Foreclosures, capital and sickening cures
-James Saft is a Reuters columnist. The opinions expressed are his own-
A dilemma at the heart of the response to the financial crisis is that the antidote to so many ills actually causes the symptoms to worsen.
Take for examples bank capital levels and the chaos surrounding home mortgage foreclosures.
Both issues are the fruit of the same tree: the desire to do things quickly, cheaply and with minimal safeguards. And both, if you want to fix them, are probably going to slow the economy and lower asset prices in the short term.
So over the long term, paradoxically, the economy will slow and asset values fall anyway.
Being in possession of a hammer and sighting a nail, Governor of the Bank of England Mervyn King put it bluntly on Monday: “Of all the many ways of organizing banking, the worst is the one we have today.”
He’s not kidding and he’s probably not far wrong – the current system has enshrined too big to fail and the upcoming new banking regulations, Basel III, calculates the need for capital based on losses during the last crisis.
Markets make prisoner of the Fed
“Market participants should not direct policy,” Kansas City Fed President Thomas Hoenig warned listeners at a town hall meeting in Lincoln, Nebraska, back in August. Unfortunately that is precisely what is now happening.
Hoenig noted that Wall Street’s clamour for cheap money was not disinterested: “Of course the market wants zero rates to continue indefinitely … they are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases.”
Now the same pressure groups want the Fed to launch a second round of asset purchases so they can sell U.S. Treasury bonds to the central bank (in effect back to the federal government) at inflated prices.
A new round of securities purchases provides investors with an exit strategy from what might otherwise be a dangerous bubble in the bond market. Every bubble needs a “greater fool” prepared to pay a higher price for the asset to keep the bubble inflating. In this case, the guaranteed sucker is the Fed itself.
Meanwhile quantitative easing (QE) has pushed up the value of all the risk assets institutions and investors hold, giving the market a highly desirable insurance policy.
Set aside the question of whether the Fed should socialise investors’ risks and losses in this way. Set aside also the issue of moral hazard — whether by bailing out investors the Fed will encourage more excessive risk-taking behaviour in future. Most officials admit recent actions have increased moral hazard but believe it is a problem to be solved in the long term by appropriate supervision.
The immediate policy question is whether the prospective QE programme is contributing to stability in the financial markets and an environment likely to encourage more long-term investment by businesses and job creation. In other words, is QE succeeding in its own terms, meeting the objectives set by the central banks themselves? There are several reasons to be extremely doubtful.
The trade of QE causing intense inflation harming primarily the poor and further QE to keep the S&P alive is a hard choice.
The Poor, rationing between food and fuel, now reaching to the lower middle class, which Mr. Bernanke when addressing food & fuel doesn’t consider as real inflation conflicting with Europe’s measurements; or propping up the S&P and Dow by maintaining a cheap dollar and pushing exports.
Unfortunately his positive arguments for QE is weakened by the Large corporate entities going rapidly offshore to avoid paying American Corporate taxes. It’s tough when your chosen constituents stick it up your rear.
Cross-dressing in fiscal, monetary policy
“For what is a man profited, if he shall gain the whole world, and lose his own soul?” (Matthew 16:26)
Bank of England Governor Mervyn King and his colleagues on the Monetary Policy Committee (MPC) might be tempted to ask the same question.
For the governor has seized control of fiscal policy, only to lose control of monetary policy.
In the run-up to and the aftermath of the UK general election in May, King has acquired unprecedented sway over the broad outlines of the budget through his influence over the policies of the Conservative-Liberal Democratic coalition, and especially “Iron Chancellor” George Osborne.
King is credited with encouraging the coalition to opt for a front-loaded, aggressive deficit reduction strategy to ensure Europe’s sovereign debt crisis does not spread to Britain. His influence has been cited as decisive by senior Lib Dems in persuading their party to sign up for a coalition agreement committing them to deep, controversial spending cuts.
Not since Montagu Norman (1920-1944) has any governor wielded this type of influence. It is all a far cry from the 1970s, when the Bank was dismissively known as the East End branch of the Treasury.
But in becoming one of the inspirations and architects of the government’s deficit reduction strategy, King has increasingly tied his hands and those of his colleagues on monetary policy.
Monetary policy is one of the best criteria and economic way to know the place of a person. It is mainly used to low unemployment, low inflation, economic growth, and a balance of external payments.
http://www.mikeastrachan.com/
from The Great Debate UK:
Greenspan and the curse of counterfactual
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
Suppose that, instead of appeasing Nazi dictator Adolf Hitler at Munich in 1938, Neville Chamberlain had taken Britain to war, what would today’s history books say about the episode?
It is of course impossible to know. Perhaps something along the lines: “the British prime minister’s stubborn refusal to compromise resulted in a war which dragged on for 6 months at a cost of over 300,000 lives.....” Make up your own scenario.
We can never know. But we can be 100 percent certain the history books would NOT now say anything like: “by refusing to appease the dictators, Neville Chamberlain saved more than 30 million lives, prevented the division of Europe and saved the world from 40 years of Cold War”.
In the same way, we can be absolutely sure that, if former Federal Reserve Chairman Alan Greenspan had raised interest rates and tightened credit in 2005 or 2006, putting a stop to the lending boom before it could become a risk to the banking system as a whole, he would not today be feted as the man who saved the world from the worst financial crisis in 60 years.
More likely, opinion would be divided over whether the ensuing recession, with the loss of maybe 1 percent of GDP and 100,000 jobs, was at all necessary.
Critics would have called for Greenspan’s head and possibly even for the Fed to lose its independence, while the defence would have been left lamely quoting the famous dictum of a previous chairman that it is the job of the Fed to take away the punchbowl just as the party gets going.
All we need is Banker’s salary/bonus should be consistent to other sectors. Huge bonus makes them greedy and force them doing creative accounting to boost bonus. We need to stop all bonuses, if they want to go away, they are most welcome. There will be no shortages of bankers in this job market.
Actually government and we the general public are responsible for their activities. We made them too greedy. In developing countries bankers doesn’t have those benefits,yet doing their job.
So I’m agree with Laurence and want lower payments for bankers. If they need more money, they are most welcome to leave job and do their own business. Only then they will realize life is not a bed of roses.
from The Great Debate UK:
Can inflation be controlled by raising interest rates?
- Mark Bolsom is the Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. The opinions expressed are his own.-
One of the Bank of England’s Monetary Policy Committee members, Andrew Sentance, was quoted this morning suggesting that the Bank of England will need to consider raising interest rates this year if a “recovering economy poses a threat to inflation.”
Sentance’s view that inflation will rise is consistent with our forecast and is also backed up by the recent upwards trend in the UK’s CPI Manufacturing data. A rise in inflation is unsurprising, given the Bank of England's asset purchasing scheme, which aims to boost liquidity through printing more money. Inflation has also been bolstered by a weak pound, rising oil and commodity prices, as well as the return of VAT to 17.5 percent.
However, whether rising inflation can be controlled by raising interest rates, as Sentance suggests, is debatable. Historically, central banks have used interest rates to combat inflation, as they act as a brake on credit consumption – as rates become higher, credit becomes more expensive. Hiking up rates therefore offers the consumer an incentive to save, and reduces liquidity in the economy.
However, the current problem faced by the Bank of England is that raising rates above their current level of 0.5 percent will not have a positive impact on liquidity, because credit remains relatively tight. Although billions have been injected into the financial system, it seems that, thus far, this is still being used to build up balance sheets and asset prices. Relatively little has filtered through to consumers, and borrowing remains both restricted and difficult.
Similarly, increasing interest rates will not curb rising input prices in the manufacturing industry and eventually this sector will be forced to pass on these rising costs as they feel the squeeze.
It is also unlikely that the Bank will want to raise interest rates whilst Britain faces a period of extensive fiscal tightening. Due to the UK’s ballooning budget deficit, taxes are expected to rise and government spending is to fall. I think it would be far too premature for the Bank to raise rates against this backdrop of government spending cuts and higher taxes.
In praise of smaller banks, less volatility
– James Saft is a Reuters columnist. The opinions expressed are his own. –
If we want a world with safer banks, we need to be prepared for the consequences; lower growth over a painful medium term but the promise of making it up over the long run as we suffer less devastating financial blowups.
A banking system forced to operate with more capital and a higher proportion of safe, liquid assets is one that will shrink and charge more for credit, potentially retarding growth as we transition to a different mix of financing.
This may also imply better returns to credit investors outside of banks, but perhaps lower returns for equity. The prize for most thought-provoking speech by a central banker of 2009 quite possibly goes to David Miles, of the Bank of England, who this week delivered an address considering the implications for the economy and monetary policy of changes in the financial landscape.
“The result of pursuing policies that significantly reduce the chances of another banking crisis like the one we have seen is likely to be a smaller banking sector,” Miles said.
“That is something that creates transitional problems, but it is not something we should seek to avoid.” There is, of course, very great doubt that the reforms we end up with are effective in reducing the chances of another binge and bust, but let’s pretend for a moment that banks are forced to operate with fewer sails unfurled.
First off, it is important to understand how profound have been the recent changes to how banks operate; how they fund themselves, what they own and how they lend.
Banks seem to be one of the few industries impervious to government breakups. While its valuable to have a large deposit base, and nationwide or global coverage, this strategy tends towards consolidation. While we still have several major banks, any issues and they could further consolidate, and entrench what is becoming a monopoly.
Basically, Citi should have been broken up by the government. While they have shed some assets, they continue to wheeze and bleed. Due to many of the shotgun weddings during the crisis, they have basically created a banking cabal. When the government decides to get tough on banking, and not through pseudo socialism or ineffective regulatory overhauls, then we will have a more competitive and healthy banking sector. The breaking of past monopolies always ultimately benefited both the companies and the consumers.
BoE extends QE, fears 1930s re-run
– John Kemp is a Reuters columnist. The views expressed are his own –
The Bank of England’s decision to continue with its asset purchase programme, or quantitative easing (QE), at the rate of 50 billion pounds per quarter in Oct-Dec, unchanged from Jul-Sep, shows bank officials are more worried about ending support for the recovery too soon than about risking inflation by leaving it too late.
The problem with QE is that you have to keep buying the same amount of assets each month to maintain the same monetary stance. With interest rates, the Bank can cut them and they stay cut. If asset prices drop with QE, it represents a tightening of monetary policy.
The Bank initially bought 75 billion pounds in the first 3 months (Apr-Jun) and then tapered this to 50 billion in the second three months (Jul-Sep) as the crisis engulfing the banking system and the rest of the economy eased. A cautious approach might have tapered the QE programme again to 25 billion in the final three months of the year before ending it entirely at the start of 2010. But the Bank opted to stick at 50 billion.
Critics point out that the programme has not achieved its announced objective of increasing bank credit and the amount of money in circulation. The rate of growth in M4, the broadest money supply measure, has risen only marginally. But that ignores the counterfactual of what would have happened to M4 in the absence of the programme — it might have fallen sharply.
Growth in the monetary aggregates is, in any event, mostly endogenous. It depends on demand for credit. In the current environment, where many households and businesses have little or no collateral, credit is impaired, and most are focused on paying down debt rather than adding to it, limited growth in M4 is not surprising. Trying to make it grow faster is like force feeding a duck to make foie gras — possible but unnatural.
Cheer up John, it could be worse…
“After the last Great Depression, Keynesian economists emerged victorious in proposing that a nation must spend its way out of crisis. This time around, they will be proven wrong. The world is a very different place now. Loose credit, easy spending and massive debt is what has led the world to the current economic crisis, spending is not the way out. The world has been functioning on a debt based global economy. This debt based monetary system, controlled and operated by the global central banking system, of which the apex is the Bank for International Settlements, is unsustainable. This is the real bubble, the debt bubble. When it bursts, and it will burst, the world will enter into the Greatest Depression in world history.”
from http://www.globalresearch.ca/index.php?c ontext=va&aid=14680
from The Great Debate UK:
Bank of England faces dilemma on QE extension
-- John Kemp is a Reuters columnist. The views expressed are his own --
LONDON, April 9 (Reuters) - The Bank of England's terse press statement announcing it will maintain overnight rates at 0.5 percent and continue the existing 75 billion pound quantitative easing (QE) programme gives no clue about whether the Bank intends to extend the programme when the first tranche of asset purchases are completed in June. But officials will have to make a decision soon: unless they signal a commitment to extend QE, gilt yields will rise even further in anticipation that the major buyer in the market will withdraw. The QE programme is dogged by ambiguity about its objectives (which a cynical observer might conclude is deliberate). Officially, the aim is to prevent inflation falling below target by accelerating money supply growth, not manipulate the yield curve for government and corporate debt. In this, the Bank's avowed strategy is more conventional than the Fed's ambitious efforts to determine the cost of credit for borrowers throughout the economy. It is a straightforward quantitative easing patterned on the Bank of Japan, rather than a credit easing patterned on the Fed. If true, the measure of success is how much the money supply has been boosted at the end of the three month period; the Bank should be indifferent about whether ending QE causes yields and borrowing costs to rise. So long as money supply has risen consistent with the inflation target, and the Bank can discern some green shoots of stabilisation if not recovery, officials can declare victory, end the programme, and keep the other 75 billion pounds of asset purchases authorised by the chancellor in reserve. Yields can be left to find their natural level. But many suspect the Bank's real objective is yield control -- in which case it will have to announce another round of buy backs of gilts and corporate bonds in good time, well before the current programme is completed, to shape market expectations. The results of the existing round have been unimpressive. After falling initially, gilt yields are almost back up to the level they were at before the Bank's foray into unconventional monetary policy. The snag is that if the Bank stops buying, other investors will struggle to absorb all the new government paper on offer without a major increase in yield -- pushing up borrowing costs for everyone, precisely what the Bank has sought to avoid. The Bank's dilemma is whether to push on (heightening fears about inflation) or call a halt (risking a spike in yields all the same). Either way, the Bank needs to give the market, as well as the Treasury and the Debt Management Office, plenty of warning about its intentions. (Editing by Richard Hubbard)
from The Great Debate UK:
Quantitative easing a last resort
-Alan Clarke is UK economist at BNP Paribas. The opinions expressed are his own-
As expected, the Bank of England left the Bank Rate unchanged at 0.5 percent at the April meeting, the first unchanged decision since September 2008.
The accompanying statement was short and sweet. The Bank has accumulated 26 billion pounds of asset purchases and will take a further two months to complete the planned 75 billion pounds of purchases - see you next month!
It is disappointing that gilt yields haven't remained low - partly because of firmer economic data, but also because the market is wary of the exit strategy. Hence the statement was a bit of a missed opportunity. The Bank has run out of interest rate ammunition and hence is having to use alternative measures including quantitative easing. Some form of verbal intervention, voicing a desire to get gilt yields lower could have been a cheap and easy way to loosen conditions in the economy.
Ultimately we expect the scale and duration of quantitative easing to be more than most expect. Our models suggest that if the Bank Rate could fall below zero, interest rates "should" be -4 percent. That shows the magnitude of the stimulus that is required from unconventional policy. Given this, we expect Bank purchases of assets to amount to as much as double the 150 billion pound that the Bank is currently authorised to spend.
Quantitative easing is called unconventional policy for a reason. It is the last resort. We don't know if it will work; if it does work we don't know how well it will work or how quickly it will work; we don't know how big any side effects will be. If it was so fast and effective then it wouldn't be unconventional - we wouldn't bother moving the Bank Rate, we would use QE instead.
The point is, it is going to take a long while before we discover if QE has worked. The typical lead time between interest rates and the economy is 12 to 18 months. Hence as a starting point, that is the horizon over which we should be able to conclude whether the programme of asset purchases has worked.
good article as usual..thanks !