Links 18 August 2016

Macro & Markets




Terra Specufestorus

…and furthermore…


  1. Have some of this with your morning cuppa…

    The Finance Franchise

    Robert C. Hockett
    Cornell University – Law School

    Saule T. Omarova
    Cornell Law School

    August 8, 2016

    Cornell Legal Studies Research Paper No. 16-29

    The dominant view of banks and other financial institutions is that they function primarily as intermediaries, managing flows of scarce funds from those who have accumulated them to those who have need of them and can pay for their use. This understanding pervades textbooks, scholarly writings, and policy discussions – yet it is fundamentally false as a description of how a modern financial system works. Finance today is no more primarily “intermediated” than it is pre-accumulated or scarce.

    This Article challenges the outdated narrative of finance as intermediated scarce private capital and maps the basic structure and dynamics of the financial system as it actually operates. We begin by developing a three-part taxonomy of ways to model financial flows – what we call the “credit-intermediation,” “credit-multiplication,” and “credit-generation” models of finance. We show that only the last model captures the core dynamic of a complex modern financial system, and that the ultimate source of credit-generation in any such system is the sovereign public, acting primarily through its central bank and treasury. We then trace the operation of this dynamic throughout the financial system, from the banking sector, through the capital and “shadow banking” markets, all the way out to the “disruptive” frontier of peer-to-peer digital finance.

    What emerges from this retracing of the financial system’s operative logic is a comprehensive view of modern finance as a public-private franchise arrangement. On this view, the sovereign public acts effectively as franchisor, licensing private financial institutions to earn rents as franchisees in dispensing a vital public resource: the public’s monetized full faith and credit. We conclude the Article by drawing out some of the potentially transformative analytic and normative implications of a paradigmatic shift from the orthodox theory of financial intermediation to the franchise view of finance.

    Disheveled Marsupial… one can go back a few hundred years and find those that completely understood the ramifications of the full faith of credit [ours] and the consequences of screwing with it… so…. D – e – v – o…

    • “franchisor, licensing private financial institutions to earn rents as franchisees in dispensing a vital public resource” usurious rents

      • Mig…

        It must be remembered that its not a black and white world that transcends time. In some periods which some might distinguish as “virtuous” private banks function as risk mediators wrt the issuance of credit and for that service they should received both a risk premium and attendant profit. Unfortunately there are those that think the wild west ™ is a better way of going on about things, because interfering with people seeking to maximize their utility and potential is grievously affronted by any friction of any sort. These same people also have a hard time entertaining the concept of “public resources” because private ownership and profit preclude such novelties, not that the market demands that everything under the sun is monetized and a price affixed to it, regardless if that is an empirical fact representing the true state or not…..

        Disheveled Marsupial… is there grievous levels of risk premium and profit extraction, absolutely, tho’ this should not be confused with some religious opinion out of antiquity. It should be noted that the taboo on usury was only amongst fellow ethnic religious members and everyone else was fair game. Bad history has a habit of distorting perceptions imo… hope Carlin is helping in this regard, but, there is no such thing as a one stop shop.

      • Nothing to do with religion skip, the profit they make for managing risk comes from underfunding that risk, and maximising profits is the sole responsibility private profit making enterprises. Ergo, things will ALWAYS come to this…

      • Mig…

        I’m sorry, but there is a historical background to all of this, attempts to reduce it to truisms or one size fits all pseudo empiricism is just not an accurate reflection of events. We can easily observe the dominate thinking pre Great Depression and the post periods, w/ the interim, and the reversion to mean from the 70s onward. This state of affairs is not just relative to banks or government, but society as a whole and those directing / dictating the perspective.

        Disheveled Marsupial…. what I find curious… is how once esteemed persons of the faith are readily thrown to the lions as blasphemers without any deeper introspection by the clergy and attendant flock…

    • Skippy,

      That is an excellent article and everyone should spend some time to read it.

      I almost like the “Franchisor / Franchisee” articulation as much as a “Public / Private fusion of Public Money creation power”.

      Could almost squeeze in “Private Banker Pseudo Fiat creation” as part of the Franchise agreement.

      Page 59 onwards is good but leaves us waiting for Episode 2.

  2. Straya! Good government starts… Oh forget it

    “Doubtless, the opposition’s approach is churlish, but novel it is not. It was first legitimised by the Abbott opposition against Julia Gillard.

    Back then, her minority government needed every number to survive and the hyper-partisan Abbott, aided and abetted by Christopher Pyne, and Scott Morrison, was determined to bring it down, no matter what Westminster conventions were trashed, or conceptions of the national interest invoked. A cleaner case of party before country is hard to cite.

    It set a low tone for a low period”

    • “The last month or so of Trump-Hillary coverage may have been the worst stretch of pure journo-shilling we’ve seen since the run-up to the Iraq war. In terms of political media, there’s basically nothing left on the air except Trump-bashing or Hillary-bashing.”

      Gets worse every election

  3. This site is damned near unuseable!

    Here’s an interesting theory about why the dollar is dropping – Market Watch””

    Good observations but not sure the writer grasps the long term macro involved. Fundamentally there is a flood of USD across the world. The article does record that maybe the world has got enough of the damned things!
    Note the US has pulled a great trick with the USD by printing them to pay for everything. Once they are printed and accepted as payment they are out there be it in the form of USD or Treasuries.The only way they can be redeemed is to buy real US assets and the effects of this are already apparent in many parts of the US.
    Perhaps the demise of the USD might be quicker than some currently surmise.

  4. Pound spikes after UK inflation hits highest level since November 2014 after Brexit vote– Telegraph””

    The insanity of modern economics and monetary theory clearly illustrated! The inflation figure is high which means your currency is declining in purchasing power yet its value goes up? The stupidity of this freeforall is just plain to see yet nobody can see it? Nuts!

  5. “”RBA governor Glenn Stevens warns on foreign investment, housing inequality”
    JHC!!! The RBA has had this selling off any and all assets to foreigners to finance lower interest rates and the CAD is its POLICY for as far back as I can remmeber. Now Stevens is coming out and warning about it. Yet not a single commentator ANYWHERE, including MB, comments on this and the sheer unadulterated lying hypocrisy of what is going on!
    This has been going on for 60 bloody years!!!!! Strewth! Unfortunate;ly it is not just Stevens who is so stupidly arrogantly ignorant (or deliberately treacherous) on this. The whole of the Aus academic economic community should immediately resign ALL their positions and issue a giant public apology to the Australian people. Then we can get on with pilloring, in its strictest sense, the bankers.

    We want returned to us all Glen’s salary plus all the salaries and bonuses of bank execs of the past 50 years. In addition the forcibly retiring academics should have all super benefits totally confiscated.
    The treachery and greed that has been involved in this totally corrupted system is beyond the imagination of the ordinary person.
    “”Mr Stevens also warned about increasing social problems because of high home prices.””
    AGAIN this was the stated policy of the RBA in its arguments for reducing interest rates. Booming home prices were the ‘rebalancing’ mechanism!!!
    Does not a single person remember this stuff in the RBA minutes?

    Sorry got to go ring a carpenter to put back up the walls of my office!

  6. Philippines’ Universal Robina snaps up Aussie snack maker for $460 million”””

    You bloody bewdy! That keeps us solvent for another 3 days!!!!! 3 bloody days! One wonders what we are planning to sell next Monday to keep us afloat!

  7. Bretton Woods: RIP – Marc to Market

    “”To be sure, floating, and therefore volatile, exchange rates are not ideal, but they seem preferable to the alternatives. They serve as another shock absorber in the dynamic system of modern capitalism.””

    What complete and absolute BS! Theoretically flexible exchange rates should act as a stabilising influence in an economy. However in a world where trade imbalances are over-shadowed by uncontrolled insane levels of money/credit printing associated with then totally open çapital markets” (what a misnomer – RIGGED capital markets more like)

  8. This is what it’s like trying to attract and retain tech talent in Australia – Matt Barrie
    Well worth the read. Couldn’t have said it better myself. Hits all my usual points about technology / Stem reform requiring a real change in Australian Primary schools and High Schools.
    Unfortunately I suspect he’s preaching to the choir, I get the feeling these words will only have real meaning when Australia’s Bankers and Bogans can repeat them without a crib sheet. Sorry Matt but I’ve lost my faith.