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Financing Infrastructure Buildout

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We’ve discussed, on your forum, about infrastructure. Why do we need to fund infrastructure in the Keynesian way of deficit spending? We have a decent size to our banking system, so why can’t we just raise capital ratios to ~20-25%, then take ~$1-1.5 trillion of that capital raised in the banking system to purchase shares in a newly created Federal Infrastructure Bank (FIB).

The FIB would have a capital of ~$1-1.5 trillion from private capital and we can add in public capital if necessary. The asset size of it could be ~$3-4 trillion of financing to fund all kinds of projects ranging from a smart grid to lay out an infrastructure which can finance renewable energy to a federal high-speed rail grid connecting all major urban centers across the country to rehashing old nuclear power plants to rehashing our old hydroelectric energy to rebuilding dams/levies, and so forth.

The idea here would be to set a growth target of ~4-5% over ~15-20 years driven by a large infrastructure build-out. If something starts to wrong or if debts start to rise or if there’s trouble that starts to build up, we can easily counterbalance it by increasing capital ratios.

I don’t see why we need a Keynesian infrastructure type of system when we can have a Hamiltonian structure to finance a much larger infrastructure build-out to drive growth for decades by laying out a federal infrastructure base for the next ~100-150 years. Again, this is a fundamentally Hamiltonian model.

I just wanted to get your take on something like this, how it’d work, what the drawbacks would be, and what the risks are that I’m not seeing. If there’s anything that starts to go wrong, we can fix it by simply raising capital ratios.

I go into this proposal in more detail in my most recent blog post, which I linked below.
http://suvysthoughts.blogspot.com/2017/03/structural-goals-of-development-model.html

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Posted by Suvy Boyina
Posted on 05/05/2017 3:01 PM
251 views
Private answer

I have been in favor of this for years.
http://www.publicbankinginstitute.org/

I understand that Cullen is all about how our system actually works today (e.g. MR). If we can understand that, then we can think about the aspirational ideas that might make a tremendous amount of sense. But I have not seen him weigh into these great and/or stupid aspirational ideas very much. I wish he would. I’ve asked way too many of those type of questions already, and I know have you as well.

That typed. If we understand how it is today, then this is the perfect place to explore these things because we have a basis of understanding that most of the numbskulled folks in economics apparently don’t have. A thumbs up or a thumbs down would be fun, even if it is just our dreaming.

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Posted by Dennis
Answered on 05/06/2017 2:50 AM
    Private answer

    One more point. I have always been of the opinion that Ellen Brown is a bit “over the top” on conspiracy theories. But if we take a close look at Cullen’s MR TODAY, it has not been updated to consider the impact of Trumps’ policies that change the MR. We might just have a conspiracy impacting our private banks “comin’ round the bend” with so-called deregulation. The attack on Janet Yellen (now apparently defunct for a time), together with a yuuuge budget and taxation reform, may change our MR.

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    Posted by Dennis
    Answered on 05/06/2017 3:12 AM
      Private answer

      Suvy – “so why can’t we just raise capital ratios to ~20-25%” Plenty of reasons really. Raising capital ratios to 25% would be a pretty Herculean task. To do so quickly would involve either banks stopping all new lending and calling in as many loans as they could to reduce the denominator in the capital ratio, or they would have to persuade holders of money to give up their money and accept bank shares instead – to increase the numerator. Both actions would have major ramifications for the wider economy. Capital can also be increased more slowly by retaining profits in the bank and not paying out any dividends until the required ratio is reached. This will be a slow process, but will also have knock on effects – particularly for holders of bank shares.

      Having answered your first question, I have to say I’m a bit stumped by the next suggestion. Total US bank assets are about $17trn. If you are talking about a simple capital ratio of 20%, that would mean that banks would have capital (assets less liabilities) of $3.4trn (nearly twice current levels). If you are taking about a risk weighted capital ratio of 20%, that number might come down to, maybe, $2.5trn = still a significant increase from current levels. But I don’t really understand what you mean by ‘taking $1trn to $1.5trn of that capital to buy newly issued in a newly created FIB’. Bank capital is just very simply assets less liabilities. If you want to reduce bank capital by $1.5trn, you can either appropriate $1.5trn of assets from the banking sector or force them to assume $1.5trn of new liabilities. Either way, you would have a hard time persuading prospective purchasers of newly issued bank shares (to meet the objective of having a 20 to 25% capital ratio in your first step), if they knew that most of the value of those shares is going to be taken from them by your second step.

      I definitely don’t understand your proposal. Maybe you could try explaining it in a slightly different way. Maybe I will get it then.

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      Posted by Robert Pearson
      Answered on 05/06/2017 1:57 PM
        Private answer

        Robert,

        The process wouldn’t be overnight. The process would be over an extended period of time. And yes, it wouldn’t be great for lending. We could offset that by simply applying it only to banks that’re >$10 billion in assets. If you wanna take more risk or lend, you’ll have to downside and create spinoffs. Local and community banks would be mostly fine, and may even benefit, as a result.

        I don’t see why we’d have to appropriate anything. Bank regulators can already raise capital ratios. If we raise $3 trillion of capital in the banking system, some of that $3 trillion in newly raised capital can be diverted to purchase shares in the FIB.

        If you’re a large bank with a TBTF or moral hazard problem, you’ll be dealt with as a utility. If you wanna take large risks or do crazy things, be a smaller bank and we can encourage spinoffs or community/local banking.

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        Posted by Suvy Boyina
        Answered on 05/07/2017 1:32 AM
          Private answer

          FTR, I’m not arguing for public banking. I’m just arguing for a kinda financial system we haven’t seen in a while. The basic idea is to take current US system, look at modern imperial/federal/national needs, mix in good aspects of certain political systems like China without the bad, and then adapt it to the US.

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          Posted by Suvy Boyina
          Answered on 05/07/2017 1:46 AM
            Private answer

            FTR, I’m not arguing for public banking. I’m just arguing for a kinda financial system we haven’t seen in a while. The basic idea is to take current US system, look at modern imperial/federal/national needs, mix in good aspects of certain political systems like China without the bad, and then adapt it to the US.

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            Posted by Suvy Boyina
            Answered on 05/07/2017 1:46 AM
              Private answer

              FTR, I’m not arguing for public banking. I’m just arguing for a kinda financial system we haven’t seen in a while. The basic idea is to take current US system, look at modern imperial/federal/national needs, mix in good aspects of certain political systems like China without the bad, and then adapt it to the US.

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              Posted by Suvy Boyina
              Answered on 05/07/2017 1:46 AM
                Private answer

                Suvy – It appears that you are taking two almost unconnected concepts and trying to connect them.

                If you think that higher capital ratios for commercial banks is desirable, you are not alone. There has been plenty written about the obvious upsides of higher capital ratios, but also a bit about the downsides.:
                https://www.cato.org/publications/commentary/basels-capital-curse
                https://www.cato.org/publications/commentary/perils-deleveraging.

                Where you lost me was when you said “then take ~$1-1.5 trillion of that capital raised in the banking system to purchase shares in a newly created Federal Infrastructure Bank (FIB)”. You don’t need to take capital from banks to do this. Indeed you cant’t just take capital from banks – it’s not really a meaningful concept.

                Setting up and capitalising a FIB is completely separate to raising capital requirements for banks. Who should capitalise a FIB depends on who you want to own and control it. Obviously the Federal government should have some ownership. Maybe the states should as well. Perhaps you could open up ownership to the private sector – but why would you necessarily want commercial banks to be owners of a FIB?

                There are plenty of models for a FIB around the world. One is the European Investment Bank (EIB), which is owned by the member states of the EU, is a not for profit organisation, lends mainly for infrastructure projects on a long term basis and raises most of its financing on the capital markets (the EIB doesn’t offer customer deposit accounts). Take a look:
                http://www.eib.org/about/index.htm

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                Posted by Robert Pearson
                Answered on 05/07/2017 5:26 AM
                  Private answer

                  I’m not taking stuff from Europe here. I’m using examples from American history and adding in elements from China more than Europe.

                  We can have public capital ownership as well. We could have $1 trillion of public capital and $1 trillion of private capital while using that to finance $5-6 trillion of infrastructure over 20-30 years.

                  I’m aware that raising capital is very different from capitalizing an FIB, but that doesn’t mean they can’t be done together. The basic idea here is to shift the growth model from debt-fueled consumption to an investment driven model wherein the primary mode of financing is equity. The objective here is a structural shift of the American economic system to set up an infrastructure base for the next ~100-150 years.

                  From a purely practical standpoint, there’s no chance Congress signs $5-6 trillion of infrastructure spending. If we want that much infrastructure (which’s a conservative estimate on what we can use over the next few decades IMO–and I can get into why that is), we’ll need a bank to finance it.

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                  Posted by Suvy Boyina
                  Answered on 05/07/2017 11:44 AM
                    Private answer

                    FTR, I suspect Cullen is at least somewhat sympathetic to what I’ve proposed here. I do wonder what he thinks about the details and the general structure as well.

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                    Posted by Suvy Boyina
                    Answered on 05/08/2017 11:25 AM
                      Private answer

                      Isn’t this similar to what has been talked about in the UK by some of the proponents of “QE for the people”? You create something like a central bank and use it solely for infrastructure and similar projects?

                      We should be clear that this is just deficit spending by another name. It’s just off balance sheet if you consider the CB to be independent.

                      I’m not necessarily against the idea I guess. I just don’t see the need. Why not just appropriate the funds the way we always do rather than having an independent entity do it?

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                      Cullen Roche Posted by Cullen Roche
                      Answered on 05/08/2017 2:20 PM
                        Private answer

                        Cullen – I’ve seen a few mentions of “people’s QE”, but i wouldn’t say it’s been talked about that widely. It is, of course, simply deficit spending and has attracted the attention of Jeremy Corbyn, leader of the left wing Labour party, who has been convinced by his unofficial adviser Richard Murphy that there is a magic money tree: http://www.taxresearch.org.uk/Blog/2016/12/22/there-is-a-magic-money-tree-so-why-did-politicians-lie-about-it-throughout-2016/

                        Deficit spending is outlawed by the EU (which the UK is still a member of, just). I would postulate that one of the reasons that Jeremy Corbyn campaigned in such a lukewarm fashion in favour of his party’s official line of remaining in the EU is that he would like to see the restrictions on deficit spending, state aid etc removed. He sees the UK outside of the EU as a necessary first step toward that goal.

                        If the idea of PQE does gain any traction it will be because regular QE has been widely misunderstood. Most commentators have a vague understanding that QE involves the creation of money, but the vast majority believe that it has somehow been ‘given to the banks’. Supporters of PQE buy into this misunderstanding and propose that the money created by PQE should instead be given to ‘the people’, either as helicopter money or as investment in infrastructure.

                        I agree with you that if a government wishes to invest in infrastructure, it should do so in the regular way, either by taxing and spending or borrowing and spending. If the investment is worthwhile, it will lead to higher GDP and tax receipts.

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                        Posted by Robert Pearson
                        Answered on 05/08/2017 3:11 PM
                          Private answer

                          This isn’t PQE. This is basically taking the oligopolistic banks and treating them as utilities. You’d be diverting their *private capital* from whatever they do to a massive infrastructure build-out.

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                          Posted by Suvy Boyina
                          Answered on 05/09/2017 9:41 AM
                            Private answer

                            Suvy, I think I need to go back to my first reply – I don’t really understand what it is you are proposing.

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                            Posted by Robert Pearson
                            Answered on 05/09/2017 12:02 PM
                              Private answer

                              > Suvy

                              It is part of MR that borrowing creates money.

                              MR does not accept the loanable funds model.

                              And so a FIB does not need to borrow loanable funds from commercial bank capital.

                              Are you saying your proposal give the opportunity for the private sector to take the risk and a revenue from FIB projects.

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                              Posted by Dinero
                              Answered on 05/09/2017 1:00 PM
                                Private answer

                                > From a purely practical standpoint, there’s no chance Congress signs $5-6 trillion of infrastructure
                                > spending. If we want that much infrastructure (which’s a conservative estimate on what we can use
                                > over the next few decades IMO–and I can get into why that is), we’ll need a bank to finance it.

                                Aren’t you saying here that we need a public bank that is guaranteed to be bailed out by the taxpayers because there’s no profit to be had in financing non-privatized infrastructure boondoggles so no private bank would ever lend to it? Well, you know my answer to that. Privatize it so we don’t wind up back in the same situation we are now in another 50 years since government clearly lacks any incentive to be competent at maintaining and managing infrastructure. Is that even arguable at this point?

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                                Posted by MachineGhost
                                Answered on 05/09/2017 10:46 PM
                                  Private answer

                                  Why would this have to be backed by the public purse on failure when you can resolve the issue by raising capital in the banking system.

                                  I’m also certainly *not* using anything from loanable funds. I’m not talking about having the private banking system issue loans to the FIB. I’m talking about raising capital in the banking system as a way to purchase *shares* in FIB. This is equity, not debt.

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                                  Posted by Suvy Boyina
                                  Answered on 05/10/2017 2:19 AM
                                    Private answer

                                    Suvy – probably the last thing you want commercial banks to be doing is purchasing equity in other banks. Volcker’s head would probably explode if you suggested such a thing to him. Let me show you why.

                                    Let’s assume that all assets are 100% risk weighted (apart from central bank reserves) and that banks are required to have a 20% capital to asset ratio. For commercial banks between them to purchase $1trn of newly issued equity in a FIB, they themselves would have to raise $200bn of new equity – that is they would need to persuade holders of $200bn of bank deposits to give up their bank deposits and accept shares in commercial banks instead. With $1trn of capital the FIB could then grant up to $5trn of loans for infrastructure projects. That’s great, but there’s only actually been $200bn of new capital created to back these loans. The system is 25x levered, not 5x.

                                    The obvious solution to this problem would be to risk weight assets that are bank equity at 500%, such that the $1trn of new equity in the FIB would require the commercial banks to raise $1trn of new equity capital themselves (persuading holders of $1trn of deposits to give them up in return for shares) in order to maintain their 20% capital ratios. The FIB could still grant $5trn of loans to infrastructure projects, which would be 5x levered on the new equity raised. But that begs the question as to why the commercial banks need to be involved at all. Why can’t the FIB simply raise $1trn of equity itself – why shouldn’t it try to persuade holders of $1trn of bank deposits to give them up in return for shares in the FIB itself?

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                                    Posted by Robert Pearson
                                    Answered on 05/10/2017 5:45 AM
                                      Private answer

                                      I don’t mean risk-weighted capital. I mean tier 1 capital.

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                                      Posted by Suvy Boyina
                                      Answered on 05/10/2017 1:01 PM
                                        Private answer

                                        As a “public” institution, such cannot be let to fail and imperil public infrastructure under development or being operated or maintained, hence it will be backstopped by taxpayer funds one way or another. There’s no “creative destruction” in the public sphere. This gives license to the worst kind of greed and incompetence possible, e.g. perpetually growing debt issuance and ever decreasing quality. Sound familiar?

                                        Oh, so you’re talking about INVESTMENT BANKS floating an IPO to raise the capital for shares of a FIB? Well, that’s different, because there’s no other way it can be done short of socialist-coercing of private banks to fund a FIB (and where exactly is that funds coming from, their capital buffer? Well a FIB wouldn’t be Tier 1 asset). We had something similar under Bush Jr. — American Infrastructure Bonds. I’ve no idea how well that worked out but considering that nothing really changed in terms of our decaying infrastructure…

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                                        Posted by MachineGhost
                                        Answered on 05/10/2017 7:32 PM
                                          Private answer

                                          Also, look at the EU… each member’s central banks are forced to buy junk bond status sovereign PIIGS debt to use for their capital buffers. How well did that work out? Tier 1 doesn’t work if it is notional only instead of real.

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                                          Posted by MachineGhost
                                          Answered on 05/10/2017 7:34 PM
                                            Private answer

                                            The Fed can already raise capital ratios. What I’m suggesting has been done before. It isn’t really a radical idea.

                                            And yes, FIB wouldn’t be a tier one asset for sure, but if you’ve got a high capital buffer and basically cut off lending elsewhere by sharply raising capital ratios, it’s something that could be paid for.

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                                            Posted by Suvy Boyina
                                            Answered on 05/10/2017 8:57 PM
                                              Private answer

                                              The Fed can (and is) coercing large banks into raising more capital. Is that socialist? I wouldn’t say what I called for is socialist, but I would say it’s centralizing the investment process and the economic model (which’s certainly the goal).

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                                              Posted by Suvy Boyina
                                              Answered on 05/10/2017 8:59 PM
                                                Private answer

                                                The Fed can’t engage in fiscal policy which is clearly what this would involved unless Congress authorized it. I don’t see how raising a capital ratio and then forcing that extra capital into FIB shares which is not Tier 1 helps the situation at all. It’ll leave a big gap and where is the bank gonna scramble to get that missing Tier 1 capital? And you still haven’t pointed out what exactly is the purpose or need for a FIB? What is wrong with Congress spending on infrastructure?

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                                                Posted by MachineGhost
                                                Answered on 05/10/2017 9:15 PM
                                                  Private answer

                                                  There seems to be some confusion as to what Tier 1 means.

                                                  Tier 1 capital is what we usually refer to as bank capital, where assets less liabilities = bank capital. In the regulatory world, it isn’t exactly that, but you get the gist. Tier 1 capital comprises the instruments on the liability side of a bank’s balance that absorb losses first. As such, if you own Tier 1 capital instruments issued by a bank, you own the riskiest instruments possible that the bank might issue (from your point of view).

                                                  This is why I have said previously that regulators will take a very dim view of one bank holding Tier 1 capital instruments issued by another bank. In fact, I wouldn’t be surprised if in the latest iteration of the Basel capital regulations it is banned completely. If one bank held Tier 2 capital instruments issued by another bank (contingent capital, subordinated bonds etc), that would be somewhat less risky, but regulators would still want to discourage it.

                                                  The regulators want to discourage this behaviour for the reason I outlined previously – you can end with massive leverage in the system. One bank with $200m spare capital could buy $1bn of another bank’s capital (assuming a 20% capital ratio and 100% risk weighting of the capital instruments when viewed from the asset side). That bank could then acquire $5bn of another bank’s capital, which could use it to support $25bn in loans. Even with a headline 20% capital requirement (which is high), the system has easily created $25bn of assets with only $200m of real capital.

                                                  The suggestion that commercial banks should provide the share capital for a FIB is really a non-starter.

                                                  As I have suggested and Machine Ghost has suggested, why not simply have Congress authorise infrastructure spending, or, alternatively have Congress authorise the federal government to fund the capital for a FIB, which would then raise additional funds in the bond markets.

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                                                  Posted by Robert Pearson
                                                  Answered on 05/11/2017 5:44 AM
                                                    Private answer

                                                    Robert

                                                    With respect, your leverage multiplier idea does not work.

                                                    A bank cannot acquire shares in another bank by using its own deposits.

                                                    If it raises $200 Million Cash from shareholders it can then buy $200 Million shares in the other bank.

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                                                    Posted by Dinero
                                                    Answered on 05/11/2017 6:35 AM
                                                      Private answer

                                                      Dinero – are you saying that a bank cannot acquire shares in another bank for a regulatory reason or a theoretical reason?

                                                      Theoretically a bank can acquire whatever assets it wishes and pay for them with newly created deposits.

                                                      If you’re saying the restriction is down to regulatory reasons, in order to stop the leverage effect, then I would say I’m glad that regulators are doing that.

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                                                      Posted by Robert Pearson
                                                      Answered on 05/11/2017 7:41 AM
                                                        Private answer

                                                        A bank can aquire shares in another bank , But it cant pay for them with its own deposits.

                                                        It has to pay for them with assets , which would typically be central bank reserves that it holds in its assets.

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                                                        Posted by Dinero
                                                        Answered on 05/11/2017 7:52 AM
                                                          Private answer

                                                          For the leverage idea to work It would require that the bank that is issuing the equity agree to becoming a permanent deposit holder of the second bank in return. So OK theoretically it could happen.

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                                                          Posted by Dinero
                                                          Answered on 05/11/2017 8:32 AM
                                                            Private answer

                                                            But I think you will find that arrangement is prohibited by the definition of “p aid in “, to contribute to capital the shares must be fully paid in, and the bank can not directly or indirectly have funded the purchase of the instrument.

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                                                            Posted by Dinero
                                                            Answered on 05/11/2017 9:14 AM
                                                              Private answer

                                                              It’s not like we’ve got assets spread across tons and tons of banks either. What we have is effectively an oligopoly of banks who control most of the assets across the financial system. It’s not gonna go through the payment system again and again.

                                                              And why not have Congress authorize ~$5 trillion in infrastructure spending? Cuz it’s not gonna happen. If you wanna finance an infrastructure build-out that large, you’ll need some kinda infrastructure bank.

                                                              Tier 1 capital=assets-liabilities. Are you saying we can’t have the 5 largest banks issue ~$1 trillion in shares and then use that acquired capital to purchase shares on the asset side? Why’s that not possible?

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                                                              Posted by Suvy Boyina
                                                              Answered on 05/11/2017 9:23 AM
                                                                Private answer

                                                                Dinero – If the commercial banking sector (ComB) has $200m spare capital and purchases $1bn of newly issued shares in FIB, it does so simply by instructing the central bank to debit the reserve accounts of ComB by $1bn and crediting the FIB’s reserve account by the same amount. ComB simply swaps one asset (reserves) for another ($1bn worth of shares in FIB). FIB’s’s balance sheet has $1bn in assets (reserves), with no liabilities, thus capital is $1bn (as you would expect having just sold $1bn worth of shares). At that point the FIB is probably the safest bank in the system having 100% reserves on its asset side and 100% capital on its liability side.

                                                                But that won’t last. FIB will start making infrastructure loans to major construction projects, which will see new deposits created in the names of builders, cement suppliers etc at ComB. To settle these payments, reserve will transfer back from FIB to ComB.

                                                                If FIB wishes to grant more than $1bn in loans, it will have to either start having to attract deposits back to it, or issue long term bonds in the market. The second option is the most likely. It could issue up to $4bn of bonds, (for a capital ratio of 20%). The buyers of these bonds would have their deposits at ComB debited by $4bn, ComB would have their reserves debited by $4bn and FIB would have its reserve account credited with $4bn. It could then grant another $4bn of loans to infrastructure projects, which would see the $4bn in reserves transfer back to ComB, with $4bn of new deposits created in the names of the builders, cement suppliers etc at ComB.

                                                                At the end of this FIB has assets of $5bn in the form of loans to infrastructure projects and liabilities in the form of $4bn of bonds that it has sold to the non-bank private sector. ComB has $1bn of new assets in the form of shares in FIB and $1bn of new liabilities in the form of bank deposits. The non-bank sector also has new assets in the form of $4bn of bonds issued by FIB.

                                                                Don’t believe me that leverage has been multiplied? What happens then if FIB takes a modest write down on its assets of 4%? Its assets move from a valuation of $5bn to $4.8bn. Liabilities are unchanged at $4bn, so capital reduces to $800m. ComB thus takes a write down on its holding of shares in FIB, from $1bn to $800m. Its liabilities are unchanged, so capital reduces by the entire $200m that underpinned the whole transaction. Capital being wiped out by a 4% reduction in loan valuations means that capital was levered 25:1 not 5:1.

                                                                This is why there are regulations to prevent this happening. This is why regulators don’t like banks purchasing shares in other banks.

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                                                                Posted by Robert Pearson
                                                                Answered on 05/11/2017 12:54 PM
                                                                  Private answer

                                                                  Suvy – to be clear the only bank assets that go through the payment system are central bank reserves. Prior to QE there were only a few 10s of $billions of reserves in the system – that was all that was (and probably is) needed The vast majority of bank assets is in the form of long dated loans. Unless they get securitised and move off the banks’ balance sheets they tend to just sit there, doing nothing. There’s no reason for them to move

                                                                  There are many more bank liabilities that go through the payment system – these liabilities being bank deposits, which we use as money. If I bank at Chase and make a payment of $1,000 to someone who banks at BofA, I instruct the payments system to debit my account by $1,000 and credit the account of the person I’m paying by the same amount. If there are no other transactions occurring within that settlement period, Chase will instruct the Fed to debit its reserve account by $1,000 and credit BofA’s by the same amount. In reality there are thousands of transactions occurring in any particular settlement period and there are likely to be as many payments going from Chase to BofA as there are from BofA to Chase. So whilst there are many movements in liabilities of banks as we all go about our business receiving pay cheques and making payments to stores etc, there aren’t nearly as many movements in the assets on banks’ balance sheets.

                                                                  So a few banks ‘control’ a large amount of assets – so what? What do you want them to do with these assets?

                                                                  And for why I think it’s a really bad idea for commercial banks to purchase shares in other banks, see my answer to Dinero.

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                                                                  Posted by Robert Pearson
                                                                  Answered on 05/11/2017 1:15 PM
                                                                    Private answer

                                                                    Dinero – just checked with someone still plugged into banking regulations. Regulators recognise the risk of leverage multiplication, so insist that any holding of bank shares by another bank leads to a 1 for 1 reduction in Core Equity Tier 1 of the acquiring bank. Regulations prevent leverage being used for purchases of bank equity.

                                                                    So in my example a commercial bank with excess capital of $200m could only purchase $200m of shares in another bank. Which leads me back to the question, why not simply return that $200m of excess capital to shareholders and let them decide if they wish to purchase shares in the other bank.

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                                                                    Posted by Robert Pearson
                                                                    Answered on 05/11/2017 1:48 PM
                                                                      Private answer

                                                                      Suvy, do you have any links about why a FIB is preferred over fiscal policy? Does it generate better outcomes?

                                                                      Leaving aside the leverage constraints, I still don’t see how a private bank will issue its own equity and use that money raised from the secondary markets to invest in share of a FIB. What’s in it for them? Why would they do that? You say its not socialist, so the money transfer won’t be enforced, so what’s the incentive for them do it in the first place?

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                                                                      Posted by MachineGhost
                                                                      Answered on 05/11/2017 2:02 PM
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                                                                        Robert,

                                                                        I was thinking of much higher capital ratios (~40-50% or more as I find 20% to be too low) for the FIB with the rest being from public capital so leverage won’t be multiplied that high. 20-25% is too low for such a project IMO. The idea is to have ~$1.5-2 trillion of private capital with the same amount of public capital that’d give the FIB ~$3-5 trillion in total capital for total assets of ~$7-10 trillion.

                                                                        Machine Ghost,

                                                                        The purpose of the FIB is to shift the economic model of the US economy away from debt-fueled consumption to one built on investment. The basic idea is to take elements of China’s growth model, especially the public investment part, and try to recreate those same elements in our economy without the bad aspects (namely the reliance on continuously having to roll over bad debt for useless projects). If something goes wrong or capital begins to be misallocated, raise capital ratios and bring on a liquidity contraction to shut down some senseless crap.

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                                                                        Posted by Suvy Boyina
                                                                        Answered on 05/11/2017 3:16 PM
                                                                          Private answer

                                                                          > Robert
                                                                          Yep, I see the leverage multiplier , with that accounting, borrowed money, not capital, and its a moot point as you are saying it is prohibited my regulation.

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                                                                          Posted by Dinero
                                                                          Answered on 05/15/2017 5:46 AM
                                                                            Private answer

                                                                            -typo. – by regulation.

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                                                                            Posted by Dinero
                                                                            Answered on 05/15/2017 6:03 AM
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