Thread by @CantillonCH

Proposition: #Banks won't rally because rates -long & short- are too low; #Japan is our marker, banks there falling while US/#EZ rose pre-#GFC, not gaining afterward; Also v-a-v EZ peers, #US bank returns were anomalous, ergo can't be repeated. 1/x

Response: Banks make money by increasing charges in the absence of NIM
NB: When long rates are artificially suppressed & flattened to/thru 0%, opportunity cost vanishes and demand for money -as a savings medium, not a transactional tool - RISES 2/x

It wasn’t low rates per se that held #Japan banks back, post 1989, but scattered failures and an heroic amount of write-offs and restructurings of their toxic, bubble-era legacy - something which helped the country’s eventual, creditable real per capita GDP recovery. 3/x

In contrast, in the EZ and the US, the deliberate laxity of monetary policy (a) to paint lipstick on the pig of the newly-launched #euro and (b) to overcome the Tech Bubble & 9/11 saw many false #profits earned which rightly evaporated retrospectively in the #GFC bust. 4/x

Since then JPY banks have continued to reflect a thankfully reduced role in society (finance is a means, not an end!).
Terminally overbanked Europe, under the #ECB’s horribly politicised management & the #EU’s strangling bureaucracy would have been zombified, #NIRP or no. 5/x

The US was also a place where the bank restructuring made necessary after #LEH, was carried out. Countless hidden horrors no doubt lurk but, ostensibly, balance sheets went into #lockdown in their best condition in decades (FDIC, qv). 6/x

Japan’s as our pathfinder? Perhaps. Noted societal differences may not entirely outweigh economic law and commercial logic but it also depends on the degree to which the state will step back, post-pan(dem)ic - something about which must be cautiously pessimistic. 7/x

Does their example mean US banks are doomed to follow the same course? We shall see. The Banking ‘Trust’ in the US is perhaps still too powerful to let itself wither so passively on the vine. 8/x

Certainly, with dividends being frowned upon and untold #NPLs to overcome, this has merit. But we might also note the pre-LEH highs were regained just before we went over the cliff again this spring, despite ever lower rates across the curve and out the #credit spectrum. 9/x

So, the idea that US #banks they are best avoided for now is something not to be too fervently disputed. The rising tide (of panicky #Fed intervention) may lift all boats, but banks carry a heavy anchor of Rumsfeldian Unkown Unknowns. 10/x

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