Margin Call

[August1991]

This movie is dark. It covers a 24 hour period, starting at about 5 pm, but most of the movie is around 2 am or so. It could have been a theatrical play since there's no action, and everything seems to be a discussion around a table. Lots of close-up shots but there are also the Manhattan, slo-mo flyovers. The movie was made with a Red digital camera, and edited with Final Cut Pro. (Amazing.) It's also dark because it deals with some ugly truths of life: we have to make choices.

This movie is cerebral, but it once again shows that Hollywood cannot show business - while no doubt, it does business. At one point, the character played by Stanley Tucci explains that he was an engineer who built a bridge that saved many people time since it made crossing a river faster. The Tucci character, like a quant, provides numbers. But how much did the bridge cost? And more important, how was it financed? Well, how was this movie financed? I gather that many firms/producers were involved. The movie (and Hollywood) neglects to note that a large part of production is financing. Wall Street produces: It takes risk.

This movie has good actors, who play their roles well. Jeremy Irons, with his knife and fork, got it close to right. I recommend this movie.

Edited November 14, 2011 by August1991

[dre]

This movie is dark. It covers a 24 hour period, starting at about 5 pm, but most of the movie is around 2 am or so. It could have been a theatrical play since there's no action, and everything seems to be a discussion around a table. Lots of close-up shots but there are also the Manhattan, slo-mo flyovers. The movie was made with a Red digital camera, and edited with Final Cut Pro. (Amazing.) It's also dark because it deals with some ugly truths of life: we have to make choices.

This movie is cerebral, but it once again shows that Hollywood cannot show business - while no doubt, it does business. At one point, the character played by Stanley Tucci explains that he was an engineer who built a bridge that saved many people time since it made crossing a river faster. The Tucci character, like a quant, provides numbers. But how much did the bridge cost? And more important, how was it financed? Well, how was this movie financed? I gather that many firms/producers were involved. The movie (and Hollywood) neglects to note that a large part of production is financing. Wall Street produces: It takes risk.

This movie has good actors, who play their roles well. Jeremy Irons, with his knife and fork, got it close to right. I recommend this movie.

The movie (and Hollywood) neglects to note that a large part of production is financing.

You neglect to note that financing happened because theres demand. The financial/credit system should be thought of more as a piece of infrastructure than as a part of the actual production.

When an orange farmer believes that there is room in the market place for more oranges he will head down to a bank and take out a loan to expand his operation. On the face of it it might seem that the bank has contributed something to the increased production of oranges but it hasnt. Because in the fractional banking system the banks dont actually have in their posession the money they are lending out. It simply writes a number down next to the orange farmers name in a ledger. The money the orange farmer uses to expand his operation did not exist before he signed his contract with the bank. In fact its value is entirely derived from that contract.

So to say that financiers contribute to production is about as true as saying that a road delivers goods.

And the reality is that for thousands of years all kinds of production happened without the existance of todays modern financial system. Even before there was ever such thing as a bank large prosperous civilizations were emerging, and people in the economy were extremely productive. The baker was baking bread... the butcher was selling meat, and so on.

So really to suggest we would not have a vibrant economy without todays financial system is the ultimate fallacy. The people in charge of money expect you to believe that the baker would stop making bread, and the seamstress would stop making clothes. But the reality is that productive economic activy is driven by the demand for food and clothing, not anything else.

In fact, the market place didnt even want any of this. They had already established a system of trading using self issued credit which was very successfull. The early version of our financial system actually had to be forced on them by the crown of england and the church.

Edited November 14, 2011 by dre

[August1991]

So to say that financiers contribute to production is about as true as saying that a road delivers goods.

But roads do produce goods (and services).

Without roads or the Internet, what goods or services would we receive?

----

In the case of finance, Wall Street and margin calls, the issue is similar to roads and transportation - but far more grave. Who should decide how to allocate our savings?

As much as people detest Wall Street, the people at Gosplan are far, far worse.

OTOH, if you're a Hollywood movie-maker seeking financing for a project, a government bureaucrat is probably an easier mark than a New York banker.

Edited November 14, 2011 by August1991

[dre]

But roads do produce goods (and services).

Without roads or the Internet, what goods or services would we receive?

----

In the case of finance, Wall Street and margin calls, the issue is similar to roads and transportation - but far more grave. Who should decide how to allocate our savings?

As much as people detest Wall Street, the people at Gosplan are far, far worse.

OTOH, if you're a Hollywood movie-maker seeking financing for a project, a government bureaucrat is probably an easier mark than a New York banker.

There is not difference between the newyork banker and the government buraucrat. They are quite literally the exact same bunch of people with the same bunch of interests. The governments financial apparatus is run almost completely by power players in the private financial sector.

These are not two separate entities like you are portraying them.

Without roads or the Internet, what goods or services would we receive?

Absolutely. Thats why I was trying to get you to think of the monetary as a piece of infrastructure as opposed to a producer.

The purpose of money is simply to provide a transactional medium. The banks have been endowed by the government with the power to control the ammount of money in the total supply. So when you borrow money for a business venture they arent actually "lending" you anything. They are simply growing the money supply.

So by its nature all credit is self issued. This is an important concept to understand... Credit does not come from a bank. Long gone are the days when banks actually made loans based on real deposits. Your credit is derived completely for your reputation and your ability to produce goods and services. All a commercial bank does is assess your credit and adjust the size of the money supply to allow for the economic activity you propose. They lend you nothing at all, and charge you interest on money that they do not have and did not exist until it was written into existance backed by your reputation as a producer.

Who should decide how to allocate our savings?

We should. But thats not what commercial banks do. Investment banking and capital markets however are natural and logical functions of the economy. I favor keeping these institutions not abolishing them, but the system should be based on perpetual money, and the financial sector and government need to be untangled from one another. The government should issue currency, and the financial sector should be a fairly light weight layer that connects investors those seeking venture capital.

But roads do produce goods (and services).

No roads faciliate the delivery of goods. Money facilitates transactions between individuals. Money does not "cause" goods and services to be produced.

In fact in theory even in a market place with absolutely no financial services at all, capital would still be efficiently allocated. Reputable producers would still be the beneficiaries of credit because as I explained before all credit is at its root self issued.

In fact... theoretically the financial services industry actually results in LESS capital reaching productive enterprises because it takes a huge piece of the action.

Edited November 14, 2011 by dre

[Bonam]

Investment banking and capital markets however are natural and logical functions of the economy.

In case you didn't notice, it's precisely investment banks that made all the bad bets and sold the bad products that triggered the collapse in 2008 and again the European crisis now.

Commercial banks that keep their business to commercial banking and just offer people checking and savings accounts, debit cards, credit cards, etc, are hardly some kind of economic parasites as you describe them. Whatever the % of the money they lend out that they actually have in reserve, they provide a valuable service. And, they usually do this at minimal costs to clients, often all their commonly used services are entirely free. Imagine how much more cumbersome it would be to keep all your money in cash. Wanna pay rent? Can't write a cheque, gotta stuff an envelope full of cash. Wanna buy something on the internet? Can't, you don't have a card to pay with. Wanna keep tracks of your expenses? Gotta keep a little logbook of your receipts or something, since you don't get a statement. Wanna pay your utility bill? You gotta send cash in the mail or something... (don't think that's even allowed/done anymore?)

It just doesn't work in our modern society. I look upon the service that commercial banks provide as a critical utility, no less important or necessary for a household than water, electricity, internet.

The banks have to pay for the costs of doing business somehow. If it wasn't on making loans and collecting interest on them, they'd be charging us a ton for our checking and savings accounts. And, personally, I'm just fine with them sucking money out of stupid people who take out high interest loans so they can give me my checking account free...

Edited November 14, 2011 by Bonam

[dre]

Commercial banks that keep their business to commercial banking and just offer people checking and savings accounts, debit cards, credit cards, etc, are hardly some kind of economic parasites as you describe them.

The problem is that what you describe is how commercial banks worked 100's of years ago. They no longer just accept deposits and lend money on them, and rent space in their vaults. They now control the size of the money supply, and create money out of thin air at will and dump it into the economy. This monetary expansion causes risky behavior, and results in the business cycle (asset bubbles like the one that caused the recent meltdown).

Im totally fine with a private company accepting money from depositors, providing credit cards, and lending deposits out at interest which is shared with the depositor. But thats a very outdated description of banks, that doesnt even come close to describing how they operate today.

The banks have to pay for the costs of doing business somehow. If it wasn't on making loans and collecting interest on them, they'd be charging us a ton for our checking and savings accounts. And, personally, I'm just fine with them sucking money out of stupid people who take out high interest loans so they can give me my checking account free...

Absolutely. Banks provide important services that as I said are logical functions of the economy. They keep track credit (monitor your balance of trade), and they administrate the electronic collection of loan payments. Valuable and essential services, but services for which a simple fee would be charged.

If all the bank brings to the table is the credit check and the administration of your mortgage do you really think its justified that they charge $300 000 dollars in fees by the time you pay off your 300 000 mortgage? Of course not. Iv seen this broken down before and for the banks to screen you, and administer your mortgage costs about .25% and the reality is that if the government did not use force to keep the current private banking system in place, other private enterprises would quickly emergy that perform these functions for a small profit.

Anyhow... Im all for private banks, and I understand why some of the services they supply are necessary. The only part I dont like is that the government allows them to expand the money supply which steals from all other holders of currency, and then collect usury on that brand new money that the bank didnt even have.

Imagine how much more cumbersome it would be to keep all your money in cash.

Absolutely. "Cash" is a technology just like gold was a technology. With todays technology we can easily track credit electronically in a secure way.

As a matter of fact. If you look at what commercial banks do... they expand the money supply based on the willingness of people to promise future goods and services in exchange for credit today, and they electronically collect payments, and they electronically run credit checks to screen borrowers, and they electronically accept deposits. A piece of computer software could all this stuff today for almost nothing.

Edited November 14, 2011 by dre

[August1991]

Gawd, what a thread hijack....

======

No roads faciliate the delivery of goods. Money facilitates transactions between individuals. Money does not "cause" goods and services to be produced.

When I drive on a road, I receive a useful service. In Italy and north of Toronto, I am even willing to pay for this service. (I've also taken a cab in NYC but I fear that you may quibble about such road use.)

dre, in some ways, "transaction costs" are at the heart of modern economics. Better money and better roads lower transaction costs.

There is not difference between the newyork banker and the government buraucrat.

I have been both a banker and a bureaucrat, and there is a huge difference in terms of incentives.

As I say, Gosplan is no Wall Street.

The only part I dont like is that the government allows them to expand the money supply which steals from all other holders of currency...

But I expand the money supply every time I write a cheque or use my credit card. Is that wrong?

If you look at what commercial banks do...

Ultimately, financial markets decide a price. This piece of information - a simple term of trade - is remarkably useful, and very valuable. Edited November 14, 2011 by August1991

[Bonam]

The problem is that what you describe is how commercial banks worked 100's of years ago. They no longer just accept deposits and lend money on them, and rent space in their vaults. They now control the size of the money supply, and create money out of thin air at will and dump it into the economy. This monetary expansion causes risky behavior, and results in the business cycle (asset bubbles like the one that caused the recent meltdown).

And yet we had the business cycle, bubbles and busts, just like we have now, prior to the implementation of the current system.

Im totally fine with a private company accepting money from depositors, providing credit cards, and lending deposits out at interest which is shared with the depositor. But thats a very outdated description of banks, that doesnt even come close to describing how they operate today.

No. They still do all that. They just also do a few other things.

If all the bank brings to the table is the credit check and the administration of your mortgage do you really think its justified that they charge $300 000 dollars in fees by the time you pay off your 300 000 mortgage? Of course not.

Umm, a big chunk of that payment is inflation. On a 30 year mortgage now typical in the US, which you can now lock in at a rate of ~3.5%, the bank only gets that ~600k or whatever it works out to over 30 years. By then, with an inflation rate of ~2%, that 600k is worth a lot less. Secondly, besides the administrative costs, they take on risk with every loan they make. Remember, the money they "create" doesn't just go to the bank coffers, it gets paid to the person who sold the house. And if you default on your payments and the bank can only sell off the house for say $200,000, the bank just lost $100k. That's a real $100k loss for the bank. And, since the bank loans out at a ratio of 20:1, that's a loss of $2 million of leverage. That's a substantial loss. To undertake that risk, you have to charge enough in interest to cover the losses you take, and still to make some profit as well.

If a stranger came to you and asked to borrow $300k which they would only pay back over 30 years, do you really think you'd settle for asking them for just a 0.25% fee of $750 over the 30 years? Of course not. Just to cover 2% inflation over the 30 year period you're looking at asking them for a total of ~$500k in payments. And if you're doing this a lot, and say 10% of people default, and you wanna still break even despite that risk, throw in another $50k. Add in a bit of profit and you're right back to that number you said, $300k of "fees" for a $300k mortgage.

Iv seen this broken down before and for the banks to screen you, and administer your mortgage costs about .25% and the reality is that if the government did not use force to keep the current private banking system in place, other private enterprises would quickly emergy that perform these functions for a small profit.

As I've just shown, the mortgages that banks give really already do operate at just a "small profit". Especially now at historically low rates.

The only part I dont like is that the government allows them to expand the money supply which steals from all other holders of currency, and then collect usury on that brand new money that the bank didnt even have.

The money supply has to expand as the economy grows. You said yourself in another thread that if we had an economic growth rate of 2.9%, things would work out just fine with this system. So we are a few tenths of a percentage point short in growth and that makes the whole system unworkable? I don't buy it.

Anyway, what makes you so sure that government bureaucrats would do any better or more fair of a job of controlling the expansion of the money supply than bankers? Like you said, it's the same people.

[dre]

And yet we had the business cycle, bubbles and busts, just like we have now, prior to the implementation of the current system.

No. They still do all that. They just also do a few other things.

Umm, a big chunk of that payment is inflation. On a 30 year mortgage now typical in the US, which you can now lock in at a rate of ~3.5%, the bank only gets that ~600k or whatever it works out to over 30 years. By then, with an inflation rate of ~2%, that 600k is worth a lot less. Secondly, besides the administrative costs, they take on risk with every loan they make. Remember, the money they "create" doesn't just go to the bank coffers, it gets paid to the person who sold the house. And if you default on your payments and the bank can only sell off the house for say $200,000, the bank just lost $100k. That's a real $100k loss for the bank. And, since the bank loans out at a ratio of 20:1, that's a loss of $2 million of leverage. That's a substantial loss. To undertake that risk, you have to charge enough in interest to cover the losses you take, and still to make some profit as well.

If a stranger came to you and asked to borrow $300k which they would only pay back over 30 years, do you really think you'd settle for asking them for just a 0.25% fee of $750 over the 30 years? Of course not. Just to cover 2% inflation over the 30 year period you're looking at asking them for a total of ~$500k in payments. And if you're doing this a lot, and say 10% of people default, and you wanna still break even despite that risk, throw in another $50k. Add in a bit of profit and you're right back to that number you said, $300k of "fees" for a $300k mortgage.

As I've just shown, the mortgages that banks give really already do operate at just a "small profit". Especially now at historically low rates.

The money supply has to expand as the economy grows. You said yourself in another thread that if we had an economic growth rate of 2.9%, things would work out just fine with this system. So we are a few tenths of a percentage point short in growth and that makes the whole system unworkable? I don't buy it.

Anyway, what makes you so sure that government bureaucrats would do any better or more fair of a job of controlling the expansion of the money supply than bankers? Like you said, it's the same people.

The money supply has to expand as the economy grows. You said yourself in another thread that if we had an economic growth rate of 2.9%, things would work out just fine with this system. So we are a few tenths of a percentage point short in growth and that makes the whole system unworkable? I don't buy it.

Just to be clear that number (2.9%) was the calculation of how much growth would be required to keep the system solvent based on the numbers I provided (Canadian numbers shortly after 2000). 2.9 isnt some kind of magic number, its just how the math worked out at that particular time.

And I absolutely agree the money supply has to grow with the economy in order for you to have price stability, and if youre not going to have price stability we might as well just go back to the barter system.

But the problem in terms of the future stability of this system is that the money supply and debt are growing much much faster than the economy and since all that debt represents promises to produce goods and services its pretty easy to see why this cant go on indefinately.

If a stranger came to you and asked to borrow $300k which they would only pay back over 30 years, do you really think you'd settle for asking them for just a 0.25% fee of $750 over the 30 years? Of course not.

You need to stop thinking of this as a person loaning out money they actually have. Thats NOT what banks do.

If I was allowed to walk over to my printer, and print out 30 thousand ten dollars bills and then "lend" them to you, then yes. I could do it for about .30 percent. My costs plus some profit. Even if there was 2% inflation that would not matter because I entered the transaction with nothing in the first place, and while the money Im now collecting interest on is worth a little less, is was still pretty much free for me in the first place.

Edited November 14, 2011 by dre

[msj]

The movie (and Hollywood) neglects to note that a large part of production is financing. Wall Street produces: It takes risk.

While August neglects to note that it's easy to take risk when it's other peoples money and the government will back stop you full tilt.

[dre]

Gawd, what a thread hijack....

======

When I drive on a road, I receive a useful service. In Italy and north of Toronto, I am even willing to pay for this service. (I've also taken a cab in NYC but I fear that you may quibble about such road use.)

dre, in some ways, "transaction costs" are at the heart of modern economics. Better money and better roads lower transaction costs.

I have been both a banker and a bureaucrat, and there is a huge difference in terms of incentives.

As I say, Gosplan is no Wall Street.

But I expand the money supply every time I write a cheque or use my credit card. Is that wrong?

Ultimately, financial markets decide a price. This piece of information - a simple term of trade - is remarkably useful, and very valuable.

When I drive on a road, I receive a useful service. In Italy and north of Toronto, I am even willing to pay for this service. (I've also taken a cab in NYC but I fear that you may quibble about such road use.)

Absolutely. Roads are an important piece of infrastructure that facilitates trade just like currency is.

dre, in some ways, "transaction costs" are at the heart of modern economics. Better money and better roads lower transaction costs.

Thats exactly the problem with our financial and monetary system. It puts a huge tax on our economy and makes transactions more epensive and riskier than they need to be.

I have been both a banker and a bureaucrat, and there is a huge difference in terms of incentives.

As I say, Gosplan is no Wall Street.

Im not talking about the inherent differences between incentives in the public sector vs the private sector. Im point out that these are quite literally the SAME PEOPLE. The bailout czar that gave goldman sachs 2 gigantic bailouts during the subprime meltdown was the vice president of goldman sachs Basically elites in the private financial system just take turns running the governments financial apparatus. Its the same bunch of people.

But I expand the money supply every time I write a cheque or use my credit card. Is that wrong?

You dont necessarily expand the money supply when you write a check, and if you keep your credit card balance relatively low then you dont expand the money supply much there either.

But no. Its not morally "wrong" for you to use credit.

But you could argue its morally wrong for banks to loan money they dont have. Its basically counterfeiting. Picture I print a really good 10 dollar bill and use it to buy six beer. Who was harmed? Not the beer store. They give my ten dollar bill as change to a guy that paid with a fifty. That guy buys something at the super market, and the money gets passed around and around just like a real 10 dollar bill would.

The reason why counterfeiting is treated as such a serious crime though is because it dillutes the money supply. When I created that 10 dollar bill which was good enough to stay in circulation, I actually stole a tiny bit of purchasing power from every single bill in existance. And this is quite literally exactly what modern banks do today. In common law this behavior has traditionally been regarded as fraud because it creates an "impossible contract". The bank is promising to give you something that belongs to someone else.

[August1991]

You dont necessarily expand the money supply when you write a check...

But you could argue its morally wrong for banks to loan money they dont have. Its basically counterfeiting.

But I do exactly that when I write a cheque, or use my credit card. Heck, I do it when I borrow my friend's car.

Im not talking about the inherent differences between incentives in the public sector vs the private sector. Im point out that these are quite literally the SAME PEOPLE.

They may be the same people, but their incentives are critically different. That strikes me as a key point.

In general, I think that people at Goldman-Sachs have the right incentives. Those at the US Treasury or the BOC do not.

-----

As to the whole Goldman-Sachs/Wall Street bail out story, I'm with Bernanke. If your house were beside your rich neighbour's house on fire, you too would bring water to stop the house fire. You would not merely do this because of decency, you would do it because your house could burn too.

Solidarity. Ah yes, it goes in various directions.

[dre]

But I do exactly that when I write a cheque, or use my credit card. Heck, I do it when I borrow my friend's car.

They may be the same people, but their incentives are critically different. That strikes me as a key point.

In general, I think that people at Goldman-Sachs have the right incentives. Those at the US Treasury or the BOC do not.

-----

As to the whole Goldman-Sachs/Wall Street bail out story, I'm with Bernanke. If your house were beside your rich neighbour's house on fire, you too would bring water to stop the house fire. You would not merely do this because of decency, you would do it because your house could burn too.

Yup. The problem once your rich neighbor knows you will bail him out it changes his behavior and the way he views risk.

In general, I think that people at Goldman-Sachs have the right incentives. Those at the US Treasury or the BOC do not.

Those people are the same people with the same plan, and the same incentives. These days the government is a bit player in the system. They arent even allowed to audit the private federal reserve system if they want to. The government basically just gets to pick which wallstreet executive controls the overnight rate.

[GostHacked]

Thanks for the tip, I'll have to give that a watch!

[August1991]

Thanks for the tip, I'll have to give that a watch!

GH, thank you for returning this thread to sanity.

IMHO, Margin Call is a good but dark movie.

-----

Yup. The problem once your rich neighbor knows you will bail him out it changes his behavior and the way he views risk.

Rich neighbour? I'd be more worried about my poor neighbour.

IOW, maybe we should think more about the incentives of our poor neighbours, rather than our rich neighbours.

Everyone looks at the tax rate at the high end. But all in - clothes, time, transport, hassle of finding reliable child care (even at $7) - what's the marginal rate at the low end? What does one lose from leaving home and starting work?

And what's the effect of the marginal rate at the high end? What does a bank analyst lose in her bonus? Does she decide to stay late and go to the roof, or does she go home?

Edited December 28, 2011 by August1991