Wednesday, Jan 21, 2009
Or ... Banks hit further as pound slides
BBC 'News': Pound slides further as banks hit
This is a classic case of uneducated meeja muddling up cause and effect; bank stocks are taking a hammering because the size of the banks internationally-held debts are increasing relative to GBP. So the sliding pound is the cause of the banks problems, not an effect. Years ago when seeking to abolish student grants, Mrs Thatcher used a similar argument - "A University education leads to higher earning potential". This was missing the point that the two were completely unrelated. Smart people earn more, and smart people tend to go to University. The causal link is absent though.
Posted by paul @ 11:07 AM (2021 views) Add Comment
52 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. mark wadsworth said...
The real comparison is between smart people who went to Uni and smart people who didn't (there is a clear overall advantage to smart people who went to Uni as against those who didn't), or indeed thick people who went ot Uni and thick people who didn't (where having gone to Uni probably makes precious little difference).
Ergo, in teh end, only smart people who benefit would go, and they'd pay for it as well, what's wrong with that?
This is one of the areas where Thatcher was right. In other areas she was totally insanely wrong, so you have to look at her on a case-by-case basis.
2. paul said...
Well, don't forget that the argument was being used to justify a cost-cutting exercise, so the important question is - was her argument valid as a justification for what she wanted to do?
The answer clearly is no because the causal link did not exist then (there was no statistical basis for the claim) and almost certainly still does not exist.
3. bellwether said...
Paul I'm not sure I follow your argument that the fall of sterling is crashing the banks because this somehow renders worthless foreign debt.
(1) Giving that sterling is a sign of a lack of confidence in the UK I would have thought foreign debt would have been seen as a good thing as more likely to be paid back.
(2) The banks will be paid back in sterling whether the loans are domestic or international so I don't see the relevance of currency devaluation on share price which is of course denominated in the devalued currency ie sterling.
I am begining to think we could see a experience a worse stock market crash in UK than elsewhere as foreign investors flee equities denimonated in sterling. Haven't seen anyone suggest this yet but seems probable. Perhaps the FT better twill hold up as a lot of companies earn in foreign currencies.
Although companies that earn only in the UK eg most retailers would be exposed, these look hugely overvalued now given what has just happened to financials.
Think I may have wandered a bit off point but just some thoughts.
4. paul said...
Okay from Robert Peston's (for it is he) blog:
"The connection between sterling and the health of our banking system goes like this.
Our banks have colossal overseas liabilities; they've borrowed huge sums abroad. According to Bank of England figures, the gross foreign currency liabilities of British banks are around £4,400bn (having quadrupled over a decade).
Of course the banks all have matching assets. But the problem is that the assets tend to be illiquid, hard to sell. Whereas the lenders to the banks can often ask for their money back at relatively short notice.
The reason that Royal Bank of Scotland and HBOS - now part of Lloyds - were semi-nationalised in October was that lenders to them were demanding their money back. They were hours from collapse and it was therefore vital that the British state should be seen to be standing firmly behind them, to reassure all lenders to them that their funds were safe."
5. paul said...
So, these banks effectively own HUGE liabilities abroad, which have to be repaid in ... sterling equivalents.
And that is why every time sterling devalues, the amount that has to be repaid increases in sterling terms.
Can you see the problem?
6. str 2007 said...
Being Devils advocate for a second Bellwether.
Due to sterling isn't money owed to us now easier for other countries to pay back and aren't our stocks 30% more attractive as an initial purchase price to foreign investors (particularly Swiss, US & Japanese).
Much like London houses which to us maybe down 20% but to foreigners down 50%.
Assumingthere is a bottom somewhere will it not be found first by foreign investors ?
Just a thought.
7. str 2007 said...
Sorry should have read Due to Sterlings collapse isn't money ......
8. Ketha said...
Yes, the problem is not becoming apparent.. the more Gordon tries to save our economy, the more he lowers the pound, the more the banks owe, the more he needs to save them, on and on... is his plan to get to a point where britain will hold a gun to the world's head and say 'write off all debt or we default and take you down with us'?
I really think that the sad truth is no one has a clue what happens here.. reading HPC for a year pretty much got me to expect that this point would be reached.. i haven't seen any convincing articles that really tell me where we go now
9. bellwether said...
Thanks Paul my misuderstanding it is the monies that the banks are owing not owed. Makes sense now although would suggest that it is not sterling falling which is crashing the banks but ult a lack of confidence in the creditworthiness of our govt the guarantor,
Unless I suppose people are insisting on being repaid now before our currency is worthless ie effectively a run on the banks which is really a run on the currency - I wonder if the creditors are due to be paid back in sterling or their own currency.
The mess become uglier the more it is thought about!
10. str 2007 said...
Paul
I think you've part answered my question (simultaneous posts).
What I think you're saying is if our banks lend money abroad we demand to be paid in Sterling and if we borrow we do so on the basis we will repay in Sterling (so we don't get caught out by a Sterling collapse).
Wait a minute I don't think that's what you're saying.
Have we borrowed like crazy abroad and agreed to pay back in those currencies ?
Oh my God.
Surely standard business practice would have in place some sort of currency hedge to cover fluctuations/total collapse.
Anyone taking out a Yen mortgage who was paid in Sterling would be considered a massive risk taker.
Tell me that's not what we've done..
11. bellwether said...
I know this is obvious but also what is happening with banks shares is exagerated relative to what is happen to currency. If banks continue to exist in any form then they are well priced relative to just about anything else you could buy in the UK right now.
What the market is expressing ( along with its ferocious appetite for shorting finacials) is a view that banks shares are going to be diluted out of existence.
12. mountain goat said...
A lot of debts are to be paid back in $ yes, that's why this is so dangerous
13. paul said...
The closest parallel is a friend who has property in France - when he bought it he regarded it as an asset but now it's a massive liability which goes up in cost every time sterling goes down and down in price along with the rest of the European property market.
It is exactly the same for the UK banks and RBS in particular. The key phrase in Peston's (for it is he) blog is foreign currency liabilities.
Yes, it really is that bad and sterling's falls are making it worse by the day. Now why doesn't anyone in government geddit?
14. fjcruiser said...
If the banks cannot repay their debt, they call on their government to bail them out.If the government cannot repay its debt, particularly its foreign debt as a result of owning these bailed out banks, it has to call on to the IMF.
15. stillthinking said...
To a certain extent, whether UK banks have been lending in sterling or lending in foreign currencies doesn't matter so much. Of course if their external liabilities are in a foreign currency, backed up by a foreign debt which is in default, then their loss is magnified as sterling falls.
But.
The real problem, IMO, is that internal to the UK, moving money around (whether sterling or not) doesn't actually make any difference because it is all in the same banking system. However, irrespective of sterling or a foreign currency, should deposits be withdrawn by foreigners then they -leave- the UK banking system. So if you were to consider all the UK banks mashed up into one single bank, then as foreign deposits are withdrawn and deposited into a -foreign- bank, this is essentially a run on the bank.
So, the falling pound is bad for the banks not necessarily just because of increasing external liabilities, but mainly because sentiment causes funds to leave a system which depends on basically being closed, and also pulls the pants down from the banks because they don't actually have the deposits, they spent them on stuff which has collapsed in value. But if nobody wanted to remove funds from the system this wouldn't in fact matter and they could wait for an asset price recovery (or that seems to be the plan, whether it happens or not).
Basically my key point is that banks work as closed systems, being balance sheet exercises then debts+deposits should equal zero for the UK system, and also for say the French system. Should a depositor move funds from the UK to the French system then debt+deposits for the UK goes negative...i.e. the balance sheet doesn't balance. This is separate from exchange considerations.
16. mountain goat said...
Historically speaking we have a long way to go before the IMF gets called in. Debt levels have been far far higher in the past.
source FT Alphaville
17. cyril said...
Surely the way to stop the currency and everything else sliding into oblivion is to put interest rates up? (They are 18% in Iceland)
18. stillthinking said...
Devaluing sterling is the goal, it isn't the problem, the BoE just want an orderly devaluation, not some dramatic collapse and then a run on sterling. Devaluation helps the export industry and also imports inflation. Personally I don't agree with the reasoning behind weak currencies being a good thing, but that is the -goal- of the UK government now.
19. rm96696 said...
I agree with stillthinking. The government wants sterling to devalue to prop up the housing bubble. House prices have fallen by half in terms of euros or dollars over the last 18 months and the government hopes this will attract foreign "investors" seeking "bargains".
When push comes to shove governments (and not just the current labour one) always prefer trashing peoples' savings to watching house prices fall. In the end its all about politics: we're a nation of debtors and property speculators, not savers.
20. mountain goat said...
Stillthinking & Rm96696 - I agree but this may change. If the banks are nationalised as is becoming increasingly likely then the gov holds debts that have to be paid back in foreign currency. Since our taxes will pay for this devaluing GDP makes these debts harder to pay.
The good news from all this is houseprices. The gov will simply have to let them fall, they will be far too committed propping everything else up to worry about houseprices in the UK.
21. mountain goat said...
sorry - should be Since our taxes will pay for this, devaluing GBP makes these debts harder to pay.
22. george monsoon said...
Mountain goat...
The difference is that we have no farming or manufacturing industry to facillitate a way out of this mess.
The level of debt may be less, but the coffers are empty.
23. Imminent_plunge said...
RM96696 - I wish I shared your optimism. However, I'm convinced the Gov thinks propping up the housing bubble is the only way out of this mess and they will do anything they can (and are doing) to try and prop it up.
24. inbreda said...
18. rm96696 said...always prefer trashing peoples' savings to watching house prices fall.
agreed - which is why (while we are in a temporary deflation stage at least) money is better off stuffed under the mattress rather than in the banks. Yes it would devalue quicker, but it would be safer and would force their hand as they would have a requirement to fund
25. goweresque said...
Does anyone know how much of the banks' lending is similarly in foreign currency? IE have they (say) borrowed dollars on the money markets and lent it to developers in Dubai in those same dollar terms? Surely the issue is not just that $Xbn has been borrowed but whether $Ybn has also been lent in currency other than sterling.
26. Tomwatkins said...
What you people are missing is the calculation of GDP. The rapid downturn in the financial services industry (which accounts for most of GDP these days) is accelerating daily and therefore GDP for 2008 as a whole is irrelevant. This is what the forex market is calculating as well.
27. troy said...
Government bailouts using taxpayers' promise to pay have simply taken the place of the money supply previously created from mortgages, remortgages, car loans, credit cards, and various other forms of consumer and company debt. The practice is however, in the existing situation, not only unsustainable, as were previous 'buubles' but terminal.
28. bellwether said...
rm96696 the house price perspective is too narrrow, if killing house prices would clearly save the economy then even Labour would look to do it.
Like it or not land and property prices are what support the whole rotten edifce and if they drop too much too quickly we invite chaos and the uncertainty of what will emerge from that.
I don't buy that a devalued currency will encourage foreign investors to buy our property. Rents will be in the devalued currency ie it is nil sum unless you expect sterling to strengthen in the medium term making the rents more valuable.
Whether devaluation works depends on who you are, and to what extent you can push it. It is begining to look as if the UK are too small to push it much further.
ST@17 surely the isort of inflation we would import would not be the sort of inflation we want ie wouldn't it just make us poorer rather than the sort of inflation that provides the illusion of growth.
29. plato said...
As far as I can work out: All valuations, currencies or otherwise were too high in the first place. They were inflated and almost everything was bubbling up everywhere. ( I don't believe the official statistics regardng inflation,although I have no proof. I just look at the cost of living we were experiencing)
Banks seem to be caught in the trap of owning asset bubbles such as property here and abroad which balanced their sheets. Currencies are falling at different rates compounding the problem. Assets are falling in value as well. So the answer would seem to be an international agreement not to call in these loans until the markets are allowed to revalue everything.
In other words this means a severe stock market correction is necessary, after which we know where we are.
I'm not technical,but this is how I see this problem. Any help appreciated as currency to me is just part of the problem.
30. troy said...
plato ~~~ your comment "Banks seem to be caught in the trap of owning asset bubbles such as property here and abroad which balanced their sheets" casued me to google "Fractional Reserve Banking" for the first time in several weeks. Aren't puters just wonderful. Google found 180,000 results in just 0.31 seconds. You can spend fruitless days hunting in libraries and bookshops for FRB in the index.
Banks don't work like you and I do they? If you loaned me £1,000 you wouldn't have use of the money until I repaid you.
If a bank loans me £1,000 it appears on their balance sheet (along with the interest) as an asset. That is as if it was still there, like £1,000 worth of gold or pidgeons or jam tarts. They can sell it or use it as 'security' to borrow and lend more.
31. plato said...
thanks troy...........so then it's a gamble with others' money and the law backing the culprit.
32. troy said...
plato ~~~ from the fractional reserve banking google pages I just came across an interesting article on de leveraging from The Mortgager Lender which may be of interest to some of us. Here's a few samples :-
"This makes complete sense when you consider the leverage ratios of the big banks. As I wrote a week ago, Citi has $2.1 trillion of on-book assets and $1.2 trillion of off-balance sheet assets compared to less than $10 billion of tangible common equity. Depending on how much of those off-balance sheet assets have to be taken back onto the balance sheet, Citi’s leverage ratio is impossibly high for the bank to keep operating without government guarantees."
"This is “de-leveraging.” It’s what happens during a “credit crunch.” Those employing too much leverage to begin with, like all the banks, have to shrink their balance sheets by crunching credit: cutting credit lines, selling good assets and raising capital (either from the government or privately). Leverage = Assets / Equity. Reducing credit lines shrinks the numerator; selling assets shrinks the numerator and plugs cash into the denominator; raising capital grows the denominator."
"By pulling credit out of the economy, de-leveraging leads to deflation. Credit is a form of money just like cash. Removing it from the economy reduces the amount of dollars chasing goods and services, lowering prices. We’ve already seen this with housing prices of course: As mortgages are harder to come by, fewer people are able to buy a house. Demand falls relative to supply, so prices fall too."
http://optionarmageddon.ml-implode.com/2008/12/02/understanding-deleveraging/
33. troy said...
Just realised the above is part of a set of tutorials! including one on Leverage (contempory FRB) itself.
So what is the capital cushion underneath our largest financial institutions? I spent today compiling this spreadsheet:
(CHART HERE in file) and loaded with formulae throughout.
Those are some ugly numbers and I’ll explain why. Citigroup’s leverage ratio of 56 means that the bank has $56 of assets for every $1 of common equity. If the value of those assets falls 2%, then common stockholders are wiped out. Here’s why: Assets = Liabilities + Equity. If you understand this formula, you will understand the credit crisis. So read on…
http://optionarmageddon.ml-implode.com/2008/11/24/leverage-by-the-numbers/
34. troy said...
last one then I'll shut up ~~~
"Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of sovereignty of Parliament and of democracy is idle and futile... Once a nation parts with control of its credit, it matters not who makes the nation's laws... Usury once in control will wreck any nation. "
William Lyon Mackenzie King ~~~ Canadian Prime Minister
35. This comment has been removed as it was found to be in breach of our Blog Policies.
36. plato said...
p.doff.........
Would you mind not communicating with me in that manner you are a complete idiot.
37. troy said...
p.doff ~~~ what do you mean don't create the interest? I can't find any reference to it anywhere.
If google can come up with 180,000 results for FRACTIONAL RESERVE BANKING then what is surprising is that so few posters are discussing the issue in tune with the rest of the world!
Have you got anything positive and/or constructive to say?
38. This comment has been removed as it was found to be in breach of our Blog Policies.
39. James said...
32 - but he did it wrong... repeatedly. Troy does at least seem to be on the right lines - even to understanding a balance sheet, which is still WAY beyond Malct, p4ac, crunchy - any of those big sillies.
troy - it has been on the site, quite a lot - viz:
http://www.housepricecrash.co.uk/newsblog/2008/07/blog-this-film-criticises-the-gold-standard-and-provides-other-solutions-pointing-out-that-gold-is-primarily-held-by-private-banks-15139.php
http://www.housepricecrash.co.uk/newsblog/2008/09/blog-history-is-it-beginning-to-repeat-itself-16688.php
40. James said...
Incidentally, Troy, reviewing those threads, you'll need to be careful sharing your understanding of FRB on here. Because, you see, there are an awful lot of posters who don't understand it and think it's a malign creation of an evil conspiracy to control the masses... And if you do understand it (as you seem to) you're working for them...
41. James said...
Troy - actually - the thing about the loan / asset remaining there? That's just a function of accounting - i.e. if a metal basher sells you a widget, in the period you owe that company money, that will also appear as an asset on their balance sheet.
42. flintster1994 said...
Now now ladies,
It doesn't matter who's who at the end of the day. It's about a variety of information. I'm sure that the level of intelligence shown on this site is quite capable of accepting or discarding bloggers posts. It is a wee bit annoying though, granted.
43. troy said...
flintster "Damn all I want to do is good things!"1994 ~~~ I agree and am pleased to have the opportunity to offer my appologies for the wind up yesterday. It wasn't intentional and some of your points are a valid explanation.
It is quite clear that some bloggers with a dreadfully narrow view of what this site is about and what is really happening to us, together with a separate element of VIs put pressure on HPC webmasters to prevent discussion of subjects which others consider valid if not critical.
44. plato said...
Ignorant personal remarks invite personal reaction....so I hope I am not invited to react again!
45. flintster1994 said...
troy,
Appologies are not necessary; I like to think I'm pretty thick skinned.But your humility is appreciated and noted.
Plato,
I understand your point and the difficult thing is to rise above it. I know, from my negative reactions, in the early days, of visiting this site.
Most of us now realise that house prices are pretty much incidental with regards to the bigger picture. However this site has boundries, whether we like it or not and the most important thing is to stay unconfrontational ( as possible) and syphon off the information that is more relevant to the bigger picture.
We are entering a new age and I believe that agendas have been set. Working out what these agendas are is paramount to realising what has been planned. It is very easy to think that this mess is purely down to human incompetence. Very easy indeed. I call it the gully(apparently that's what I called my comfort blanket) syndrom.
46. plato said...
flintster1994 ..........
Appreciate your rationality. Usually I do ignore. However this particular character made a direct unfounded suggestion bordering on mockery which I do not take lighty and is consistently practised in this manner. My retort was therefore fact and not my opinion which is far worse, and like this comment will be widely read and deservedly so.
Some medicine has justly been administered.
47. flintster1994 said...
James
Do you mind if i ask you why you have an interest in blogging on this site?
I'm seriously interested. What do you get from it?
48. phdinbubbles said...
You remove two quite inoffensive comments and keep the comment describing someone else as a complete idiot. A simple lesson in human psychology for you - those who protest first and play the victim and accuse others of winding them up are actually the bullies - Normal people have a sense of shame and defend themselves with reasoned arguments when challenged and will back down if they question themselves and rationalise their behaviour wasn't acceptable - Bullies restate their position and refuse to back down - i.e. describing an earlier insult they made as being 'fact' and projecting blame onto someone else - e.g. saying someone invited them to react - no they did not. That's the equivalent of a badly behaved two year old saying that someone else made them do it, in response to being challenged about their behaviour.
Perhaps you should ban me from posting and then I can make up different usernames and come back and have conversations with myself by pretending to be different people.
49. p. doff said...
37. troy said...''p.doff ~~~ what do you mean don't create the interest? I can't find any reference to it anywhere''.
1. troy said...and the fact that the debt is ~created~ but the interest comes out of the economy was it crunchy that kept going on about this?
Tuesday, January 13, 2009 05:46PM Report Comment
9. Malct said...troy @ 5.40pm When they create the debt based money supply they do not create the interest.
Tuesday, January 13, 2009 08:04PM Report Comment
RES IPSA LOQUITUR
50. p. doff said...
37. troy said...''p.doff ~~~ what do you mean don't create the interest? I can't find any reference to it anywhere''.
3. troy said...''do you think malct or crunchy have or point about interest and the drain on the economy?''
Remember now?
The case for the prosecution rests!
PS don't take it too seriously (you too Plato) - it's only a bit of fun on a bloggsite.
51. troy said...
Thank you for the clarification p.doff but I really meant in text, essays, articles or books.
52. James said...
flintster94 - okay... I'm a chap who didn't buy a house in 06/07, though I was in a position to do so. I like the newsblog part of this site as it has a bunch of good articles that confirm that my thinking was more or less right. Dozens of people seeking out all the economic news that is in the papers.
I suppose what you're getting at, in a snarky way (apologies if I'm misattributing snark where there is none) is that I do hae a tendency of correcting people. That's true enough, but it's only motivated by seeing people writing stuff that's wrong. Just plain wrong.
For example, let's say you know about cars. I know very little about them. If you found a forum that contained loads of great car news, but then there were a number of commentators on each thread insisting that Skodas were absolutely qualitatively the best cars available due to the 'fact' that their carburettors contained a filter made of finest mahogany, wouldn't you be tempted to correct them? Especially if you had a little too much time on your hands?