Mish's Global Economic Trend Analysis

---

Time for Banks to Be Banks, Not Hedge Funds or Slush Funds; Free Money Math vs. 100% Gold Backed Dollar Posted: 27 Nov 2013 01:31 PM PST In the wake of all the misguided pleas for negative interest rates in Europe (hoping to get banks to lend), comes news US banks warn Fed interest cut could force them to charge depositors.  Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves. Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households. The warning by bank executives highlights the dangers of one strategy the Fed could use to offset an eventual "tapering" of the $85bn a month in asset purchases that have fuelled global financial markets for the last year. Minutes of the Fed's October meeting published last week showed it was heading towards a taper in the coming months – perhaps as soon as December – but wants to find a different way to add stimulus at the same time. "Most" officials thought a cut in the interest on bank reserves was an option worth considering. Executives at two of the top five US banks said a cut in the 0.25 per cent rate of interest on the $2.4tn in reserves they hold at the Fed would lead them to pass on the cost to depositors. Banks say they may have to charge because taking in deposits is not free: they have to pay premiums of a few basis points to a US government insurance programme. "Right now you can at least break even from a revenue perspective," said one executive, adding that a rate cut by the Fed "would turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them". Other bankers said that a move to negative rates would not only trim margins but could backfire for banks and the system as a whole, as it would incentivise treasury managers to find higher-yielding, riskier assets. About half of the reserves come from non-US banks that do not have to pay the deposit insurance fee. Their favourite manoeuvre is to take deposits from money market funds and park them overnight at the Fed, earning millions of dollars risk-free. Cutting the interest on reserves would stop that. Excess Reserves Free Money Math The Fed pays .25% interest on excess reserves. A quarter of a percent on $2.4 trillion happens to be $6,000,000,000 (six billion) annually. Time for Banks to Be Banks, Not Hedge Funds or Slush Funds Printing money that just sits overnight at the Fed allowing banks to make risk-free profits on $2.4 trillion in excess reserves is of course ridiculous. It is also ludicrous for banks to complain about the take-away of free money that it should not be getting in the first place. The Fed has so distorted the economy that no true pricing mechanism exists on anything. Should banks feel the need to charge depositors interest on deposits, then so be it. That's the way it should be in the first place. 100% Gold Backed Dollar In a true free market economy, with a 100% gold-backed dollar (where one dollar represented a fixed amount of gold, as opposed to a fixed price of gold), banks would of course charge a fee for safekeeping and other services. The closer we get to that model the better, regardless of complaints by banks or others. Notice the emphasis on safekeeping. A 100% gold backed dollar would not stop lending. It would stop fractional reserve lending, lending of money in demand accounts, and lending of money for greater terms than the bank has use of funds. Banks could not lend money available on demand (checking accounts), but they could lend money in interest bearing accounts such as CDs, for the term of the CD. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

War Between Spain and Germany Erupts Over Next Round of Watered Down Stress Tests; Germany Complains About the "Carry Trade" Posted: 27 Nov 2013 11:05 AM PST On October 23, ECB president Mario Draghi announced new bank stress tests. At the time, I offered a "Draghize" Translation. Here is a small snip. Translating Draghize For those of you who do not speak Draghize I offer these translations. Draghize: "Banks do need to fail to prove the credibility of the exercise". Mish: We are carefully scrutinizing several non-critical banks, looking for a couple of scapegoats, hoping to fool the public regarding the credibility of the exercise. Draghize: "If they do have to fail, they have to fail. There's no question about that." Mish: If any big banks are in trouble. They won't fail. There's no question about that. Draghize: "The test is credible because the ultimate purpose of it is to restore or strengthen private sector confidence in the soundness of the banks, in the quality of their balance sheets" Mish: The test is credible because we say it is. War Erupts Over How Much to Water Down Stress Tests Via translation El Confidencial reports War between Spain and Germany Erupts Over the Hardness of Stress Tests The new stress tests of European banks have caused the outbreak of a new confrontation between the governments of Spain and Germany. Until now, it was Spain who argued in favor of a tough exercise, similar to what Spain had to undergo when seeking bailout funds. By contrast, Germany (supported by France and Italy) preferred more lax exercises that do not bring to light the shame of their banks balance sheets of billions in toxic assets, including Spanish mortgage securitizations. But now the German authorities found one flank to counterattack: the huge public debt exposure of Spanish banks, which they believe should be penalized in these exercises, which can be catastrophic for our financial system when it just starts to lift head. Sovereign Debt Not All Risk-Free The German authorities consider that if the tests need to be hard, then they should be hard in every way, including sovereign debt. In addition, the German central bank seeks to distinguish between the sovereign debt of their country and peripherals. It is what they call "enforce the triple A". The penalty is a recurring request from the Bundesbank. Its president, Jens Weidmann, has warned several times about the risk posed by this link between governments and entities, and has called for a regulatory change that public debt is not considered a risk-free asset. "It makes no sense that risk-free treatment is given to BBB Spain titles. Sovereign debt cannot all be considered as zero risk equally. Only those with the highest rating can be considered risk free" is the argument from Germany. Germany Complains About the "Carry Trade" Weidmann's claim is deeper than a mere fight stress tests estate. In its latest monthly report, the Bundesbank takes offense at the stratospheric rise in the positions of the Spanish banking debt: an increase of 133 billion euros over two years, to around 300 billion euros today. This is explained by the famous carry trade with which banks borrow very cheap on the open bar ECB liquidity at 0.75%, then invest in public debt paying 4% interest. Spanish officials claim it makes no sense to penalize these asset as if they were bad loans. But the answer to this argument is simple: a stress test is by definition a simulation of a worst case scenario that the current (or adverse stressed scenario) and that scenario should take a further fall in bond prices and an increase yields. If the Bubdesbank imposes its criteria, the result can be disastrous for some of our institutions. Some industry sources are confident that the Spanish government reaches a deal with the German to "not to hurt each other." Germany Convinced of Easy Stress Tests Via translation, also consider Merkel stands up to Guindos Regarding Stress Tests According to a source familiar with the situation, "Germany is convinced that the test will be very light because of so much opposition to make the stress tests a serious exercise." In fact, postponing these tests from the last quarter of 2013 to the first quarter of 2014 is another sign of the imposition of the German thesis. Neither France nor Italy wants very rigorous stress tests so as to not aerate the shame of their own banks. French reluctance is justified by the enormous exposure with their banks in recent years. As for the Italians, "they are in a state of denial as that Spanish banks had before the disaster," explain the sources cited. "And the worst is that they usually get away with it, not least because Mario Draghi is Italian." "Deal to Not Hurt Each Other" In return for watering down stress tests on certain toxic assets that French banks, German banks, and Italian banks do not want, industry sources think a deal will be reached to also not include skyrocketing sovereign debt of Spanish banks. Conclusion: expect another stress-free test. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

You are subscribed to email updates from Mish's Global Economic Trend Analysis To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google Inc., 20 West Kinzie, Chicago IL USA 60610