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Why Did Central Bankers Allow Teaser / Discount Rates?

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A few commentators have said that if banks had restrictions placed on them over pay the bankers would find ways around it, like payment in kind ie paying for kids schooling etc....

So where teaser rates designed to undermine monetary policy and get around the rules? For many banks the loan as it was wasn't profitable but what made it viable was turnover. The more loans they made the bigger the profits. Long term the loans may not be profitable but that wasn't the point, the goal was the short term profit which was clearly very large and too tempting to resist.

Why did the central banks allow them to get away with undermining there own base rates with teasers or discounted?

Had someone modelled a system where continually undermining the base rate with loss leaders was more profitable and appeared to be sustainable?

Central bankers love talking the talk but apparently don't do the walk?

Why did they allow there banker friends to undermine there own stability policies?

Interest rate policy had effectively become useless and yet the central bankers continued with the charade they where in control.

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greenspan was pushing it a lot in 2003/04

basically he was worried about deflation (remember bernanke's helicopter speech at the time?)

by encouraging people to believe rates would remain low for longer people thought it was safe to go on teaser/arms. he wanted people to get lower rates so they could refinance, get more debt, keep the ponzi finance scheme going again after the ponzi nasdaq blewup

and the fed was so gentle in raising rates believing market rates would price in higher rates and shift the yield curve up

did they hell. they just believed the fed was a wimp and would never hurt them

a bundesbank style surprise 100bp hike in 2004 would have saved us all from global meltdown 4 year's later

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why? they needed to produce CDOs by the million....there was huge demand for these high yielding, riskless assets. from your pension fund, your local authorities and of course, our bankers.

they managed to turn a base rate return on a sub prime mortgage to a base rate PLUS return and made it AAA . Magic.

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Cut throat competition among mortgage lenders meant they would offer loss making teaser rates in the hope that the customer would stay with them beyond the teaser rate period. Even in 2007, you could still let teaser rates of Base Rate MINUS half a per cent.

Not easy for Central Bankers to intervene. Imagine if they banned low rate mortgages? The yah boo nanny state brigade would have been on their case.

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  • 433 Brexit, House prices and Summer 2020

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