Low Rates Have Caused The Crisis – They Are Not The Solution To It

[Sancho Panza]

Apologies if it's been posted before.Can't see it anywhere.

Independent 19/5/15

'Central bank policies have stabilised conditions but not restored growth or created sufficient inflation to address the world’s debt problems. As Helmuth von Moltke, a 19th-century head of the Prussian army, observed: “No battle plan ever survives first contact with the enemy”.

Now the spectre of deflation haunts financial markets. Deflation would mean general tax revenues would stagnate or even fall. Asset price falls would also reduce tax revenues. Businesses revenues also fall. There would be an appreciation in the real value of debt. The high level of borrowing would be increasingly difficult to service, with serious consequences for the banking system.

The premise was that expanding money supply would create inflation. In practice, the process is complex, with additional conditions needed to create inflation. Central banks control the monetary base, a narrow measure of money supply made up of currency plus the reserves that commercial banks hold with the central bank. The relationship between the monetary base, credit creation, nominal income and economic activity is unstable. While the money supply has increased, the velocity of money has slowed. The reduced velocity offsets the effect of increased money flows.

Inflation also requires an imbalance between demand and supply. Most developed economies have a significant “output gap” ranging from 2 to 8 per cent (the amount by which the economy’s potential to produce goods exceeds total demand), though the extent is uncertain due to drops in participation in the labour force which may have reduced capacity. The gap reflects lower demand but also excess capacity. This translates into a lack of pricing power and low price inflation.

While ineffective in achieving its targeted outcomes, current policies have toxic by-products. Expansionary fiscal policies have left many countries with large and growing levels of sovereign debt. The rapid build-up of government debt following the events of 2007-08 now restricts the ability of many governments to respond to new crises.

Monetary policy distorts normal economic activity. Citigroup equity strategist Robert Buckland argues that low rates and QE actually reduce employment and economic activity, rather than increasing them. They encourage a shift from bonds into equities. But as investors look for income rather than capital growth, they force companies to increase dividends and undertake share buybacks. To meet these pressures, companies shed workers and reduce investment to cut costs.

Low interest rates reduce the income of retirees living off their savings, decreasing demand. Low rates perversely reduce consumption and increase savings as people set aside cash for future needs. Low rates increase unfunded liabilities of defined benefits pension funds. These shortfalls ultimately retard growth as sponsors must divert earnings to meet these future liabilities.

Low rates “zombify” the economy. Low rates allow weak businesses to survive, directing cash flow to cover interest on loans which can never be repaid but which banks cannot afford to write off. This ties up capital and reduces lending. Firms do not dispose of or restructure underproductive investments. The creative destruction and re-allocation of resources necessary to restore the economy’s growth potential does not occur.

Low rates distort investment, encouraging excessive risk-taking in search of higher returns. Risk premiums have fallen sharply to uneconomic levels in equities, dividend paying stocks, corporate debt, high yield bonds, structured securities and other risky assets.

These risks are compounded by the continued high levels of leverage in financial institutions. Under new reporting guidelines, the five largest UK banks, among the best capitalised in the world, have leverage (which may be under-stated) ranged from 20 to 35 times their capital base, meaning a 3 to 5 per cent fall in the value of their assets would render the banks insolvent.

The monetary policies being pursued by developed nations also adversely affect emerging economies. Investors were encouraged to increase investments in emerging markets offering better returns and more encouraging growth prospects. These capital flows distorted those economies, creating major problems. Given that emerging markets have been a key driver of the tepid recovery in economic activity globally, this risks truncating the recovery.

The low rates, mispricing of risk and excessive debt levels that were the causes of the crisis are now considered the “solution”.'

Some salient points in there oft discussed on here about the decline in velocity and the effect of QE on pensioners spending,which is espeically pertinent in many Western countries given their demogrpahic problems.

[TheCountOfNowhere]

Do you get the feeling some people are being stitched up good and proper.

Sell your BTL empire before it's too late.....................sorry, it's too late now.

[Venger]

Haven't we been over and over all of that, for so many years now? Every single one of those issues and likely effects of the policies they've opted for.

The yield chasers, especially those who have seen long-wave asset inflation to pledge/remortgage to reinvest again on the margin, need to suffer the hardest of all correction.

Vs the position of all the young - even the brightest landing the excellent jobs vs London HPI of last 12 months / 24 months / 15 years - who are just getting hammered. There's just no way for them to get position by themselves against this HPI fest the Realm of HPIers think is the best.

19 May 2015

...But TUC general secretary Frances O'Grady said: "House prices are going up four times faster than people's wages. No wonder mortgage approvals are falling and first-time buyers are struggling to save a large enough deposit. "And we all know that housing bubbles burst and cause economic chaos." http://www.bbc.co.uk/news/business-32795016

I'm not too sure about this part, vs outlines of stress tests not long back (maybe pre newest guidelines) suggesting nearly all main banks could survive financial shock and awe. And it doesn't account for the little explored phenomenon that banks can reliquify very quickly into a HPC, booking instant real profits, after they volume lend in much greater number of transctions on crashed house prices (even if each mortgage is substantially less than is required to pay these ponzi prices, there's far more of them, and continued to be for years ahead with steady house prices and far healthier transaction numbers).

Under new reporting guidelines, the five largest UK banks, among the best capitalised in the world, have leverage (which may be under-stated) ranged from 20 to 35 times their capital base, meaning a 3 to 5 per cent fall in the value of their assets would render the banks insolvent.

[Agentimmo]

In 2004, I thought rates would rise for through the following 3-4 yrs . Decided to play the long game to move up the ladder. Wait.

In 2008, I thought I'd wait 1-2 years until the crash had gained hold and move up the ladder. Enter QE and all manner of props to keep HPI ongoing. The long game just got longer. No way would I buy into this madness.

Today, plates just about spinning in some areas. Others been on downward trend for 4-5 years. I'll play the long game again and wait for the next recession. One is due along any minute.....

It's been a long, long, long game for me and many others. When it all cracks up, I'll be sitting back with the popcorn at hand. This has been a mad 15 years manufactured by the banks, VI's, and their political chums......

[TheCountOfNowhere]

This:

Under new reporting guidelines, the five largest UK banks, among the best capitalised in the world, have leverage (which may be under-stated) ranged from 20 to 35 times their capital base, meaning a 3 to 5 per cent fall in the value of their assets would render the banks insolvent.

Is scary.

And that is after house prices being artifically lifted back to 2007 levels.

House prices really are 50% over values so the zombie banks are effectively bankrupt unless the population decide to ( and can continue paying 60% of their incomes to the bankers every money and see their house prices collapse 50% over a 20 year period.

Nothing says to me houses are a good investment now, they were 30 years ago for sure but that pyramid scam has sailed.

[TheCountOfNowhere]

Ignore

Edited May 21, 2015 by TheCountOfNowhere

[Meerkat]

This:

Under new reporting guidelines, the five largest UK banks, among the best capitalised in the world, have leverage (which may be under-stated) ranged from 20 to 35 times their capital base, meaning a 3 to 5 per cent fall in the value of their assets would render the banks insolvent.

Is scary.

If this is, what would you say of the bank having 80:1 or thereabout leverage? Makes the UK banks look like apostles of prudence, relatively.

[Venger]

It's been a long, long, long game for me and many others. When it all cracks up, I'll be sitting back with the popcorn at hand. This has been a mad 15 years manufactured by the banks, VI's, and their political chums......

Yes; same.

This:

Under new reporting guidelines, the five largest UK banks, among the best capitalised in the world, have leverage (which may be under-stated) ranged from 20 to 35 times their capital base, meaning a 3 to 5 per cent fall in the value of their assets would render the banks insolvent.

Is scary.

And that is after house prices being artifically lifted back to 2007 levels.

House prices really are 50% over values so the zombie banks are effectively bankrupt unless the population decide to ( and can continue paying 60% of their incomes to the bankers every money and see their house prices collapse 50% over a 20 year period.

I don't believe it. Also they have BoE to exchange securities with during the rough now. So many £Trillions of pounds are held on the owner side in property. The value of their homes / equity rich / owned outright. Smuggers, counting their HPI. Absolutely no use to the banks because no/little debt on their homes.

I'm holding to this being more towards the real position (next stress test is going to include China slowdown).

16 December 2014

The Bank of England tested the lenders' resilience to a 35% fall in house prices, and a 30% drop in the value of the pound, among other factors.

Five major banks passed the test.

The results show that the banking system is "significantly more resilient", said Bank of England governor Mark Carney, and that the "growing confidence in the system is merited".

"This was a demanding test," he added.

Sterling falls by about 30%

House prices fall by 35%

Bank rate rises to 4.2%

CPI inflation peaks at 6.6%

Unemployment rises to nearly 12%

GDP falls by 3.5%

Share prices fall by 30%

In the first test of its kind, the balance sheets of eight UK banks and building societies were assessed by the Prudential Regulation Authority, which is a part of the Bank of England.

HSBC, Barclays, Santander, Standard Chartered and Nationwide all passed.

http://www.bbc.co.uk/news/business-30491161

And I look at HPC followed by volume lending. Let's say today's basic £400K flats/terraces fall to £200K in HPC, and that you have £50K to put down. (Maybe £20K for some).

Mortgage of £150,000 at say 5% over 25 years. The banks can instantly book at £113,000 profit (Total repayment over 25 years = £263K) And more people would likely be good for repaying that £150K over the term, than the scraping of the barrel now looking for mugs wanting to pay £400K. Vastly more transactions, and a healhier transaction market for many years ahead, will put the banks well in. Debt is the problem, but vastly more mortgage debt in greater transaction numbers on lower asset prices, is the solution.

Edited May 21, 2015 by Venger

[TheCountOfNowhere]

Yes; same.

I don't believe it. Also they have BoE to exchange securities with during the rough now. So many £Trillions of pounds are held on the owner side in property. The value of their homes / equity rich / owned outright. Smuggers, counting their HPI. Absolutely no use to the banks because no/little debt on their homes.

I'm holding to this being more towards the real position (next stress test is going to include China slowdown).

And I look at HPC followed by volume lending. Let's say today's basic £400K flats/terraces fall to £200K in HPC, and that you have £50K to put down. (Maybe £20K for some).

Mortgage of £150,000 at say 5% over 25 years. The banks can instantly book at £113,000 profit (Total repayment over 25 years = £263K) And more people would likely be good for repaying that £150K over the term, than the scraping of the barrel now looking for mugs wanting to pay £400K. Vastly more transactions, and a healhier transaction market for many years ahead, will put the banks well in. Debt is the problem, but vastly more mortgage debt in greater transaction numbers on lower asset prices, is the solution.

I'm sure you are a clever chap...but if you know that and I know that then they know that !!!!!!!

When they think they can survive the crash then we are going to see one mother of a collapse.

Stitched up like a kipper springs to mind.

It does beg the question how f**ked must the banks have been in 2008....and why they people responsible for this are still walking the streets.

What was it gordon Brown said....now is not the time to apportion blame....well that time is long past due,.

[Sancho Panza]

Haven't we been over and over all of that, for so many years now? Every single one of those issues and likely effects of the policies they've opted for.

I posted because I thought it's about the best succinct,summation of my own position that I've read in a very long time.Shaun Richards wrote about the effect of low interest rates on demand the other day but as an aside not as a main plank of an argument.

I find it bizarre that our CB's spend all this time focusinng on money supply and neglecting to consider the impact of increases on velocity.

It strikes my uneducated mind that the route to real economic recovery lies in driving velocity higher not pumping the money supply.

Edited May 21, 2015 by Sancho Panza

[Venger]

When they think they can survive the crash then we are going to see one mother of a collapse.

Stitched up like a kipper springs to mind.

It's HPI vs HPC. We can't afford any projecting of how the owner side might have happily danced into it, including that journo on Prime London thread the other day going on about house prices being so much about supply and demand, and that house on his road up for £2m vs him paying quite a lot less in 2013.. and how hpc might be for them.

Nothing has been proven on a possible large HPC side. It's been the most uncomfortable place to be on the prudent renter/saver patient upsizer position. Only thing proven is house prices yet again up something like 11% over the last year. When prudent side, younger side, has been this up against it, my view is all about them vs this market - these house prices.

I posted because I thought it's about the best succinct,summation of my own position that I've read in a very long time.Shaun Richards wrote about the effect of low interest rates on demand the other day but as an aside not as a main plank of an argument.

I find it bizarre that our CB's spend all this time focusinng on money supply and neglecting to consider the impact of increases on velocity.

It strikes my uneducated mind that the route to real economic recovery lies in driving velocity higher not pumping the money supply.

Oh post away. The article combined many important premises from many other articles in one place - it was a good read. Simply pointing out that many a VI doesn't see any of the same negatives to current policies they've been running since QE1 2009 slash to trace base rates.

How do you get velocity higher, with asset prices so high?

[VeryMeanReversion]

I'll play the long game again and wait for the next recession. One is due along any minute.....

It's been a long, long, long game for me and many others. When it all cracks up, I'll be sitting back with the popcorn at hand. This has been a mad 15 years manufactured by the banks, VI's, and their political chums......

I've also got that tingly feeling that another financial crisis is due. I've converted all pension assets to cash to wait it out. At least cash is holding its value for now.

However, the problem with the long game is that it can exceed your working lifetime.

[VeryMeanReversion]

How do you get velocity higher, with asset prices so high?

Ban cash and implement negative interest rates.

[Venger]

Ban cash and implement negative interest rates.

To try and force hpcers to pay silly high market prices?

[Venger]

And that solution seems to me to only be weakening the very tiny capital core/money/saver position that already props this multi-hundreds-of-trillion dollar ponzi up.

Savings are an antidote to depression/poverty, not the cause.

Central banks don't have magic powers. They can create liquidity by creating debt, but that isn't the same as creating capital. Whenever a central bank monetizes an asset by buying it (printing press money) - it creates a liability. Running the printing presses at a higher speed destroys more wealth than it creates. Only the market can create capital by valuing assets above liabilities.

[Executive Sadman]

Its a pity we don't have a federal system like the US, where individual cities and states are likely to default, unable to shove their incompetence onto younger taxpayers who'll run away to a state without the deadweight.

[Hairy1305]

Yes; same.

I don't believe it. Also they have BoE to exchange securities with during the rough now. So many £Trillions of pounds are held on the owner side in property. The value of their homes / equity rich / owned outright. Smuggers, counting their HPI. Absolutely no use to the banks because no/little debt on their homes.

I'm holding to this being more towards the real position (next stress test is going to include China slowdown).

And I look at HPC followed by volume lending. Let's say today's basic £400K flats/terraces fall to £200K in HPC, and that you have £50K to put down. (Maybe £20K for some).

Mortgage of £150,000 at say 5% over 25 years. The banks can instantly book at £113,000 profit (Total repayment over 25 years = £263K) And more people would likely be good for repaying that £150K over the term, than the scraping of the barrel now looking for mugs wanting to pay £400K. Vastly more transactions, and a healhier transaction market for many years ahead, will put the banks well in. Debt is the problem, but vastly more mortgage debt in greater transaction numbers on lower asset prices, is the solution.

All well and good, however, what happens when 20% of people who have put down 10% of 400k, leaving a mortgage of 360k, hand back the keys to their flat, now valued at 200k, meaning a book loss of 160k?

[Bruce Banner]

All well and good, however, what happens when 20% of people who have put down 10% of 400k, leaving a mortgage of 360k, hand back the keys to their flat, now valued at 200k, meaning a book loss of 160k?

In the USA, yes, but here the banks will should pursue you for the full amount plus interest. Of course, there's always bankruptcy.

[Venger]

All well and good, however, what happens when 20% of people who have put down 10% of 400k, leaving a mortgage of 360k, hand back the keys to their flat, now valued at 200k, meaning a book loss of 160k?

Carney has said people prioritise their mortgages, and there are consequences for those who don't.

Also I don't see it as too big a deal. Look what occurred in the last HPC. And by that I mean late 80s to mid 90s. Where banks didn't have a defaulter, such as a professional who can't afford to go bankrupt for sake of their career, who they knew they could squeeze for future repayments/settlement, they often sold the debt on for very little in the pound. It's not a big deal, imo.

(Then of course you can also pursue the defaulter for 12 years. BTW; there's also some interesting fluctuations on the grid about going after pensions. 2 court cases conflicting with one another at the moment. Waiting for something substantive to whether can tap into your pension for monies owed, and into bankruptcy.)

The bank sells the house on at £200,000 to someone taking a £180K and recoups a good chunk of its position anyway (bookable profits because mortgage books are tradeable instruments), on the few defaults. £180,000 at 5% over 25 years = total interest payable £135,678.62 = total repay £315,678... which for the banking system as a whole, covers most part of the defaulters. (Book loss of £160K, vs an admittedly 25 year slow actual recoup of near £136K interest).

It's always the same thing... overlooking the fresh lending equation to reliquify.

[Hairy1305]

In the USA, yes, but here the banks will should pursue you for the full amount plus interest. Of course, there's always bankruptcy.

1 year to turn it around too. There are reasons a lot of Europeans come to this country to declare themselves bankrupt. No brainer for me; on the hook for £160k after already taking a £40k hit or a year spent unemployed...

Carney has said people prioritise their mortgages, and there are consequences for those who don't.

They go bankrupt. Not really severe, it's not a debtors prison...

Also I don't see it as too big a deal. Look what occurred in the last HPC. And by that I mean late 80s to mid 90s. Where banks didn't have a defaulter, such as a professional who can't afford to go bankrupt for sake of their career, who they knew they could squeeze for future repayments/settlement, they often sold the debt on for very little in the pound. It's not a big deal, imo.

(Then of course you can also pursue the defaulter for 12 years. BTW; there's also some interesting fluctuations on the grid about going after pensions. 2 court cases conflicting with one another at the moment. Waiting for something substantive to whether can tap into your pension for monies owed, and into bankruptcy.)

The bank sells the house on at £200,000 to someone taking a £180K and recoups a good chunk of its position anyway (bookable profits because mortgage books are tradeable instruments), on the few defaults. £180,000 at 5% over 25 years = total interest payable £135,678.62 = total repay £315,678... which for the banking system as a whole, covers most part of the defaulters. (Book loss of £160K, vs an admittedly 25 year slow actual recoup of near £136K interest).

Er, no, they Get £20k back immediately, then £135k over 25 years. Total loss 5k without taking into consideration inflation and the further risk over those 25years. If you saw a 50% right down, I think more than 20% would walk away.

It's always the same thing... overlooking the fresh lending equation to reliquify.

It really isn't. The start off with a £140k loss in this example. That's no reliquifying, that is starting to come back from a bad loss. They never reliquify, as they are always at a loss, with risk.

[Venger]

(BTW; there's also some interesting fluctuations on the grid about going after pensions. 2 court cases conflicting with one another at the moment. Waiting for something substantive to whether can tap into your pension for monies owed, and into bankruptcy.)

Awaiting clearer clarification. Maybe it will draw in some of your defaulters. I hope so.

Jan 29, 2015

But it applies only to people in their 50s, 60s or 70s, right, and only for small sums of money, right? Well yes and no, you see in April 2015 the pensions laws in the UK change, enabling people over 55 to drawdown all their pension from their pot.

What this means is that anyone 52 years or older (allowing 3 years for an IPO/IPA) should, if at all possible, defer making any decisions to go bankrupt or not until the appeal is heard and decision made, or the government bring in some emergency legislation. It might be that you will have to use other options such as a Debt Management Plan or Token Payments to buy that time.

http://www.midlandsbusinessrecovery.co.uk/lose-pension-bankrupt/

[Venger]

Er, no, they Get £20k back immediately, then £135k over 25 years. Total loss 5k without taking into consideration inflation and the further risk over those 25years. If you saw a 50% right down, I think more than 20% would walk away.

How much could they sell that new mortgage on for in the immediate term to another investor? Lower risk of current buyer defaulting, because the buyer is carrying a £180K mortgage, whereas before others were carrying £360,000 mortgage for same/similar properties in the bubble.

Or they can wait for full term and it pay out, sharing some with savers and shareholders too. Agreed there are other risks over the 25 years, but not sure if inflation is one of them, but of course could be. Anyway I'm not worrying about the defaulters/debt stressed. I do think my theory holds somewhat for given the attitude of banks to big hpc late 80s-early 90s, and fresh mortgages for those in position to buy or upsize. I'm hpc.

The big money anyway is in more transactions/mortgage growth on all those baby boomer houses owned outright, sitting on £Trillions in equity, with no or very little debt. Shock and awe them to cashing out, then rxe and others won't be so keep on holding yet another property when he's (or many others like him) panicking to raise funds to cover deflationary crash on other property interests.

A lot of that demograhic has very good pensions. My mother is being paid well from my father's final salary scheme. No financial stress at all. Now her friends may be a somewhat strange demographic, but I don't see any of them in major trouble, all are in the same position, nice big houses, decent pensions, and very low outgoings with zero debt. It seems to be the following generation that spends it all on flash holidays and motors.

Now at some stage (hopefully a long way off), I will probably inherit the place. Honestly, I'd rather my mother did what she wanted to, rather than attempt to lock in some sort of asset. When the time comes, I will view it as a bonus, whatever the value. What would I do with it? I've got somewhere to live. If I sell it, I have to find somewhere else to put the money, and these days, that is pretty fraught. So, whatever it is worth, I'd probably keep it.

My point is that there are a very large number of people out there who are pretty immune to house price shifts. We focus on the ones who have cocked up and got themselves in trouble, but I think these are a minority - like the people on the TV last night who had a somewhat idealistic view of being a landlord.

I would view it as a once in a lifetime opportunity to transfer assets across 2 generations and not pay the government a vast amount to do so. I don't believe in this bubble, but I continue to believe in property as a long term investment. While the value of companies in stock markets may collapse, in local currency a decent house in a decent area will be worth having.

Edited May 21, 2015 by Venger

[canbuywontbuy]

In 2004, I thought rates would rise for through the following 3-4 yrs . Decided to play the long game to move up the ladder. Wait.

In 2008, I thought I'd wait 1-2 years until the crash had gained hold and move up the ladder. Enter QE and all manner of props to keep HPI ongoing. The long game just got longer. No way would I buy into this madness.

Today, plates just about spinning in some areas. Others been on downward trend for 4-5 years. I'll play the long game again and wait for the next recession. One is due along any minute.....

It's been a long, long, long game for me and many others. When it all cracks up, I'll be sitting back with the popcorn at hand. This has been a mad 15 years manufactured by the banks, VI's, and their political chums.....

I just tossed the script I was supposed to follow in the bin. This country is setup for eastern European frontier workers. Now THAT's what I call aspiration. To be a Norman Normal British person - plodding along on 25K a year, 25 year 80% mortgage, crossing your fingers you'll keep your job and your health for that amount of time - it would require a complete lack of aspiration to walk down that road. I actually think people who live that kind of life are a bit dim. Life is too short. Too many things to do and places to visit. A Polish worker can pay off his mortgage in under 5 years. He has a life to live, after all. I truly (and no sarcasm here) respect that kind of thinking.

Edited May 21, 2015 by canbuywontbuy

[R K]

30 years of supply side policies needs to morph into 30 years of demand side policies.

Sorted.

[TheCountOfNowhere]

If the UJ banks are so close to insolvency...how come the US got their much needed crash without the world ending.

Is seems to me, someone is lying.