Free market and the effect of banks and immigration

[Basil II the B.S]

There is a great deal in your post, but I will focus on only the Central banking system in the USA. The Federal Reserve system is government owned and operated. The branch banks are just that, branches within the government owned and operated system. Do not be confused by phrases such as stock owned by private banks. This is a often misunderstood part of the system. Private banks are required by law to own the stock as a means to reserve capital for the banking system so the private banks cannot simply lend out all of their own private capital. Things have changed over time so there are even more restraints on bank capital. Go back to your own links that you posted and read them with a bit of a critical eye in light of what I have stated.

The whole point of co-ownership is to make central banks independent from the government.
This is another point both links I posted highlight and reflect the current reality: central banks should not take orders from the government. The idea comes from the monetarist take over in the 80s and is now widely used in the West. The big ideologist of central banks independence in the academia is Rogoff from Harvard.

Similarly, a key element of the ECB is independence, by treaty.
https://www.ecb.europa.eu/explainers...endent.en.html

I have to disagree with you entirely. To say that central banks are owned and operated by governments in the West is misleading if not plainly misunderstanding the current situation.

If they were, central banks would not exist to begin with. Monetary emission until modern times used to be a function of the treasury. Then yes, monetary policy is fully controlled and owned by the government.

I may be closer to your political philosophy than you think, but we cannot let such beliefs ignore the facts around us. I am concerned about the effects of capital movement and how it changes the prospects locally for jobs and for compensation for those jobs. I am concerned about immigration and the short term effects on local jobs as well. But seriously, banks need a return on capital to reward investors, but there is always a danger of bank failure when over leveraged. This is why banks are regulated and the federally chartered banks are required to own 'stock' in the Federal Reserve System.

Banking has got so complicated that even bankers lose control of their own creations (see the subprimes) and regulators are years behind, a similar example are high frequency trading firms.

As for my philosophy, on paper I'm an Adam Smith guy, but I'm aware of the limitations of ideological approaches and the lack of correspondence in the reality of mixed-economies we live in. I also appreciate List's criticism of free trade, while I find Marx's argument about class interest rather fitting the current reality. The 3's visions are one criticism of the other so I'm hardly a very ideological guy.

Over leveraged investments is akin to borrowing money from the mob to bet on roulette in Las Vegas. The mob will always be better at collecting the debt than you will be at winning from the mob at roulette. (for some reason I have a movie "Get Shorty" on my mind now, darn) Over leverage / Ponzi-like schemes are not sustainable. What you are seeing is indeed a problem and it may be that banks that pursue such policies are not sustainable. In the end it is the problem of investor expectations that drive poor unsustainable decisions and foolish management that never looks to the probable end result that is the problem. Yes too much debt is a part. Too little debt is probably also a problem if outside investors are to be attracted. In the end it is a balancing act and that is why ownership needs to be tied to good management.

I still think your fundamental premise in the first post is the assumption that a Ponzi-like scheme is not sustainable. I agree these schemes are not sustainable, but the solution is to avoid such schemes in the first place.

It's a cultural problem. The current business-investor relation is based on those quarterly reports, with the result that inevitably the timeframe of planning is reduced to quarters. Investors do not care about the long term. At best they are willing to go as far as 3 years (previous year-current year, next year), which leads to losing completely the touch with the bigger picture. Demographic trends are one of those things that can't be assessed properly in quarters, but should in decades. Of course the current culture doesn't allow it until the damage is done.

[NorseThing]

It's a cultural problem. The current business-investor relation is based on those quarterly reports, with the result that inevitably the timeframe of planning is reduced to quarters. Investors do not care about the long term. At best they are willing to go as far as 3 years (previous year-current year, next year), which leads to losing completely the touch with the bigger picture. Demographic trends are one of those things that can't be assessed properly in quarters, but should in decades. Of course the current culture doesn't allow it until the damage is done.

I thought a bit about this and thought I would make a short response based upon my understanding of the banks and our American economy. It is not a cultural problem. The problem is leverage and what is considered as collateral for a lender and also the differential between the cost of debt and the expected return from the leverage. Lenders look to what will happen if the loan were made and then it goes bad. So if you borrow to buy a home the lender know the value of the home, the barrowers credit history, current income and so on -- and then makes a decision. The borrower knows other assets cannot be taken if the loan goes bad. A lends a business much in the same manner, but there is a difference. The bank also knows that the owners of the business will lose their capital investment in the business first before the bank loses a dime. This is an incentive. The bankers see that the investors will move mountains to avoid such a lose.

When the business is owned by a small number of owners, this is true. When the business is owned by thousands, the owners individually are powerless other than to buy or sell their shares at whatever the market will bear. So the result will be a take over by an arbitrage firm seeking to reorganize the failed business. This might be a private firm looking for an opportunity or it might e a private firm recruited by the bankers to 'save' their loans as part of a 'deal'. Thus the bankers will try to convert the huge number of shareholder to just a few so that the mountains to be moved can be restored to the banking equation and the safety of the banking loans to the business. This is why real estate investors like Mr. Trump can do deals even after tanking on some investments. It is not a special skill. It is just the dynamics of what happens when a large business with many investors fails. The same business can be pulled out by a focused core of investors working with the banks. This is why many failed businesses get reorganized as private and not public corporations. It does not mean they are better as a private business, but there are clear advantages both for the business and the bankers.

[Basil II the B.S]

Hmm, yes and no. Most evaluation models are variations of CAPM and Sharpe's, which everyone by now recognizes they are not based on reality but everyone uses anyway. That is a mix of lazyness and lack of better alternatives.

When it comes to housing, it's a boom and bust sector. Property bubbles are rather common, yet no investor takes in consideration the bust time. They just hope the boom lasts forever or at least as long as they are in it. Then if the bust comes, all of a sudden the borrower defaults, but he had likely bought the house during the boom period, hence even if you foreclosure that, you still post a loss in your balance sheet. That is where the problem for the investors start: mass mortgages, packaged unto securities, all of a sudden with a collateral worth much less than what it was in any model. That's part of what happened in 2007.

What I dub as cultural problem are the unwillingness of investors to change models, when they should, because they are not grounded in reality and the newly found unwillingness to take losses. There has been a hysteria to move towards ''safe markets'' and ''safe investments'' which in turn has made the central banks suppress volatility. Now, if this thing last forever, great. If it doesn't, and nothing does, it'll end up in tears.

[NorseThing]

What I dub as cultural problem are the unwillingness of investors to change models, when they should, because they are not grounded in reality and the newly found unwillingness to take losses. There has been a hysteria to move towards ''safe markets'' and ''safe investments'' which in turn has made the central banks suppress volatility. Now, if this thing last forever, great. If it doesn't, and nothing does, it'll end up in tears.

Clipped the first part of your post. They are good points. This is a good point as well. People are always unwilling to change if it has worked in the past. Often with hindsight we can see what we interpret as unwillingness since it did not work most recently. The problem is that if you change immediately after the strategy does not work you risk doing the dreaded but high sell low strategy. Anything that on average works needs some time to convince us that a one time miss is a flawed tactic.

Now the desire for safety is actually contrary to the risk takers goal of larger than average returns. Volatility is the friend of risk takers or perhaps it is why the risk takers seek out the higher rates during periods of volatility. The basic economic dictum is that increased volatility means an increased expected rate of return is needed. This is a bit why the bank losses happened in the subprime housing market as the bank tried to cover for the losses in an increasingly volatile housing market.

[Basil II the B.S]

There's also another element, right now passive investing beats active investing. Meaning the ultra-wealthy is paying enourmous sums to hedge-fund managers to manage their money when they would be better off putting everything in S&P 500 futures, ETFs or similar benchmarks following securities.

So, despite their education, connections and everything else, most hedge fund managers do not beat the market. They are inefficient. Free market says they need to go. Current market says ''lel they get paid various millions a month''.

Now this is partly because of volatily suppression that kills opportunities, nonetheless, that's the state of the financial sector. Inefficiencies everywhere, rewarded with big money. Yay!

[NorseThing]

There's also another element, right now passive investing beats active investing. Meaning the ultra-wealthy is paying enourmous sums to hedge-fund managers to manage their money when they would be better off putting everything in S&P 500 futures, ETFs or similar benchmarks following securities.

So, despite their education, connections and everything else, most hedge fund managers do not beat the market. They are inefficient. Free market says they need to go. Current market says ''lel they get paid various millions a month''.

Now this is partly because of volatily suppression that kills opportunities, nonetheless, that's the state of the financial sector. Inefficiencies everywhere, rewarded with big money. Yay!

I think you are falling into your long run versus short run trap with this, but yes it seems so at the moment.

[Basil II the B.S]

I think you are falling into your long run versus short run trap with this, but yes it seems so at the moment.

Hmm, true but I'm talking about post 2008 markets.

So, medium run?