I’m a quarter way convinced mid-sized banks’ stock shouldn’t be publicly traded.
Actually, most of this fixation is directed at grousing at the Fed for creating money, while ignoring the roles of retail banks issuing loans in creating money.
> Creating a successful company creates money.
No, it doesn't.
Creating a successful company creates value. Creating value often results in creating movement of money. The velocity of money in the economy is a loose proxy for the overall health of the economy.
> Crypto created money.
Yes, it did. One of the criticisms of it is that the amount of 'money' it created * the current value of that 'money' is significantly smaller than the amount of value it created.
> Creating a successful company creates value. Creating value often results in creating movement of money. The velocity of money in the economy is a loose proxy for the overall health of the economy.
It creates money in the same way a loan does. There are no new dollar bills printed, and yet people behave as if those dollars are in more places at once. People pull forward future (expected) company revenue to put a current value number on the company and then they exchange money for parts of that company, and adjust their spending habits based on that present value. Like how in a loan they pull forward a future value of the sum of their expected payments on the loan, in order to increase the velocity of those dollars that were loaned out vs them sitting in a mattress.
I suppose my quibble is that the concepts of "creating value" vs "creating money" distinction is largely meaningless in a world where we have so many mechanisms for exchanging money for the expectations of future money or value. Or even for the derivatives of those expectations!
Firstly, I don't think the 'shadow economy' of horse-trading on projected value/cashflows (Which is what investment is, if we reduce it to absurdity) is particularly relevant to the actual act of creating value. It can certainly accelerate/deccelerate it (Speculative investment, versus tightening investment), but it can also operate entirely disjointly from it (Most of the crypto ICO craze.)
> There are no new dollar bills printed, and yet people behave as if those dollars are in more places at once.
They are in more places! Not at once, but they change hands more frequently. You've then gone on to describe ownership of capital, but you've missed the most relevant part - consumer behaviour. Consumers don't exchange money for parts of the company, they don't look at the firm's financials, they exchange money for what the company produces! And the company behaves in the same way towards its suppliers.
Consider a closed village of subsistence farmers who don't buy anything, and make everything they consume with their own hands.
How much value does a peasant create? As much as he consumes.
Now, consider that same closed village, where half the people are growing all the food, and half the people are making all the household goods, and they trade with eachother.
How much value does a peasant create? About as much as in case #1.
What's different about these cases is that money changes hands in the latter. That money can be taxed. That money creates opportunities for employment (Which is very relevant in a modern economy, because most people make their living by working for someone else, as opposed to themselves.)
Is all this a confidence trick? To an extent, yes, but it's a confidence trick that a 'jobs' based society requires to keep functioning.
> I suppose my quibble is that the concepts of "creating value" vs "creating money" distinction is largely meaningless in a world where we have so many mechanisms for exchanging money for the expectations of future money or value.
I largely agree with you in the sphere of 'investment', but strongly disagree with you in the sphere of 'consumption'.
I agree completely about the valuation of circulation, I think I was just getting at it differently when talking about creating a sucessful company "creating money." Thinking about consumer behavior of the founder, investors, and any other employees of that company. They're gonna spend their "actual dollars" much more freely because they have that new asset of ownership of the company in their back pocket. Which increases circulation, taxable receipts, etc etc.
Value is ultimately necessary, yeah, I think that's what you're getting about re: the consumption sphere. Because I believe that most companies produce more real value than crypto, say, I do think real companies are a much better long-term way to go since sooner or later people will notice that gap and start selling their stakes in things not actually bringing in real revenue in exchange for real value with corresponding bad effects on consumption. A company and a crypto token can both give a bunch of early parties a bunch of "new spending power" overnight - but for long-term health, you need something that will continue to reward the next several generations of investors, vs just a greater fool scam.
This is the wealth effect [1].
The proposal is to eliminate fractional-reserve banking, which usually requires public accounts at the central bank [1][2], though in practice, there is no reason each state couldn’t open an account at the Fed, to keep the Fed out of the business of retail banking.
[1] https://www.econstor.eu/bitstream/10419/197911/1/1043494065....
[2] https://www.reuters.com/article/us-swiss-vote-sovereign/swis...
Loans create deposits. (When you're approved for a loan, the bank makes the numbers in your account go up.) Banks don't lend out deposits.
See: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
If you deposit $1000 of cash at a bank, and they loan it to someone else, you still have $1000 of money but now that other person also has $1000 of money.
But the abstract (and more accurate) version is even more interesting. Let's assume the person getting the loan deposits the money at the bank. Now we don't even need to touch cash. Giving out a loan is just adding 1000 to someone's account balance, in exchange for their contract to repay $1000+interest later.
A bank can do this over and over, and each time it creates $1000 of money. And when the loan is repaid, the money disappears.
Unsure. Clearly, Credit Suisse and Deutsche Bank aren't making a case for big banks right now. But in light of TBTF, and the sole benefit of public ownership being scale, the tradeoff just doesn't seem to make sense for mid-sized banks.
First Republic is sweating every down tick. You know who aren't? OneWest. FirstBank. MidFirst. Eastern. Nobody is writing stories about their stock price because it's not publicly traded.
Banks are different. A random drop in their stock price will lead to a perceptions failure that trigger run conditions. This is how Signature and Credit Suisse were, at least proximately, done in. We’re practically seeing it play out again with Deutsche Bank.
Public ownership lets these banks access cheaper capital. But the operational effects of volatility make it seem a bad deal. For the largest banks, if closely supervised, I can see the risks balancing. But for mid-sized banks I don’t.
You have the cause & effect wrong, the stocks tanks because the bank is failing. Tons of banks that are not publicly traded fail too.
In this cycle, Signature and Credit Suisse's stock slides preceded their banking panics. The proximate causation flowed from equity prices, to CDS, to deposits. (The ultimate causation stemmed from a general insolvency. But that's not unique to Signature over its privately-held counterparts.)
> (March 9) Credit Suisse shares drop as annual report delayed following SEC call > Postponement comes as regulator weighs in on 2019 cash flow statements
> (March 14) Credit Suisse finds ‘material weaknesses’ in financial reporting controls > Swiss bank says it lacked effective processes to identify risk of misstatements
Never has is been so easy to shit talk a stonk online and have it matter. We are in the meme stonk phase of capitalism.
The real pros at the grift create SPACs and become stock market influencers.