tag:blogger.com,1999:blog-913439.post3318218534398688324..comments2024-02-26T11:30:05.072-08:00Comments on winterspeak.com: Accounting for Loans, deposits, and equitywinterspeakhttp://www.blogger.com/profile/13611241702356475764noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-913439.post-53356971486171485172010-06-26T09:53:53.535-07:002010-06-26T09:53:53.535-07:00W:
I wonder what MMT'er balance sheet/account...W:<br /><br />I wonder what MMT'er balance sheet/accounting treatment of the profit paradox might be, i.e. more or less detailed SFC description of monetizing profits.<br /><br />Here's what I posted on http://bilbo.economicoutlook.net/blog:<br /><br /><br />---------------------<br />Speaking of profits and looting.<br /><br />How does MMT treat the paradox of profits ?<br /><br />[In a closed system without external exchange, with money created by banks through loans, the private sector financed by such loans can hope to recover only the original loans by selling the totality of their products. When the principal was repaid, there is nothing left for either profits or even interest (see the circuitist theory, e.g. Graziani)].<br /><br />Steve Keene approached the problem with some unorthodox accounting, but some mmt’er (I do not recall who exactly) commented that (s)he was puzzled by the paradox without elaborating much.<br /><br />Since the private sector consolidated sheet balances to zero, how do mmt’ers ‘monetize’ profits in the accounting sense ? Where does money come from (my hunch is that the CB has to be involved to generate new money)? Could an mmt’er in the know describe a more or less detailed sequence of money flow through balance sheets that leads monetizing profits ?<br /><br />I am familiar with various circuitist attempts to solve the paradox, however, I could not find any SFC MMT treatment of the problem.<br /><br />Thanks.<br /><br />-------Госбанкhttps://www.blogger.com/profile/11821463910467664330noreply@blogger.comtag:blogger.com,1999:blog-913439.post-44131551910241763162010-06-25T15:30:38.224-07:002010-06-25T15:30:38.224-07:00Excellent points, thank you!Excellent points, thank you!winterspeakhttps://www.blogger.com/profile/13611241702356475764noreply@blogger.comtag:blogger.com,1999:blog-913439.post-25117054576283732472010-06-06T12:49:33.313-07:002010-06-06T12:49:33.313-07:00There is another way to look at this.
Consolidat...There is another way to look at this. <br /><br />Consolidate the banks' and SPEs' balance sheets. The loans appear back in the combined entity's balance sheet. In the liabilities, however one has MBSs' instead of deposits. <br /><br />However, since they report on-balance-sheet numbers, banks may have loans and deposits of similar size. However if you count it via other sectors such as households, businesses etc., the loan numbers may be different i.e, the total loans may be much higher than what banks' balance sheet may show.Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-913439.post-32808903514416617782010-06-06T11:03:22.108-07:002010-06-06T11:03:22.108-07:00Winter,
Yes secondary market purchase will be the...Winter,<br /><br />Yes secondary market purchase will be the way you described. <br /><br />At the point of creation of these securitized products things happen differently. Let us assume that the economy has the sectors households, production firms, banks, central bank and the government. Household purchase financial securities directly. When a pool of loans is securitized and sold, the following happens:<br /><br />Initially the pool of loans made increase the deposits of the banking system. Then,<br /><br />1. An SPE is formed. <br /><br />2. The bank pools these loans and "sells" it to the SPE <br /><br />3. The SPE creates ABSs and sells it to the bank. <br /><br />Steps 1, 2 & 3 happen simultaneously. <br /><br />3. The bank sells it to households and debits the deposits and issues the Asset backed securities. <br /><br />Later when the ABS is traded, the total deposits do not change. At the creation they do. <br /><br />Its a liability management trick. The SPE has loans as assets and ABSs as liabilities. However, the SPE belongs to the bank itself and the ABSs are the bank's liabilities, though off balance sheet.<br /><br />Its really tricky. The bank makes a gain because it sells the loans at a price above the book value and since the loans go off balance sheet, it makes a regulatory arbitrage - its capital adequacy ratios improve!<br /><br />I had intentionally combined the household sector and the financial sector to simplify. Else it is difficult to see. The financial sector usually purchases these ABSs and MBSs - but then one runs into complications about the financial sector selling some other security to purchase the ABS and one loses track of the whole chain.Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-913439.post-65157912442140365332010-06-06T08:58:38.938-07:002010-06-06T08:58:38.938-07:00The other thing to note is that deposits don't...The other thing to note is that deposits don't always stay deposits. I can use my deposit at my bank to purchase a CD at my bank, or transfer it into a MM account, or a savings account both at the same bank. Or I can transfer my deposit into any of these sorts of liabilities at any other bank. Any of those transactions result in a decrease in deposits and an increase in the other type of bank liabilities.<br /><br />Scott FullwilerSTFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-913439.post-64774034095499135462010-06-06T06:27:05.935-07:002010-06-06T06:27:05.935-07:00Ramanan:
TH was talking from the perspective of t...Ramanan:<br /><br />TH was talking from the perspective of the banking system.<br /><br />Good point about Treasury purchases draining deposits. That's true whether it's a household or a bank doing the purchasing, of course.<br /><br />And yes, since all bank spending is done by balance sheet expansion, that create/reduce deposits without the corresponding asset being a loan.<br /><br />I'm not sure about securitization. If I buy a MBS, my deposit account is debited, and some other deposit account is credited. Isn't that just an asset swap?winterspeakhttps://www.blogger.com/profile/13611241702356475764noreply@blogger.comtag:blogger.com,1999:blog-913439.post-3272148441499885102010-06-05T01:53:32.671-07:002010-06-05T01:53:32.671-07:00Winter,
There are many questions one can ask. I b...Winter,<br /><br />There are many questions one can ask. I believe the reader TH may be asking this from an individual bank's viewpoint. For for him/her, the simplest answer is that deposits may move out and be replaced with interbank liabilities. <br /><br />In case TH is looking from the perspective of a banking system:<br /><br />Government deficits do create deposits but in the US, banks hold less Treasuries so bond sales would drain most of the deposits created by spending, so less likely the explanation. <br /><br />There is another way deposits are drained. Issue of equities/bonds by banks drains deposits. <br /><br />To complicate things, there is a lot of securitization done in the US, and the outstanding I believe could be anywhere between $7T to $10T. Issue of securitized products also drains deposits because the banking system attracts the deposit holders to buy to these products. <br /><br />Apart from wages paid by banks, there is another way deposits can increase/change: purchase/sale of FX and/or real assets by banks increases deposits because they pay by increasing liabilities.Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.com