Thread by @bauhiniacapital

I am curious how many other people came to the same conclusion.

For me, the article is something of a mess.

Pension funds and insurance companies are ‘shadow banking’?

And the complaint that QE has screwed everything up is a common one. The problem with every single of

https://twitter.com/michaelxpettis/status/1416044821324644356

these articles which say Something Must Be Done is it is always Something but never This Thing Must Be Done to Accomplish That Goal.

There is literally no recipe here to follow. Just a general complaint filled with odd specificities such as “Blackrock manages $8 trillion” as

if that is somehow symptomatic of how awful things have become. But there are either misunderstandings or misrepresentations. Blackrock is an asset mgr. Banks simply don’t enter the equation here unless you expect all capital activity to be intermediated by banks.

There are other misrepresentations. Pensions who use no leverage are now part of the leveraged world of shadow banks. The explanation of repo and further rehypothecation clearly seems designed to mislead. It simply doesn’t work the way she says it does.

There are, indeed, imbalances. But fixing them is not so much a monetary decision as a political decision. Banks are not going to stop ‘creating money.’ That has been the role of banks for centuries. Pension funds are going to disappear? Trade is going to stop?

I may not be that much of a fan of SPACs as an incentive structure to do right by investors, but that is more a matter of what investors allow. And investors have been sold crap for as long as there have been people selling investments to investors.

The general complaint is that the total value of all securities and cash and assets is too high. There is a specific mention of billionaires having gotten richer in 2020 while the real economy suffered. So, the obvious solution is to regulate returns, asset prices, and commodity

prices so they are pro-cyclical? If it is the SCALE of QE which is problematic, then perhaps that should regulated, either by specific regulation or by a New Bipartisan Common Sense led by technocrats trusted by all. So how do we regulate? Do we say CB balance sheets may not

grow (or shrink) by more than X% in any given period? Is there a rule about WHEN they should grow? Is there an expectation it will have an effect? (Obviously, the ills of the world, including Blackrock’s $8trln AUM, are caused by QE so doing it right would mean such ills would

not be caused by QE). What if QE following those rules does not have the desired effect and some population or group suffers when you had hoped QE would make them suffer less. In times of stress like covid-19, if FISCAL policy gives lots of money to people allowing them to spend

on used cars, lumber futures, or AMC shares, is this OK or is this also problematic? Should fiscal action also be regulated? If fiscal action is regulated but in times of crisis money is spent prudently and wisely according to such prudent and wise regulation, are used car prices

allowed to rise? Are stocks allowed to go up?

The problem with most polemics is they provide neither a proposal for an end result nor a path to achieve it. The article is deemed “extraordinary clear” by one commentator (it is not) and the last two paragraphs are telling.

The penultimate paragraph talks about shadow banking, and seems to equate the rise of shadow banks - elsewhere defined as pension funds, insurance companies, and hedge funds - with an ‘obscenely unequal globalised economy.’

Then she talks about when the vast shadow banks wobble’

“there is the threat of a disastrous contraction of the credit for the real economy, which could bring everything crashing down.”

What? Is this for real?

Private investors allocate capital. Sometimes they want to take more risk. Sometimes less. They are generally pro-cyclical.

When people stop paying their mortgages, or their car loans, or companies default on their loans, such investors (or even banks, as lenders), are often reluctant to ‘take undue risk’, which is exactly as Ms Pettifor prescribes. Taking undue risk would be bad, but avoiding that

undue risk leads to a contraction of lending. The only way to avoid the contraction of lending in such instances is to raise the cost of guaranteeing such risk (raising rates, spread, ownership, control). “The elite” are ripping us off and stealing the assets of the common man!”

The other way is to simply regulate away ‘wobbles.’ If one regulates away economic cyclicality or fluctuation, that solves a lot of problems. And if one regulates how private money is lent so that it does not invest ‘unequally’ in assets with a higher potential return, that

solves the problem of hot money. Private investors can save safely by investing at returns determined centrally. Against risk determined centrally. And because risks are prudent, always, there are no business failures which would cause losses. Disruption caused by invention or

progress? Can one lend to such new jobs-creating business when doing so would lead to disruption and losses of jobs elsewhere?

The final paragraph tells you.
Yes. It means regulate risk.

Maybe introduce capital controls. And therefore trade controls.

The last sentence is the kicker.

“Only then will the world stand any chance of kicking the QE habit, address those dangerous imbalances and finally escape this grim shadowland of money.”

Hahahahahaha.

No.

Changing flow does not change stock. Inequality will remain. It will be fixed as it is. Regulating return would not change relative wealth unless you ‘fixed’ it through confiscation. Or over generations via inheritance tax or asset taxes. You’d probably have to do some of both.

Two ideas I leave here.

1) If public bodies regulate risk-taking, they don’t need QE to bail out private risk-taking. The public sector has effectively agreed to take on all risk.
2) Elimination of inequality (or vast changes to the paradigm) is confiscation. Expect friction.