not capitalism. Hopefully, that doesn't happen again. And hopefully, the lesson learned is that quantitative easing does not work- it's not a money supply problem.
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Capitalism on its own isn't capable of fixing itself, and it certainly isn't capable of managing human problems, like keeping everybody fed and healthy. Defaulting to business interests all the time is a lousy form of government.

The lesson we should have learned is that the government should assist the people first, businesses second. But after some good initial ideas, it doesn't look like we learned that lesson. The govt. should be replacing peoples' incomes, like parts of Europe are doing. If you keep debt failures to a minimum, the banks won't need help.

But I'm also not against preserving businesses that were otherwise viable. The more economic destruction you can avoid, the less we will need to rebuild later.
 
2BInTO said:
Inflation is an increase in the supply of money. Printing money is inflationary.
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Most people define inflation as a general increase in prices.

Money is created all the time, both by the government and by banks, yet prices are pretty stable. It's not an increase in the money supply that determines prices. Inflation is caused by a whole bunch of factors.
 
JohnfrmClevelan said:
I wanted to clear this one up first, so I took your questions out of order.

You would have more reserves simply because the Fed attacks liquidity problems by increasing reserves; that, plus I expect some significant government payments to the private sector, which also increases reserves.

Loans don't dictate the number of reserves anymore. They did before 2008, when the Fed was using bond interest to set the overnight rate ceiling, which called for a thin layer of excess reserves. Now, since QE, we have tons of excess reserves. Also, the "money multiplier" is a myth. QE should have demonstrated that. Banks can't just "multiply up" money based on reserves; it's the demand for loans, from creditworthy borrowers, that determines the amount of lending.
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I think we are missing each other slightly.

The money multiplier is not the myth. The myth is that banks expand credit.
 
JohnfrmClevelan said:
Well, where do you think that liquidity crisis started?

Banks stopped lending because the drop in the value of MBSs left them undercapitalized. And the drop in value was for good reason - a higher-than-anticipated rate of defaults, due to a bolus of no-docs and other crap mortgages that were failing. The Fed fixed both problems by buying MBSs with reserves.
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Again, I think we are missing each other. The issue is defaults. They didn't significantly exist. It was the 'SCARE' of default.

I totally disagree that reserves fixed much of anything.
 
JohnfrmClevelan said:
Credit creation theory is not a myth. It isn't even a theory. It's how banks have operated for many years.

I can explain the accounting of it, if you like. I have done that dozens of times in this forum already. Or you can read the following paper.

https://www.bankofengland.co.uk/-/m...tin/2014/money-creation-in-the-modern-economy
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mmm... again not disputing credit creation. the banks did not respond and increase credit with more reserves. i'm a cpa so i'm good on the accounting.
 
JohnfrmClevelan said:
Capitalism on its own isn't capable of fixing itself, and it certainly isn't capable of managing human problems, like keeping everybody fed and healthy. Defaulting to business interests all the time is a lousy form of government.

The lesson we should have learned is that the government should assist the people first, businesses second. But after some good initial ideas, it doesn't look like we learned that lesson. The govt. should be replacing peoples' incomes, like parts of Europe are doing. If you keep debt failures to a minimum, the banks won't need help.

But I'm also not against preserving businesses that were otherwise viable. The more economic destruction you can avoid, the less we will need to rebuild later.
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ahh... agreed.
 
2BInTO said:
Again, I think we are missing each other. The issue is defaults. They didn't significantly exist. It was the 'SCARE' of default.

I totally disagree that reserves fixed much of anything.
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There were lots of defaults, initially more with NINJA loans that were a bigger share of the mortgage market back then. Then, the normal cascade of defaults followed. Did you not notice the housing market in 2008? Tons of foreclosures? People losing their jobs?

The reserve injection allowed banks to recapitalize and lend again. But we were already in a recession, so loans didn't increase much.
 
2BInTO said:
mmm... again not disputing credit creation. the banks did not respond and increase credit with more reserves. i'm a cpa so i'm good on the accounting.
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Banks don't increase credit just because they have more reserves; banks don't lend out reserves. And reserves have never been the limiting factor in lending anyway - the Fed has always accommodated banks with enough reserves as the demand for lending dictated.

Banks will only create loans when there are creditworthy borrowers, and creditworthy borrowers are in short supply during recessions.
 
JohnfrmClevelan said:
There were lots of defaults, initially more with NINJA loans that were a bigger share of the mortgage market back then. Then, the normal cascade of defaults followed. Did you not notice the housing market in 2008? Tons of foreclosures? People losing their jobs?

The reserve injection allowed banks to recapitalize and lend again. But we were already in a recession, so loans didn't increase much.
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Some of the crap defaulted this didn't lead to a cascade to AAA rated debt that was anticipated. Yes the media definitely highlighted some homeowner foreclosure but this by and large this was overblown.
 
JohnfrmClevelan said:
Banks don't increase credit just because they have more reserves; banks don't lend out reserves. And reserves have never been the limiting factor in lending anyway - the Fed has always accommodated banks with enough reserves as the demand for lending dictated.

Banks will only create loans when there are creditworthy borrowers, and creditworthy borrowers are in short supply during recessions.
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yes i agree with much of what you are saying. however, this was a stimulus and the anticipated reaction was a freeing of credit- it did not happen as anticipated that is part of the reason for the slow growth bounce back.
 
2BInTO said:
Some of the crap defaulted this didn't lead to a cascade to AAA rated debt that was anticipated. Yes the media definitely highlighted some homeowner foreclosure but this by and large this was overblown.
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Then you have a pretty high bar for what is "overblown."

Anecdote warning. I moved from Cleveland to D.C. in 2008. Cleveland is always a slow market, but D.C. was hot, and they were hit hard. In the neighborhood where I rented, I took my kids out on Halloween. Maybe 1 out of 2 homes were occupied. A formerly nice neighborhood looked like crap. After a year of paying both rent and mortgage (my house in Cleveland wasn't close to selling), we moved back. A lot of my neighbors lost their (upscale suburban) homes, most because they were underwater. The problem was very, very real, even in Cleveland, where homes had never shot up in value pre-2008.

Aggregate demand suffered. It was a real recession. People lost a ton of equity, if not their jobs and their money. Companies needed bailing out. I don't know what your experience was, but if you don't have a few friends who lost their homes or otherwise suffered, you are one of the very few.
 
JohnfrmClevelan said:
Then you have a pretty high bar for what is "overblown."

Anecdote warning. I moved from Cleveland to D.C. in 2008. Cleveland is always a slow market, but D.C. was hot, and they were hit hard. In the neighborhood where I rented, I took my kids out on Halloween. Maybe 1 out of 2 homes were occupied. A formerly nice neighborhood looked like crap. After a year of paying both rent and mortgage (my house in Cleveland wasn't close to selling), we moved back. A lot of my neighbors lost their (upscale suburban) homes, most because they were underwater. The problem was very, very real, even in Cleveland, where homes had never shot up in value pre-2008.

Aggregate demand suffered. It was a real recession. People lost a ton of equity, if not their jobs and their money. Companies needed bailing out. I don't know what your experience was, but if you don't have a few friends who lost their homes or otherwise suffered, you are one of the very few.
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Look, loss is tragic and real loss happened. The issue is what was the cause. Was it MBS? Or was it a bunch of bankers who got scared. Did people loss their homes because they defaulted BEFORE bankers got scared. Or did they get caught up in the tsunami that ensued afterward. The chicken or the egg?
 
How do you explain the fact that the US government did not lose anything on it's TARP purchases?
 
2BInTO said:
Look, loss is tragic and real loss happened. The issue is what was the cause. Was it MBS? Or was it a bunch of bankers who got scared. Did people loss their homes because they defaulted BEFORE bankers got scared. Or did they get caught up in the tsunami that ensued afterward. The chicken or the egg?
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Bankers were worried for good reason - the value of their capital assets was dropping, due to defaults, and the normal market for those assets was... other banks.

So to answer your question, the defaults came first. Relaxing regulations in 2004 resulted in NINJA loans with high default rates. When the initial low-interest period ended and/or balloon payments came due, you had a spike in defaults. (The movie actually spelled it out quite well.) Home values dropped in the hot markets, and more defaults ensued.

2BInTO said:
How do you explain the fact that the US government did not lose anything on it's TARP purchases?
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One, the Fed can afford to hold onto weak assets long-term, where they have more of a chance to pay off. Two, part of the reason that MBSs dropped in value was because the market wasn't there, so their value dropped further than if they were simply flawed assets within a functioning market for flawed assets. After the banks got back on their feet, that market (the banks) re-emerged.
 
i don't think your getting it. or you just being purposefully stubborn. or you are just swallowing what you are familiar and comfortable with. there was no cascading that is why TARP was not a loss. yes, lending behaviour was criminal but significant cascading losses did not occur as anticipated. the structure (cascading) was threatened as liquidity was temporarily strangled due to collateral fears- this has continued in the repo market to this date. this is further evidence that ninja loans, however wrong, were not the true problem.

are you familiar with the mark to market issue? by definition long term assets do not need to and should not be disposed of. flawed assets don't simply 're-emerge' they are flawed.

but i'm not here to argue. i'm here to gain insight and hopefully develop a deeper understanding.
 
2BInTO said:
i don't think your getting it. or you just being purposefully stubborn. or you are just swallowing what you are familiar and comfortable with. there was no cascading that is why TARP was not a loss. yes, lending behaviour was criminal but significant cascading losses did not occur as anticipated. the structure (cascading) was threatened as liquidity was temporarily strangled due to collateral fears- this has continued in the repo market to this date. this is further evidence that ninja loans, however wrong, were not the true problem.

are you familiar with the mark to market issue? by definition long term assets do not need to and should not be disposed of. flawed assets don't simply 're-emerge' they are flawed.

but i'm not here to argue. i'm here to gain insight and hopefully develop a deeper understanding.
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If you want me to accept your argument, you are going to have to back it up. Not immediately buying your premise doesn't make one stubborn, and it doesn't mean I'm "not getting it." You just haven't made much of a case here. Why, for instance, would bankers be spooked without any reason?
 
the reason is speculation on credit worthiness of collateral- fear

any other questions?
 
further:

so speculation is just a guess.

mbs was collateral for interbank lending. they stopped accepting each other collateral for repo and liquidity dried up.

so the bankers created these instruments, accumulated assets to fulfill them, and then bailed on their own creations and blamed main street.

this is significantly different than people just not paying their mortgages.
 
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2BInTO said:
the reason is speculation on credit worthiness of collateral- fear
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And the bankers all felt this very specific fear, at the same time, with no underlying events that triggered it? And they all acted to shut down lending based on this strange coincidence?
 
no that is the cascading effect. they are all interconnected through lending instruments.
 
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