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Sir John Gieve Says Banks Shoud Lift Rates, Not Print Money

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I heard this being discussed on BBC's Wake up to Money this morning.

It starts 13 mins in

http://www.bbc.co.uk/iplayer/console/b00v149f/Wake_Up_to_Money_04_10_2010

(On the same show, there is also an interesting discussion about how the banks are broke. That starts at 5 minutes in.)

I looked up the article they discussed, but being The Times, it is subscription only now, so this is all I could find......

http://www.thetimes.co.uk/tto/news/

"Banks Urged to lift rates, not print money

The Bank’s former deputy governor Sir John Gieve said the central lender should return borrowing costs to normal levels in the next two years."

On Wake up To Money, they commented that the opposite was being said last week, so there is a split, and a lot of discussion within the mpc right now.

They said Sir John makes the point that inflation has been well above 2% for some time now, and if at some stage, this were to run out of control, the obvious first thing to do, would be to raise rates.

But on the other hand, bearing in mnd, we seem to be in a weak recovery, raising interest rates could choke that off.

So maybe that next bout of QE, is not such a done deal after all?

They also said on the front page of the Times today, there is an article saying George Osbourne has made a pledge to end the city's dominance. He doesn't want too much growth in one sector, he wants more invested in high spreed rail, green technologies and medical research.

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IMO, the conflicting views about what should be done with the base rate, demonstrates why setting interest rates centrally is flawed. Why can't banks extend credit depending on the supply of money, the demand for loans and the risk of default? In short, the central bank is disrupting the pricing signals, which the market keeps trying to listen to.

Increasing rates at a time when people are struggling not to default, may be even worse for savers; if the debts can't be repaid at the higher rates, debtors will default, resulting in a possible hair cut for savers and bond holders (if there are insufficient capital reserves). Alternatively, it will mean more printing to bail out the banks, which is also bad for savers. It would be like a negative interest rate, via defaults/debasement*. Ofc, it may help to purge the system, but it may not be to the benefit of savers (including those with pension funds).

Perhaps this hand will be forced in time anyway, as when inflation takes off, I don't know what else they can do to slow it, other than the raising of rates. With all that printed money sloshing about, rates could end up sky rocketing... I hope those with big debts have paid them down by then or they will be in big trouble! :unsure:

* Which isn't to say this approach is invalid, but it will hurt those with savings/pensions if banks start to fold as a result. This doesn't even consider the effect it would have on businesses, which could be substantial.

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IMO, the conflicting views about what should be done with the base rate, demonstrates why setting interest rates centrally is flawed. Why can't banks extend credit depending on the supply of money, the demand for loans and the risk of default? In short, the central bank is disrupting the pricing signals, which the market keeps trying to listen to.

Increasing rates at a time when people are struggling not to default, may be even worse for savers; if the debts can't be repaid at the higher rates, debtors will default, resulting in a possible hair cut for savers and bond holders (if there are insufficient capital reserves). Alternatively, it will mean more printing to bail out the banks, which is also bad for savers. It would be like a negative interest rate, via defaults/debasement*. Ofc, it may help to purge the system, but it may not be to the benefit of savers (including those with pension funds).

Perhaps this hand will be forced in time anyway, as when inflation takes off, I don't know what else they can do to slow it, other than the raising of rates. With all that printed money sloshing about, rates could end up sky rocketing... I hope those with big debts have paid them down by then or they will be in big trouble! :unsure:

* Which isn't to say this approach is invalid, but it will hurt those with savings/pensions if banks start to fold as a result. This doesn't even consider the effect it would have on businesses, which could be substantial.

Lehmans failed.

The world is still here.

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Bank of Credit and Commerce International, Baring went bust too.

Also..note that banks are on 4% ish margin at the moment... say rates go to 2% and is shared 1% each way, then only the extremely indebted will go bust - and rightly so.

By the way, higher interest is just a tax, and so is inflation. At least if we raise rate, only the reckless would go bust, if we let inflation takes its toll, then even the prudent will go bust.

There is no easy painless choice at this juncture.

Edited by easybetman

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Also..note that banks are on 4% ish margin at the moment... say rates go to 2% and is shared 1% each way, then only the extremely indebted will go bust - and rightly so.

What would be a normal margin? or, put another way, what would the base rate normally be at for this level of lending rates?

Peter.

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I read the article. Problem is that Gieve and people like him still see only two alternatives - continued "recovery" or intervention of some sort (most likely QE). Letting nature takes its course i.e. a healthy dose of deflation isn't seen as viable option by anyone in any position of influence.

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What would be a normal margin? or, put another way, what would the base rate normally be at for this level of lending rates?

Peter.

A the peak of the bubble Some lenders were operating at a rate less than the base rate (all those teaser rates), partly due to the ability of bank's to do Fractional RB and the Loan to Deposit ration of >100% (BoS was on 140+%).

Historically, mortgage rate are within 1% of base rate (hence you got all these base + 1% tracker).

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Bank of Credit and Commerce International, Baring went bust too.

Also..note that banks are on 4% ish margin at the moment... say rates go to 2% and is shared 1% each way, then only the extremely indebted will go bust - and rightly so.

By the way, higher interest is just a tax, and so is inflation. At least if we raise rate, only the reckless would go bust, if we let inflation takes its toll, then even the prudent will go bust.

There is no easy painless choice at this juncture.

4%?

against the capital yes, but if they borrow @2% and lend @4%, thats a 100% mark up on cost.

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4%?

against the capital yes, but if they borrow @2% and lend @4%, thats a 100% mark up on cost.

Exactly and then multiply for fractional reserve and you get profits of 1000% for the system as a whole. Its rational to strive to be a banker in this system don't you know <_<

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Exactly and then multiply for fractional reserve and you get profits of 1000% for the system as a whole. Its rational to strive to be a banker in this system don't you know <_<

Correct. There are two sorts of people in the world: bankers and idiots. :angry:

(Unfortunately I'm an idiot.)

Edited by Nationalist

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Exactly and then multiply for fractional reserve and you get profits of 1000% for the system as a whole. Its rational to strive to be a banker in this system don't you know <_<

except....with leverage, they only need a 2% default and they are toast....indeed...as they are.

and with assets falling, and there is a danger that US MBS issues could be worthless ( denninger.net)..they/we have a big problem coming up.

Im still unsure how to protect myself.

I think hinding under the table will do little good.

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All the banks could fail. The world would still be here.

What's your point?

Sorry, It wasnt meant to be a critique of your post, just a general comment, apologese for my laxness.

My point was, the threat from Lehmans...the DAY BEFORE THEY DIED...was that there would be systemic collapse.

It didnt happen.

threats from bankers should be ignored...indeed, I think the man in the street may well start doing so when things get even harder in the coming months.

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Sorry, It wasnt meant to be a critique of your post, just a general comment, apologese for my laxness.

No worries.

My point was, the threat from Lehmans...the DAY BEFORE THEY DIED...was that there would be systemic collapse.

It didnt happen.

threats from bankers should be ignored...indeed, I think the man in the street may well start doing so when things get even harder in the coming months.

I think there could have been consequences for letting the whole lot go. We may have been in a better place if we had let it all go, but there would have been winners and losers.

What I was trying to outline, is that raising the interest rates may not be good for savers. Nominally, they may do better, but adjusted for inflation, who knows? If it meant there were many defaults and lots of money printing, in real terms, they may be worse off.

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No worries.

I think there could have been consequences for letting the whole lot go. We may have been in a better place if we had let it all go, but there would have been winners and losers.

What I was trying to outline, is that raising the interest rates may not be good for savers. Nominally, they may do better, but adjusted for inflation, who knows? If it meant there were many defaults and lots of money printing, in real terms, they may be worse off.

I think the banks and the Governments have been slipping into a deep dark place between a rock and something very nasty for a long time, way before 2007.

Deflation is the natural remedy for this, and heads will be culled by the process.

Sadly, they will try to avoid this as the very people they are bailing are the worst hit.

If the currency subsequently fails, we will get the deflation required by default.

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4%?

against the capital yes, but if they borrow @2% and lend @4%, thats a 100% mark up on cost.

Against funding cost (wholesale or depositor, about the same at the moment) shall the credits (loan) made are transferred out.

Other than LBG, none of other big banks are having LTD > 100% though so the leveraged is no where the theoretical 10x

(though not sure whether they count their toxic asset as 'loan')

Banks capital cost is around 10% at the moment - i.e. if banks are to issue a Tier 1 sub ordinate bond, about 10% yield is needed at the moment.

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What I have been saying for months - low rates are damaging the economy.

And there is not vast amounts of printed money 'sloshing about' in the economy because it was all used to purchase government debt which went to fund the current level of defecit spending.

Meanwhile people who have savings have stopped spending money in the real economy because interest rates are so low

And people with debt aren't spending either - they are paying down debt.

Andrew Sentance said the same thing the other week and he was 100% correct.

Why should banks lend money to businesses in a recession if the interest they can charged does not cover the risk involved?

They may as well sit on any money they do have and consolidate their balance sheet.

The BOE has lost what little credibility it had IMO

:blink:

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No worries.

I think there could have been consequences for letting the whole lot go. We may have been in a better place if we had let it all go, but there would have been winners and losers.

What I was trying to outline, is that raising the interest rates may not be good for savers. Nominally, they may do better, but adjusted for inflation, who knows? If it meant there were many defaults and lots of money printing, in real terms, they may be worse off.

Raising interest rates would curb inflation

At the moment inflation is being ignored and savings are being eroded to bail out people who got themselves into debt.

This will bite the economy in the ass IMO because we need a much higher savings ratio in the UK and people who were living off interest are either not spending or will spend what they have and claim benefits instead.

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Raising interest rates would curb inflation

Yes, it would. But we now have a load of printed money to hold back, which could cause rates to go very high, leading to...

[quote name='Game_Over' date='04 October 2010 - 03:16 PM' timestamp='1286201816'

At the moment inflation is being ignored and savings are being eroded to bail out people who got themselves into debt.

This will bite the economy in the ass IMO because we need a much higher savings ratio in the UK and people who were living off interest are either not spending or will spend what they have and claim benefits instead.

If you raise rates, savers may lose more through defaults. If people are unable to repay high interest loans, then banks may fail, resulting in savers and/or bond holders taking a hair cut. This would be counter productive for both creditors (savers) and debtors. Please try to digest my point, as you seem to be looking beside it.

At a risk of sounding like a scratched record again, the savings ratio is not total savings. Total savings (mortgages, loans etc) = total debt (broad money supply, M4). As there is loads of debt, there is loads of credit. They are two sides of the same coin. In the bigger picture, those with lots of credit (such as cash flush businesses) need to spend it, letting those with lots of debt (such as FTBs) retire it.

Edited by Traktion

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The BOE’s forecasting has been dreadful for the last 4 years. They have got there Growth and Inflation predictions wrong almost every time.

Inflation is already 1.1%over target and has been consistently all year. We have a VAT and Duty increase coming up. Commodities prices are rocketing.

I think inflation will be 5-10% by early next year and they will push the panic button yanking up rates , probably crushing the economy in the process.

More QE would surely be crazy unless inflation is pretty much 0 or - and we are back in deep recession.

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What I have been saying for months - low rates are damaging the economy.

And there is not vast amounts of printed money 'sloshing about' in the economy because it was all used to purchase government debt which went to fund the current level of defecit spending.

Meanwhile people who have savings have stopped spending money in the real economy because interest rates are so low

And people with debt aren't spending either - they are paying down debt.

Andrew Sentance said the same thing the other week and he was 100% correct.

Why should banks lend money to businesses in a recession if the interest they can charged does not cover the risk involved?

They may as well sit on any money they do have and consolidate their balance sheet.

The BOE has lost what little credibility it had IMO

:blink:

its pushing on a string...the rates are low BECAUSE, the economy is diving.

usually, low rates encourage borrowing and a new boom.

sadly, we were still in the boom when rates were lowered. borrowing hasnt been defaulted to any great degree, and the banks, who should be reeling in are themselves able to default with impunity, so they can borrow when they should be attracting funds from savers.

capital for lending is not being formed.

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Sorry, It wasnt meant to be a critique of your post, just a general comment, apologese for my laxness.

My point was, the threat from Lehmans...the DAY BEFORE THEY DIED...was that there would be systemic collapse.

It didnt happen.

threats from bankers should be ignored...indeed, I think the man in the street may well start doing so when things get even harder in the coming months.

OMG shocking to find a BLoo Loo post i almost agree with.... the threat was not from Lehmans per say... but in fact in the days following the Collapse of Lehman there very nearly was a total collapse... at one point Goldmans and MS were effectivly bankrupt as their CDS traded 2700bps but Hanky Panky Paulson came up with the TARP and ML3 in the nick of time ( justified by the threats you talk about above ).. and that averted the endgame for a while...

As an austrian I'm totally down with the collapse and reputidation of all the worthless ponzi debt... but as Chuck Prince said.. while the music plays you have to keep dancing... I'm still dancing... and so are the politicians... I dont know where it ends but the trip is going to be wild...

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its pushing on a string...the rates are low BECAUSE, the economy is diving.

usually, low rates encourage borrowing and a new boom.

sadly, we were still in the boom when rates were lowered. borrowing hasnt been defaulted to any great degree, and the banks, who should be reeling in are themselves able to default with impunity, so they can borrow when they should be attracting funds from savers.

capital for lending is not being formed.

Rates are low because a decision was taken to hit savers at the expense of those in debt.

And the BOE has consistently lowered rates when it should have raised them for entirely political NOT economic reasons.

At the risk of sounding like a stuck record myself - low rates are damaging the economy and many people are now begining to realise this.

I know what the theory is - but the 'theory' is b*llocks - according to the 'theory' we shouldn't get inflation when the economy is stagnating but what did we get in the 80's? - STAGFLATION.

Andrew Sentance is a professor of economics and he agrees with my analysis

Of course either of us could be wrong - but lets not pretend anyone actually knows what they are talking about

Cos it's all guesswork IMHO

:)

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  • 259 Brexit, House prices and Summer 2020

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