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A Walk-Thru The First Shadow Bank Run... 250 Year Ago

Tyler Durden's picture




 

Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn't.

As the NY Fed's blog (whose historical narratives are far more informative and accurate than its attempts to "explain away" the labor force participation collapse) recounts, the first tremor in the shadow banking system took place not in 2008 but some 250 years ago... during the Commercial Credit crisis of 1763, whose analog today is the all too shaky and largely unregulated core shadow banking system component: Tri-Party Repo.

From the NY Fed blog, by James Narron and David Skeie:

Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market

During the economic boom and credit expansion that followed the Seven Years’ War (1756-63), Berlin was the equivalent of an emerging market, Amsterdam’s merchant bankers were the primary sources of credit, and the Hamburg banking houses served as intermediaries between the two. But some Amsterdam merchant bankers were leveraged far beyond their capacity. When a speculative grain deal went bad, the banks discovered that there were limits to how much risk could be effectively hedged. In this issue of Crisis Chronicles, we review how “fire sales” drove systemic risk in funding markets some 250 years ago and explain why this could still happen in today’s tri-party repo market.

Early Credit Wrappers

One of the primary financial credit instruments of the 1760s was the bill of exchange—essentially a written order to pay a fixed sum of money at a future date. Early forms of bills of exchange date back to eighth-century China; the instrument was later adopted by Arab merchants to facilitate trade, and then spread throughout Europe. Bills of exchange were originally designed as short-term contracts but gradually became heavily used for long-term borrowing. They were typically rolled over and became de facto short-term loans to finance longer-term projects, creating a classic balance sheet maturity mismatch. At that time, bills of exchange could be re-sold, with each seller serving as a signatory to the bill and, by implication, insuring the buyer of the bill against default. This practice prevented the circulation of low-credit-quality bills among market participants and created a kind of “credit wrapper”—a guarantee for the specific loan—by making all signatories jointly liable for a particular bill. In addition, low acceptance fees—the fees paid to market participants for taking on the obligation to pay the bill of exchange—implied a perceived negligible risk. But the practice also resulted in binding market participants together through their balance sheets: one bank might have a receivable asset and a payable liability for the same bill of exchange, even when no goods were traded. By the end of the Seven Years’ War in 1763, high leverage and balance sheet interconnectedness left merchant bankers highly vulnerable to any slowdown in credit availability.

Tight Credit Markets Lead to Distressed Sales

Merchant bankers believed that their balance sheet growth and leverage were hedged through offsetting claims and liabilities. And while some of the more conservative Dutch bankers were cautious in growing their wartime business, others expanded quickly. One of the faster growing merchant banks belonged to the de Neufville brothers, who speculated in depreciating currencies and endorsed a large number of bills of exchange. Noting their success (if only in the short term), other merchant bankers followed suit. The crisis was triggered when the brothers entered into a speculative deal to buy grain from the Russian army as it left Poland. But with the war’s end, previously elevated grain prices collapsed by more than 75 percent, and the price decline began to depress other prices. As asset prices fell, it became increasingly difficult to get new loans to roll over existing debt. Tight credit markets led to distressed sales and further price declines. As credit markets dried up, merchant bankers began to suffer direct losses when their counterparties went bankrupt.

The crisis came to a head in Amsterdam in late July 1763 when the banking houses of Aron Joseph & Co and de Neufville failed, despite a collective action to save them. Their failure caused the de Neufville house’s creditors around Amsterdam to default. Two weeks later, Hamburg saw a wave of bank collapses, which in turn led to a new wave of failures in Amsterdam and pressure in Berlin. In all, there were more than 100 bank failures, mostly in Hamburg.

An Early Crisis-Driven Bailout

The commercial crisis in Berlin was severe, with the manufacturer, merchant, and banker Johann Ernst Gotzkowsky at the center. Gotzkowsky’s liabilities were almost all in bills of exchange, while almost all his assets were in fixed capital divided among his silk works and porcelain factory. Berlin was able to mitigate the effects of the crisis when Crown Prince Frederick imposed a payments standstill for several firms. To prevent contagion, the prince also organized some of the first financial-crisis-driven bailouts after he examined the books of Gotzkowsky’s diverse operations. Ultimately, about half of Gotzkowsky’s creditors accepted 50 cents on the dollar for outstanding debts.

Meanwhile, banks in Hamburg and the Exchange Bank of Amsterdam tried to extend securitized loans to deflect the crisis. But existing lending provisions restricted the ratio of bank money to gold and silver such that the banks had no real power to expand credit. These healthy banks were legally limited in their ability to support the credit-constrained banks. To preserve cash on hand, Hamburg and Amsterdam banks were slow to honor bills of exchange, eventually honoring them only after pressure from Berlin. The fact that Amsterdam and Hamburg banks re-opened within the year—and some even within weeks—provides evidence that the crisis was one of liquidity and not fundamental insolvency.

The crisis led to a period of falling industrial production and credit stagnation in northern Europe, with the recession being both deep and long-lasting in Prussia. These developments prompted a second wave of bankruptcies in 1766.

Distressed Fire Sales and the Tri-Party Repo Market

From this crisis we learn that it is difficult for firms to hedge losses when market risk and credit risk are highly correlated and aggregate risk remains. In this case, as asset prices fell during a time of distressed “fire sales,” asset prices became more correlated, further exacerbating downward price movement. When one firm moved to shore up its balance sheet by selling distressed assets, that put downward pressure on other, interconnected balance sheets. The liquidity risk was heightened further because most firms were highly leveraged. Those that had liquidity guarded it, creating a self-fulfilling flight to liquidity.

As we saw during the recent financial crisis, the tri-party repo market was overly reliant on massive extensions of intraday credit, driven by the timing between the daily unwind and renewal of repo transactions. Estimates suggest that by 2007, the repo market had grown to $10 trillion—the same order of magnitude as the total assets in the U.S. commercial banking sector—and intraday credit to any particular broker/dealer might approach $100 billion. And as in the commercial crisis of 1763, risk was underpriced with low repo “haircuts”—a haircut being a demand by a depositor for collateral valued higher than the value of the deposit.

Much of the work to address intraday credit risk in the repo market will be complete by year-end 2014, when intraday credit will have been reduced from 100 percent to about 10 percent. But as New York Fed President William C. Dudley noted in his recent introductory remarks at the conference “Fire Sales” as a Driver of Systemic Risk, “current reforms do not address the risk that a dealer’s loss of access to tri-party repo funding could precipitate destabilizing asset fire sales.” For example, in a time of market stress, when margin calls and mark-to-market losses constrain liquidity, firms are forced to deleverage. As recently pointed out by our New York Fed colleagues, deleveraging could impact other market participants and market sectors in current times, just as it did in 1763.

Crown Prince Frederick provided a short-term solution in 1763, but as we’ll see in upcoming posts, credit crises persisted. As we look toward a tri-party repo market structure that is more resilient to “destabilizing asset fire sales” and that prices risk more accurately, we ask, can industry provide the leadership needed to ensure that credit crises don’t persist? Or will regulators need to step in and play a firmer role to discipline dealers that borrow short-term from money market fund lenders and draw on the intraday credit provided by clearing banks? Tell us what you think.

* * *

Fast forward to today when we find that the total collateral value in the Tri-Party repo system as of December amounts to $1.6 trillion.

... or 10% of US GDP. What can possibly go wrong.

 

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Fri, 02/07/2014 - 16:27 | 4412987 Deathrips
Deathrips's picture

Long Wheelbarrows!

 

and toilet paper.

 

RIPS

Fri, 02/07/2014 - 16:30 | 4413003 Divided States ...
Divided States of America's picture

By the time you see a real bank run on your local streets, a stealth bank transfer of epic proportions has already occurred leading up to it. And of course we sheeples will be fighting with each other over the scraps they left in the ATM machine.

Fri, 02/07/2014 - 16:44 | 4413034 walküre
walküre's picture

ATMs are just like chewing gum machines. You can tell when they're empty and there's no magic ATM fairy stocking up the machine in the back walls either.

Banks are no longer useful, neither are their ATMs. If you don't have it by now, you probably can't get to it.

Fri, 02/07/2014 - 17:31 | 4413193 max2205
max2205's picture

Bs.  If they won't let the dow go down 5% do you really think they would allow a bank run...seriously

Fri, 02/07/2014 - 17:47 | 4413247 walküre
walküre's picture

What do you mean "allow" it? The Chinese are running on their banks for a while now which is why they have the liquidity problems. PBoC prints away to fix the holes. How much longer can they print "x" when Chinese confidence getting smaller is "y"? Americans may not be paying attention because of massive massive distractions, but people elsewhere (any EM country) are full aware of what is going on and they are in the midst of a monetary collapse.

Nothing the Fed can do to prevent it from happening over there. The biggest threat the Fed's control is what is beyond their sphere of influence and potentially causing "contagion" in the US.

Run on BTC today. What's that all about?

Fri, 02/07/2014 - 20:35 | 4413922 disabledvet
disabledvet's picture

this is a good question...especially so since it is "unanswerable" (about the future).

we can SPECULATE...but what history teaches us is this "no one proceeds with a bailout with first looking at the books."

2008....was a HIGHLY UNUSUAL...if not UNIQUE..."crisis response."

Unlike the 1906 Knickerbocker crisis where a: JP Morgan (the man) was warned of the danger then b: was warned BY THE TREASURY DEPARTMENT ITSELF of the danger then c: proceeded to IGNORE the danger and "take a nice trip to Italy" then d: "returned to America, headed down to Virginia just to show he was chillin' like a villian" then e: was suddenly EXPOSED to the danger...finally...E: "roared into town on his personal train and immediately demanded to see the books."

this order did not go over well...as upon opening of said books he realized every bank in New York City was broke but his.

Ahhhhhh. Heaven.

Solution? "Give me all your gold and i'll tell all of you how to deal with the over-extension issues. By all means our discount window remains open."

Interestingly "hammerin' HanK" didn't proceed with this option...even though clearly he had all the gold.

Since we can go to the video tape on this it is clear the option he did choose...option "F"...as in "Fannie and Freddie."

This is quite surprising since he came up through the ranks of the "wilding equity trader set"...but goes to show the unique insights he "gleaned" from that experience.

In short "know where your liquidity lies"...in this case not with gold at all with "the debtor of last resort"...namely the Government itself.

This is a VERY radical...i would argue even idea...let alone "solution."
I distinctly recall screaming bloody murder at it at the time...basically going insane with rage and watching as the dollar tanked, gold soared and treasuries got crushed.

And boy did i get a lesson in "why some guys get paid the big bucks" while others do not.

In other words "why not bankrupt Wall Street?" (in effect...by taking all their gold.) This "other" option ("F") seemed HIGHLY speculative to me...putting the reserve currency status of the dollar "right in the cross hairs."

Talk about a vote of confidence!
I haven't read the book...the only definitive account of what actually happened during the entirety of the Bush Years actually...but i did take note it was quite thin.
http://www.bargaineering.com/articles/on-the-brink-by-henry-m-paulson-jr...
interesting that the Russians tried to convince the Chinese to dump all their Fannie and Fred stuff. Hope you enjoy your Olympics!

http://www.theatlantic.com/business/archive/2014/02/hank-paulson-mastere...
when you're in the belly of the beast you often have to ask the question "what is history itself" rather than "will I be remembered and how."

We already know "his" drivers...but does he know "the other drivers" as well?
Perhaps instead of speculating on "what was done" someone will set about the cold hard task (and yes, someone...in fact many...will) of "putting it in context."

There is obviously no way he could have predicted say...the biggest energy boom in US history for example.

Of "trying to divine the impact of Quantitative Easing" as another "fart ramp."
Seemed "historically plausible"...just...had never been tried before.

"Congratulations you are the war effort" does strike me as a rather alarming conditional reality. It wasn't like he was the only Treasury Secretary...the last two had gotten the boot and "his phone was ringing off the hook."

If history were to say anything to me it would be this: "his timing was perfect."
Got out of Goldman RIGHT at the top...and then proceeded to "make history."
Sounds easy..."take charge, start giving orders. Have your orders obeyed." (Ummm...Dad...I need 750 billion dollars...and I need it this week)...nay, veerily. Many people like to THINK they can do this...BE this...WANNNNNNNNT this...nay, veerily indeed..."it fell to one guy."

http://www.youtube.com/watch?v=2eMkth8FWno "and his trusty savant Patsy (Bernanke.)"

Sat, 02/08/2014 - 05:46 | 4414604 zhandax
zhandax's picture

Well now you get a first hand seat to the re-writing of history. Although I may read the book and/or see the movie, that is all this is. As was best witnessed by the depression of 1920-21, the fastest recovery from credit excess is the rapid expungement of bad debt and reduction of government spending. It is painful; it is ugly, but is necessary, and results in the fastest recovery. Hank did nothing but postpone the inevitable and we are still suffering from the results today. I for one am not willing to forgive him for that no matter how elegant the political process in it's execution.  Morgan was within his right to save his banker buddy's asses in 1907 because he used his own money to do so.  It is disingenuous to imply it benefited the country more than the new york bankers and explicitly criminal to allow the federal reserve act to shift the risk of such inevitable credit busts onto the shoulders of the average man.

Sat, 02/08/2014 - 06:48 | 4414670 Tapeworm
Tapeworm's picture

You hit it with, "banks are no longer useful".

 At least not in the greater sense of what will happen when the derivatives chains are severed.

 The risks for savers are at any extreme of all time when compared to the pittance of lending hard earned capital.

Fri, 02/07/2014 - 16:53 | 4413058 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

DS, if we see something similar there will be no steath bank transfer. There will be NO funding of any kind. We will all be broke. This is what should have happened back in 2008-2009.

Fri, 02/07/2014 - 16:56 | 4413068 walküre
walküre's picture

Define broke. Cash in your mattress is never going to zero unless CBs provide new cash in exchange for old cash up to a certain amount and declare the rest nil and void (for example). Gold and silver in your house or at the bottom of the lake are never going to zero either. So, define broke please.

Fri, 02/07/2014 - 17:53 | 4413249 Sudden Debt
Sudden Debt's picture

good point and also already happened in history where the new currency was markt with stamps.

But during WOII there was also something else that is worth telling.

When Americans where in Europe, America was flat broke and didn't have enough dollars.
So therefor, they paid their soldiers with a militairy dollar currency which was widly accepted in Europe in 44.

So when the dollar crashes, America will need a currency to keep their armed forces in check and that will most probably come back.
Maybe not only for the army but a civil servant currency that will be backed by gold of something with intrensic value and, it might sound dirty, backed by the guns of America.

http://upload.wikimedia.org/wikipedia/commons/9/95/10_Dollars_Series_692...

Fri, 02/07/2014 - 18:07 | 4413317 walküre
walküre's picture

Good point. But I'm not selling my biggest eggs and my best cut meats for "civil servant" or "military" Dollars. I'm not discriminating but if the civil servants or the military want to have it, they need to bring gold, silver, art or do me a "favor" once in a while. I learned alot when studying last century Europe.

The royals and farmers typically made out better than ok. I can't be a royal due to my blood type but I can be a farmer. :)

Fri, 02/07/2014 - 19:04 | 4413591 Offthebeach
Offthebeach's picture

Soviet Ukranian farmers, not did so good.

Good luck when the farm tax man shows up demanding environmental impact whatever tax in government fiat only. This makes you, all farmers sell crops into the market.

If you trade, you pay tax, indirectly.

The genius of the present free roaming tax plantation is that they don't go to the violence mat for the last 10%. Not worth the overhead.

Also, as the value of the fed dollar declines, taxes must go up to keep the demand of the junk paper up. Taxes are the price we pay for monetary inflation.

Fri, 02/07/2014 - 17:20 | 4413154 Panafrican Funk...
Panafrican Funktron Robot's picture

Notice that about 70% of the total collateral is agency MBS and US treasuries.  Funny, that's exactly what QE is supporting.  Wonder what will happen if QE keeps getting removed

Crashes don't happen on accident.

Fri, 02/07/2014 - 17:52 | 4413254 GeorgeHayduke
GeorgeHayduke's picture

"And of course we sheeples will be fighting with each other over the scraps they left in the ATM machine."

That's that part I'm concerned about. The owners are masters at controlling the herd and having them eliminate the folks pointing at the owners saying "there's your problem right there." The herd won't listen until it's too late, then they'll take out their anger on the wrong target. Happens nearly every time.

Fri, 02/07/2014 - 16:41 | 4413029 walküre
walküre's picture

Long mothballs for all those ghost cities, ghost malls, ghost trains, ghost ships, ghost mines, ghost cars, ghost anything.

Demand getting smaller and smaller and the supply side is filled to the brim with existing inventory. None of which will be used. On top, the artificial demand for resources all those five long years has created artificial wealth in the EM which is now trying to leave before the exits are secured and tightened.

The FED cannot fix this and prevent the coming collapse.

Would you like to buy the 2012 GM product in 2016 at the same price as the 2017 model year coming out? Of course not, but that is exactly what we're looking at. Shipyards or airplane manufacturers have overproduced based on orders that are being cancelled with penalties. Metals still had to be mined, forged and used. Sitting now unattractive all over the world in half finished, snail pace finishing stages.

Fri, 02/07/2014 - 17:30 | 4413184 Jumbotron
Jumbotron's picture

This from holland history.net

 

In these years Amsterdam banking firms made large profits with money trades and loans to other European banks, who lent the money to their governments that needed the money for the war efforts. To cover the loans large quatities of goods were sent to Amsterdam. But in 1763, because of the end of the war, the abnormal high war prices plummeted, commodity and goods lost their value rapidly. More than 30 banking and trade firms went bankrupt, with an estimated debt of 20 million Dutch guilders.

 

http://www.hollandhistory.net/history_of_amsterdam/banking-crisis-amster...

 

This is why you have the endless "Global War on Terror."  Without the need to flow money into and out of the industrial/military/crony capitalist system and thus create the debt to replenish said flow of funds......the whole thing collapses.  The thing lives because of the inherent inflation that comes from such a system and how the rich feed themselves and we spend more on the scraps that are left.....only to assuage ourselves with idle distractions on TV and with electronic gadgets and iShit.

 

Welcome to Prison Planet.....whose International Anthem is "War Pigs"

 

https://www.youtube.com/watch?v=OGPD0ZBiMs0

 

 

Fri, 02/07/2014 - 17:51 | 4413250 walküre
walküre's picture

Haven't seen you for a while Jumbotron. Good you're back.

Fri, 02/07/2014 - 18:06 | 4413296 Jumbotron
Jumbotron's picture

Thanks walkure.  Took a breather to get my soul right.  Was a bit out of sorts.  Probably because 50 was staring at me then.  Now that that's come and gone a few days ago I feel like putting my two cents in.  But will be way more selective.....and less personal.  I was getting to be a real dick and it was beginning to seep from the Matrix into the real world.  Had to check my self before I broke myself as they say in 'da hood.

Peace be with you my friend.

Fri, 02/07/2014 - 18:23 | 4413384 walküre
walküre's picture

I know the feeling. It's hard to keep a straight face and often fake it when you just know how much bullshit is going on.

One example in this context. I used to be a "religious" man. No, not Nacho. Used to accept the stories and the faith. Now I'm just amazed at how much energy believers are wasting in convincing themselves and others about their beliefs! Once you accept that it is just fiction and no different than any other fairy tale, and you see how thousands of pastors and millions of followers are discussing and dissecting text upon text, word upon word from a fairy tale it gets real frustrating.

Imagine if you will, the people went to a public forum, like a meeting hall or so every Sunday regularly to attend a seminar on any of the books written by Brothers Grimm. Wow, simply wow! "Today we're diving into this piece of Hansel and Gretel and we will read exactly what Hansel said to the witch.... and over and over and over again"

Sorry, hope I'm not stepping on your toes.

Fri, 02/07/2014 - 19:24 | 4413648 Jumbotron
Jumbotron's picture

Nah......no worries.  I am one of those religious men......but you couldn't tell it from my posts.  I had lost the distinction between rightous anger and just plain 'ol "spray and pray" anger.  Plus....just like some folks drink or do certain drugs for the way they make them feel....and to mask the pain.....I love the feel of a good curse word...or two....or 15.  There is something about the feel of a "fuck" or "shit" either coming out of the mouth or typed on the screen.  I just had to remember that Jesus got angry as well.....he just channeled it better.  And whether you believe or not......you've got to like the fact that the only time he showed anger was not towards the sinner and the down and outters.....but it was against the priestly hypocrites and the money changers in the temple.  Whether you believe that he was simply an historical man or the Son of God.....that does tell you a little bit about his character.....and his wisdom towards the corruption of men in power.

Don't be too hard on us religious types.  Not all of us have checked our reason at the doorstep .  Plus, I've got a pretty thick skin.  I know it may seem crazy.  But to tell you the truth.....the more I study quantum physics and mechanics, the more I am convinced that sometime down the road a lot of people will realize that the language the poets and the religious mystics used to describe God and the heavenlies was simply man's primitive and heartfelt attempt to describe and quantify and understand unseen and impossible to rationalize at that time forces we are just now beginning to come to grips over in the scientific language of quantum physics and mechanics.  You will of course never prove the existance of God with simply the mechanical toolkit of science.  But I do believe there will come a day when many rational scientists will realize after further refinement of the quantum sciences that the language and metaphor of religious literature was simply another way to describe the same the thing.  Much like the brain is divided into two parts....one controlling the rational and the other controlling the creative and the emotional.  But one brain none the less. 

And if every particle that makes up matter has a sub atomic and a sub-sub atomic particle that eventually exists in two states at once and transfers in and out of other dimensions......well....whose to say that the brain is simply made the way it is to be a sort of organic antenna.....in tune to both the physical, rational, mechanistic world and the world beyond.....the "spiritual dimension"....if you will?  The one world we can use our rational side of the brain to build tool sets to understand it....to model it.  But perhaps....the other side....the emotional, creative, poetic side is there for just as important a role.....to be able to tap into that which the toolset of science can not right now....or perhaps....never be able to properly model or understand.  But it is no less real.  And no less vital to mankind.

I dream of a day in which the advances of science causes the scientist to reach out a hand and say...."You know....i still don't believe in what you believe....but I must in all honestly have a dialouge with all of you about the tantilizing similarities of what we are seeing in the quantum world and the possibilites that it unveils.....and what your wise men and seers and prophets have written about and the way their language and poetry describes such phenomena."

In other words.....there just may come a time in which "String Theory" or the "Theory of Everything" not only unlocks the secrets of the Physical world.....but forces us to come to grips that the "String" extends and connects each and everyone of us to another world....another dimension.....and perhaps....the "Source" of it all.

Don't ever worry about my toes......I'd rather have a drink and dinner with an honest athiest than a lying "brother of the faith" any day of the week.

Peace be with you.

 

Fri, 02/07/2014 - 20:09 | 4413828 TORNasunder
TORNasunder's picture

I no longer follow a religion, but at one time sincerely pursued Jesus Christ, and gave up much to do so. The possibility of a Creator is sound. But this does not mean they are a 'god' or that they wish to be worshiped. Man created religion to explain the unexplainable, and if you think back even a few hundred years ago, everything was unknown. Man perverted religion because it turned out to be fantastic tool for the few to control the many.

Regardless if you believe in Jesus Christ or not, believe he never existed or was just a man. His message is about freedom and truth. As Jumbo said look at who his adversaries were; priests, scholars, lawyers, bankers, and Gov't officials. That group sounds like natural enemies of truth and freedom and those who love it to me.

Jesus makes it very clear in the four Gospels what it means to be a follower/believer, what today is labeled as 'Christianity' has little to no resemblance to that which he defines. Christ != what has become the religion of Christianity.

We are spiritual beings, that I am 100% sure of. If you want or need to pursue/worship/commune with god, gods, or God then by all means do so. But don't let Religion get in the way.

I believed this 25 years ago and feel even stronger about it today. If God does exist, he loathes religion. For instead of bringing us closer, it actually creates a barrier. Think about it.

Fri, 02/07/2014 - 20:43 | 4413889 Tall Tom
Tall Tom's picture

Well I can demonstrate that the odds of a "Chance Universe" can be quantified as Roger Penrose, one of Hawking's contemporaries, has accomplished. Of course that Number is so close to an Infintesimal that a "Chance Manifestation" is an impossibility.

 

If the Universe was not by "Chance" then it was by Design. Ergo there is a Designer.

 

Other than your claim that it cannot be proven I cannot agree with you more.

Roger Penrose*, a famous British mathematician and a close friend of Stephen Hawking, wondered about this question and tried to calculate the probability. Including what he considered to be all variables required for human beings to exist and live on a planet such as ours, he computed the probability of this environment occurring among all the possible results of the Big Bang.

According to Penrose, the odds against such an occurrence were on the order of 1010123 to 1.

It is hard even to imagine what this number means. In math, the value 10123 means 1 followed by 123 zeros. (This is, by the way, more than the total number of atoms 1078 believed to exist in the whole universe.) But Penrose's answer is vastly more than this: It requires 1 followed by 10123 zeros.

Or consider: 103 means 1,000, a thousand. 10103 is a number that that has 1 followed by 1000 zeros. If there are six zeros, it's called a million; if nine, a billion; if twelve, a trillion and so on. There is not even a name for a number that has 1 followed by 10123 zeros.

In practical terms, in mathematics, a probability of 1 in 1050 means "zero probability". Penrose's number is more than trillion trillion trillion times less than that. In short, Penrose's number tells us that the 'accidental" or "coincidental" creation of our universe is an impossibility.

Concerning this mind-boggling number Roger Penrose comments:

This now tells how precise the Creator's aim must have been, namely to an accuracy of one part in 1010123. This is an extraordinary figure. One could not possibly even write the number down in full in the ordinary denary notation: it would be 1 followed by 10123 successive 0's. Even if we were to write a 0 on each separate proton and on each separate neutron in the entire universe- and we could throw in all the other particles for good measure- we should fall far short of writing down the figure needed.

In fact in order to recognize that the universe is not a "product of coincidences" one does not really need any of these calculations at all. Simply by looking around himself, a person can easily perceive the fact of creation in even the tiniest details of what he sees. How could a universe like this, perfect in its systems, the sun, the earth, people, houses, cars, trees, flowers, insects, and all the other things in it ever have come into existence as the result of atoms falling together by chance after an explosion? Every detail we peer at shows the evidence of God's existence and supreme power. Only people who reflect can grasp these signs.

 

References:

* Roger Penrose, The Emperor's New Mind, 1989; Michael Denton, Nature's Destiny, The New York: The Free Press, 1998, p. 9

Fri, 02/07/2014 - 20:44 | 4413950 walküre
walküre's picture

or multiple designers

Ergo there is a Designer.

Fascinating stuff is out there, that's for sure. Trying to cram it all into one book, much of it based on folklore and fairy tales is a waste of time. Once you've read Hansel and Gretel or Pied the Piper, you get the story and don't need to read it again and again. Some good wisdom in the bible as well, but it's not the end all be all. Concept of strong family and community for example is neither unique nor exclusive to biblical beliefs.

Fri, 02/07/2014 - 20:36 | 4413931 walküre
walküre's picture

I wouldn't consider myself atheist. Evolution doesn't add up for me. Intelligent Design has more merit than deluding oneself into deducting how something as complex as man could originate from a cloud of gases. There's more to the story obviously. God or gods existed or still exist. Alien intervention perhaps.

How do you compute that JC's story came out of nowhere and only 2,000 years ago. Even taking the history of Judaism into account which is still only as old as the history of other peoples. There couldn't be an exclusive claim on godship from this one tribe and its descendants in the face of the evidence of older or equally old cultures.

Apologetics did it for me. A desperate attempt to propagate fiction as truth. Anyway, life is full of surprises and history full of interesting characters. Many men go unnoticed but they were real and accomplished some amazing and unbelievable things. Wouldn't waste my precious time on studying one guy and what several writers had to say about him.

Peace,

Fri, 02/07/2014 - 23:53 | 4414369 Jumbotron
Jumbotron's picture

Fair enough.  Perhaps agnostic then.....if I have to label from afar.  Either way you're cool by me.  I appreciate a good mind that doesn't necessarily believe rather than one that is ignorant but full of misguided theology.  That's not to say I don't believe the fundlemental tenants of Christianity.  I do.  I believe the Word is inerrent.  However, we absolutely do not know squat about the nature of space-time....much less the God who created it.  We barely can grasp even the concept of quantum physics....much less the Author of its principles.  So....when someone ask me about the six days of creation I reply quite honestly and without snark....."Why should I care and what does it matter?"  To a Being that even the Bible says that " A day to Him is like 1000 years and 1000 years is like a day"....which in itself is not to be taken literally in this instance, simply means that time is something that does not constrain Him.  He is not beholden to it.  It matters not to measure.....at least in the way we measure it.

What blew me away one day was watching a documentary on the advances of knowledge in time-space physics including quantum physics.  There was the mention of Einstein's work in relativity and the nature of not only time travel but how we perceive time....particularly as we approach the speed of light.  So in the retelling of one of Einstein's thought experiments, I was reminded of his postulating that he was riding on a particle out in space and it was approaching the speed of light.  What would he observe?  And what you would observe.....if there was nothing else around you ,....would be the steady stretching out of the entire Universe before you until it was an infintessimal, flat plane with no discernable features.  Imagine...if you will.....the blank white world that Neo found himself in when Morpheus jacked him into the computer but with no world program yet in place.  Just a blank, white, featureless void all around.  Plus......although you would continue to age normally in your present state....because of the speed you are travelling....when you decided to pop out of light speed and slow to what we consider "real time" 1,000's, perhaps millions or billions of years would have passed.  To you....one day....one year have passed.  But then you are back home on Earth and it is a molten wasteland and the Sun is now a Red Giant and 1,000,000,000 years have passed.

So.....if God....as well as Jesus....being describe several times as beings of light....in fact Light itself.....were actually the very essence of Light and something even beyond light as photon and waveform (the only primary particle that is BOTH particle and waveform by the way)......then it is not hard to imagine in this "thought exercise" that God would have told the writer of Genesis that He created the world in 6 days and the geological record show billions of year.......and they are both correct and equally truthful.  After all.....why in the world would God even attempt to explain to the writer of Genesis the theory....much less the TRUE reality of Relativity, to such a primitive mind.....at least primitive in the knowledge of time-space physics.  Just tell him the truth.  I created the Universe and the world in 6 days.  It's true from God's standpoint.  We see 13 billion years from OUR standpoint.  Einstein laughs and says......"YOU'RE BOTH CORRECT ! "     LOL !

Now....to your question of JC.  The Bible states in the Gospel of John that Jesus was the WORD or Logos.  He goes on to describe the fact that Jesus as Logos was actually the Creative force of the Universe.  So while God was doing all the " AND LET THERE BE's", Jesus was taking those instructions and acting on them as the "Grand Carpenter" if you will.....just as he was a carpenter in his physical form.  So Jesus doesn't just pop up in the New Testament.  He was from the very beginning.  Plus....the very notion of the Trinity is just PREGNANT with quantum physics.  Here's how.  We know in quantum physics that particles can exhibit both a negative and positive state at the same time.  In other words....plus and minus....on and off.  In the binary world of computing.....and even beyond....if you have enough of these particles together in this state....then quite literally the sum total of all information and truth for any given situation in time with all the various permutations that it could take would be all there.  So why is it hard to understand the Trinity in this light?  God in Three Persons.  Seperately God the Father.....God the Son and God the Holy Spirit. Three seperate states of being while at the same time in a quantum physical state of unity.  Further you could picture God the Father as the sum total state of light as BOTH particle and waveform at the same time.....while Christ, particularly in his fleshly form on earth as the collapsed waveform of God into a particle....that is to say....matter.  And the Holy Spirit would be the waveform itself.....Pure Energy.   Three seperate, distinct states.....all unified as one....AT THE SAME TIME.  That's quantum physics defined in a nutshell right there.

So.....Jesus "pops" into being and world history 2,000 years ago when God collapsed His waveform into matter.....namely DNA into Mary's womb, thus initiating her Virgin pregnancy.  For after all...according to quantum physics all particles are made up of ever smaller particles that eventually not only reach a state of being both positive and negative but travel in and out of this dimension into others....perhaps many.  DNA is no different.  Which begs the question.  Just where does our DNA go...or more specifically....where do the sub-atomic particles go.....before...DURING and after pregnancy ?  Where are they RIGHT THIS INSTANT?  Right now....at a certain level....we all exist in a super-position state of quantum reality where our smallest particles are both positive and negative and float in and out of our space-time reality into other realms.

I know this sounds kind of trippy.....but so is quantum physics.  And it gets trippier by the minute.  To the point of forcing Steven Hawkings, the person most responsible for popularizing Black Holes to now claim they do not exist.....at least the way he grew up understanding them and further more in studying them and making them known to the public at large.  If the quantum physics of the known universe tripped up both Einstein and Hawkings.....can we be surprised that we can't really get a handle on the Author and Master of quantum physics?  However, the more we learn.....we see tantalysing glimpses in the pages of the Bible which can only now be understood...even in a rudementary way.....in light of quantum physics.

So....that's why I don't consider it a waste of time.  Forget just for the moment the whole "dying for your sins thing", heaven and hell and being on the right religious team.  I find only in the Bible, these connections in a  more rational, literary and literate state than any other religious tome.  All the others, the Koran, the Bhagavad Gita, the various Greek, Roman, Middle Eastern and Oriental mythologies read as more or less phantasmorgorias.  That's not to say that in some "String Theory" sort of way the writers of these weren't tapping into the beyond and getting a glimpse but "through a glass darkly".  I believe they were.  But only in a primitive "Jungian" or Joseph Campbell way.  There's very little supernatural stuff really in the Bible as a whole.  It's mostly eye witness history of the origin and development of the Hebrew people.  But when the supernatural stuff is mentioned it is mentioned in a rather matter of fact, eye witness way.  With very little esoteric rumination.  Of course there are the more mystical visions such as Ezekial and John's Revelation.  But even here.....the phantasmorgia of it all is muted a bit when compared to the classic mythologies much less the Hindu mythologies.  In other words....you see more connection with the hard science of quantum physics in the miracles and the supernatural and even the nature of God himself than in any other myth tome.  I think there is fertile ground to be explored here between the linguist, the historian and the quantum physicist.

Ok....sorry.....that's WAY more than my two cents worth.  I guess I'm just adjusting for inflation. 

Later....my friend !

Sat, 02/08/2014 - 01:09 | 4414502 Tall Tom
Tall Tom's picture

God is Light and in Him there is no Darkness.

Since both Space and time tranform to zero by the Lorentz Transformation, then God travels zero distance in zero time. He can be everywhere at once. That solves Omniniscience and Omnipresence.(Just how many electrons are ther in the Universe? Answer: One. There is not a machine out there somewhere making Electrons. )

 

Furthermore a Light is Pure Energy that solve Omnipotence.

 

How did the ancients know that by defining God as Light would make the text consistent when describing the attributes of God?

 

It is amazing to read that you are following a similar path of discovery.

Sat, 02/08/2014 - 05:06 | 4414640 Jumbotron
Jumbotron's picture

No more amazed than me Tall Tom.  I'm certainly not claiming anything close to Divine Revelation the likes of Daniel or Ezekial or John.  But I do think God has blessed me with some sort of ability to "connect the dots" if only from afar.  Take for instance this passage in Psalms 139:13.....

 

"For you formed my inward parts; you knitted me together in my mother's womb."

 

Now certainly this is poetic language.  Indeed, it is even a song as the Psalms are.  Now look at the word "knitted".  Obviously the first thing that comes to mind is a loom spinning thread to make a garment or a rug.  Or perhaps your mom or wife crocheting a scarf together or a sweater.

 

Now,,,,look at a picture of DNA.  Tell me that does not look like a piece of thread or fiber.

 

http://watchdog.wpengine.netdna-cdn.com/wp-content/blogs.dir/1/files/201...

 

Here is a Chromosome.  And lookee here.....it is formed from the "knitting" together of DNA strands.

 

http://www.ncbi.nlm.nih.gov/Class/MLACourse/Original8Hour/Genetics/chrom...

 

Here is an actual electron microscope picture of a chromosome.  It actually looks like fibers from a furry sweater.....something "knitted".

 

http://i.telegraph.co.uk/multimedia/archive/01118/chromosome-460_1118899...

 

Here is a branch chain of amino acids.  They are "woven" or "knitted" together.

 

http://jmorrow50.files.wordpress.com/2010/07/branched-chain-amino-acid.jpg

 

Enzymes....."knitted" and "woven"

 

http://www-group.slac.stanford.edu/com/images/enzyme.jpg

 

Proteins folding.....self "knitting"

 

http://math.nist.gov/hpcc/cstl/proj-2.fig1.gif

 

Muscle tissue and tendons

 

http://www2.estrellamountain.edu/faculty/farabee/biobk/muscle1.gif

 

I mean....come on !  The Psalmist could have used any number of words to describe how God created and nurtured life in a woman's womb.  He could have used the phantasmic language of the pagans.....God could have formed me from the forehead of a goddess or the blood of a slain beast.  But he specifically used the word "knitted"

And lo and behold....science has shown us that just about every thing that makes up our bodies from the tiniest molecular chain to the gross anatomy of the skeletal muscle system take the form of a fibrous, knitted system of systems. 

Now of course....through the course of seeing animals butchered or even cutting into meat himself the Psalmist could have noticed the fibrous nature of muscle tissue and made some sort of connection.  Or it was simply a pure, poetic way to describe the creative process in forming a human in a way someone could understand watching someone at a loom take various pieces of fiber and create something from nothing.

But why is it....once again.....the Judeo-Christian Bible gets its closer to reality....even in the language of poetry.....even down to the molecular level....than any other religious or mythological book?

I just find that a bit intriguing.....and a bit more than coincidence.  It just took several thousand years for the science to catch up to the poet.  I think it's our duty now to start the process of reconciling the poet, the religious seer, to the science.  For me that's the ultimate "String Theory".....the theory of everything.

 

 

 

 

 

 

Sat, 02/08/2014 - 13:27 | 4415143 walküre
walküre's picture

Certainly a strange coincidence if you only read the translations you're using.

King James is the oldest translation and it makes less of an argument for the DNA case:

For thou hast possessed my reins: thou hast covered me in my mother's womb.

The German Luther's bible says

Denn du hast meine Nieren bereitet und hast mich gebildet im Mutterleib

Verbally translated into English: You created my kidneys and you formed me in the mother's womb

How does one get "knitting" from the Arameic word describing kidneys?

http://biblehub.com/aramaic-plain-english/psalms/139.htm

Because you have prepared my kidneys and you have carried me from the womb of my mother.

At least Luther got it right. Luther was a very intelligent and open minded man. He struggled with the church doctrine and abuse just like many of us do. He was a believer of course and never (not to my knowledge) questionned the authenticity of the historical Jesus. Perhaps one of the closest men to have ever come to understand the real message of Jesus through his studies.

Your thoughts on quantum physics and your research on the "God particle" are interesting.

http://en.wikipedia.org/wiki/Higgs_boson

Light is energy. Nothing can live without light. Equating god and light and praying to the sun or sun gods in one form or another is common across all cultures and all ethnic groups. Early men and women thousands of years ago discovered how important sun light was and how essential the light and the warmth to their survival. They couldn't explain anything of course but they knew the sun was important. Over time a cult or several cults formed around the concept of the sun and later the idea that the sun was a god came to light .. pun intended.

As a civilization we have become alot more jaded and alot less pious. We take the sun for granted because the sun is there and won't go away. It goes down every day at the end of the day and comes up again the next morning. We know this because we are connected 24/7 and our communication and travel spans the entire globe. We've also traveled above the Earth and had a view from space. We found solar systems and more suns and we have theories on how suns come to be.

I raise chickens for a living among other things. The chicken and the egg question is still fascinating to me. What came first? Darwin studied all these bird varieties on the Galapagos and figures that there had to be an evolutionary process but he fails to address just how the eggs came to be in the first place. I think Darwin has done good research on micro evolution but it is still a big stretch to assume there was macro evolution.

Life on this planet came from somewhere else. That's my conclusion for now. The code was written and sent to Earth by what is most likely a superintelligent alien life form that has since either ceased to exist or moved on much further into space than we can imagine. Maybe "god(s)".

Sat, 02/08/2014 - 20:56 | 4416117 Jumbotron
Jumbotron's picture

Right....I've seen those translations as well.  And certainly looking more closely to source language sometimes brings about a different way of looking at something and perhaps interpreting it.  I would be interested to know that in Aramaic...(which is close to being a dead language today) and in the societal context of that day....not ours....that the phrase "Because you have prepared my kidneys"....was something analogous to the way we would say, "She had me wrapped around her finger".  Of course that is physically impossible....but we all understand what that means.  The literal statement is simply symbolic of a deeper psychological fact.  Perhaps certain translators....cognicent of that seemingly strange statement were aware of the "deeper" meaning behind such a statement.....and it had to do with the creation of something.....which could be further refined as "knitting", "weaving", "constructing"

What's also interesting is how in the King James the phraseology is "For thou has possessed my reins...."  I have a few horses and one can make a hand-waving argument that Chromosomes bear a certain resemblence to a haulter and reins.  It's a stretch I know.....but that's how I see things sometimes.  Thing is....I don't go out looking for these connections.  They just come out of the blue after reading or hearing or watching something else and not even thinking about religion or theology.  It's just like a light switch turning on the moment a fact is revealed to me and a connection with the spiritual is made.  To me....it must be something akin to what the prophets felt when they received revelation.  Not that mine....if they are that...reach any where to that scale.  But even with these small moments.....the feeling is of amazement and real pleasure.  Funny enough...it's NOT surprise.  Amazement....sure.  But not surprise.  It's as if a voice in my head says......"See....you knew this all along".  But I'm amazed at how that connection manifested itself and when.

I raise chickens too....just not for a living.  Not only have I never done that....but I've never really been around chickens that much in my life.  They didn't really interest me that much as a species.  But I tell you....after having them for about a year......the passage in the Bible in which Jesus has been rejected by all as Messiah after his entry into Jerusalem and the Temple and is weeping after rebuking the priests where he describes what he has been tryiing to do for his people.....

Luke 13:34     "Jerusalem, Jerusalem, you have murdered the prophets and you have stoned those who were sent to her.  How many times have I desired to gather your children as a hen that gathers her chicks under her wings!  But you were not willing!

I've seen this behavior and it's touching enough.....but my adult hens and roosters treat me as a mother hen from time to time.  They all follow me around particularly in the morning when I feed them before going to work.  That's to be expected.  Big Ugly Chicken FEEDS US....let's follow !   But there are times when certain hens will just come up to me while sitting on a stump just admiring the sky and they hop in my lap and snuggle up.....just purring away.  It's quite the feeling when a creature that genetically has nothing to do with you still finds comfort, safety and peace in your company.  It automatically causes a response in me.....a feeling of heightened responsibility and even love.  I desire to protect them.....which I did recently all night on the lookout for a horned owl that took out about 4 of the them over the course of a couple of days. 

But more to the point.....here is this feathered creature and there is this connection that has nothing to do with blood or intra-specie familial relationships.  And yet I understand it's feelings towards its chicks better....I am aware that we do share desires for companionship and protection and saftey and peace, and I understand the heartbreak of Jesus at that moment and the heartfelt desire to save and protect his people that much better.

A 2000 year connection made between God as man.....me.....and a chicken.  How bizarre and profound is that.  But I think that shows just how much God desires to have a relationship with us.  Sometimes it takes a connection so jarringly strange on the surface to break us out of our stupor.....if we only would allow the bio-chemical antenna in our brains to pick up on such signals.  We do it for pulsars and alien life.  Why not God?

Fri, 02/07/2014 - 22:10 | 4414148 are we there yet
are we there yet's picture

Several bankers have left the matrix lately.

Fri, 02/07/2014 - 18:56 | 4413545 N57Mike
N57Mike's picture

Excellent Point Jumbo.......

Fri, 02/07/2014 - 16:27 | 4412996 commercial paper
Fri, 02/07/2014 - 16:33 | 4413008 Bohm Squad
Bohm Squad's picture

What's the old saying?  ..."When you see a line in front of your bank - Get in it!"

Fri, 02/07/2014 - 16:37 | 4413016 halfawake
halfawake's picture

this is the nyfed telling us to get our money out now?

Fri, 02/07/2014 - 16:40 | 4413023 1000yrdstare
1000yrdstare's picture

When you see a line  in the front of your bank YOUR MONEY IS ALREADY GONE! (fixed it fer ya)

Edit: ( it never was your money...)

Fri, 02/07/2014 - 18:26 | 4413409 Hacked Economy
Hacked Economy's picture

Um...I'm pretty sure the cash I have stored outside the bank/ATM is already mine and no longer the bank's.  That's the whole reason I keep most of it outside the banking system in the first place.  FRNs and junk silver.

Fri, 02/07/2014 - 16:42 | 4413033 oddjob
oddjob's picture

At BMO you now have to swipe your card at the teller to gain access to your account. Guaranteed they will have some sort of software glitch when you need your cash.

Fri, 02/07/2014 - 16:42 | 4413035 Darksky
Darksky's picture

OT, but I think y'all are rubbing off on me.

Smashburger CEO was just on cnbs. Unnamed 7' female anchor-azon asked him if he was concerned about the rising price of beef. He said "no we are growing so fast and opening stores so fast that our buying power is growing EXPONENTIALLY so we are able to keep our burger costs from rising." The anchor-azon didnt even blink and went on to next question.

After wiping the Mountain Dew off my nose and iPad, I immediately felt anger growing inside me. So this fuck just thinks he can buy expontentially more beef (nevermind hundreds of competitors buying beef) and things will just be fine. This fuck must be setting Smashburger up for an IPO where he makes billions and the company goes bankrupt in a couple years. He will be smiling on some Caribbean Beach with jamie dimon drinking the finest Rum cheering how they are richer than us.

God this makes me fucking sick. There was a time when i wouldnt have caught onto his line of shit. Thanks everyone here for opening my eyes.

Fri, 02/07/2014 - 17:00 | 4413079 walküre
walküre's picture

He's not concerned about the rising prices of beef because he's serving a SMASHING derivative. They all do. The beef they buy on the hoof gets fed with synthetic feeds before its even in their meat production. The meat gets diluted with more synthetic fillers until the price is "right".

DO NOT EAT FAST FOOD BURGERS just like you do not smoke (anymore). The fast food industry is a link in the chain to severe types of cancers in your digestive tract.

Fri, 02/07/2014 - 17:09 | 4413107 Darksky
Darksky's picture

But he also said something about how the high quality, organic, grass fed, fresh never frozen beef he uses in his burgers is what differentiates his burger from other burgers.

Are you trying to tell me he was lying to me?

Man I'm learning alot here. I wonder who else is lying to me........

Fri, 02/07/2014 - 17:31 | 4413206 Panafrican Funk...
Panafrican Funktron Robot's picture

http://www.naturalnews.com/035124_olive_oil_adulterated_canola.html

Just one random example.  Think it through; there is a shitload of very obvious corruption at the regulatory agencies that supposedly govern the financial sector.  Why would any other regulatory agency get a pass as "assumed to be uncorrupted", particularly given the money flows from entities such as pharma companies and ag companies (FDA, USDA).  

This is the really important reason you should either grown your own food, or buy it from local producers, esp. producers that actually let you visit their farm.  

 

Fri, 02/07/2014 - 17:54 | 4413261 walküre
walküre's picture

.gov is either lying or "bending truth"

As for the burger joint exec. He'd say anything to sell his crap. If he really used grain fed organic beef in his products, the cost would be exponentially higher. There's no magic formula to cheat yield on anything related to food and food supply. If it's cheap, it's filled with crap and preservatives to increase shelf life.

Food production 1:1

Fri, 02/07/2014 - 16:47 | 4413043 antidoomsayer
antidoomsayer's picture

This website is the preserve of nihilist misfits who are misleading the public about impending doom.

 

NOTHING predicted here comes true.

Fri, 02/07/2014 - 17:02 | 4413084 walküre
walküre's picture

The more (of your type) are posting, the more I'm certain the top is in. Go sell some TWTR. Good luck offloading any significant position in any equities to a real buy side partner.

Fri, 02/07/2014 - 17:22 | 4413156 Poor Grogman
Poor Grogman's picture

Bit rich for you to be talking about misfits!

Mr unicorn and rainbow man.

So much discussed here actually does come to occur, sure the world still rolls on, but so much of the glossy bodywork has been knocked off over the last few years that one can now examining the pipe work underneath.

Don't look now but there a few problems still lurking in the financial architecture that will eventually result in major system maintenance or a complete rebuild.

If the financial machinery is pushed any harder or longer, all bets are off.

As for yourself, have you heard the term " sheeple" before.

Fri, 02/07/2014 - 18:20 | 4413376 Rising Sun
Rising Sun's picture

go play with yourself over at Seeking Alpha or Business Insider - where all you nimrods can sit around and talk about stocks that everyone else should buy.

 

Like really asshole, if you don't like it here, fucking leave.  Or die.  Or do both!!

Fri, 02/07/2014 - 18:40 | 4413434 SweetDoug
SweetDoug's picture

'

'

'Nothing predicted "has" come true here. You are of course, referring to the big one?

Actually, quite a bit has come true, with regard to, well, Europe, Greece, BLS revisions, and oh, umm… You must be new.

And lots of stuff isn't about 'coming true' around here, it's about telling the truth and telling it before and infront of the lies or the mid-stream media simply ignoring it.

 

•J•
V-V

Fri, 02/07/2014 - 19:25 | 4413672 hobopants
hobopants's picture

Patience Troll.

The logic is sound and the sleeper is stirring. At this juncture up and down mean the same thing, as the markets and economic reality become violently divorced from each other in the collective consciousness. This volatility is fight or flight kicking in to full swing. People are trading on fear, desperation and denial.

Or from the man himself

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

So don't conflate "hasn't happened yet" with "won't happen"...dumbass.

Sat, 02/08/2014 - 08:31 | 4414722 Agstacker
Agstacker's picture

I predict a down arrow for you...

Fri, 02/07/2014 - 17:25 | 4413147 saturno_v
saturno_v's picture

Someone can please clarify for me a simple concept...how can the modern shadow banking system create money (credit)?
Only banks are allowed to create deposit in excess of their reserve....then we could talk about Steve Keen piece about credit being created regardless of reserves on hand but that is a topic for another day.
You know the drill, I deposit $100 in a bank, the bank lend it out but I still have theoretically access to my money, et voila', money (credit) is created...with reserve requirements lowered basically to zero, banks are limited only by their capital ratio...they still need to acquire deposits (or borrow from other banks) in order to keep lending.
In Shadow Banking, money is created because at some point in the Repo chain a bank is involved??
If I borrow money from an individual or a non banking business, money is not created, I surrender a claim to an asset (a government bond for example) and my counterpart surrender his money to me.
When I buy stock on margin, for example, money is created?
Thank you

Fri, 02/07/2014 - 18:03 | 4413281 walküre
walküre's picture

Shadow banking is a huge deal in China for example. Problem is when the size of shadow banking is equal or greater than the size of commercial banking.

http://www.economist.com/news/finance-and-economics/21595483-big-default...

http://www.ft.com/cms/s/0/90fd764a-7e89-11e3-8642-00144feabdc0.html

http://www.businessinsider.com/china-shadow-banks-2014-1

Commercial loans are behind the massive shadow banking industry. There's no collateral for all the loans created. When the loans or investments in the shadow banking world collapse, the commerical loans go down with it and so goes the commercial bank.

Fri, 02/07/2014 - 19:24 | 4413673 flow5
flow5's picture

The term "shadow banks" is new, but they are actually old school non-banks.  Non-banks don't create new money.

THE SAVINGS-INVESTMENT PROCESS OF THE COMMERCIAL BANKS CONTRASTED TO THAT OF FINANCIAL INTERMEDIARIES: L.J. Pritchard

(A)   The commercial banks create new money (in the form of demand deposits) when making loans to, or buying securities from the non-bank public; whereas lending by financial intermediaries simply activates existing money.

(B)   Bank lending expands the volume of money & directly affects the velocity of money, while intermediary lending directly affects only the velocity.

(C)   The lending capacity of the commercial banks is determined by monetary policy, not the savings practices of the public.

(D)  The lending capacity of financial intermediaries is almost exclusively dependent on the volume of monetary savings placed at their disposal.  The commercial banks, on the other hand, could continue to lend if the public should cease to save altogether. 

(E)   Financial intermediaries lend existing money which has been saved, and all of these savings originate outside the intermediaries; whereas the commercial banks lend no existing deposits or savings: they always, create new money in the lending & investing process.

(F)    Whereas monetary savings received by financial intermediaries originate outside the intermediaries, monetary savings held in the commercial banks (time deposits & the saved portion of demand deposits) originate, with immaterial exceptions, within he commercial banking system.  This is demand deposits constitute almost the exclusive net source of time deposits.

(G)  The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can make loans (if monetary policy permits & the opportunity is present ) which amount to several times the initial excess reserves held.

(H)  Monetary savings are never transferred from the commercial banks to the intermediaries; rather are monetary savings always transferred through the intermediaries.  The funds do not leave the banking system.

(I)     If time deposit banking is to add to the aggregate profits of commercial l banks as a system, it is necessary to assume that the expansion of time deposits per se induces the Federal Reserve to alter monetary policy toward greater ease (or less restraint) to the extent necessary to supply the banking system with an added volume of excess reserves adequate enough to enable the banks to expand their earning assets, & thereby their net earnings, by an amount sufficient to more than offset the overall increase in costs associated with the growth of time deposits.

(J)     The growth of time deposits n commercial banks denies savings to intermediaries, reduces lending opportunities for all institutions (including the commercial banks), and slows down the tempo of business activity; since in their time deposit function, the commercial banks are neither intermediaries nor creators of loan-funds but are simply custodians of stagnant money

(K)   The growth of financial intermediaries has no effect per se on the aggregate assets, earnings assets, gross income, or net profits of the commercial banks as a system; but their growth does activate monetary savings and tends, therefore, to increase the lending opportunities of the commercial banks. The growth of financial intermediaries should, therefore, enhance commercial bank earnings & profits, if the Federal Reserve permits the commercial banking system to exploit their expanded lending opportunities

.

L

 

Fri, 02/07/2014 - 22:32 | 4414198 Urban Redneck
Urban Redneck's picture

Your notion of "the drill" is misguided.

Money creation by a bank does not require any deposits. There are only 3 constraints to a banks ability to print money 1) Regulatory Capital Rules (Tier 1/RWA etc) and 2) Assets - Liabilities = Shareholder Equity and 3) Banker creativity and honesty (in the few instances where the latter exists)

#1 in the US is ~1000 pages (but to demonstrate the perversity the 7/9/13 rule revisions) -- if Jamie Dimon loans you 100k for a prime first lien mortgage that bank asset (mortgage) gets a 100% risk rating, if he loans that same 100k to Federal Gov, the Federal Reserve or the GSEs the loan gets a 0% risk rating (the same as cash or gold), and if it is loaned to another bank it only gets a 20% risk rating (at the end of the calculation isn't quite that linear). Packaging debt, equity and derivatives into new products and passing them back and fourth between banks, or accepting some claim for "future money" from another bank (including collateral transformation but there are other types of future money) isn't as efficient a mechanism of money creation as simply loaning dollars to another bank, but as the actual supply of dollars to print into existence is constrained by the balance sheet, capital rules and the available supply of fodder for the money printing machine, inter-bank transactions allow more money creation and hence profit than lending to you or me (unless they can charge usurious rates exorbitant fees and still be guaranteed repayment).

There is no repo "chain". The repurchase agreement itself has two parties 0,1 or 2 of which may be banks. A tri-party repo has three parties one of which must be one of two banks (in the US). There are however collateral chains, and once a counter-party has your collateral it is generally fungible just like money and can be deposited/loaned/hypothecated as the custodian sees fit until either maturity or a contract covenant is activated.

So if you buy stock on margin, money may* be created depending on who your broker is, but probably not by the act of loaning you money, depending on who "you" are (credit creation is distinct from money creation, even if they aren't mutually exclusive). However, if you buy stock on margin, you have a margin account, which means the bank can loan, swap, repo, hypothecate your securities to their heart's content and in that process both credit creation and money creation likely occur). Where money creation through margin trading definitely does occur is in creating collateral to post against margin calls, particularly at the institutional level.

* I left banking over a decade ago (and investment banking a while later) at which point we weren't anywhere near done fully exploiting the opportunities of the Glass-Steagall repeal, the initial focus was unlocking the "money" in brokerages and getting it into a proper bank where we could create more money directly as opposed to the less efficient collateral transformation/shadow banking method. The primary to impediment to money creation through margin lending to individual traders is that all the banking systems are geared towards a preference of debt over equity and domestic currency over foreign currency (so the complexity and haircuts involved with creating money at the individual trader level, as opposed to a bank loaning money to an investment firm, are (were) prohibitive - but if someone figured out a way to squeeze a few bps of it then someone is doing it. Perhaps someone else around here has more "contemporary" experience in the US than I.

Sat, 02/08/2014 - 00:39 | 4414460 Serenity Now
Serenity Now's picture

Loan sharking (i.e., payday loans) comes to mind.  I read a great article about a year ago that claimed China's entire economy (or a significant segment, at least) was existing on loan sharking at astronomical rates (150% and higher).  I'm sorry I don't have a link.  I have no idea where I read it.

Another example that comes to mind is a second or third mortgage.  There is only one asset to be pledged/mortgaged, but money is created two, three, or more times.

I don't know if this answered your question, but your question made me think.

Fri, 02/07/2014 - 17:24 | 4413165 curbyourrisk
curbyourrisk's picture

If you like your deposits, you can keep your deposits.

Fri, 02/07/2014 - 18:28 | 4413416 Hacked Economy
Hacked Economy's picture

Aaaaaaaaannnnddd.....it's gone.

Fri, 02/07/2014 - 19:07 | 4413607 ThroxxOfVron
ThroxxOfVron's picture

Indeed.

 

Howzit hangin' Curbyourrisk?  

It's nice to see You and the classic Ben-Clown avatar around...

I hope You are well.

Fri, 02/07/2014 - 17:25 | 4413175 Spectre
Spectre's picture

This article should have brought to the forefront the Bitcoin Exchange, Mt. Gox today.

Fri, 02/07/2014 - 17:28 | 4413180 Fix It Again Timmy
Fix It Again Timmy's picture

If you can't see it, how do you know it's there?  That seems to be Germany's problem at the moment....

Fri, 02/07/2014 - 17:39 | 4413216 Poor Grogman
Poor Grogman's picture

"One of the primary financial credit instruments of the 1760s was the bill of exchange—essentially a written order to pay a fixed sum of money at a future date"

Prof Antal Fekete talks at length about these instruments, which he calls real bills, he considers them an essential part of a working gold standard.

However he also considers it essential that they have a statutory time period say 30 days whereby they must be converted into money (gold).

I cannot understand how an arbitrarily fixed time period of expiry could be compatible with a free market gold standard.

Real bills seem to be just another paper promise to pay, of course they will eventually come to dominate the monetary system as people push the limit of how many of these things they can issue. No different from fractional reserve lending I suppose.

Any real bills people out there who can enlighten me?

Fri, 02/07/2014 - 19:41 | 4413728 withglee
withglee's picture

As with all "money" these real bills were "promises to complete trades. " They were created by traders, accepted by the trading partner and quickly exchanged for something he wanted. The key is, to whom and what is being promised. When you buy a house, your real bill is the mortgage. You supposedly promise to pay the mortgage company equal payments for about 30 years and get the house now and have use of it over those 30 years. But they just turn around and sell the loan. Buy the time you've paid for the house there could have been dozens of so-called investors who you were actually paying.

If you read the linked article, they said their bills were short term instruments for long term obligations (i.e. a roll over was built in and expected). Is it any wonder people got in trouble? This was a built in trap door.

A properly manged medium of exchange (MOE) would not exhibit this flaw. With a properly managed MOE, it is the entire marketplace that is accepting the promise. And if you DEFAULT, your DEFAULT is recovered from the entire marketplace through INTEREST collections equaling your DEFAULT. It becomes an actuarial issue, like insurance management. This "guarantees" zero INFLATION of the MOE itself by the relation: INFLATION = DEFAULT - INTEREST.

Any other management of a MOE is a con game and somebody's going to get hurt. They call that somebody the 99%.

Fri, 02/07/2014 - 18:07 | 4413305 SMC
SMC's picture

A rural definition of "Money" to hedge against Banksters, Crony-Capitalists and their political minons...

ZERO DEBT.
Pesiticide free, non-GMO crops
Healthy and well cared for livestock
Fresh and clean water
Production of Ethanol, Methanol and Diesel substitutes
Production of Electrical power
Energy efficient housing and greenhouses
Participate in the community and local governance

Combined with Knowlege, Tools, Ability, Determination and Focus.

Fri, 02/07/2014 - 19:26 | 4413680 withglee
withglee's picture

When a speculative grain deal went bad, the banks discovered that there were limits to how much risk could be effectively hedged.

Improper management of the Medium of Exchange (MOE) creates this domino effect. Such an effect doesn't occur with a properly manged MOE ... just as bank runs don't occur when the MOE is properly managed.

Sat, 02/08/2014 - 13:57 | 4415211 Vin
Vin's picture

Every loan made (once it is utilized by the borrower) requires funding.  If a bank had zero deposits but made a loan anyway, the bank would have to borrow the money in some form such as borrowing the money in the interbank market, or repoing out some collateral that it has in its portfolio, etc.  How is this creating money?

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