Thursday, Aug 20, 2009
More pushing on that elastic ...
Metro: Bankers pass on just a third of rate cuts
This article is quite informative by Metro standards. It tries to perpetuate the myth that there is an economic link between the BoE base rate and mortgage rates (or indeed savings rates) with this:"While the Bank of England has slashed the base rate from five per cent to 0.5 per cent since August last year, the average mortgage rate has fallen by just 1.3 per cent." but at least they allow the lady from Lloyds to explain this: "Banks are now raising funds through longer-term funding; this is more expensive to do as longer-term interest rates are typically higher than short-term rates."
Posted by mark wadsworth @ 09:58 AM (678 views) Add Comment
11 Comments
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1. flashman said...
The link between BOE base rate and mortgage rates is not much weaker than it used to be. Banks have reverted to the mortgage lending profit margins, they enjoyed before the boom. The boom caused the banks to jockey for market share and they consequently reduced their profit margins to a level that could only be sustained by super high volumes. Obviously the current market does not support this strategy, so they have increased their margins to pre boom levels. This has given the impression of a broken link
2. techieman said...
flash - a bit like the reduction on margins on the exotic default instruments. You start off with low competition and big fat juicy margins, then everyone else gets in on the act, then the whole thing becomes more and more lopsided, then you forget about the risk and dont bother to insure the super senior or insure it with monolines who cant pay if the thing they are insuring against happens en masse.
Ay a tipping point the whole lot goes t1ts up and then the leverage works the other way and the rates go through the roof - or the cover is not available at all - so the downward spiral starts!
Such is the price of trying to achieve continued growth - or is that greed? Was it buffet that said that sometimes you just need to go to the golf course? Doing nothing is sometimes better than doing "something".
3. flashman said...
techie: your first two paragraphs constitute as good an explanation of the cause of boom and busts, as I’ve ever heard. It makes you realise that boom and busts are the natural rhythm of things and that they can't really be avoided
4. techieman said...
Shucks flash you are embarrassing me! I suppose the issue is that we never keep enough reserves in the good times, when things get too extreme and our peers are making bundles its all a bit of herding. I am no expert on the CDS etc. markets but as you have said its just a reflection of the human condition. We end up being sucked in because everybody else is making tons and there is pressure to not be left behind.
By the time the prudence is found to have been the right course after all - its been abandoned!!!
5. mark wadsworth said...
F, somebody pointed out that in times of yore, the BoE base rate was set at approximately equal to 3-month LIBOR, a rule of thumb which held for decades, until late 2008. So it's a question of which follows which (or which is set in anticipation of changes in the other).
T has outlined the Austrian School analysis of credit booms and busts (which is quite accurate, that's exactly how it is), but so what? A credit bubble cannot exist in isolation, there always has to be a corresponding asset price bubble. There's not much you can do about credit bubbles (human nature being what it is) but there's a lot you can do about land/property price bubbles ...
6. flashman said...
mark: regarding land/property price bubbles: there is a rising school of thought that land value tax would be the solution. You should look it up :)
7. techieman said...
M surely its how credit bubbles manifest - i.e. in what markets. As i understand it in the 20s/30s in the US the stock market was in effect the manifestation because people could by on 10% margin - so the credit bubble was linked to the stock market bubble.
Now its manifested in property (although you could argue that it was manifested in part in the tech bubble, although the bursting of that didnt cause widespread - in terms of numbers of people - effects).
Are you saying it always relates to real estate? If so then the taxes you recommend would be a good way of reducing this, but wouldnt the credit bubble manifest elsewhere is my point. I suppose works of art or tulips spring to mind!
8. techieman said...
without going on this time the credit bubble was probably even more linked with property as the MBS (and "derivaties" of it) game became the one to play in!
9. flashman said...
I think the human condition will always cause us to covet a particular asset class, at any one time. It can be for status, gain or just to fit in. LVT would put an end to house price bubbles but like techie says, we'd find something else to covet and there would be a corresponding credit boom to back it up
10. mark wadsworth said...
T, the dotcombubble didn't matter much because it wasn't done by leverage, it was just cynical people taking money off gullible people, and no 'systemic risk'
The 20s/30s US stock price thing was an anomaly (and easily fixed by e.g. Glass-Steagall etc).
The tulip bubble was government engineered, quite deliberately - by legislation, all sale/purchase agreements were converted into call options, where the option price was set at 3% of the contract price. So if tulip bulbs were really worth $3, you could offer $100 for them - worst case, the price fell to below $3 (and you were no worse off than if you'd bought them outright), and best case the price rose (so you exercise your option).
The UK property price bubble has a lot to do with artifical restrictions on supply (so more money ÷ same assets = higher prices), in Ireland/Spain it had to do with joining Euro and corresponding fall in interest rates, in the US prices rose enormously in areas with strict planning laws and hardly at all in the state without planning laws.
I've looked into these bubbles - and they do usually relate to land and property (certainly in terms of sheer volume of £ billions and longevity - who cares about a brief blip in food or oil prices, for example), and there is usually some government meddling/unintended consequence behind them. Now, what is this "LVT" of which you speak?
11. techieman said...
Mark i totally accept you knowledge on these issues has a high correlation with your passion for tax reforms. Thats to compliment someone that has "done the research". So i can stand corrected. I suppose land is the most accessible to the masses, so what you say does make sense..... until it isnt (accessible i mean, by your proposed measures).