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Comment by pjc50 | Hacker News Reader

> printing money and handing it out to your wealthy buddies.

So much confusion is caused by the inability to distinguish between "gift" and "loan".

The problem with allowing banks to hard-fail is that imposes real, huge costs on customers even if the deposits are 100% covered, because the failover is not instant and you end up with money locked up for a period and are unable to make your own payments.

> prices going up exponentially with time might be bad for my welfare!

And prices going down exponentially is bad for investment, and precisely keeping prices the same forever is impossible; that's why the target is 0-2% and central banks have been extraordinarily successful at meeting that target through interest rate adjustment.

> pension fund style entities are the ones backing the whole show

Pension funds are more or less obliged to buy the safest assets they can?

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> So much confusion is caused by the inability to distinguish between "gift" and "loan".

QE4 was the better part of a trillion dollars. That much money moves through a system that is too complex and jargon filled for the layman to understand, and you want them to believe that there is nothing to see here?

1. The people on the other side of the bad loan, who aren't expected to pay back the money, are making bank by taking on silly levels of risk and then benefiting from the bailouts.

2. These loans aren't available to ordinary people or businesses because the terms would obviously put any individual far too far ahead. We can tell they are unfair just from that.

3. There isn't any reason to believe the loans are being paid back. Every time it looks like debts might get called in on aggregate, people claim financial crisis and there is another big round of lending.

> The problem with allowing banks to hard-fail is that imposes real, huge costs on customers even if the deposits are 100% covered

Yeah. People can't funnel their savings to incompetents and expect a good outcome. They should be very picky and reserved in deciding who to trust with their money, and there should not be coordinated giving of massive funds to a small pool of institutions who are regularly discovered to be wasting the resources they are entrusted with. This is one of the reasons we put up with the economy, it is supposed to keep power away from those sort of fools.

They need to be sent broke when they screw up badly. And people shouldn't be punished for saying "they're all untrustworthy, so I'm keeping money under my mattress".

> And prices going down exponentially is bad for investment, and precisely keeping prices the same forever is impossible

You've missed a bunch of options here though, namely the infinite number of functions that aren't exponential. Prices could be a random walk around an average, for example.

> Pension funds are more or less obliged to buy the safest assets they can?

I'm not following the story too closely, but the word I heard was the UK pension funds were getting margin called on their safe assets.

> 1. The people on the other side of the bad loan, who aren't expected to pay back the money, are making bank by taking on silly levels of risk and then benefiting from the bailouts

Which people? Which loans? Please please be specific.

> These loans aren't available to ordinary people or businesses because the terms would obviously put any individual far too far ahead

Again, which loans? What are the collateralization rules for them? What are the interest rates? Do you think an individual and a bank have the same credit score?

You cannot expect to be taken seriously if you just allege "crime" without specifics.

> There isn't any reason to believe the loans are being paid back

Please distinguish between "default" and "rollover". There is nothing wrong with rollover unless the risk has changed?

> Every time it looks like debts might get called in on aggregate

This can't really happen in a world of pension funds, because that's what the other side of the balance sheet is: the increasing number and amount of money owed to future pensioners. That's why the US "social security balance sheet" (which is accounted separately for some reason specific to the US) keeps increasing.

> coordinated giving of massive funds

lending?

> wasting the resources they are entrusted with

Example of "wasting"?

> Prices could be a random walk around an average, for example.

That's "inflation targeting at 0%"; it's both politically and practically achievable, but you do have to convince people that the locally-deflationary effects aren't a problem. And you can't avoid external shocks: if you embargo Russian gas, prices are going to go up, and that's inflation regardless of money supply issues.

> the UK pension funds were getting margin called on their safe assets

Yes - UK govenment bonds (gilts), which suddenly look a lot more risky in the presence of stupid policy decisions. Quite hard to find a safer asset, though.

> That's "inflation targeting at 0%"

So when you think a random walk around 0, you think of an ever-increasing positive trend? Because that isn't what a random walk looks like.

> And you can't avoid external shocks: if you embargo Russian gas, prices are going to go up, and that's inflation regardless of money supply issues.

Later on it would go down. It is a commodity market, and trade will normalise.

The issue here isn't that prices rise and fall, it is that the people who make prices rise continuously are forcing everyone to use their system. They shouldn't do that. And if there were any choices, it'd be a rare bird indeed who voluntarily signs up for a system where prices always trend up.

> Quite hard to find a safer asset, though.

I mean, maybe I've badly misunderstood what a "margin call" means, but my feeling on this one is it suggests margin is involved. It is not a conservative financial decision if they involve buying safe assets for someone's retirement on margin, because they aren't safe assets any more.

Bond prices go down and I'm at no risk whatsoever of being sent bankrupt by that, because I'm not stupid enough to start using debt in my retirement savings. To claim they're buying "safe assets" while simultaneously they are in need of assistance due to playing around in the gilt market derivatives is an impressive take.

> Which people? Which loans? Please please be specific.

When someone (A) lends money to another person (B), that person becomes a counterparty. So if B goes bankrupt, A loses money. If B is about to go bankrupt, gets big loans from a central bank then pays back A, A has effectively gotten a handout. What should happen is A loses money for taking on a risky gamble.

> Again, which loans? What are the collateralization rules for them? What are the interest rates? Do you think an individual and a bank have the same credit score?

Yeah, good point, that part doesn't actually make any sense. I was thinking about QE1 when I wrote that, but the issue there wasn't really any deals getting done as much as the general money printing.

> Please distinguish between "default" and "rollover". There is nothing wrong with rollover unless the risk has changed?

There absolutely is something wrong with rollover. If entities can perpetually roll over their debt, and the entity issuing the debt is a government entity or bankrolled by a government entity - ie, risk insensitive and unable to go bankrupt because of policy - then all the usual economic controls to make sure the money is well spent are removed.

> Example of "wasting"?

If a banking entity goes bankrupt due to enormous losses it has effectively wasted all the money it was given. Which is fine, happens from time to time, but the people responsible shouldn't get a chance to try again because the regulators like them.

> ...if you just allege "crime"...

Sorry, I missed a step here. What crime are you talking about? I don't think anything criminal is happening.

"I loan you a billion dollars now to buy assets, then inflate money so billion dollars is worth half a billion dollars, then demand my billion dollars back. This isn't a gift wink wink."

After QE4, seems to me inflation wasn't particularly high.

Asset inflation ran quite high throughout QE. The same number of dollars might be obtained by selling half of what one purchased with borrowed money at the start of the program.

QE involved the Fed buying assets, not giving away money. What you're saying would suggest that the Fed made massive profits for the public, which is actually correct. Overall QE, apart from it's other effects, has been hugely profitable for the US government. Not so much here in Britain, unfortunately.

Who did they buy those assets from, and where did they get the money to buy them in the first place?

The government bought them from the banks, using money the Treasury created. When the assets are sold the created money is 'retired' and any profit returned to the Treasury.

IMHO QE in the US went too far, but it was absolutely a necessary programme that stabilised the US economy at critical moments. The increased reserve requirements on banks, while dragging on bank profits since, were prudent and seem to be working well, especially compared to Europe.

> [When a bank fails, depositors] end up with money locked up for a period and are unable to make your own payments.

From the FDIC's Deposit Insurance FAQ (<https://www.fdic.gov/resources/deposit-insurance/faq/index.h...>):

> Q: What happens when a bank fails?

> ... First, as the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either 1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or 2) issuing a check to each depositor for the insured balance of their account at the failed bank.

Honestly, I'd expect just about any judge in the country to be _very_, _VERY_ angry at a creditor that was unwilling to -free of charge- delay receipt of money owed by (typically) one or (sometimes) a few business days because the Federal Government needed that time to take over a failed bank's obligations.

This reason you've provided is just plain bogus.

> So much confusion is caused by the inability to distinguish between "gift" and "loan".

What the difference between a gift and a loan that costs nothing?

The loans didn't cost nothing, and capital requirements were raised massively which severely dragged on the profitability of US banks. You can see this because European banks didn't face the same requirements and now after a period of making hay are looking very shaky, particular Credit Suisse.

In fact, a loan on generous terms which causes the broader market to judge your entire industry as explicitly backstopped by the government, and thus lend you money at lower rates of interest than you would otherwise pay, is a gift that keeps on giving.

Gift vs Loan really depends a lot on Time Value. If the loan carries interest at a rate that is lower than the return earned on the loaned value, it's basically a gift of sorts, even if not quite in the manner a lay person may understand it (a net gift, if you will (and if the interest is higher than it's capable of yielding as a return, it's a trap!). At the end of the day though, the cycle of lending money at interest in a manner externalizes the cost to the society at large, who is left to cope with an expanded money supply (which eventually can be measured as inflation), while meanwhile the party loaning the money out sees a return in the form of interest, and the party taking out the loan sees the return in the form of access to capital and a net gain.

The Federal Reserve can be thought of as there to balance out the cost of this arrangement (unending inflation) with the benefits it provides (expanded access to capital by those who would otherwise perhaps never be able to raise the funds -- hard to run a business when you don't have the "machinery" that makes it go).

It turns out, this is really hard. At the end of the day though, if they weren't there "picking winners" as it sometimes appears they're doing, we'd still have winners being picked, as we did under the old gold backed currencies in the past, but we'd also get to contend with the effects of banks going bust from failing to adequately navigate the markets, which would be further made turbulent by a lack of coordination between their interest rates being haphazardly determined. Presumably, those with the most money and clarity would be the only ones left after an epic game of Monopoly, and we'd be left with...a central bank, much like we have today.

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