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zugzwang

Ubs: The Real Reason The Fed Is Tolerating Bubbles

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The world's central bankers are now so fearful of interest rate rises that they'd prefer to tinker with macrophooey than run the risk of blowing everything up.

Still experimenting. :blink:

http://www.testosteronepit.com/home/2014/6/30/ubs-the-secret-reason-the-fed-is-tolerating-bubbles.html

Monday, June 30, 2014 at 12:05AM


Swiss megabank UBS, one of the great beneficiaries of the Fed’s policies, ponders in its latest FX Comments how to deal with asset bubbles, “most importantly in housing markets,” a topic that is a “hotly debated issue among central banks.”

Turns out, after nearly six years of printing money and inflicting ZIRP and financial repression on most developed economies, thus creating these asset bubbles in the first place, central bankers find themselves “essentially in an experimental phase.”

Shouldn’t they have thought about this before? It seems. But publically, the Fed and other central banks are still vociferously denying that there are any asset bubbles. In fact, the Fed prides itself in having “healed” the housing market: prices in many cities, including San Francisco, are now substantially higher than they were at the craziest peak of the last housing bubble.

So in this environment of pandemic central-bank bubble-denials, UBS writes that “policymakers around the world are struggling with potential asset bubbles” that are “a logical and inevitable consequence of historically unprecedented monetary policies.”

It took nearly six years to figure this out? The report goes on:


Asset prices have indeed in many cases reached stunning levels, quite obviously out of line with ‘fundamentals,’ for example in credit or government bond markets. The most dangerous of bubbles are deemed to be those in housing markets as their bursting could wreck whole economies.

Given central-bank focus on enriching those who hold financial assets, identifying asset bubbles is, according to UBS “notoriously difficult.” In fact, it’s larded with risks: once central banks officially identify asset bubbles – not just a little “froth” – they have to do something about them or lose what is termed, as if it had been a great insider joke all along, their credibility.

But from the point of view of those who hold these bubbly assets, there is never a right time. They’re their wealth bubbles that would get pricked. So “tolerating them for a bit longer might look tempting given the risk of pricking them at the wrong time,” UBS muses.

But even the IMF, the official international bondholder bailout organ, had warned in June that “the era of benign neglect of house price booms is over.”

So how can central banks stop these bubbles they created, while denying that they exist, and even if they did exist, that central banks created them? It’s a bit of a quandary.

One option would be to stop printing money and raise interest rates, the classic maneuver, “which would typically have been seen as the first, and possibly only, line of defense,” UBS explains wistfully. But it would wreak all sorts of havoc on the financial markets and deflate the wealth of those who’ve benefited from the money-printing binge. UBS explains it this way: “with economic activity levels still seen as too fragile in most major countries, central banks have been searching for substitutes.”

Hence, “macroprudential” measures, such as imposing stiffer requirements on mortgages. Currently, “an intense debate” is transpiring among central bankers about “the effectiveness of such tools and their interaction with more traditional monetary policy” – with policymakers “more often than not hoping to thereby delay having to deploy the blunter tool of interest rate hikes.”

Hoping. Because no one knows; they’re all just “experimenting.”

The report discusses the different approaches: the Bank of England “underwhelmed markets” with its “muddled” message on how to deal with ballooning home prices; the Reserve Bank of New Zealand, among the first to warn of house price inflation, has a “mixed experience.” The Swiss National Bank “has no choice but to rely on macroprudential measures” and can’t raise interest rates as long as it is maintaining its EURCHF floor.

Then there’s the Fed, “a remarkable dovish outlier.” Instead of focusing on the incredibly ballooning home prices and citing them as a reason for what might count as monetary policy normalization, it has been warning, ironically, of slowing sales volume. Ironically, because slowing sales are a direct consequence of prices that have ballooned out of range for many real home buyers. And even investors that convert homes into rental properties have seen their business model get hit by high prices, and they’re pulling back.

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The odd thing is that all of these effects seem not just predictable but inevitable consequences of the policies being enacted- so maybe we need a new definition of insanity- because surely there is something mad about following a strategy designed to create specific outcomes while-at the time- expecting the entirely predictable side effects of those outcomes to be avoided.

So they set out to inflate asset prices to create a 'wealth effect' only to be surprised that a bubble in asset prices then occurs-really?

The only surprising thing here is that they are surprised.

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We are so f*!cked

At least I'm battle-hardened to brutal unfairness.

There are plenty of other people who've been living a life of bliss and complacency on this experimentalist intervention - to support and reflate overvalue house prices even more from 2009.

One landlord couple who should have gone under, have instead been spending like Emperors last few years; luxury holidays, top end cars and replacement every few years, jewellery, £5K watches.

There could be a right time to pop bubbles by the banks though, better recapitalised, and not all the non-owners will offer victimhood excuses to those holding the massively over-valued assets. After all, some people rent, and waiting for better value. Life isn't just about keeping owners homes inflated in value.

Including that BTL woman who "has been through a divorce in 2011" and moved into her BTL... won't sell the terrace for £450,000 after buying it for perhaps 1/3 of that in 2001, and annoyed tracker has gone up from £350pm to £800pm.

But from the point of view of those who hold these bubbly assets, there is never a right time. They’re their wealth bubbles that would get pricked. So “tolerating them for a bit longer might look tempting given the risk of pricking them at the wrong time,” UBS muses.
Edited by Venger

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One landlord couple who should have gone under, have instead been spending like Emperors last few years; luxury holidays, top end cars and replacement every few years, jewellery, £5K watches.

The Wilsons? Lovely couple.

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The Wilsons? Lovely couple.

No; they've claimed they don't spend, don't like holidays - when stories were going around they were selling their portfolio to investors for mega millions - like to run old cars, and even that they're 'humble-folk' - although they did do all the expensive racehorse stuff. I was referring to just one example from plenty of average landlords around here. Mid 30s, bought load of BTLs in the run up years to 2007 with family money - saved by the miracle of QE/0.5%/and victimhood excuses from non-owners.

Instead of paying down debt, offloading into the reflation, upsized their own home recently, taking on an extra £200K of debt. Reflation and low repayment bliss years, with an expectation the market is always about supporting property owners firmly embedded into their minds. Also a vulgar coarsening evident about their entitlement, above the non owning peasants/mob.

Although as I understand it Wilsons have been looking to sell up. Would like to know whether or not their lender(s) have involvement with that course of action.

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No; they've claimed they don't spend, don't like holidays - when stories were going around they were selling their portfolio to investors for mega millions - like to run old cars, and even that they're 'humble-folk' - although they did do all the expensive racehorse stuff. I was referring to just one example from plenty of average landlords around here. Mid 30s, bought load of BTLs in the run up years to 2007 with family money - saved by the miracle of QE/0.5%/and victimhood excuses from non-owners.

Instead of paying down debt, offloading into the reflation, upsized their own home recently, taking on an extra £200K of debt. Reflation and low repayment bliss years, with an expectation the market is always about supporting property owners firmly embedded into their minds. Also a vulgar coarsening evident about their entitlement, above the non owning peasants/mob.

Although as I understand it Wilsons have been looking to sell up. Would like to know whether or not their lender(s) have involvement with that course of action.

Central Banks are trying not to scare the horses only to realise you can lead a horse to water but you can't make it drink.

Where next, o wise ones?

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In fact, the Fed prides itself in having “healed” the housing market: prices in many cities, including San Francisco, are now substantially higher than they were at the craziest peak of the last housing bubble.

Impressive.

When bubbles "create" growth the only logical option is to create bubbles.

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i'm seeing quite a bit of this

My God, me as well. I cannot believe it. It is evident even amongst members of my family. When, the housing market begins to go down, the screaming and the gnashing of teeth will be deafening

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Asset prices have indeed in many cases reached stunning levels, quite obviously out of line with ‘fundamentals,’

ZIRP is the key fundamental.

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ZIRP is the key fundamental.

There are IMO three key fundamentals:

1. ZIRP, as you say

2. Fiscal deficit

3. wealth inequality/savings overhang

Items 1 and 3 are deflationary and item 2 attempts to push in the opposite direction.

Possibly a 4th fundamental is the robots/abundance strand, but I think the jury is still out on that one.

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There are IMO three key fundamentals:

1. ZIRP, as you say

2. Fiscal deficit

3. wealth inequality/savings overhang

Items 1 and 3 are deflationary and item 2 attempts to push in the opposite direction.

Possibly a 4th fundamental is the robots/abundance strand, but I think the jury is still out on that one.

Debt service is the key fundamental. The other three you mention have arisen as a consequence of our inability to service prior debt out of current income.

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Debt service is the key fundamental. The other three you mention have arisen as a consequence of our inability to service prior debt out of current income.

Disagree, we have structurally always been unable to 'service our debt' in the static situation, unless roll-overs and nominal MV expansion is occurring, which in turn depend on an expansion in aggregate demand which in term depend on demographic growth and growth in aggregate energy consumption.

This has been the case since the early 20th century IMO.

What is different now is that having reached the zero lower bound the rollover and expansion dynamic is dead.

Hence zirp is a fundamental IMO, although one could argue that the structural issues in the economy which make steady-state debt service an impossibility are the actual driver. But then I would argue that the structural flaw is itself the zero lower bound anyway so it comes back to zirp for me.

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There are IMO three key fundamentals:

1. ZIRP, as you say

2. Fiscal deficit

3. wealth inequality/savings overhang

Items 1 and 3 are deflationary and item 2 attempts to push in the opposite direction.

Possibly a 4th fundamental is the robots/abundance strand, but I think the jury is still out on that one.

Rather agree with you on all counts.

Good to see you again too!

If we're going for the full list I'd add demographics too, but that's less of an issue in UK than elsewhere (UKIP permitting)

Edited by R K

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Disagree, we have structurally always been unable to 'service our debt' in the static situation, unless roll-overs and nominal MV expansion is occurring, which in turn depend on an expansion in aggregate demand which in term depend on demographic growth and growth in aggregate energy consumption.

This has been the case since the early 20th century IMO.

What is different now is that having reached the zero lower bound the rollover and expansion dynamic is dead.

Hence zirp is a fundamental IMO, although one could argue that the structural issues in the economy which make steady-state debt service an impossibility are the actual driver. But then I would argue that the structural flaw is itself the zero lower bound anyway so it comes back to zirp for me.

OK, we've reached the zlb now but the crash and depression from which we're still trying to extricate ourselves happened at ~5% not 0%, and it was the reckless and unregulated expansion of aggregate demand via ponzi debt origination, risk engineering and security fraud over the last thirty years that got us here. Of course this state of affairs isn't without precedent, notably the 1920s - this time around, however, the active post-Keynesian engagement of the world's central bankers has fantastically complicated everything.

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There are IMO three key fundamentals:

1. ZIRP, as you say

2. Fiscal deficit

3. wealth inequality/savings overhang

Items 1 and 3 are deflationary and item 2 attempts to push in the opposite direction.

Possibly a 4th fundamental is the robots/abundance strand, but I think the jury is still out on that one.

I would add entrenched ideology to this list- the resilience of the neo liberal economic model in the face of it's total failure is downright uncanny- it's like a post apocalypse cockroach that refuses to die.

As a result it's impossible to have a sane discussion on just about any aspect of the problems the crisis has exposed.

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Janet Yellen endorses macrophooey rather than interest rates to control house prices, cites 'range of housing bubble studies'. The housing bubble she is talking about, of course, being the one she and fellow Keynesian make-believers failed utterly to comprehend at the time. :rolleyes:


http://www.telegraph.co.uk/finance/economics/10941966/Janet-Yellen-interest-rates-the-wrong-tool-to-address-financial-stability-risks.html

Raising interest rates to keep house prices under control risks “sizeable” increases in unemployment and could even undermine central banks’ efforts to keep inflation stable, according to the chairman of the US Federal Reserve.

Janet Yellen said using tighter monetary policy to address financial stability risks was a “very blunt tool” with “significant limitations” that would increase the volatility of inflation and employment.

She said a range of studies had concluded that using interest rates to head off the US housing bubble during the mid 2000s would have caused significant damage to the economy while having a very “modest” impact on price rises. “A very significant tightening, with large increases in unemployment, would have been necessary to halt the housing bubble,” she said in a speech on Wednesday.

While Ms Yellen did not rule out using rate rises to curb risks to financial stability, she said a macroprudential approach to supervision and regulation needed to play “the primary role” in managing these risks.

“Macroprudential policies, such as regulatory limits on leverage and short-term funding, as well as stronger underwriting standards, represent far more direct and likely more effective methods to address ... vulnerabilities,” she said. “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment."

Ms Yellen’s sentiment was echoed on Wednesday by Andy Haldane, chief economist at the Bank of England, who described UK monetary policy as the “last line of defence” against financial stability risks.

Mr Haldane said that while there was a risk that some financial markets were getting “over-egged”, it was the responsibility of macroprudential and regulatory policy to address these risks. “We’ve said at the Bank that monetary policy can on occasions have a role to play in insuring against these financial stability risks - not as a first line of defence but sometimes as a last line of defence.”

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Spotted the causal relationship between central bank policy and asset price inflation yet, Janet?

Looks for all the world like a debt mega-bubble, doesn't it?

I think I'm beginning to understand the central bankers' flat refusal to raise interest rates now...

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Edited by zugzwang

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