Captain, we need another Printing Press.

[Phelps McManus]

I still don't understand what happens in that Reverse Mortgage scenario.

What about when banks buy a credit default swap to cover their loans? They can lend extra money there right? And as long as the issuer of the swap isn't required to hold a reserve (since they aren't a bank, they don't have deposits right?), we can go infinite!

[prescient63]

Originally Posted by Phelps McManus

I still don't understand what happens in that Reverse Mortgage scenario.

What about when banks buy a credit default swap to cover their loans? They can lend extra money there right? And as long as the issuer of the swap isn't required to hold a reserve (since they aren't a bank, they don't have deposits right?), we can go infinite!

Admittedly, I don't know much about reverse mortgage but it sounds fairly simple. A person owns a home (asset), and based on relevant factors the bank lends the person some cash or provides them with an annuity until they move out of the home or die. After the person moves out or dies the bank sells the house and recoups their costs with any additional revenue going to the heirs, and if necessary the bank eats a loss on the property.

As for CDSs why do you think that banks get to put out as many loans as they want because they bought a CDS? All a CDS says is that if the person or entity defaults on their loan payment you, the issuer of the CDS, will pay instead, and for that I'm going to pay you some sort of premium. The person issuing the CDS doesn't have any regulation attached to them so they can issue a bazillion dollars in CDSs but it still isn't like infinite money.

Edit: I did find the article about BoA writing down the guys mortgage and then issuing him an reverse mortgage interesting.

[Phelps McManus]

Yeah but the bank in the article didn't pay annuities to the homeowner, they paid themselves. Granted they sound like a mom and pop operation, so it probably doesn't happen that much.

Originally Posted by prescient63

As for CDSs why do you think that banks get to put out as many loans as they want because they bought a CDS? All a CDS says is that if the person or entity defaults on their loan payment you, the issuer of the CDS, will pay instead, and for that I'm going to pay you some sort of premium. The person issuing the CDS doesn't have any regulation attached to them so they can issue a bazillion dollars in CDSs but it still isn't like infinite money.

Oh OK. I just assumed that was the case because I read somewhere that the CDS allowed the bank to remove risk and free up reserves to bet somewhere else.

I guess you can't believe everything you read on the internet (except here of course).

[prescient63]

Originally Posted by Phelps McManus

Yeah but the bank in the article didn't pay annuities to the homeowner, they paid themselves. Granted they sound like a mom and pop operation, so it probably doesn't happen that much.



Oh OK. I just assumed that was the case because I read somewhere that the CDS allowed the bank to remove risk and free up reserves to bet somewhere else.

I guess you can't believe everything you read on the internet (except here of course).

Well sure it frees up reserves. Think about it if you make loans and you don't know if the parties are going to pay you back then you have to hold back some cash in reserve. However, if I make some loans, and then get some cheap insurance that says if those parties don't pay me back a third party will step in and make payments on their behalf then I can deploy my capital elsewhere.

[Phelps McManus]

Originally Posted by prescient63

Bank 1 receives 200k deposit and loans 180k
Bank 2 receives 180k deposit and loans 162k
Bank 3 receives 162k deposit and loans 146k
etc.....

You fuckers make my brain hurt.

In your scenario, 200k becomes 2mil.

If Bank1 pays $10k for a CDS on a 170k loan to Bank2, it now has 170k-17k to lend to Bank 2 as well. So $323k total.

Bank2 now has $323k to work with, which is not only more than it had in your scenario, it is more than even Bank1 had. This sounds infinite to me...

And what happens if Bank 1 buys a second CDS?

edit: Oh nm, reserves! So, in my scenario $10k would free up my $20k reserves. Still, it sounds like we are able to create more than $2mil based on realistic numbers for cost of CDS. Who keeps track?

[revolreggin]

Originally Posted by Strifen

Can't edit the title but It was supposed to be called US money supply.

That's what the total credit market debt is, the money supply of the US. The federal reserve tracks the total credit market debt. Every time you swipe a credit card or go to a commercial bank and request a loan you have effectively added to this debt.

For the last 70 years the US consumer has been the engine that has driven the world, every economic zone either has the US as their #1 importer or they import to a country that does. What does the US export? US consumer debt(US dollars) the engine that powers the system.

The numbers shows that the US consumers hit their maximum potential to manufacture new dollars back in 2006, shortly after they ran through all willing borrowers with the sub-prime fiasco.

Now what we're seeing is debt deflation, the US consumers are tapped out and are not even creating enough new dollars to service the existence of the previously requested ones.

Damn lizard Illuminati Jews

[Aetos]

Originally Posted by Phelps McManus

In your scenario, 200k becomes 2mil.

If Bank1 pays $10k for a CDS on a 170k loan to Bank2, it now has 170k-17k to lend to Bank 2 as well. So $323k total.

Bank2 now has $323k to work with, which is not only more than it had in your scenario, it is more than even Bank1 had. This sounds infinite to me...

And what happens if Bank 1 buys a second CDS?

edit: Oh nm, reserves! So, in my scenario $10k would free up my $20k reserves. Still, it sounds like we are able to create more than $2mil based on realistic numbers for cost of CDS. Who keeps track?

You are confusing commercial banks with investment banks, they have different rules to follow.

[Strifen]

Originally Posted by revolreggin

Damn lizard Illuminati Jews

The lizard Jew rebuttal, how original.

Anyways... I'll update the thread with the federal reserves Q3 numbers when they release them. If there's deflation of the money supply in Q3 and Q4 as well it just confirms my beliefs all along. Back in 2007 consumers in the US requested approximately 4.4 trillion dollars of new money into existence. We need around 4.8-5 trillion new dollars to enter the economy in 2009 for there to be any real growth but consumers have slowed their demands of new money to the point where its impossible to have that amount of new money enter the system.

Economic growth is not infinite, it's a wave. On the way up consumers in the US were forced to demand more and more but now they can only demand less and less. The growth of the money supply stopped in Q1 and is shrinking in Q2 for the first time the current global trade system has been in existence. We need a consumer able to consumer better then the US consumer has been since the end of WW2 or its the end of the line.

[Amnesiac]

QQ

[Soriak]

Originally Posted by prescient63

Well sure it frees up reserves. Think about it if you make loans and you don't know if the parties are going to pay you back then you have to hold back some cash in reserve. However, if I make some loans, and then get some cheap insurance that says if those parties don't pay me back a third party will step in and make payments on their behalf then I can deploy my capital elsewhere.

I don't think the fed ever accepted CDS as part of the reserves... the TAF (Term Auction Facility) took some pretty crazy debt as collateral, but that's an entirely different matter unrelated to reserves. It made sense there, because the loans were mostly short-term and the point was to temporarily exchange illiquid assets for cash - hard to do if you don't accept illiquid assets as collateral.

[prescient63]

Originally Posted by Soriak

I don't think the fed ever accepted CDS as part of the reserves... the TAF (Term Auction Facility) took some pretty crazy debt as collateral, but that's an entirely different matter unrelated to reserves. It made sense there, because the loans were mostly short-term and the point was to temporarily exchange illiquid assets for cash - hard to do if you don't accept illiquid assets as collateral.

I was thinking more along the lines of (and I haven't totally thought this through and so I might be way off base here) I buy a CMO and I think x% of that CMO is going to default on their payments. From a risk management standpoint I shouldn't expect 100% of the cash flow from that CMO to come in. However, if I purchase a CDS I know (or think) my losses are capped at some point. This would free up cash flow and allow me to put that cash to use in other endeavors. Now if I'm a bank this means that I have more money available for lending because I'm no longer worried bout incurring default losses as I've effectively hedged against that default risk, yes? I didn't mean to say that I could drop below the RRR as I'm assuming that is based on Tier 1 capital.

I'm actually pretty interested in this so any insight would be appreciated. As an aside I'm reading An Arbitrage Guide to Financial Markets which up to this point (chapter 3) has been pretty interesting and nothing hardcore (you should know basic options stuff, basic financial math) so I would recommend it to people.

[Soriak]

I'm really no expert on it either... I figure for internal risk-control, it is as you said. Hence the credit freeze when the CDS turned out not to be so secure after all - they had to change their models to reflect the real risk. That'd also explain why much of the money they got wasn't loaned out immediately, since they were really below the (self-imposed) reserves they should have had.

I may have misread Phelps' comment, but I thought he was talking about the mandatory reserves, not the self-imposed ones. The latter would lead to a higher than 10% reserve, and therefore less money in circulation.

From the newsweek article on CDS:

By the mid-'90s, JPMorgan's books were loaded with tens of billions of dollars in loans to corporations and foreign governments, and by federal law it had to keep huge amounts of capital in reserve in case any of them went bad. But what if JPMorgan could create a device that would protect it if those loans defaulted, and free up that capital?

I'm really not sure what the author of the article is pointing at here. This might be related to the (now outdated) Basel I accord, which includes risk in the reserve requirements. Lowering the risk of loans would reduce the required reserves. Although I thought the Fed reserve requirements were higher than Basel I... maybe the latter includes divisions of JP Morgan not covered by the fed. Or maybe Newsweek is off - it's not a technical article.

The reverse mortgage thing is just odd. I guess it's a reaction to the pressure to modify mortgages. I assume the owner had some equity in his house and forfeited it with the reverse mortgage - and the monthly payout from that goes to the bank to cover what would normally be mortgage payments. Presumably this is better than foreclosing the house and being unable to sell it... the article mentions that this was done for 20 houses, so it's probably not done on a larger scale. One wonders why it's being done at all. /shrug

[GrobbeeTrull2.0]

Reverse mortgages have been around at least 5 years, and I heard about it in my grandparents retirement community. You pay into your house for most of your life, find out you're old and can't make payments for whatever reason, so you essentially "sell" your house back to the bank, cashing out the equity and they pay you per month until you die. When you die, your relatives can "buy" the house back for the total amount of the reverse mortgage plus interest... essentially, your relatives pay off your equity loan and get the house.

[rinthea]

Originally Posted by Soriak

I don't think the fed ever accepted CDS as part of the reserves... the TAF (Term Auction Facility) took some pretty crazy debt as collateral, but that's an entirely different matter unrelated to reserves. It made sense there, because the loans were mostly short-term and the point was to temporarily exchange illiquid assets for cash - hard to do if you don't accept illiquid assets as collateral.

'crazy debt' yeah, I'd call it theft.

i remember

-bonds that defaulted 5 years ago
- bonds that had matured! 5 years ago
- numerous bankrupt companies
- near worthless warrants

This sort of collateral was common, not outlier stuff. It has set a precedent. They will take anything in a panic.

There is a distinct difference between an illiquid security and a worthless one.

[Soriak]

On the upside, I don't think the Fed made a loss on any of it? If we're talking about an institution like BoA, they might as well take their toilet seat as a collateral. If the bank goes to hell, the default will be the least of the problems.

Grobbee: the odd thing was that the bank is the beneficiary of the reverse mortgage, not the resident/owner.