Am I reading this wrong? Is this a bad analogy? Is it not exemplary of how creditworthiness seems to rise at a higher rate than the means used to justify that creditworthiness? I'm a layman, but I'd like to know more.
If you are rolling short term debt and only have long term assets you can't sell, you are taking a liquidity risk. You may be perfectly solvent (have more assets than liabilities) but if you cannot refinance the debt one day, you will go bust.
The Federal reserve is not in the business of injecting capital into insolvent banks (which is why TARP in 2008 was a very unusual and controversial measure), it is in the business of providing a backstop of liquidity to banks that are solvent (this is enforced through capital requirement) but may require liquidity on a short term basis.
It just seems like real cash and assets are valued less than financial instruments? Because they're More Future Money That We Expect To Exist compared to Less Now Money Which Actually Exists? I guess that makes sense but is also absolutely insane?
Again, correct me if I'm wrong.
The building doesn't appreciate, if you spend $5000 on home improvements or repairs almost invariably an honest agent will tell you the value of the building was only marginally increased by doing this, because it was never the building value that mattered.
Where people just own the building and NOT the land, "mobile homes" or "manufactured homes" depreciation destroys the value of the home relatively quickly, within a lifetime usually.
There is also another reason. In most jurisdictions a mortgage is a super senior claim. It is senior even to the taxman, which is very rarely the case for private debt.
The thing about financial instruments is that they scale infinitely better than "real assets".
It's like seeing Amazon, Google etc. spend so much on cloud computing, and then asking if real computers are valued less than virtual ones.
This is what a loan is. Look at the assets and revenue someone has and give them money if you think they can pay it back. You could reconstitute that situation as thinking of it as selling the equity in your assets and future profits and then buying it back in installments.
Companies try as hard as they can to minimize the amount of money just sitting around and not doing anything. They accomplish this with frequent short term loans that smooth out the noise in their cashflow.
The challenge with real assets is they are hard to value, and hard to sell quickly. Therefore the interest and fees charged are higher (also people prone to need short term loans using their car as collateral are also very prone to not pay these loans back).
These financial assets can be calculated, sold, more purchased, etc. in known quantities very close to instantly. Standardized financial assets are very easy to move or use in large quantities for these reasons. A 5 yr US Gov't bond is a known quantity.
Which, arguably, should be a thing, so long as it's elevated in priority to the level of a debt to the IRS (i.e. can put liens on anything you own and garnish wages).
Similarly, if the Fed loans to these banks at a penalty rate -- presumably much more that regular risk-free loans like in e.g. securities a money market fund -- I wish the Fed would let people sign up for these programs so our idle cash could get lent out at that rate.
For assets whose ownership is more nebulous than an automobile you typically have to temporarily relinquish ownership of it to use it to secure a temporary loan, ie, pawn it.
And that's pretty much what banks do with the Fed. They have assets that they get funding for from the Fed with a short term repo transaction. In theory the Fed takes very little risk on the transaction.
1) Imagine you own 10 houses outright. Congratulations, you're worth $5 million dollars! You want to spend some of that on a boat, but it's not liquid fungible money, so you can't, not without some intermediary steps that inject liquidity into your situation. You're basically solvent, no bank owns a claim on you.
2) Now, imagine you "own" 10 houses, only they each have a $500,000 mortgage. You are worth negative $5 million. But it's okay! You rent them out, and generate enough revenue to pay the mortgages. Again, you're solvent.
3) Repeat #2, only without the rent revenue. You're insolvent.
This doesn't mean insolvency & illiquidity can't coexist, but one is not an extreme form, nor does it necessitate, the other. You can be insolvent but very liquid. You can be illiquid but solvent. You can be insolvent and illiquid (which is basically #3 above)
My point was that, when the illiquidity is sufficiently advanced -- when you the actual ability to sell is far enough into the future, and the possibility of making a sale is increasingly dubious -- then those judgments of how much it's "worth" become likewise dubious, and the venture is more reasonably characterized as insolvent, because the unwillingness of others to buy means the property doesn't have a value that supports its status as sufficient collateral.
Also, in your example, assuming (which was the thing I was conditionally disputing) that the real estate really is worth the $5 million, you'd be worth $0, not negative $5 million.
Only one bank has failed in the US in the last two years.
https://www.fdic.gov/bank/individual/failed/banklist.html
The real risks are systematic (many banks failing), not that an individual bank will fail.
https://www.politifact.com/new-hampshire/statements/2012/oct...
But yes, it’s far easier to get funded as a bank than an individual, mostly because there are laws, institutions, and processes to try and remedy problem banks if trouble happens and individuals are really on their own to find advice and resources.
EDIT: I was wrong, according to FDIC it was 157[0].
That's not really that comforting, especially when there were 8 failures in 2017. 2018 was the first time since 2006 that there wasn't a bank failure and multiple bank failures. 2006 was also the last time we had consecutive years without a bank failure.
From a quick search: apparently in 2017, there were 767,721 non-business bankruptcies in the US. That's about 0.236% of the population.
And that year, there were 4,909 banks. 8 failures would represent 0.163% of them.
So it looks like individuals were a bit more likely to go bust than banks in 2017, but those figures aren't really all that different.
(I haven't checked exactly what these figures mean, or how authoritative they are. Just wanted a ballpark idea...)
OK, we probably should exclude children from the calculation of the individual bankruptcy rate, which would make it look rather worse. Still, the difference between individuals and banks isn't as dramatic as I'd have expected.
Think of it as lubrication for a system that is a bit squeaky in some places.
You should be asking what the steady state looks like.
The Federal Reserve implements its mandate to control interest rates and inflation by managing the money supply. Specifically, they do that by creating and destroying money by buying and selling government bonds on the market, until the price of those bonds is such that the interest from holding them falls within the target interest rate range.
When certain interest rates were, for a moment, excessively high, they took a modestly extraordinary step to intervene. That's all.
Bank bailouts were a bad idea that increased moral hazard and left the economy more at risk than it was before, but this isn't a bailout, and the commentary is about as topical here as a generic Microsoft rant on a random HN article about compilers.
Its not that "no one cares" about "a little guy", it's that even though I didn't eat lunch today, my colleagues did. If me skipping lunch meant my colleagues didn't have any food, someone would step in to avoid my colleagues dying
It's hard to make analogies between household finance and corporate/national finance. Modern finance is a huge and complex topic. If you haven't and are interested, start with some basic economics, then move on to more focused topics.
This is then multiplied when those people are those who actually do the work. Rich people in retirement homes can't get their stocks and 401ks or whatever to wipe their asses.
one other thing though, that i think about a lot is:
why do we even have a system that needs so many bailouts and adjustments and hacks to keep it going... seems like our “economic os” is lacking “memory protection”...
Which is horrifying because it means it’s being driven by total ignorance.
>why do we even have a system that needs so many bailouts
Overnight lending is not a bailout, ffs. You can do the same thing as an individual with a credit card, a payday loan, etc.
Basically, the Fed issued a bunch of promises of positive growth in order to get businesses or people with money (cash) to dump that money into the banks to increase liquidity if I'm understanding this right.
The financial market actually only gets into trouble when money (capital reserves) get low in comparison to balances/liabilities. "Money now" being in the right places is more important in keeping things going smoothly than "Money Later" being dumped into the market.
"Money Now" shortages cause bank runs. "Money Later" (Treasury Bonds) excesses tend to attract "Money Now" when people want somewhere safe to plop "Money Now" to get back "Money Later". The extra "Money Now" allows interest rates on lending to drop.
As I understand it, low "Money Now" supplies are responded to by lending at increased rates, because the bank in question can't just issue loans without the capital to service them.
Or something like that.
Shit, I don't even know if I managed to help. I just spent a week pouring over economics stuff to try to make sense of it all, and I'm still not sure I'm grokking it.
i think that says more about your relationship with your friends than it does the banking system.