Thread by @bauhiniacapital

@INArteCarloDoss As noted, pensions purchase royalty streams on mining operations. They buy Bowie Bonds. They participate in mezzanine lending funds or the equity tranche for real estate deals. Yes, this is unregulated lending but it is not exactly ‘shadow banking’ b/c no bank could hold these.

@INArteCarloDoss And yes, they are outside the central bank QE cookbook ingredient list.

Yes, pensions invest in things which provide unregulated financing. That doesn’t mean it is not appropriately priced and when they do so, they know at the outset they do not have an asset-specific CB put.

@INArteCarloDoss Strangely, modern banking was founded on the practices of merchant bankers, which did indeed fund risk, both as equity and through syndication. In the UK, Barings was one but marchand-banquiers are far older. Eventually, after many lost ships in trading, they enlisted other

@INArteCarloDoss financiers to provide insurance. Together with sweat equity, a ship owner, names, merchant bankers would put together deals to facilitate and profit from trade.

Lest we misunderstand, the history of banking is prop trading and the history of modern banking is levered prop.

@INArteCarloDoss The evolution of the scottish banking system from the late 17th c is somewhat 'closed' but highly informative. Growth was local, layered, expansive, illiquid, but robust. It was also subject to crisis, and the entire system was put under stress by a UK banking crisis in 1826.

@INArteCarloDoss The growth and spread of widespread services, and the separate roles played by wholesale banks, merchant banks, deposit-taking institutions, etc effectively all contributed to the layered, grossed up, complex banking system which drove huge growth (and crashes) in the 19th c UK.

@INArteCarloDoss Where we are now is that 150 years later, with lower nominal growth, banks simply cannot take the risks on the balance sheet they did back then. They have been made far safer. And the roles which were played by banks back then after the banks had institutionalised the activity

@INArteCarloDoss (performed by wealthy families in centuries before) are now spread amongst banks, mortgage lenders, and institutional investors - effectively institutionalised forms of private wealth which are both broader and more diverse than the private families and privately-owned banks were

@INArteCarloDoss way back when. Banking is an illiquid activity. Disintermediation of banks has been happening broadly for not quite two centuries in the US and the UK. The history of emerging markets investment is of merchant banks selling (illiquid) bonds to deals with far less support and

@INArteCarloDoss legal structure to people who had money. And pensions for decades have been investing in illiquid deals and long duration assets because of their particular liability profile (insurance companies too). In a QE world, they are what they were. Banks have changed.

My complaint w/

@INArteCarloDoss Ann Pettifor's argument is that to solve the problem of people making lending decisions outside banks, that means banks have to make all the lending decisions. And because crises are not allowed, that means that all pensions should effectively put their assets to bank equity or

@INArteCarloDoss lending co-investments. Insurance companies too. Hedge funds too. And should foreigners want to invest their hot money in "our" country (whichever one it might be), one should definitely restrict their investment to just regulated lending. Own bank shares, or coinvest with them.

@INArteCarloDoss One could implement different types of capital controls to achieve the same flows, but if only banks are allowed to make decisions to lend, then thinks get pretty dire on the lending front. It is, as I suggested, a way to avoid cyclicality, and effectively put a public backing to

@INArteCarloDoss private savings. Make volatility and losses illegal and require equity to be high enough that it garners a bond-like return and require that such incremental equity provision has first lien on private savers' savings and one can avoid all this QE stuff.

@INArteCarloDoss Sorry about that.
I kinda went off.
Pensions and other investors of course have flexibility to take risk which banks can't/don't take, and of course it sometimes goes bad. Insurance cos too. But they have parts of their business which invest in equity, which has risk of loss.

@INArteCarloDoss And to insinuate that they are NEWLY - because of QE - that way is wrong (there is so much wrong with her piece). Private direct-lending funds run by asset managers, including hedge funds, are indeed "scarier" than much bank lending, but when their performance goes bad, which

@INArteCarloDoss would possibly lead to relative constriction in lending to small businesses and entrepreneurs, somehow I think that would be an acceptable reduction of risk. When all of one's borrowers start suffering, it is not clear near-term risk profile of lending more to those people is

@INArteCarloDoss appropriate, and the conclusion she seems to imply is private lenders shd not have the ability to not lend, because conceivably, they might lend less in future. Private sector capital allocation seems not to be a thing. The whole piece is, as an acquaintance put it, a "hot mess."