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It's right there in the blockquote: investorsspeculators are buying shares on broker credit.

So no, obviously it's not QE money.

Bubbles are self-fuelled because the expectation of returns encourages speculators to buy shares on credit, and it encourages the brokers to lend for share purchases. After all, if share prices will go up, the loan pays itself, doesn't it? And the credit purchases are share purchases, so they increase share prices and so the positive feedback loop.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:07:15 AM EST
[ Parent ]
What reserves (if any) must brokers have to lend on?
by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 04:27:16 AM EST
[ Parent ]
I'm not sure, that's probably an SEC regulation unless the broker is a bank.

But I'm guessing not much. And brokerage margin lending is probably a big contributor to the "shadow banking system".

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:46:10 AM EST
[ Parent ]
I do not recall that this question was dealt with in my Money and Banking course. From an SEC PDF: SEC Financial Responsibility Rules

SEC amended the net capital rule (Rule 15c3-1) in 1975 to establish uniform net capital standards for brokers and dealers' registered with SEC under Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). With few exceptions, all broker-dealers registered with SEC must comply with this liquidity standard.' The primary purpose of this rule is to ensure that registered broker-dealers maintain at all times sufficient liquid assets to (1) promptly satisfy their liabilities-the claims of customers, creditors, and other broker-dealers; and (2) to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate. The rule achieves its purpose by prescribing a liquidity test that requires a broker-dealer to maintain the greater of a specified minimum dollar amount or specified percentage of net capital in relation to either aggregate indebtedness (generally all liabilities of the broker-dealer) or customer-related receivables (money owed to the broker-dealer by customers) as computed by the reserve requirements of Rule 15c3-3. The net capital rule thus enhances investor/customer& confidence in the financial integrity of broker-dealers and the securities market. The net capital rule applies only to the registered broker-dealer and does not apply to the broker-dealer's holding company or unregulated subsidiaries or affiliates.'

To me it is difficult to see which of the SEC and Federal Reserve is worst at prudential regulation.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 11:02:13 AM EST
[ Parent ]
ensure that registered broker-dealers maintain at all times sufficient liquid assets to (1) promptly satisfy their liabilities-the claims of customers, creditors, and other broker-dealers; and (2) to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate
If this is really "in excess of liabilities" then the bigger the margin lending bubble the bigger the drain in liquidity in the system at large.

IMHO, and somewhat counterintuitively, insisting on liquidity buffers actually decreases systemic liquidity, as it ties down a large fraction of the available liquidity.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 11:43:48 AM EST
[ Parent ]
Well, my 'intuition' was completely useless trying to imagine the effects of that statement.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 12:37:17 PM EST
[ Parent ]
investorsspeculators are buying shares on broker credit

Is this something new, like the result of some deregulation?

What I mean is that there was the dot-com bubble when worthless stocks were sold with "knowledge economy" mumbo-jumbo; then there was the subprime mortgage/derivates bubble when mortgages with little hope of repayment were re-packaged to be sold as the safest investment around; what's the biggest Ponzi scheme this time?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon May 19th, 2014 at 01:19:12 PM EST
[ Parent ]
Is this something new ...

Not really.  Mr. Market has once again decided This Time It's Different©.  In my view because corporations, etc., are sitting on whacking great Piles O' Cash and haven't a clue what to do with it.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon May 19th, 2014 at 01:23:38 PM EST
[ Parent ]
Mr. Market has once again decided This Time It's Different©

But if it's not broker credit, then what's the trick this time? What new story they tell investors to convince them that This Time It's Different? What's the biggest latest "financial innovation"?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon May 19th, 2014 at 02:21:15 PM EST
[ Parent ]
I can't believe anyone thinks It's Different This Time. What they think is that there's a heap of money to be made in this bull run, and they're smart enough to get out in time.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 02:38:38 PM EST
[ Parent ]
speculators are buying shares on broker credit

Is this something new, like the result of some deregulation?

You should really read John K. Galbraith's The Great Crash, 1929. It's a short little book.

I mean, blowing bubbles is what "market participants" do...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 06:38:10 PM EST
[ Parent ]
From the chapter The Twilight of Illusion in The Great Crash:

(Sorry about the readability, there still seems to be a 600px limit on image height...)

by afew (afew(a in a circle)eurotrib_dot_com) on Tue May 20th, 2014 at 02:17:56 AM EST
[ Parent ]
No need to posit financial innovation or new Ponzi schemes in order to explain a margin-loan-fuelled bubble.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue May 20th, 2014 at 06:08:28 AM EST
[ Parent ]

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