Jump to content
House Price Crash Forum
Sign in to follow this  
Starcrossed

Not Only Panorama...

Recommended Posts

For those without televisions, Radio 5 have a programme investigating 'the selling of mortgages that people have no hope of repaying' this Sunday at 10am. It probably covers a lot of the same ground as the Panorama programme but its existence shows how prominent the issue is becoming.

Share this post


Link to post
Share on other sites

Another distraction.

Hmmm. Another programme which attempts to pin the blame on the banks while ignoring the real cause of Brown's Bubble -- recklessly loose monetary policy at the macro level, in particular the setting of monetary policy by targeting an artificially suppressed index of consumer prices whilst deprecating or ignoring money supply growth. Lax lending by banks is just a symptom of that.

Share this post


Link to post
Share on other sites
Another distraction.

the setting of monetary policy by targeting an artificially suppressed index of consumer prices whilst deprecating or ignoring money supply growth.

I just don't see it in such conspiritatorial terms.

Firstly, nobody's "articially supressing" the inflation indices. There's no such thing as a universally applicable inflation rate, your inflation rate will differ from mine, and furthermore the constituent parts of both our inflation rates will be constantly changing. Any measure of inflation requires some difficult technical and judgement calls in areas like "switching" behaviour and accounting for quality improvements over time, but the office of national statistics is very transparent about their methodologies and even provide Excel versions of their raw data so we're all at liberty to reconfigure the data any way we choose.

Secondly, no central banker ignores the money supply. But equally they don't slavishly set interest rates according to some money supply driven mechanical formula, and I'm relieved they don't. If central bankers are as furtive or incompetent as you suggest then you've got to spell out a viable alternative and state what machiavellian motives they could possibly have for manipulating the figures?

I read Greenspan's book last week and he sets out a much more plausible (but far duller) scenario that has nothing to do with sinister international conspiracies. He argues,

1. Fiat currencies will always be liable to inflation because politicians in a democracy will always be tempted to run defecits and set interest rates too low. This doesn't make them evil figures from SMERSH, it just means they're human!

2. The economy needs checks and balances just like the judiciary. So in the same way judges should be appointed for life and beyond political interference, there should be an independent central bank tasked with keeping inflation within pre-set limits.

3. The biggest political event in the last fifty years was the collapse of the Soviet Union. The obvious lessons from this prompted China to accelerate towards a market economy, which has meant the migration of 5-600 million people from the counrtyside to the factories and cities of the Pearl River delta. This seismic population movement created a pool of low cost labour which placed a deflationary brake on the entire world, and allowed interest rates to be lower than they otherwise would be without driving up inflation.

4. But Greenspan say's this migration is nearly complete and consequently the party is nearly over. He's honest enough to say that because of the industrialisation of China he had a relatively easy job during his chairmanship of the Fed, but he states Bernanke will face a much tougher environment. In fact Greenspan calculates that over the next 20-25 years interest rates will need to be about three points higher to maintain inflation at the levels we've enjoyed for the last 15-20 years, furthermore he says that three points higher is just a long run baseline, and there will undoubtedly be extended periods where we'll need double digit interest rates.

5. He's concerned that politicians will have the resolve and wisdom to retain the independence of central bankers, especially given the budget pressures that a retiring generation of baby boomers will cause around the world, but he believes it's impractical for us to revert to a gold backed currency which would guarantee moderate inflation.

So, no evidence of "recklessly loose monetary policy", just well intentioned individuals trying to do their imperfect best in an imperfect world. And further evidence incidentally why buying property just now won't be a smart investment over the next decade or two.

Share this post


Link to post
Share on other sites
Another distraction.

Hmmm. Another programme which attempts to pin the blame on the banks while ignoring the real cause of Brown's Bubble -- recklessly loose monetary policy at the macro level, in particular the setting of monetary policy by targeting an artificially suppressed index of consumer prices whilst deprecating or ignoring money supply growth. Lax lending by banks is just a symptom of that.

While I've absolutely no doubt that we've seen fraud on a spectacular scale as a result of the failing of the FSA to regulate the financial services, the real problem is deeper.

The problem is with accountability.

The boom in London has been with respect to derivative trading. Derivative trading is similar to spread-betting (William Hill for people who think they are wealthy) and is pitched as a way to insure against losses. This allows someone to "short" an asset - which, one can think of, as being similar to promising to sell something one doesn't own. The "short seller" is betting that the price will go down by the time that the future/option contract expires - and the difference can be collected. Short selling is traded on "margins"- which is a tiny fraction of the amount of money that could be lost. The upshot of this is to destabilise the stock market - since it is possible to enter into both short (pretending to sell something you don't own) and long (pretending to buy something now and seeing how much it goes up) positions. The payouts on these bets can be used to artificially inflate or deflate an asset's value.

A CDO is a contract which indicates an amount of mortgage to be repaid... where these mortgages are mis-sold (i.e. sold to desperate house-hunters who are forced to bet on future pay rises) this introduces risk of bankruptcy for mortgage holders. The optimal strategy for the financial services sector is to keep mortgage holders on the brink of bankruptcy - this way they maximise their profits. The risk, however, is future defaults... which must either be covered up or dismissed. Risk is a problem on a balance sheet... so risks must be mitigated... which can be done with a CDS contract - i.e. a Credit Default Swap... but, and this is the magic, the CDS can (in principle at least) be traded on a margin... and, worse than that, the margin itself might be a CDO now these are accepted as collateral for loans by the Bank of England.

The serious problem now is that there is a cycle... monetary supply increases at an exponential rate that matches the rate of trading. Hyperinflation.

While I'm not aware of the correct terminology, I'm sure a similar system exists in the context of corporate finance... I strongly suspect that vast amounts of money have been fraudulently obtained in corporate paper markets. I see no other plausible explanation for the frenzy of private equity deals.

I am absolutely certain that this situation is _exactly_ what has spooked the banks... and why they aren't lending to each other. The exact same problem as sub-prime in America is afflicting us in the UK... securitised debt is impossible to value. Moodys; Standard & Poor and Fitch are ratings agencies who attempt to do this... but they are paid only on sale - so, there's a conflict of responsibility here - leading to more optimistic default estimates than are sensible. Unless this whole fiasco is resolved, every currency which honours derivative contracts is effectively worthless because the worth of the money cannot be quantified. Accountants and auditors might give their opinion - but this is not binding and, really, is about as much use as an IOU in crayon on toilet paper by a 2-year-old.

So, what should we expect to happen? It is impossible to predict... with Banks refusing to share information no-one knows who owns what and who is solvent and who isn't.

As I see it, the only resolution is to conduct a solvency test on every individual and business - and to foreclose on all loans above the value of those which can be made by government and enforced.

With a debased currency, valuation of any asset becomes absolutely impossible. Without military defence, even owner occupiers who've repaid their mortgage are at risk.

Are you long or short on sterling?

Can you trust your bank to have transferred the money?

Share this post


Link to post
Share on other sites
Guest
So, no evidence of "recklessly loose monetary policy", just well intentioned individuals trying to do their imperfect best in an imperfect world. And further evidence incidentally why buying property just now won't be a smart investment over the next decade or two.

Excellent post, silver. Nice to see some balance. I am tiring of the uber conspiracy theorists. If everything they say is true, then the powers that be would have "done us all in" yonks ago.

Share this post


Link to post
Share on other sites
A CDO is a contract which indicates an amount of mortgage to be repaid... where these mortgages are mis-sold (i.e. sold to desperate house-hunters who are forced to bet on future pay rises) this introduces risk of bankruptcy for mortgage holders. The optimal strategy for the financial services sector is to keep mortgage holders on the brink of bankruptcy - this way they maximise their profits. The risk, however, is future defaults... which must either be covered up or dismissed. Risk is a problem on a balance sheet... so risks must be mitigated... which can be done with a CDS contract - i.e. a Credit Default Swap... but, and this is the magic, the CDS can (in principle at least) be traded on a margin... and, worse than that, the margin itself might be a CDO now these are accepted as collateral for loans by the Bank of England.

Some people would argue that derivatives are a 'good thing', because they allow for shorting. They (e.g. Shiller and other bubble economists) also argue that the housing bubble has occurred precisely because shorting is difficult in housing markets. I posted a link to a presentation by Andrew Farlow which explains this very clearly and convincingly.

The difference between CDS and CDO is that CDS are very liquid and deep market, even in the current situation. CDO and ABS and other such things aren't very liquid at all and this, some people would argue, is behind the current crisis.

Another different (which sort of explains the liquidity problem) is that the pricing of a CDO depends on a lot of different inputs. Briefly: CDO's and similar products are 'tranched' so that different investors have different risks. The equity trancheholder picks up any loss whatever on anything (say any mortgage) in the portfolio. When this tranche is used up, it passes to a mezzanine tranche, then to more senior tranches and so on. Pricing these tranches is difficult because (a) it depends on the default probability of any mortgage (B) on the default 'correlation'. Let me explain the second one. If no default is correlated with any other, the equity holder has a very high risk (because the chances of 1 or more of 1,000 mortgages defaulting is extremely high). For the same reason, the senior tranche holder has a very low risk – he will only suffer loss if 900 of the mortgages default, which is like throwing 900 heads or whatever. But suppose now the correlation is 100% - if one mortage defaults, all of them default, otherwise none defaults. This benefits the equity holder, because the chance of loss is the chance attributable to each mortgage. So also for the senior holder – indeed, their risks are now identical. So these things are very hard to price, because correlation is very difficult to measure until it has happened.

With a CDS, by contrast, you have a swap on an individual name. The probability of default drives the price of a CDS, and is a relatively transparent number.

Hope that helps.

Share this post


Link to post
Share on other sites

Consumer Price Index NOT inflation.

I just don't see it in such conspiritatorial terms.

I neither state nor imply any conspiracy.

Firstly, nobody's "articially supressing" the inflation indices.

I didn't say they were. I said that the monetary policy was being set by targeting an artificially suppressed index of consumer prices. True inflation is the growth in the money supply. Inflation has been roaring away while many consumer prices have been suppressed by cheap imported goods and cheap imported labour. The UK Consumer Price Index is further suppressed for a variety of statistical reasons, not least because it only includes a subset of typical consumer spending -- it does not, for example, include house prices or council tax. The Index is an artificial construct that's only loosely correlated with the rate of inflation many years previously.

There's no such thing as a universally applicable inflation rate...

M4 will do for me.

Secondly, no central banker ignores the money supply.

They may not ignore it, but it's not within the Bank of England's remit to control it. It should be.

If central bankers are as furtive or incompetent as you suggest...

I never suggested that they are "furtive and incompetent". They're just doing what they're told to.

... then you've got to spell out a viable alternative and state what machiavellian motives they could possibly have for manipulating the figures?

I haven't got to do anything of the sort -- it's perfectly reasonable to criticise something that's clearly a disastrous failure without putting forward an alternative (viable or otherwise).

As it happens, my suggestion would be to target a multi-year rolling average of money supply growth. By all means let money supply run ahead of its long term sustainable growth rate when the economy's recovering from recession, but once house prices start to take off it needs to be reined in to meet the long-run objective. I also advocate using both interest rates and reserve requirements to control money supply growth. Let the economists decide on what a sensible long-term average for money supply growth is -- Professor Tim Congdon and others suggest 6-7%. One thing is for certain: it's not in double figures as it has been for most of the last decade.

So, no evidence of "recklessly loose monetary policy", just well intentioned individuals trying to do their imperfect best in an imperfect world.

M4 money supply has grown by almost 50% over the last three years. Do you seriously think that M4 growth of over 13% a year, year after year, is low inflation? Do you think it's even consistent with maintaining the CPI within its target range? Such recklessly loose monetary policy has been a feature of many economies over the last decade. Inflation in the money supply is first seen in the assets for which the money is borrowed: houses and the share prices of businesses subject to private equity takeovers. Then it percolates out to the rest of the economy creating excessive growth in demand and forcing up commodity prices. This is eventually reflected in rising consumer prices for most goods and services. It can take six years or more for the effects of money supply growth to come through -- all the more reason it should be kept under control.

Share this post


Link to post
Share on other sites

greenspans explination doesnt cover WHY they allowed loose lending. even if china was importing deflation. why allow so much lending. could we have just enjoyed the deflation and increase in our wages buying power.

its all been sapped up because of a mountain of monopolising lenders grabbing assets using cheap money.

because of this we all (the unhomed) have to work extremely hard just to live.

explination doesnt make any sense.

Share this post


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...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 356 The Prime Minister stated that there were three Brexit options available to the UK:

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal



×
×
  • 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.