Dear,
Common opinion says that we’re in this recession because Bankers have become insane and play Casino instead of giving credit.
I wish it was that easy, if that was the case fixing the problem would be as easy as implementing stronger regulation penalizing speculative investments. That will happen and it will be part of the solution, but it’s not “the solution”.
This is a Depression triggered by a crisis of Solvency; without economic growth the world’s debt is unpayable and economic growth is not possible due to the scarcity of resources (oil, gas, financial solvency, etc).
Since October 2008 the proposal has been injecting liquidity financed with more debt (Quantitative Easing cycles and Bail-Outs).
Has anybody thought how can we fix a crisis of debt with more debt? For me this is like putting out a fire with gasoline.
Bankers claim that lending is impossible if there’s no solvent demand, and there’s no solvent demand because there’s no economic growth.
But on the other hand central banks are injecting a huge amount of liquidity on the system, and the banks use this liquidity for buying public debt.
The question is; are banks buying that debt expecting future cash-flows? Not really, they’re buying bonds because they’re a quite liquid asset and they expect to make profit by selling the asset to new buyers.
It’s a purely speculative/casino game, I buy an asset because I expect an increase on its price in the short term.
Actually, as Warren Buffet pointed out brilliantly last week, the current interest rates are artificially low which makes the bonds price artificially high (remember the price of the bonds has an inverse relationship to their yield). As a consequence, any future increase on the interest rates will make the bubble burst.
http://bonds.about.com/b/2013/05/07/warren-buffett-bonds-are-a-terrible-investment-right-now.htm
Don’t forget that Banks are private companies, and their executives are supposed to generate profit for paying dividends to shareholders and get their bonus. If the most profitable business is short-term speculative investment, it’s common sense to take part on it.
The alternative is tackling the solvency issue and there’re only three ways to do it.
- Economic Growth. Not expected soon.
- Recapitalization. Somebody has to provide the funds.
- Bail-In. That’s the Cyprus alternative we discussed some weeks ago. But, are you ready to accept it?
In the meantime, enjoy the game.
Looking forward to read your opinions.
K. Regards,
Ferran.
Common opinion says that we’re in this recession because Bankers have become insane and play Casino instead of giving credit.
I wish it was that easy, if that was the case fixing the problem would be as easy as implementing stronger regulation penalizing speculative investments. That will happen and it will be part of the solution, but it’s not “the solution”.
This is a Depression triggered by a crisis of Solvency; without economic growth the world’s debt is unpayable and economic growth is not possible due to the scarcity of resources (oil, gas, financial solvency, etc).
Since October 2008 the proposal has been injecting liquidity financed with more debt (Quantitative Easing cycles and Bail-Outs).
Has anybody thought how can we fix a crisis of debt with more debt? For me this is like putting out a fire with gasoline.
Bankers claim that lending is impossible if there’s no solvent demand, and there’s no solvent demand because there’s no economic growth.
But on the other hand central banks are injecting a huge amount of liquidity on the system, and the banks use this liquidity for buying public debt.
The question is; are banks buying that debt expecting future cash-flows? Not really, they’re buying bonds because they’re a quite liquid asset and they expect to make profit by selling the asset to new buyers.
It’s a purely speculative/casino game, I buy an asset because I expect an increase on its price in the short term.
Actually, as Warren Buffet pointed out brilliantly last week, the current interest rates are artificially low which makes the bonds price artificially high (remember the price of the bonds has an inverse relationship to their yield). As a consequence, any future increase on the interest rates will make the bubble burst.
http://bonds.about.com/b/2013/05/07/warren-buffett-bonds-are-a-terrible-investment-right-now.htm
Don’t forget that Banks are private companies, and their executives are supposed to generate profit for paying dividends to shareholders and get their bonus. If the most profitable business is short-term speculative investment, it’s common sense to take part on it.
The alternative is tackling the solvency issue and there’re only three ways to do it.
- Economic Growth. Not expected soon.
- Recapitalization. Somebody has to provide the funds.
- Bail-In. That’s the Cyprus alternative we discussed some weeks ago. But, are you ready to accept it?
In the meantime, enjoy the game.
Looking forward to read your opinions.
K. Regards,
Ferran.
1 comment:
Thanks for the informative article.
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