Reply To: Inflation: What's holding the dam together?


“A” bank can’t buy assets prior to its collapse, unless you mean “buy assets to prevent collapse” in which case it is not in a pre-collapse situation, anyhow (since its flush with liquidity)

If “A” bank buys assets then declares “whoops, we’ve collapsed,” those assets would be liquidated in bankruptcy and go to creditors. In normal times. Admittedly, we do not live in normal times, but even now most banksters won’t take that level of risk. (They’d have to find a way to shift the assets). If one, even major, bank steps out of line in this way, odds are they just get their throat slit for not playing well with the others (though the executives will parachute away quite rich, still, even as all the customers get screwed, MF Global-style, baby!); so “a” bank won’t do it until they credibly believe others are about to do it, too; then each will rush to be first lest they get left holding the bag.

If all the major banks jump together they could do what you describe but they would then, as I described, be precipitating the very crisis their jumping would be responding to (“it’s impending, so we jump now”); they could then hope to get away with it because it’s “systemic” and they would hope to be bailed out again, and probably would be, but it’s not an obvious winning move for them because they would also be destroying most of their current banking assets (such as those are), which are various dollar-based accounts & derivatives.

Of course, if and when they decide those assets are already essentially worthless anyhow, they could say “screw it, lets do it.” I guess that’s what to watch for. But probably it won’t be a coordinated plan but a near-simultaneous response in the face of a panic precipitated by some external event (like a major bank in China or Dubai, or sovereign wealth fund, deciding the dollar has had it and dumping tons onto the market at one time, causing others to do the same). I dk what the odds of that happening is, but Professor Herbener’s replies suggest that it’s very low in the near term.

Each year the current policy path goes on, though, the odds go up. Something I’m not sure Professor Herbener would disagree with.