porca misèria

Mervyn King Is Our Best Hope

37 posts in this topic

Obviously King is a divisive figure but the OP is not suggesting that he was a good Governor in the past, rather that he is the only person making any noise about banking reform.

As to the relevance of banking reform, I think about it this way - given that we don't have capital controls to stop money flooding into the country chasing yield at present we are faced with either accepting boom/bust cycles in the mortgage market or doing something about the inevitable "money flood" that will turn up sooner or later as a consequence of the globalisation of capital.

I take is as given that boom/bust cycles in housing are a bad thing and that anything that reduces their scale and duration is a good thing.

As no-one is talking about international capital controls it seems that the next best thing is controls on where UK mortgage lenders can get their capital from. This is what I take to mean as "banking reform" though I have to admit that I haven't read Vickers (yet).

What the market can provide is a mechanism to make sure that the people who lend to the banks have an enlightened self interest in assessing the credit risk associated with the loans that the UK banks intend to make with the money that they borrow from the money markets.

Whilst the 2009 Banking Act means that a large bank can be resolved, the banks are so big and so opaque that people in the market probably still believe that they are "underwritten" by the UK government and will not be allowed to fail.

We need to change that perception and in order to do that we need banking reform.

IMO as King is the only member of the elite still talking about that then if you agree that banking reform is a good thing then you have to acknowledge that regardless of his complicity and culpability in making the mess he is presently our best hope for meaningful banking reform following as a consequence from the attempt to clean up the mess.

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[quote name='thecrashingisles' timestamp='1336303156' post='909031506']
-1

It was the raising of rates in 2006-2007 that made the system go pop. If it had been done earlier, the scale of the problem would have been considerably smaller. The two cuts from 4% to 3.5% should have gone in the other direction and continued upwards.

[/quote]

I'm not going to disagree with you as it is my impression that you know rather more about rate changes and their effects than I do, however I would raise the related matter that it was events in the US which revealed that all was not well in the mortgage securitisation chain and it was this change in market perception rather that any rate change that led to the evaporation the of large volume of cheap mortgages that was sustaining the boom.

As the system is so complex and interrelated it's more like a disclosure of my innate storytelling bias than an argument, but it seems to me that it was the rise and fall of the high-LTV interest only self-cert mortgage that was the final chapter in the saga. When, because of the cessation of the securitisation chain, the supply of these toxic mortgages dried up demand for houses and hence prices suddenly ran off the edge of the cliff.

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[quote name='thecrashingisles' timestamp='1336303156' post='909031506']
-1

It was the raising of rates in 2006-2007 that made the system go pop. If it had been done earlier, the scale of the problem would have been considerably smaller. The two cuts from 4% to 3.5% should have gone in the other direction and continued upwards.

As for the argument that the Bank of England were powerless due to the global situation, what an indictment of the BoE's influence. As the governor of the BoE, Mervyn King didn't have to rely merely on his ability to persuade. He also had the power to materially affect the global situation in a way that would force others to take notice.
[/quote]

Absolute BS. It was the discovery of massive fraud in the 2006 vintage subprime CDO's that popped the credit bubble. The idea that central banks raising interest rates by 0.5% here or there is the real cause of it is just bankers smoke and mirrors.

Central banks were liable only in the sense that they didn't regulate the banks enough. More importantly the criminal justice system is at fault because it's effectively decriminalised fraud as long as you're a big bank.... (in the US at least)

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[quote name='gadget' timestamp='1336303923' post='909031516']
Absolute BS. It was the discovery of massive fraud in the 2006 vintage subprime CDO's that popped the credit bubble. The idea that central banks raising interest rates by 0.5% here or there is the real cause of it is just bankers smoke and mirrors.

Central banks were liable only in the sense that they didn't regulate the banks enough. More importantly the criminal justice system is at fault because it's effectively decriminalised fraud as long as you're a big bank.... (in the US at least)
[/quote]

Also late 2000's all inflation that had been pumped into property bubble started leaking out all over the place. The consumer cannot handle >$100 oil, they do not have the income to cover it and all the follow on inflation in basics. When the consumer stopped taking on even more debt because their budgets were already being eaten alive by these prices the debt bubble imploded as they simply ran out of the ability / desire to keep the ponzi scheme going.

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[quote name='ChairmanOfTheBored' timestamp='1336303806' post='909031512']
I'm not going to disagree with you as it is my impression that you know rather more about rate changes and their effects than I do, however I would raise the related matter that it was events in the US which revealed that all was not well in the mortgage securitisation chain and it was this change in market perception rather that any rate change that led to the evaporation the of large volume of cheap mortgages that was sustaining the boom.

As the system is so complex and interrelated it's more like a disclosure of my innate storytelling bias than an argument, but it seems to me that it was the rise and fall of the high-LTV interest only self-cert mortgage that was the final chapter in the saga. When, because of the cessation of the securitisation chain, the supply of these toxic mortgages dried up demand for houses and hence prices suddenly ran off the edge of the cliff.
[/quote]

[quote name='gadget' timestamp='1336303923' post='909031516']
Absolute BS. It was the discovery of massive fraud in the 2006 vintage subprime CDO's that popped the credit bubble. The idea that central banks raising interest rates by 0.5% here or there is the real cause of it is just bankers smoke and mirrors.
[/quote]

The road from subprime lending to outright fraud is paved with low interest rates. Subprime has two necessary conditions - mortgage introductions from naive borrowers, and excess demand for apparently low risk high yielding assets. Low base rates are essential to facilitate both.

The idea that the whole saga of subprime mortgage securitisation was a phenomenon independent of interest rates is fanciful.

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[quote name='thecrashingisles' timestamp='1336304863' post='909031533']
The road from subprime lending to outright fraud is paved with low interest rates. Subprime has two necessary conditions - mortgage introductions from naive borrowers, and excess demand for apparently low risk high yielding assets. Low base rates are essential to facilitate both.

The idea that the whole saga of subprime mortgage securitisation was a phenomenon independent of interest rates is fanciful.
[/quote]

Exactly, that was the purpose of low interst rates, riggind the gilt/treasury yields, and that of QE.

TO HERD INVESTMENT INTO RISKIER ASSSETS.

Even if they didn;t pass the smeell test insurance comapnies, pensions, investmonet co's bought CDO's, MBS and the other trash because they had no other choice to have any chance of funds keeping up with inflation or providing an actul investment return.

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[quote name='gadget' timestamp='1336303923' post='909031516']
Absolute BS. It was the discovery of massive fraud in the 2006 vintage subprime CDO's that popped the credit bubble. The idea that central banks raising interest rates by 0.5% here or there is the real cause of it is just bankers smoke and mirrors.

Central banks were liable only in the sense that they didn't regulate the banks enough. More importantly the criminal justice system is at fault because it's effectively decriminalised fraud as long as you're a big bank.... (in the US at least)
[/quote]

Apart from the fact the 0.50bp cut in '05 sent all the wrong signals, the cut from there down to the half percent we're at now for three years says it all, no matter which direction you approach it from - bank insolvency risk/savers'plight/inflation. Any apologists for King could be said to belong in a bag marked KP

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[quote name='thecrashingisles' timestamp='1336304863' post='909031533']
The road from subprime lending to outright fraud is paved with low interest rates. Subprime has two necessary conditions - mortgage introductions from naive borrowers, and excess demand for apparently low risk high yielding assets. Low base rates are essential to facilitate both.

The idea that the whole saga of subprime mortgage securitisation was a phenomenon independent of interest rates is fanciful.
[/quote]

Yeah i'll agree with some of that... the search for yield was a big driver of the fraud.

But the thing that the pile-on on King is trying to achieve is "don't regulate and split up the banks, the only reason we stuffed our pockets with loot was because the evil Bank of England dropped rates 0.5%"

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[quote name='OnlyMe' timestamp='1336305324' post='909031539']
Exactly, that was the purpose of low interst rates, riggind the gilt/treasury yields, and that of QE.

TO HERD INVESTMENT INTO RISKIER ASSSETS.

Even if they didn;t pass the smeell test insurance comapnies, pensions, investmonet co's bought CDO's, MBS and the other trash because they had no other choice to have any chance of funds keeping up with inflation or providing an actul investment return.
[/quote]



I think the process is slightly different.

If entities (countries, people etc.) fail to trade in balance, and without fiscal means to redress such a balance, the remaining tool to avoid mass default is interest rates to keep the credit engine pumped...but the indebted simply become more and more indebted.

QE is a continuation of this policy, but the 'rich' are almost universally able to gain even more by getting into assets of various kinds as QE and low rates make them even richer. Meanwhile predominantly currency holders are the ones stuffed, ie. those with savings but not so much they feel they can 'risk it' on assets - they are the ones that bear the brunt of the mathematical need to bring the money system back into balance and stop it blowing up.

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[quote name='Banana Monarchy' timestamp='1336301411' post='909031491']
Output is still below 2008.
[/quote]
Remind me. What exactly are you measuring?

Oh, right. Consumer credit is down on 2008.

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[quote name='No Future' timestamp='1336292240' post='909031411']
It was the fact he stated "there was no chance of foreseeing a bust because there was no discernible boom" has really destroyed his reputation as far as I am concerned.

In fact he still can't see it....which is why he has to go with his reputation in complete tatters.


EDIT: He has plainly over estimated the productive capacity of the economy both in managing growth but also by the fact he always foresees well above target inflation falling back below target 2 years out because of the "output gap".
[/quote]
So if you had been the governor you would have said houses are in a bubble and need to drop by 20% and undone all the work the low rates have achieved over the last three years?

I wonder how many people read his lecture and amended it before it went out.

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[quote]

King's words of June 2007 were truly extraordinary. What more could a Bank of England Governor have said, without being accused of spreading panic? [i][b]And when it comes to his "lack of market knowledge", King didn't have detailed break-downs of each banks' balance sheet because the bank supervision had been transferred to the (Treasury-controlled) Financial Services Authority back in 1997.
[/b][/i]
[/quote]

I find that difficult to understand (along with quite a few other things in the article).

According to the Bank Act 1998

[quote]

[2A Financial Stability Objective

(1) An objective of the Bank shall be to contribute to protecting and enhancing the
stability of the financial systems of the United Kingdom (the “Financial Stability Objective”).

[i][b](2) In pursuing the Financial Stability Objective the Bank shall aim to work with other
relevant bodies (including the Treasury and the Financial Services Authority).
[/b][/i]
(3) The court of directors shall, consulting the Treasury, determine and review the Bank's
strategy in relation to the Financial Stability Objective.
[/quote]

So they're supposed to work together so I'm sure they could have had any information they needed or wanted. If the FSA had refused the information the BoE could have insisted on it or insisted on a change in the rules. The BoE could have gone to banks directly to get the information.

The 1998 Bank Act gives the BoE authority to obtain relevant information.

The BoE has responsibility for protecting the UK's financial stability and can't get hold of a detailed break-down of each banks' balance sheet??? - oh do come off it. Edited by billybong

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