I had a post in mind all day and I will get to it but there was plenty of other stuff that caught my eye that will make it on tonight no matter how late it goes. I am done the boxing workout so I am ready to roll. Get requests in for Friday night entertainment as well!
The "Motor City Cobra" in Foreclosure?
Regular readers know I am a huge boxing fan so when I caught this post over at Tim Iacono's site (updated the bookmark in the blogroll, but I prefer the old site!) I knew I was going to write something on it:
"Hit Man" Thomas Hearns Now in Foreclosure
You can read the details if interested.
Thomas Hearns started with the nickname "Motor City Cobra" and switched to "The Hit Man" after recording big knockout wins. His fight versus Marvin Hagler is one of the best all time, second only to Alexis Arguello vs. Aaron Pryor I in my mind. Thanks for the great find!
Banking Reserve Requirements; Useless or Need to Grow?
Last night I posted a quick piece on FED head Ben Bernanke offering that banking reserves could go to zero in the future, via The Economic Collapse. Again, key take away:
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
Kid Dynamite, who survived the rainy downpours here in the northeast, had some thoughts on this (and gave a cool hat tip over here as well):
Reserves? We Don't Need No Stinkin' Reserves!
Now, it's been brought to my attention that there are several countries who currently operate banking systems without reserve requirements. The real question is, is Bernanke suggesting that we don't need reserve requirements because in a rational free markets world, banks would hold adequate reserves anyway, and thus don't need more expensive restrictions imposed on them? I think that claim can be easily refuted by saying "See: U.S. Banking System 2007-2009." The alternative, then, is that Bernanke really believes that banks don't need to hold reserves at all.Great points and indeed there was plenty of great debate in the comments section for this post. Stuck at work I could not really participate!
Ben Bernanke's expertise in banking is greater than mine. That much is given - although I wasn't riding shotgun next to Alan Greenspan as the metaphorical car that is the U.S. Financial System was driven off a cliff. However, I literally do not understand how zero-reserve fractional reserve banking can work. If, in reality, banks lend out every dollar of deposits, with no allowance for depositor redemptions or decline in collateral (read: LOAN) value, isn't the system guaranteed to fail?...
Anyone care to explain this? Anyone? I'm looking for someone who can explain to me the rationale, even in theory, for how banks could operate with no reserves. My specific questions: most importantly: if you have no reserves, and the price of your assets (loans you have made) declines, aren't you instantly insolvent? Also, if you have no reserves, how do you handle depositor requests for redemptions? Is the answer simply that the Federal Reserve is there to backstop insolvencies arising from these two situations? That's not really an answer. Maybe the answer is that the Fed backstops "temporary" insolvencies until they can recover and right themselves - until the value of the assets "comes back." Extend and pretend! What if the value doesn't come back though?
An Anon poster (of course) seemed to think the system was so solid this was all fine because banks always have so much collateral to save themselves from losses. I know, funny stuff. He did make several good points but in the end I felt he was too theoretical and was ignoring reality. I would encourage you to read the dialogue from the comments section and make observations here. My take in the comments section:
Well I am at work and thus cannot be involved here to much degree but the conversation to me seems to boil down to theoretical debates vs reality. In reality the banks have abused fractional lending and made poor loans that are so bad it has toppled the pyramid, which in theory could not be toppled. That seems to be Anon's point, nothing KD (or I) says about solvency has any meaning because it cannot happen, well except that it just did.Later I added:
Furthermore, I thought getting loans from the FED was bad and had a stigma? Seems now the new theory is ultra low non-market based loans from the FED forever. This is quite possible but I think though forever may not be so long.
Good stuff everyone, and a good debate.Worth a look.
My only issue here is the assumption that the FED is now the permanent lending arm for the banking system from here to eternity and all that implies. If the system can only work at 0% rates and taxpayer backing for losses, how awesome is the system?
Now not even a few minutes after writing the added comment, I see this over at Bloomberg:
Greenspan Says Banks May Need to Raise Reserve Capital by 40%
I mean, you cannot make this stuff up! Either zero or raised by 40%? What's the deal? From the piece:
Former Federal Reserve Chairman Alan Greenspan said regulators may need to compel banks to raise capital levels by as much as 40 percent, saying that’s a more effective way to ensure stability than new regulatory rules targeting risk.We have a serious disagreement here! Obscure movie quote: "Stir the Tiles! Stir the Tiles!".
“The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk-adjusted capital,” Greenspan said in a paper prepared for a Brookings Institution conference today. “Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.”
Banks may need to hold capital equal to 14 percent of their assets, compared with about 10 percent in mid-2007 before the financial crisis, Greenspan said.
Now of course Greenspan had his entire tenure at the FED to make these kinds of overtures but instead lobbied hard (at the time) for a bare minimum of regulation and reserves. While this may be a way for him to try and regain some semblance of credibility (impossible?) it does make sense. Of course what's 14% as opposed to 10% really?
I do not have time to open a big debate on this tonight. Suffice to say that I think reserves are both necessary and should be large given what we have seen.
Looking for Bagholders?
I read a post over at The Big Picture today that I wanted to discuss all day long.
The post, titled "Household Equity Exposure", uses a great chart from Ned Davis Research to show "Stocks as a Percentage of Household Financial Assets (Adjusted for Pension Funds)". It is quarterly data from 1952-present. I would LOVE to post the chart but could not secure clear permission and unless you want a tip jar installed, the usage price is a bit more than I want to go for!
So please open the post above and use the chart as the visual aid. In reality one look over should do to follow what I am going to offer here.
Household balance sheet data is accumulated by the Fed, and no one makes it look prettier than Ned Davis Research. Using the Federal Reserve data, NDR shows that households are now fully invested, roughly equivalent to 1972 (when rates were much higher)And this stuck with me all day.
Not to differ with NDR, but the present levels are only modestly over-exposed to equities — nowhere near 2000, and still a good ways below 2007 peak.
I am not sure we can say the US household is “All In” just yet. Somewhere in the 1200- to 1250 range should get us pretty close . . .
Up front, I think Mr. Ritholtz is a great writer and he seems to have a firm grasp on all things Wall Street. This post, to me, really seemed a bit off for him in regards to main street though.
Looking at the chart household exposure to stocks was highest at the Tech Boom Bubble top in and around 2000. Of course the bagholders on that collapse were regular people as Wall Street unloaded all their shares to the public right before the meltdown. Weird coincidence, yes? I have talked about this time and again. No bailout for the regular Joe's that stocked up on Yahoo and Red Hat that crashed, they got what they deserved, right?
Another top was right at the peak of the housing/stock market top in 2007. This time the collapse was tied closely with Wall Street and things like mortgages and credit vehicles that only Wall Street held in large amounts. Of course household stock holdings fell as well but they were much less invested this time and this is where I want to focus.
First off most regular people, which are the only kind I know, never got over the tech collapse. Stocks may never capture their large scale attention again. Never. They did fall in love with real estate however, due to it's perceived "safety". As that has now been smashed that makes the trifecta of finance vehicle collapse; stocks 2000, homes 2007-present, stocks 2007-2009.
Lost in this is that I know many people (regular types) that borrowed large amounts from their 401k's to buy homes and now have the great pleasure of being underwater on their homes and paying back their downward adjusted 401k account at par.
What I am trying to get at here is I am not sure what The Big Picture post meant. Is an influx of household money into stocks after a run up of 60% or more from the lows a good investment idea? If it is, is it good for households in general or private paying clients?
My prediction is that regular money will not be making it's way into the stock market any time soon. The low volume melt up done by banks bidding futures up to each other will have to carry the boat. What if the algos have no bagholder to unload on? I guess another bailout will be on the way for them.
My friend who runs the Housing Time Bomb had a great post on this a while back:
Is America Losing Interest in the Stock Market?
The post fits in well here. I commented at the time:
I think money is going into bonds but anything with the "real estate" tag will be left out. We will see the FED step back in in that space. Many regular investors got smoked in the dot com bust and I think most felt they got in over their head. They switched to real estate and vanilla S&P index type funds and low and behold they got smoked on two fronts once again. At this point I think return OF capital is more important to main street than return ON capital. Too bad our whole system is based on juicing things into bubbles.I stand by that.
Best comment from the post at TBP? A guy that sees what's coming:
scharfy Says: @ March 18, 2010 at 4:20pmSharp.
I dunno, lot of bears on this board. The market seems comfortable with current multiple (15 times 2010 earnings) plus 2 percent dividends which will likely grow due to record corporate cash from lack of capex spending/hiring…. Should earnings grow to 100 your are lookin at 1500 in the S&P….
The natural question would be how the hell can they grow earnings with their customers not working and in bad shape?
Thats where I am open to the “decoupling” of corporate America from the working stiffs. Bottom line, they will squeeze us. We will still eat at McDonalds, buy an ipod, watch TV, search on Google, buy gas from Mobil , Bank at Chase and pay our mortgage. We just won’t save a lot or have a lot. This is how the poor have done it for eons and now the middle class can have a turn.
But this doesn’t mean that Corporate America will die a painful death. They might just keep right on truckin.
I have argued that the crap will hit the fan with the stock indices at all time highs and Unemployment at 9% and everything else that is wrong now is still wrong. Hard to explain that one, yes?
Of course it helps when you have the might of the full Federal Government behind you as well as the FED and the Treasury. They just do not have our backs. Be careful.
Have a good night.