Jump to content
House Price Crash Forum

Did The Bank Of England Cause The Boom And Bust?


Recommended Posts

http://www.bbc.co.uk/news/business-17523376

How much were central banks, notably the Bank of England and the US Federal Reserve, to blame for the financial boom and bust that's landed us with years of economic stagnation?

To date, most of the blame has been attached to the recklessness of bankers and myopia of financial regulators, such as the Financial Services Authority.

But central bankers have typically been tarnished only with failing to see or shout loudly enough about all that excessive and under-priced lending that took place in the run-up to the crash of 2007-8, rather than having directly contributed to it.

Which is why a recent speech by Paul Tucker, deputy governor of the Bank of England, is so striking. Under the racy title of "National balance sheets and macro policy: lessons from the past", he says there is evidence that cuts in central banks' policy rate, what's known as the Bank Rate in the UK, contributed to the lethal process of investors taking ever greater risks to earn a miserly increment of extra return.

He doesn't put it quite like that. What Tucker says is that "the possibility that monetary policy can affect risk premia should be taken seriously". But it amounts to the same thing.

http://www.belfasttelegraph.co.uk/business/exgovernor-george-says-bank-deliberately-fuelled-consumer-boom-13426232.html

The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession, the former Bank Governor Eddie George admitted yesterday.

Lord George said he and his colleagues on the Monetary Policy Committee " did not have much of a choice" as they battled to prevent the UK being dragged into a worldwide economic slump by slashing interest rates. And he said his legacy to the current MPC was to "sort out" the problems he had caused.

Not a new revelation, Eddie George has already taunted everyone with this.

Link to post
Share on other sites

http://www.bankofengland.co.uk/publications/Pages/news/2012/020.aspx

28 February 2012

​Speaking in London today, Paul Tucker – Deputy Governor, Financial Stability, Member of the Monetary Policy Committee and Member of the Financial Policy Committee – discusses some lessons learned from the financial crisis about the appropriate macro policy framework, and in particular from the over-stretched and vulnerable balance sheets households, firms, banks and governments across the Western world had accumulated prior to the crisis.

Paul Tucker highlights two possible international macroeconomic explanations for the period of pronounced credit growth and asset price appreciation prior to the crisis. “First, a fall in the world safe real rate, due to excess savings in the East. Second, increasing Global Liquidity, transmitted through expansive cross-border lending, kicked off by prolonged accommodative monetary policy.” Both of these, he notes, “…involve shifts in risk premia driven by changes in the supply and demand for financial assets.” He stresses that changes in risk premia can be key drivers of fluctuations in asset prices, and probably have substantial influence over macroeconomic fluctuations.

His analysis suggests that macroprudential policy can play a key role in containing excess and ensuring resilience in future. This leads him to suggest a number of policy lessons:

We must not rely entirely on central banks ‘mopping up’ after financial crises. Not only does it strain our capabilities ex post, it is counterproductive ex ante. If central banks are perceived as writing deep-out-of-the-money put options, then the market, believing it is protected by those tail-risk puts, will itself take more risks than otherwise. We need overall macro regimes that aim to make chronic imbalances and over-indebtedness less likely and less threatening.

The transmission of monetary policy can be affected by risk appetite, and can itself affect risk-taking behaviour, domestically and globally. We need to be alive to that in forecasting the path of nominal demand, and in assessing global liquidity conditions.

We also, therefore, need macroprudential regimes to ensure that these mechanisms do not lead to stabilitythreatening indebtedness or otherwise endanger the resilience of the financial system. We need, in particular, to be ready to contain private sector liquidity creation even when it is not driving excess nominal demand growth. That will amount to arresting occasionally the expansion or leverage of the banking system and shadow banking sectors.

Given its special role in international finance, the UK owes a special responsibility to the rest of the world to maintain the safety and soundness of the UK-resident financial system. It is therefore very welcome that the IMF has reached precisely that view in its new work on Spillovers. The Fund must ensure that we stick at it.

Reciprocally, the Fund needs to go back to the Draghi Report and incorporate its lessons into Article IV and FSAP reports.

As the Draghi Report stressed, we must try to identify and remove microeconomic incentives that distort risk-taking behaviour into dangerous channels. And given the interconnectedness of global finance, we – especially in the UK – must be alert even to such distortions elsewhere. US housing finance was a domestic system whose structure led to problems with global spillovers.

The public finances should be managed with an eye to the nature and extent of risk exposures elsewhere in the economy.

It is the precise pattern of capital flows, and the resulting composition of the resulting balance sheets, that matter to the stability of the financial system. All macro policymakers – monetary, macroprudential and fiscal – should, therefore, pay attention to the national balance sheet; and to the pattern of gross as well as net capital flows.

But, in doing so, we and our peers must avoid financial protectionism just as a previous generation learned to oppose trade protectionism. And we must not leave anyone thinking that we can eradicate economic problems.

So a speech made several weeks ago finally makes it into the press.

Full txt at the link.

Link to post
Share on other sites

http://www.bankofengland.co.uk/publications/Pages/news/2012/020.aspx

So a speech made several weeks ago finally makes it into the press.

Full txt at the link.

What caused the boom was the reaction to 11.09.2001 by central bankers.

What caused the bust was the boom

They always do.

No issue with booms and busts they are part of freedom. I have issues with bailouts

Link to post
Share on other sites

Boom and bust is a business - economic action/reaction cycle which is natural and nothing to do with the BOE or state, they are functions of investment- return-overinvestment-exhuberance-overcapacity-malinvestment and collapse, a very natural cycle

The state will amplify booms and busts in specific parts of the economy by distorting various aspects thrrough over/undersupply, taxation distortion, limited liability distortion to name but three key drivers of this debt cycle and what its gone in to.

Central Banks amplify the cycle via forced market distortion of regulated money, knobended ideas such as deposit insurance distortion to name but one.

Force always amplifies the upside and downside of booms and busts as opposed to free( r) markets, some would say the benefit is stability for investment, which is generally true in the cycles development, not much use to those left holding the hot potato every few generations at the end of the cycle created, this particular one probably heading right back to the early 30s when the Reserve currency introduced Deposit Insurance as a fillip to the previously central bank magnified depression.

Edited by Georgia O'Keeffe
Link to post
Share on other sites

What caused the boom was the reaction to 11.09.2001 by central bankers.

It's a common meme, but the USA officially went into recession in March 2001, not September

http://www.nber.org/cycles.html

and the Fed interest rate was plummeting long before September 2001.

us_rates1.gif

It was convenient for politicians at the time to blame the recession (and the subsequent policy response) on September 11th, but that was a lie.

Edited by Dorkins
Link to post
Share on other sites

Whilst we need to learn from the past surely the real issue is not making the same mistakes going forwards? Robert Peston has missed a speech given by Bank of England policymaker David Miles yesterday. It has ominous implications going forwards as highlighted below.

Comment

David Miles presses his case like the true believer that he is. The problem is simple which is that it is not working and his attempts to twist reality only end up in him misrepresenting the truth. Before this episode is over I expect one more problem to emerge and it is based on this.

The tricky task ahead for the MPC, and for the Fed and the ECB, is to know for how long to keep monetary policy at an exceptionally expansionary setting. What is the right trajectory back to a more normal setting? The challenge here is not because of any practical difficulties in unwinding asset purchases, it is the much more fundamental and timeless one of assessing the outlook for the economy and judging the appropriate monetary stance.

I have emphasised the section which is utter rubbish but my main point is that I feel that the Bank of England will be so desperate for any recovery to take place that it will fatally delay any policy tightening. So it will open us up to a more dangerous phase for inflation as letting it grow in a recovery has a very poor track record in UK economic history and it will make the losses from QE rise further as bond prices fall.

Oh what a tangled web we weave,

When first we practise to deceive!

http://www.mindfulmoney.co.uk/wp/shaun-richards/as-uk-qe-rises-above-300-billion-and-counting-david-miles-confesses-that-the-uk-taxpayer-will-get-a-large-bill/

Link to post
Share on other sites

It's a common meme, but the USA officially went into recession in March 2001, not September

At which time the US was also reneging on large numbers of its international treaties and obligations. How convenient for them to have a Big Incident to distract the world from wrongdoing and gain sympathy.

Link to post
Share on other sites

The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession, the former Bank Governor Eddie George admitted yesterday.

Lord George said he and his colleagues on the Monetary Policy Committee " did not have much of a choice" as they battled to prevent the UK being dragged into a worldwide economic slump by slashing interest rates. And he said his legacy to the current MPC was to "sort out" the problems he had caused.

He had left as governor in 2003 and 4 years later in 2007 was reported as saying something like that.

In 2007 he used words like "they were battling to prevent the UK being dragged into a worldwide economic slump".

When he left as governor in 2003 he was reported as saying he had reduced interest rates to keep the consumer boom going (not the battling worldwide economic slump - blimey, come on, that would have scared off house buyers) but it would likely build in problems for the future but that was the next governor's problem (yes in relation to the thread title representatives of the BoE were claiming to be able to control just about everything on the economy so it's laughable that there's even a debate now whether they might be responsible as well as the other bankers, politicians etc).

Edited by billybong
Link to post
Share on other sites

Whilst we need to learn from the past surely the real issue is not making the same mistakes going forwards? Robert Peston has missed a speech given by Bank of England policymaker David Miles yesterday. It has ominous implications going forwards as highlighted below.

http://www.mindfulmoney.co.uk/wp/shaun-richards/as-uk-qe-rises-above-300-billion-and-counting-david-miles-confesses-that-the-uk-taxpayer-will-get-a-large-bill/

So it looks like the Bank of England has learnt nothing from its mistakes and intends to keep making them! When will we get a change from their failed policies?

Link to post
Share on other sites

One of the most utterly disgraceful, cynical statements by someone in high office that I've ever had the misfortune to read.

Edited by juvenal
Link to post
Share on other sites

So it looks like the Bank of England has learnt nothing from its mistakes and intends to keep making them! When will we get a change from their failed policies?

The BoE is full of nitwits and negligence and their only policy is to be reactive to elsewhere and not proactive - this means we will get a change only when the Fed and/or ECB have made a policy change and are substantially amending their IR's to the upside where the lagging BoE will feel compelled to follow because they have no innate capability to decision make.

Link to post
Share on other sites

Booms and busts have existed before central banks existed- I think that Minsky's idea was closer to the truth- periods of relative investment success lead to overconfidence that lead to bubbles that burst, followed by more cautious investments that pay off leading to overconfidence that leads to bubbles that burst.

It's a theory that-unlike current economics- does not assume that humans are always and everywhere rational and possessed of perfect market knowledge.

So when gorden claimed to have eliminated boom and bust he was claiming to have radically changed human nature- a claim that stood for about a year or so before proving predictably false.

Link to post
Share on other sites

Booms and busts have existed before central banks existed- I think that Minsky's idea was closer to the truth- periods of relative investment success lead to overconfidence that lead to bubbles that burst, followed by more cautious investments that pay off leading to overconfidence that leads to bubbles that burst.

It's a theory that-unlike current economics- does not assume that humans are always and everywhere rational and possessed of perfect market knowledge.

So when gorden claimed to have eliminated boom and bust he was claiming to have radically changed human nature- a claim that stood for about a year or so before proving predictably false.

What boom? I doubt 19th century classical economists would understand our notion of "boom and bust." Which is basically asset inflation, followed by even more asset inflation! The "real" economy has been in recession for a long time. This is completely different to the traditional "trade cycle" where price inflation/deflation would manage demand for goods and services. Now its constant inflation, as the dreaded deflation of assets has been outlawed!

Link to post
Share on other sites

What boom? I doubt 19th century classical economists would understand our notion of "boom and bust." Which is basically asset inflation, followed by even more asset inflation! The "real" economy has been in recession for a long time. This is completely different to the traditional "trade cycle" where price inflation/deflation would manage demand for goods and services. Now its constant inflation, as the dreaded deflation of assets has been outlawed!

The real 'boom' ended in the late 1990's when the dot.com bubble popped as an earlier poster has noted.

It has all been an essentially been an asset ponzi since that date fueled by cheap money.

All the productivity gains from the 1990s plus the benefits of the globalisation wage arbitrage have now been pissed away

Link to post
Share on other sites

If I were to write a brief history of the boom it would be this:

The boom started as a natural return to growth following the bust from the recession of the 90s.

Most growth occurred overseas and we saw the real emergence of the BRICS.. meanwhile in the West we created growth in housing and technology.

Housing costs in the UK were largely removed from the inflation measure (I believe copying the new model used in the US when they took them out in 1983 - the idea being that rent was more stable).

House prices rose more or less as expected until the tech bubble popped in 2000.

Interest rates plunged.. cheap money shunned the western stock markets and instead found it's way into property which was seen as "safe bet" and was easy to leverage.

House prices continued to rise.. the damping effect from interest rates failed to emerge as house prices no longer influenced the inflation measure.. (rents didn't rise because they didn't need to.. people were happy with paper gains.. some people actually bought homes just to leave them empty to appreciate). Those who couldn't afford to speculate in UK property looked to low cost properties in Europe to"get in on the action". All the while the press and popular television lapped up and eagerly fed Britain's new mania for property speculation.

With no interest rate rises to act as a damper the property train screamed along with no brakes steadily gathering momentum.

The emergency breaks (sensible lending practices) were thrown to the wind by banks who were happy to lend as the principle was underwritten by the asset.. even mortgage fraud was ignored by the FSA and the people involved because while the assets covered the value of the loan.. there was no perceived risk.

The final trigger was caused by a parallel market in the US.. which happened when debtors started defaulting and lenders finally decided to question the actual underlying value of their assets. When they did this they realised precisely how much they had f***ed up, which caused them to stop lending.. leading to the credit crunch which precipitated the biggest financial meltdown since the great depression.

So I would argue no, the BoE was not specifically to blame. The think tank that persuaded the US government to remove housing from the inflation measure were partly to blame. The British government of the day (and their advisers) were partly to blame for blindly copying the US.

The group-think that housing values only rise (never bubble) led to the availability of stupidly dangerous levels of leverage, and a large majority of the populous were happy to borrow it thanks to the mania that swept large parts of society and the media hype to support it.

Basically we were all stupid idiots.. and we are now all paying to keep the biggest idiots from defaulting on their overpriced assets which they should never have been either encouraged to buy, or given credit for in the first place :rolleyes:

Link to post
Share on other sites

Since 1963 the governmnet have created approximately £25 Billion in coinage and notes.

The banks have been allowed to create £655 Billion. As Debt.

Thats the total money supply of the UK.

Even a 12 year old child could have understood the principle that this would end in massive bust.

It was organised. It was orchestrated.

How could anyone think differently?

I await the day when the total population wake up to this fact.

A lot of people took the "silly pill" and not the "wise pill"! :blink:

Link to post
Share on other sites

Booms and busts have existed before central banks existed-

Yes, but once every 5 or 6 generations, not every 5 or 6 years like now under central planning of money.

Spanish Gold, Tulips, Indian Tea. All rare events. Today a boom or Bust is constant mood music.

Link to post
Share on other sites

Brown blindly followed his mentor, Greenspan in the super low interest rate enviroment, created by Greenspan, and repeated the same mistake Greenspan made thinking that financial firms would regulate themselves.......

There is no need to regulate firms in a free economy.

You only need regulations in an attempt to patch over the market distortions that are caused by government and central planning of money.

If we had sound money, you would not need to go further.

Link to post
Share on other sites

Brown blindly followed his mentor, Greenspan in the super low interest rate enviroment, created by Greenspan, and repeated the same mistake Greenspan made thinking that financial firms would regulate themselves.......[A lie. They must have known what could or would happen.]

Whilst i believe Brown wasa thick enough to believe that, i dont for a minute believe Greenspan didnt know what he was doing in laying the debt delevaraging at someone elses feet in the future rather than his, the same as Bernanke, nobody outside Brown would be thick enough to think a socialised risk such as limited liability is going to regulate itself to the benefit of someone other than itself, Greenspan simply realised there was enough leveraged corporate debt to take down the system in 2000 without mortgage intervention, the same as Bernanke realised there was enough leveraged debt to do it without state intervention, at some point in the not too distant future someones gonna be unlucky and it wont be the ones who are able to extend and pretend until stepdown

Edited by Georgia O'Keeffe
Link to post
Share on other sites

Yes.

Them and McPhuck.

They were "independent" you know. :rolleyes:

But only if rates went up. ;)

Then McPhuck would have made sure they were cut loose and monstered.

That was the only reason he did what he did. Pure politics.

He knew how wedded John Q Debt Slave was to low rates.

Just as Cameron does today.

McPhuck saw what the ERM crisis did to Major. Low rates are all people cared about.

Exactly the same now.

Until fuel is £2 a litre.

Here endeth the story of the bleedin obvious. :(

Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    No registered users viewing this page.

  • 433 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.