One more for the Banking School. This is a thought-experiment to help us clarify our thinking about banks.
If banks bought houses, instead of lending people the money for people to buy houses, what would be different? Not much.
But we students of money and banking would avoid some common mistakes, like confusing the demand for money with the demand for loans. And we would see that financial intermediation has no necessary connection with money.
Suppose there were some prohibition (motivated by religion or politics or whatever) against banks charging interest on loans. But no prohibition on banks charging rent on houses they own. So banks stop making loans and start buying houses instead.
The asset side of banks' balance sheets would be diffferent: banks would own lumpy and illiquid houses instead of lumpy and illiquid mortgages on houses. Banks might need higher capital ratios, because houses are normally riskier than mortgages on houses. But the liability side of banks' balance sheets could be exactly the same as now. Some of the things on the liability side, like chequable demand deposits, could still be used as money, just as they are now.
People would pay rent to the bank, instead of paying interest to the bank. So banks would earn rental income from their assets instead of interest income. The revenue side of their income statements would look a little different, but banks would still make their living from the spread between the low yield on their liquid liabilities and the high yield on their illiquid assets.
So not much would change.
But it would be a lot simpler to teach money and banking.
Instead of: 1. me promising to repay a loan from the bank; 2. the bank crediting my chequing account for the amount of the loan; 3. the bank debiting my chequing account when I buy the house; 4. and the bank crediting the house seller's chequing account, — we can skip all but the last step. The bank buys the house by crediting the house seller's chequing account. Period. What happens to the money after the house seller gets it is exactly the same in both cases. And that's the important part. That money keeps on circulating around the economy. Until the bank sells a house, which destroys the money it had previously created.
It is very easy for students of money and banking to get confused between the demand and supply of money and the demand and supply of loans of money. It would be very hard for students to get confused between the demand and supply of money and the demand and supply of houses. But the two would nevertheless be related: the demand for houses by banks would be exactly the same as the supply of money by banks. (You can define them both as stocks, or both as flows, whichever you find more convenient.)
But an excess supply of money by the non-bank public wouldn't necessarily mean an excess demand for houses by the non-bank public. There are lots of other things you could buy if you wanted to hold less money.
If people wanted to hold more money, a good monetary policy would try
to ensure that this resulted in banks wanting to hold more houses. Otherwise we would get recession and deflation, as people tried to hoard money.
And
if people didn't want to hold more money, a good monetary policy would
try to ensure that banks didn't want to hold more houses. Otherwise we would get boom and inflation, as people tried to spend away the excess money.
If banks both bought and sold houses, and announced a price (or price/rental ratio, or rental yield) at which they were willing to buy or sell unlimited quantities of houses, we know that the housing market would always clear. The stock of houses demanded by the non-bank public at the price set by banks would always equal the stock of houses they actually owned. If the non-bank public had an excess demand for houses, they would immediately buy them from the bank. If the non-bank public had an excess supply of houses they would immediately sell them to the bank. But that wouldn't mean the stock of money demanded by the non-bank public would always equal the stock of money they actually owned. The market for houses is not the same as the market for money. The market for houses is just one of the many markets for money.
But if banks bought houses, instead of lending people the money to buy houses, then banks, strictly speaking, wouldn't be banks. They would act almost exactly like banks, but we wouldn't be allowed to call them "banks". Because banks, by definition, are financial intermediaries whose liabilities are used as money. And a financial intermediary both borrows and lends, and the "banks" in my thought-experiment don't lend. They buy houses instead. They create money not by making loans, but by buying houses.
But if the "banks" in my thought-experiment act like banks, but don't meet the strict definition of being banks, maybe we should change the definition? Does a bank that is left holding the houses when all its mortages default, but is still a going concern because it has adequate capital, suddenly stop being a bank, by definition? That isn't a very useful definition.
Maybe we should change the definition to: a "bank" is anything that creates money. What it spends that money on is immaterial. It could buy houses, buy financial assets backed by houses, or it could just give it away to charity, or by dropping money out of a helicopter.
What should our slogan be? "Loans create deposits!"? Maybe. "Buying houses creates deposits!"? Maybe. "Creating deposits creates deposits!". Better. "Creating money creates money!". Yep, that's it.
The one truly important and puzzling thing about banks is that people are willing to use their liabilities as a medium of exchange. But that's equally important and puzzling about any thing that creates money, whether it's a financial intermediary or not.
Worthwhile Canadian Initiative 
Too Much Fed: Ah! 3:02 AM. Well let’s map that out (assume X is some asset with some risk between 0 and 1)
bank: A: 200 X, L: 200 deposit, E: 0
TMF: A: 200 deposit, L: 0, E: 200
I start off the bank with 200 X because it’s hard to imagine the bank starting with negative equity. Now you buy shares:
bank: A: 200 X, L: 0, E: 200 (shares)
TMF: A: 200 shares, L: 0, E: 200
So now if the risk weighting for x is 1, then the CAR = 100%… so let’s assume X is instead Tsy debt with a risk weighting of 0. Then CAR is infinite. The bank’s in good shape. So now they buy a house from me (and I have a deposit at that bank):
bank: A: 200 X + 200 house, L: 200 deposit, E: 200 shares
TMF: A: 200 shares, L: 0, E: 200
TB: A: 200 deposit, L: 0, E: 200
Say the house has risk weighting 1, then the CAR = 1 still, so you’re OK!
Tom, use Ctrl and F. Type 800,000.
Fed Up: so I guess it depends on what the risk weighting for X is. If the bank starts off with a clear BS (no X no nothing!) and your deposit was at another bank, then X would be reserves after you purchased shares, which (like Tsy debt) has a risk weighting of 0.
Odie, you can destroy bank deposits by withdrawing them as cash. So that’s true. Destruction there’s a method for in both cases, but creation is different.
Tom, Sure banks are illiquid when there is a bank run. They can try sell their financial assets in the interbankmarket. Usually not a problem for treasuries and other very secure assets. If all else fails, that is why we have the Fed. It will provide the bank with money (reserves or currency) for their illiquid financial assets, and I think you know that.
For your example with the 100 % treasuries as assets. You know double entry bookkeping, right? Ok, the bank wants to credit their employees account, where is the corresponding credit? That HAS to happen at the same time, not a day, week or month later.
For your examples that you posted on your website or Joe’s answer: Again, where is money being created? You always assume the bank already has positive equity. What happens if it does not?
Odie said: “I get that in your model the bank would buy the house with newly created money but that is currently not possible for banks as we can see empirically. There is a simple reason: regulations. Imagine a bank’s depositors would demand currency/cash out their accounts. The bank does comply with that by selling assets to the Fed who supplies the bank with currency. For your picture to work the Fed would need to accept houses as assets in order to provide banks with liquidity. It does not. We can discuss whether that makes sense or not but that would be an academic argument, not really something that applies to our current monetary system.”
Looking at the fed’s balance sheet prior to 2008, it appears it wants treasuries for currency. The bank would need to sell the house (or mortgages) for treasuries and then swap the treasuries for currency.
Odie, here’s the BSs:
Bank: A: $100 Tsy debt, L: $50 reserve loan, E: $50 = assets – liabilities
Employee: A: $0, L: $0, E: $0
After payday:
Bank: A: $100 Tsy debt, L: $50 reserve loan + $10 deposit, E: $40
Employee: A: $10, L: $0, E: $10
Grocer: A: $0, L: $0, E: $0
After grocery store visit (I use my bank card or write him a check):
Bank: A: $100 Tsy debt, L: $50 reserve loan + $10 deposits, E: $40
Employee: A: $3, L: $0, E: $3
Grocer: A: $7, L: $0, E: $7
When the bank buys and sells it might affect it’s equity. When you or I buy or sell we don’t affect the banks equity.
The point is that deposits are a medium of exchange for us, just like Fed deposits can be a medium of exchange for banks. If the bank anticipates that the employee or the grocer might want to withdraw some portion of their deposits as cash it can prepare for that. Suppose it thinks we might want up to 10% of our deposits as cash: then it sells $1 worth of Tsy debt for cash and keeps it there in its vault or ATM. If the ATM runs dry they get more, and update their estimates for the future. I’ve had it happen to me! (the ATM near me runs out of cash).
If you want to know what happens with more than one bank and the reserve accounting, I cover that in my Examples 1, 1.1, 1.2, 2, 3, 3.1, 3.2. Again super simplified, but ultimately a little bit uninteresting. Aggregating the banks adds some clarity most of the time, IMO. In this case the bank can repo its Tsy for reserves to transfer, and then borrow those back from the interbank market… or it can simply let itself be overdrafted and then borrow the reserves. You know the excess reserves are out there!… perhaps at the receiving bank (like in all my examples). Or the discount window stands ready too (as a last resort).
The “Assets” side of the employee’s and grocer’s BSs, should be labeled “deposits” after the $ amount.
… again, one in spam for me. It must be like a 100 character cut-off.
Tom, saw your other comment so asked you the same question slightly differently, http://pragcap.com/can-banks-force-the-fed-to-increase-base-money/comment-page-1#comment-156069 .
Odie that’s a good point. Banks in the real world create assets with high moneyness (as opposed to the bank that buys houses).
Odie, “where is the corresponding credit?” .. in spam
jt26, I answered. Nick actually has a lot of posts on this. Just type in “reflux” or “helicopter” in his search box. Also the “banks are special” post is good when he talks about the painter vs the bank.
And of course I forget Mike Sproul: his comments (pro-reflux) are in this post (hit “previous”) and on many of the others.
Odie, more in spam, but you mention bank runs… exactly! That’s all you described before with my $100 Tsy bonds and $50 reserve loans (and $50 equity) example. But the deposits themselves can be used for an MOE, and often are. Should the bank store 10% cash ($1 in the case of paying someone with a $10 deposit) to guard against runs? Sure… if they want. That’s their decision. Bank runs are not what they used to be (1930s and prior style). Now they’re mostly just an inconvenience… they’re hardly a run really at all. It’s just the bank can run out of cash if they plan poorly: they can always obtain Fed deposits on a moment’s notice (it takes what?… 3 days to clear a check still? PLENTY of time there!). There’s no panic element anymore. The base money can always be had, since it’s no longer gold. My balance sheets are in spam.
Odie, you write:
“You always assume the bank already has positive equity. What happens if it does not?”
Check my comment at October 01, 2013 at 02:07 PM on the previous page of comments: the bank starts out with a completely empty balance sheet in that case.
Tom Brown:
“if you were invited to design the monetary systems for two (or more) separate brand new Martian colonies…”
Sorry Tom, I didn’t see this earlier.
To test the validity of the QT vs. the BT, we just have to remember that the BT says that the value of money depends on the ratio of money (M) issued to the issuer’s assets (A), while the QT says the issuer’s assets are irrelevant, and the value of money depends on the ratio of money to goods produced (Q). (The BT says quantity of goods produced is irrelevant.)
So in an ideal experiment, I’d vary M, A, and Q every which way, and see if the value of money is explained better by M/A or by M/Q.
Mike, thanks.
Nick, do you agree?
Mike, what do you think of this kind of analysis?:
http://howfiatdies.blogspot.com/2013/09/usa-hyperinflation-risk.html
Tom: no. Because desired velocity is a function of the interest rate differential between money and alternative assets. If you estimated a money demand function, and found that it was always perfectly interest-elastic, I would accept the backing theory. Because the value of money, like the value of bonds, would equal the present value of the stream of returns to holders of money. But we know that is empirically false. Witness Zimbabwe. It took a massively negative real rate of interest on Zimbabwean currency before it became worthless.
But Mike and I have been down this road too many times, and never convince the other.
Nick, thanks. I wish I understood that… but I’m going to mull it over and see if a light goes on.
Nick, three questions:
1. What is “desired velocity?”
2. I’m trying to imagine the perfectly interest-elastic demand curve: x-axis is quantity of money (M), y-axis is interest rate, and the demand curve is horizontal, intersecting the y-axis at some interest rate. Is that correct? So a small change in interest rates causes unbounded changes in the quantity of money demanded?
3. So in your Zimbabwe example we don’t see a curve like I’ve sketched in 2.: the quantity of money demanded was not sensitive to small changes in interest rates. Is that it?
Nick
“It is very easy for students of money and banking to get confused between the demand and supply of money and the demand and supply of loans of money.”
I can’t help thinking that your n-1 markets concept makes it easier to get confused on this.
I much prefer to think of things in terms of n markets with each agent subject to a budget constraint and where the market is just a measure of the overall demand and supply in each good. The market for loans is then clearly a different market to the market for money balances. However the budget constraint of banks (in the simple version where banks have only loan assets and money liabilities) implies that the supply of money must equal the demand for loans. Rather like a single factor produced, constant-returns-to-scale good, where the supply of the good must be strictly proportional to the demand for that factor.
I don’t expect to convince you on this, but I certainly find it clearer looking at it this way.
Nick Edmonds: “…implies that the supply of money must equal the demand for loans.”
I think you misstated what you meant to say. This is where imagining that banks bought houses really does clarify things.
Banks’ supply of money (the quantity of money banks wish to sell) is the same as banks’ demand for houses (the total monetary value of the houses banks wish to buy).
Now go to the real world, where banks mostly buy IOUs signed by the public instead of houses, and that same sentence becomes:
Banks’ supply of money (the quantity of money banks wish to sell) is the same as banks’ demand for IOUs signed by the public (the total monetary value of the IOUs signed by the public banks wish to buy).
What you said isn’t correct, because you said “demand for loans” which presumably means the non-bank public’s supply of IOUs signed by the public (the value of the IOUs signed by the public they wish to sell).
(“Supply” does not mean “quantity sold”, and “demand” does not mean “quantity bought”. Because quantity sold must always be the same as quantity bought, by definition.)
Apologies. I wasn’t being clear. I was using demand and supply consistently in the context of financial assets, so that demand always meant the desire to hold an asset and supply always meant the desire to be subject to the liability.
A bank’s demand for loans, to me, always means the amount of loans the bank wishes to hold as assets, but I agree that “demand for loans” is often used to mean how much people wish to borrow.
Nick, Sorry for chiming in in your discussion with Nick E. but something feels not right here. You say:”Banks’ supply of money (the quantity of money banks wish to sell) is the same as banks’ demand for IOUs signed by the public (the total monetary value of the IOUs signed by the public banks wish to buy).”
Let’s take a different business to see whether that sentence makes sense. For a car dealer it would say: The car dealers supply of cars (the quantity of cars it wishes to sell) is the same as its demand for money (the total value of money it wishes to buy). Now, I would argue that the demand for money is (at least theoretically) infinite. Nevertheless, the number of cars sold is not and probably much lower than the potential supply. Why? Because it is a transaction between a seller and a buyer, the car-buying public. For them your sentence would be: The publics supply of money (the value of money it wishes to sell) is the same as its demand for cars (the total number of cars it wishes to buy). Again, if money would not be an object the demand for cars can be assumed infinite. However, there will be a price and quantity at which supply of cars (by the dealer) and demand for cars (by the consumer) will intersect.
Translating that to banks and the public, I think the proper supply-demand relationship would be: The banks supply of money is the same as the public’s demand for loans with the interest rate being the price. This assumes banks have an infinite desire to hold IOUs (those are interest bearing and therefore income for the bank) and the public has an infinite desire to hold money (I would say that is a given). In addition, the banks would like to not sell any money if they could while the public would like to not take out any loans if they could.
I think that is what Nick Edmonds wants to say in his post.
Tom, You are right; I have to take back my “Absolutely”. The bank can deposit the employees account by just drawing on its capital (equity). However, that would only be a temporary fix as any withdrawal by the employee would require the bank to either sell assets, borrow reserves, or attract further capital or deposits (unless the other party is at the same bank). With assets consisting only of 100 % Tsy the bank would be illiquid.
Nevertheless, I think we got away from the actual question that is what assets can banks acquire with liabilities (deposits) versus capital (equity). Let’s assume the following bank balance sheet with zero capital:
Assets: loans 80, cash 20 Liabilities: deposits 100 Equity: 0 (Again, different from your examples where banks had equity or immediately created it through interest or fee income.)
A few scenarios:
1) The bank wants to pay its employees: I think impossible, would result in negative equity.
2) The bank wants to buy a house: From a strict accounting perspective possible. It would swap some asset (cash) for another asset (house). Nevertheless, now assume the bank does not hold loans but only houses for a value of 80 (as per Nick’s example). Now, the depositors want to take out 50. How can the bank get another 30 in cash? Banks not buying houses is for the simple reason they are illiquid plus regulatory problems (plus they require maintenance, taxes etc).
3) The bank makes another loan of 10: Loans increase to 90, deposits increase to 110, E = 0 still. No problem, if there is no capital requirement.
If banks want to make money in real estate they will start a subsidiary company, equip it with capital (e. g. by making loans to it) and then have it buy houses. That would be one of the those “off-balance sheet” risks.
Odie, Qs and Qd are defined in context of a particular price, not in general. A car dealership, which can only trade cars for money, has a well-defined Qd for money at the price (in cars) it has to pay, and that Qd is equal to the price (in money) of the cars times its Qs for money.
Sorry, that very last bit should have been “its Qs for cars”.
Tom,
“Mike, what do you think of this kind of analysis?: http://howfiatdies.blogspot.com/2013/09/usa-hyperinflation-risk.html”
I looked the link and that analysis does not make sense. In the first graph, he adds up federal debt plus federal deficit. However, the debt is the sum of all deficits. Thus, he is essentially counting the same thing twice.
Odie, I agree there are practical problems regarding banks buying houses rather than loans, which you point out. But it could be anything. Imagine they bought gold. Again, it’s slow to transfer, etc, but alleviates some of the problems you bring up.
bank: A: 0, L: 0, E: 0
me: A: 10 (gold), L: 0, E: 10
Now the bank buys my gold and issues me a liquid deposit instead:
bank: A: 10 gold, L: 10 deposit, E: 0
me: A: 10 deposit, L: 0, E: 10
Maybe they think I might withdraw up to 1 as cash, so they sell some gold to prepare:
bank: A: 9 gold + 1 vault cash, L: 10 deposit, E: 0
me: A: 10 deposit, L: 0, E: 10
… of course gold has the problem that it doesn’t generate any income!… which I think makes houses a better analogy for Nick’s purposes. Since that’s his goal here overall, right?
Odie, let him know. 😀
(I asked Mike because Mike had helped him earlier w/ his RBD analysis)
Alex,
Does that not assume that the car dealer has a fixed Qs? I would argue that the quantity which could be supplied by the car dealer is always larger than the quantity demanded by the public as long as the price stays above expenses.
However, there are some important differences when you look at banks. First, price is set exogenously by the Fed. The spread between interest income minus interest payments on the corresponding deposit will always be positive for the bank at the time a loan is made. The quantity supplied is unlimited (unless the Fed holds back reserves and risks a crash of the banking system). Hence, the real constraint is the quantity of money demanded by the public. We should also not forget that the public just rents the money it does not own it. (Maybe I should have chosen a car rental place, instead, thinking about it).
Tom,
Sure, I actually think banks can hold gold and it has some features that are attractive like low maintenance cost and clearly defined unit (weight). However, look at how much gold prices fluctuate; what does the bank do when gold goes down by 2? Again, an accountants nightmare.
Odie,
I’m afraid that was not what I was trying to say. I was saying exactly the same thing as the line you quoted from Nick R., but I was using the word “loans” to mean what Nick calls “IOUs signed by the public”.
This latest point makes me think that maybe part of the confusion concerns the way people talk about “demand for loans”. Mostly when we talk about demand in relation to financial instruments, we mean the desire to hold or increase holdings of assets, whether that is bonds, equities or money balances. This is consistent with demand for non-financial assets meaning the desire to undertake an item of expenditure. Both relate to debit items in accounting terms.
But if “demand for loans” means the desire to increase liabilities, then it is like a credit item – the opposite treatment to everything else. This means that if you are thinking in general equilibrium terms, you need to flip it and remind yourself that “demand for loans” is really a supply of something (IOUs if you like).
Sorry Nick E. that I misunderstood you. Maybe it is because I do think banks have an infinite demand to hold loans as assets. Since they know loans will create equal deposits and the Fed will do whatever it can to provide liquidity if needed there is no constraint in the amount of loans banks can put on their balance sheet. The real constraint for banks is to find creditworthy borrowers. Heck, which creditworthy borrower had ever been denied a loan by a bank? Since those loans mean income why would a bank refuse to supply as many as there is demand for it?
Now the emphasis is on “borrower”. The bank expects to get their money back plus interest. Think of Redbox: What is their constraint? The amount of movies they have available or the number of people who want to rent a movie?
P.S. What I essentially want to say is that there is an unlimited desire to hold assets (loan for the bank, money for the public) while no one really wants to hold the associated liability (deposit for the bank, loan for the public).
Nick E: OK. I understand you now. Carry on. 🙂
test
Tom at 04 : 20. So if the risk weighting is 1, then people can still borrow money from the bank to help buy a house. The bank would be limited by the amount of money saved as bank cap.
Sound good?
Nick, the spam filter needs some work.
Too Much: when the risk weighting is 1 on X to start out with, you’re just barely meeting the capital requirement if it’s 100%. Now you can buy a house only if it has risk weighting 0. If X has a risk weighting of 0, then you can buy a house with risk weighting 1. In this particular example (with the dollar amounts given). A general rule for this example is that the risk weighting of X and the house have to add up to no more than 1. Let’s write out a more general rule:
(bank_equity)/((risk_weight_X)(value_of_X) + (risk_weight_house)(value_of_house)) >= cap_req
Where cap_req = 1 for a 100% capital requirement. That’s just the normal CAR formula.
That should be So if the risk weighting for houses is 1.
Odie:
OK, let’s clarify some terminology here:
Supply: a curve that represents the relationship between the price of a good and how much of that good suppliers are willing to sell
Quantity supplied (Qs): given a price, the realized quantity that suppliers are willing to sell
Quantity traded (Qt): given a price, the realized quantity of the good actually traded between sellers and buyers
Quantity demanded (Qd): given a price, the realized quantity that buyers are willing to buy
Demand: a curve that represents the relationship between the price of a good and how much of that good buyers are willing to buy
Normally Qs = Qt = Qd; in some cases you may have Qs = Qt < Qd (e.g. a price ceiling) or Qs > Qt = Qd (a price floor).
For a given price, Qs is indeed fixed. However, monopolistic competition is like a price floor in that the monopolist will generally set a price above MC and so would have a Qs > Qt = Qd.
This is only true if you model the central bank as targeting a rate of interest. In the short term, that is in fact what the CB does. However, at regularly intervals the central bank adjusts that rate of interest in response to real economic conditions, and part of its calculation directly or indirectly involves its predictions of “what will the public’s quantity of money demanded be if we choose X as the rate of interest?”. Thus over the medium term the supply of money is not demand-determined, but rather controlled by the reaction function of the central bank.
And of course, you can easily imagine a central bank that doesn’t target interest rates even in the short-term, and that central bank could very easily set the quantity of money to something other than the public’s quantity demanded.
Odie: “The quantity supplied is unlimited (unless the Fed holds back reserves and risks a crash of the banking system). Hence, the real constraint is the quantity of money demanded by the public.”
Nope. Translate that into houses. If banks set the price of houses, and buys whatever quantity of houses the public wants to sell, the increase in the quantity of money is determined by the quantity of houses the public wants to sell. But the quantity of houses supplied by the non-bank public is NOT the same as the quantity of money demanded by the non-bank public.
Tom B
“Mike, what do you think of this kind of analysis?”
He talks about velocity of money, and I never speak of it. For the same reason, I never talk about the velocity of shares of GM stock, or the velocity of T-bills or houses. It’s just a magical variable that allows quantity theorists’ models to be right all the time.
Mike, Ha!… OK… so what do YOU think that Nick meant by “desired velocity?” (see my comment above at October 01, 2013 at 11:09 PM). How about questions 2 and 3? I know that’s not your thing, but in your estimation am I on the right track there re: Nick’s argument?
… keep in mind I’m just trying to digest both arguments at this point, “magic” or otherwise. Thanks.
I got to this late. When I saw the title, I thought it was commentary on what was happening in the Canadian housing market. Where according to the bears, the banks (or the CMHC…) are effectively buying houses already..
But as noted above (by somebody?) the equity of homeowners is critical for banks in the real world. You need something like Islamic finance to get this to work. There is a big difference between being a renter vs. a owner in terms of incentives for home maintenance, even if your equity slice is small. For someone who looks at bond markets, this is interesting. The argument was that London developed into a financial center because it had the banks that were able to provide the leverage for the bond market. Paris lacked the banks, and so was not able to build a bond market to the same size. Under this way of looking at the world, the bond market is an extension of the banking system, but the banks need someone who is willing to speculate and take the equity position in the bond.
But I think agree with Nick (Rowe) if I understand him – banks are not special; anyone who can issue money is special. (Minsky had a saying about that – something like – anyone can issue money; the trick is getting people to accept it.) When you consider things like vendor finance, or that Kuwait (?) had a stock market bubble financed by post-dates cheques, it is clear that financing can get complicated.
Brian: “Minsky had a saying about that – something like – anyone can issue money; the trick is getting people to accept it.”
I love that saying!
“But as noted above (by somebody?) the equity of homeowners is critical for banks in the real world.”
I wonder. If homeowners put their equity into bank shares instead of houses, banks could then buy the houses because they would have the capital cushion to offset the riskier asset. (There’s some sort of Modigliani-Miller theorem at the back of my mind).
“There is a big difference between being a renter vs. a owner in terms of incentives for home maintenance, even if your equity slice is small.”
My guess is that’s the important thing. But then renters do exist (because there are various offsetting benefits, like if you move around a lot, or don’t have much equity), so why don’t banks merge with companies that rent apartments?
“Where according to the bears, the banks (or the CMHC…) are effectively buying houses already.”
I was wondering whether to explore that possibility, but decided against.