Mish's Global Economic Trend Analysis |
- EU Threatens New Sanctions; Russia Responds with Threats on Natural Gas and Airspace Flight Restrictions
- Japanese Economy Contracts Bigger than Expected 7.1% in 2nd Quarter; Really Bad Theories
- Should Banks Lend Money At All?
Posted: 08 Sep 2014 12:28 PM PDT The tit-for-tat sanction madness in Europe took a huge leap forward today with new sanctions in the work on Russian energy companies. Russia responded by threatening to restrict commercial flights over its airspace, by threatening to halt reverse flows of natural gas to Ukraine, and with a threat to reduce gas delivery to Europe. EU Plans New Sanctions The Wall Street Journal reports New EU Sanctions to Stop Fundraising by 3 Russian Oil Giants New European Union sanctions on Russia will expand the number of Russian companies unable to raise money in the bloc's capital markets to include three state-owned oil companies, according to documents seen by The Wall Street Journal.Unacceptable Behavior EC president José Manuel Barroso commented on the Unacceptable Behavior of Russia. "We are showing to the Russians this kind of behaviour is not acceptable," José Manuel Barroso, the European Commission president, said on the sidelines of the Nato summit in Wales. "We believe it's extremely important to have a firm position in terms of making clear to Russia it should respect international principles." Russia immediately responded to the threat of more sanctions with its own views on what is unacceptable behavior. Airspace Restrictions In part one of Russia's two-part asymmetrical response to the EU, Russia Threatens Flight Ban. Blaming the West for damaging the Russian economy by triggering "stupid" sanctions, Prime Minister Dmitry Medvedev said Moscow would press on with measures to reduce reliance on imports, starting with increasing output of domestic aircraft.Russia Threatens to Reduce Gas Supply For part two of Russia's response to the EU regarding unacceptable behavior, please consider Russia Aims to Choke Off Gas Re-Exports to Ukraine. Moscow is seeking to prevent its European customers re-exporting Russian gas to Ukraine, threatening to choke off a crucial lifeline for Kiev and deepen the energy crunch it faces this winter.Why EU and US economic-jackasses think sanctions will accomplish anything positive or change Russia's behavior one bit is at first glance a bit of a mystery. However, economic-jackasses by definition are going to do stupid things, so we should expect more and more of the same failed tactics. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
Japanese Economy Contracts Bigger than Expected 7.1% in 2nd Quarter; Really Bad Theories Posted: 08 Sep 2014 10:45 AM PDT By now it should be pretty clear that Abenomics is a complete failure. Abenomics did not spur lending, investment, hiring, or wage growth. It's one touted "success" is that prices have gone up. And for cash-strapped consumers facing higher taxes, that alleged "success" is actually a disaster. Japanese Economy Contracts Bigger Than Expected 7.1% in Second Quarter Please consider Japan says economy contracted 7.1 percent in April-June on bigger drop in business investment. Japan's economy contracted at a larger than earlier estimated annual rate of 7.1 percent in April-June, as companies and households slashed spending following a tax hike.Really Bad Theories Here's a statement from the article regarding theories that caught my eye: "Theoretically, there should be no impact from the consumption tax increase on corporate spending or long-term corporate planning, but a large number of Japanese corporations seemed to see a large impact from the hike on final demand," said Junko Nishioka, an economist at RBS Japan Securities in Tokyo. Good grief. Nishioka has theories, but they are as sound as a home foundation in a swamp. Here's an easy to understand explanation. Eight Point Explanation
What is it about those eight points that economist Nishioka fails to understand? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
Should Banks Lend Money At All? Posted: 08 Sep 2014 01:45 AM PDT Banks are in the business of making loans. Is that the right model? Before answering, please consider the model of Lending Club. Lending Club is an online financial community that brings together creditworthy borrowers and savvy investors so that both can benefit financially. We replace the high cost and complexity of traditional lending with a faster, smarter way to borrow and invest. Here is the initial process straight from the Lending Club Website. Steps
Lending club claims borrowers substantially reduce their rates over those offered by banks. Exploring Lending Club Bloomberg columnist Mat Levine explores the issue in Lending Club Can Be a Better Bank Than the Banks. There are a lot of ways in which [Lending Club] is not a bank, but the big one is that basically all (95.6 percent) of its liabilities are "notes and certificates," that is, just unsecured structured notes tied directly to specific underlying loans.100% Equity-Funded Bank Lending Club is effectively a 100% equity-funded bank with 0% lending risk! Ironically, Lending Club does not make loans. Instead, it facilitates matching borrowers with creditors and takes a fee for its efforts. So, what's not to like? Unfortunately Levine jumps off the deep end with his next set of statements. First: You wouldn't want all banks to be like Lending Club. People like having checking accounts. Even beyond checking accounts, people like having liquid risk-free money-like claims. Banks exist to turn risky investments -- loans to people and businesses! -- into risk-free money-like claims, whether those are checking accounts or certificates of deposit or repo agreements.... For starters, the idea that banks can turn risky investments into risk-free claims is preposterous. Second, the idea that checking accounts would disappear is preposterous. Third, I certainly would prefer lending banks to be legitimately risk-free operations like lending Club. Advantages
Lending Banks vs. Safekeeping Banks For all intents and purposes, Lending Club is the ideal risk-free lending bank. Given that it does not lend money, no bank-associated financial crisis is possible in such a model, Does that mean checking accounts cease to exist? Hardly, and Levine should know better. All that's needed is a separation of duties (lending vs. safekeeping): Safekeeping banks don't make any loans or facilitate making loans, ever. All checking accounts (demand deposit accounts) would reside in safekeeping banks. In return for safekeeping, banks charge fees (just as they do now - ATM fees, transaction fees, checking account fees, etc.) There is no need for FDIC as no money is lent. In this separation of duty model, lending banks would facilitate lending exactly as does Lending Club. Want to earn interest? OK you pick a loan you like, for a duration you like, and you invest in it. Such loans would be term-duration loans, not FDIC guaranteed (and that is an added bonus, not a drawback). Those lending money for interest should logically assume some risk. We might see some changes such as the end of cheap 30-year mortgages. Some might see that as a drawback, but that too is an advantage. Cheap, easy loans contributed to the housing bubble and a near financial collapse. If 10- or 15-year loans became the standard, so much the better. Houses should primarily be a place to live, not a speculative plaything. Printing money into existence is at the forefront of every financial crisis, and it also helps explain the growing income inequality problem. I am not against loans. Rather I am against borrowing money into existence, FDIC, duration mismatches, etc. I suggest it's time to change the model to a 100% reserve system that eliminates duration mismatches, does not allow printing of money into existence, and also stops runs on banks without FDIC. A distinct separation between lending banks and safekeeping banks appears to be a great starting point for discussion, not that peer lending itself is the perfect solution. Note: I revised the last statement to make it clear that I am after a 100% reserve system model, not a peer lending model per se. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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