Friday, February 6, 2009

Somewhat counter intuitive

Bank of England was powerless in the face of excessive credit growth

This article proposes that perversely, when the BoE was raising rates the supply of credit increased. Due to exising near-zero rates in Japan, hot money as part of the carry trade moved into the UK, and more interest rates went up, the more funds flowed into sterling, cheapening imports and providing excessive capital for the banks (to hang themselves with). This is the idea that although we had a growing trade deficit, the money always flowed back in. So actually the restriction on credit now, is weirdly enough, because low interest rates in the UK cause capital flight. There is no conclusion in the article, but you could argue that to increase credit availability in the UK, we would need to raise rates again to become internationally competitive for capital.

Posted by stillthinking @ 08:22 PM (1391 views)
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16 thoughts on “Somewhat counter intuitive

  • stillthinking says:

    sorry to continue (not really)…

    If that is the case then GB has done exactly the wrong thing, which is a tempting argument anyway. However, it seems to me that this depends on banks being solvent, because foreign investors won’t want to risk holding sterling in a UK bank. But against that, this idea is unsustainable because it surely requires the trade deficit to keep growing, and the value of sterling to keep increasing, while the UK population runs up ever increasing real debts in a low inflation environment, or what just happened.
    Also this is interesting because it must mean that sterling is not plumbing the depths now, but just at the correct level it should be at, and there won’t be a return to higher valuations. In addition, it must mean that a lot of our recent imports are free, as in complete gifts, because anybody involved in the carry trade in the UK must have made a loss when they repatriated their funds, and that loss must be the equivalent of the effective subsidies on our imports.

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  • This ridiculuos circus will end with a crescendo of exploding inflation, Iceland style interest rates and Sterling on its knees.

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  • japanese uncle says:

    Utter rubbish. This is another incompetence defense or ‘force majeure’ defense in this instance. This argument can be valid only when we can assume there is no coordination or communication between major central banks. BoJ’s stakeholders are not disclosed but rumors have it that the powerful financiers in the City are the real owners of the Japanese central bank. (Their ownership of US FRB is a public knowledge.) Zero-interest regime has done no good but serious damage to the country, with the ‘feel bad’ factor causing serious slump in consumption in an economy ‘dominated by savers rather than borrowers. Zero interest in UK will obliterate GBP, destroying its economy again.

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  • Many Icelandic’s had mortgages in Euro’s!

    FX mortgages + Collapsing currency = Major Pain

    Although if anyone is offering a JPY mortgage I would be tempted to rip their arm off. I expect JPY to be devalued in weeks.

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  • mark wadsworth says:

    It’s a good theory, but I’m with JU on this.

    In any event, sensible banking supervision is only part of the battle. Low interest rates and cheap imports are, in and of themselves Good Things. They only become Bad Things when all the cheap credit goes into inflating land values rather than being invested in the productive economy – whether that’s your own education or research costs or building infrastructure.

    Now, let me think, what kind of tax would deter cheap credit from just inflating land price bubbles … hmmm ….?

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  • stillthinking says:

    The article is utter rubbish or what I am saying is? (or both). I find the idea of powerful financiers in the city managing to take control of the BoJ a bit of a jump, Japan has banks controlled by their keiretsu company groups, and the BoJ may be influenced by them and looks as though they have been perhaps. To make the leap that BoJ is controlled by UK financiers is too much though, JU.
    I didn’t in fact mean specifically Japan, China or any creditor nation would have done. I am sure the central banks are talking, but there was no political will to prevent things from continuing as they were. For Japan, for a while anyway, problematic deflation was being exported, and for China, a production boom. You could see why nobody would be shouting to bring the whole house down, and continue with the status quo.
    Probably I need to have another think about this idea.

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  • Look, you chaps know a damn sight more than me. I don’t believe this is a straight game at all. There seems to be massive manipulation and speculation taking place. It’s not a fair playing field in any sense. The people of the UK are being seriously indebted for generations to come. There are always reasons for everything and imo this absolutely points to an orchestrated manoeuvre by a few powerful financiers.
    If this is the case logical economic theories cannot be relied upon. Hence the volatility and contradictory movements we are witnessing.

    mark w……. OK I’m convinced

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  • “How should policymakers adjust to this complicated new world where changes in short-term interest rates do not lead to desired economic outcomes? One response would simply be to impose capital and exchange controls but, for Britain, that would be a disastrously retrograde step. Another would be to co-ordinate monetary and fiscal policy more closely, so that the economy could be cooled down without the need for higher interest rates, but that would threaten the independence of the Bank of England.”

    Do you really believe that the BoE is still independent and does it matter that much considering the stakes here? Of course the governemt would have to admit that it’s idea of maing the BoE independent was not all that godd after all.

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  • Japanese Uncle says:

    stillthinking

    Make no mistakes, banks are not controlled by their Keiretsu companies but the other way around, and banks are heavily regulated by the BoJ the banking regulator. Relationship between the Japanese banks and BoJ is quite like that between the medieval peasants and their overlord, as I heard first hand from a banker in a post to liase with BoJ. Richard Werner who studied banking at Oxford and Tokyo University before serving as research fellow at BoJ wrote a highly illuminative book titled ‘Princes of Yen’ in 1994, based on his in-depth survey by hearing from dozens of banking executives in Tokyo, clearly revealing how cheap credit was ‘pushed’ by the BoJ as quota in the form called ‘window guidance’ in a financial environment already inundated with credit, to which there was no resisting the BoJ authority, for fear they could be cut off from the supply of credit in the future when credit is running short. Banks in turn had no choice to push such cheap credit to their clients, inflating the great property bubble during 1985-1990. The book also describes intimate relationship between the successive BoJ governors and the FRB. Incidentally ‘Princes of Yen’ , despite its huge popularity, has been discontinued (carrying ten times higher price than original list-price in the used books market), while the author was expelled from BoJ.

    One more thing, both BoE and BoJ were given ‘independence’ coincidentally in 1997.

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  • japanese uncle says:

    stillthinking

    Make no mistakes, banks are not controlled by their Keiretsu companies but the other way around, and banks are heavily regulated by the BoJ the banking regulator. Relationship between the Japanese banks and BoJ is quite like that between the medieval peasants and their overlord, as I heard first hand from a banker in a post to liase with BoJ. Richard Werner who studied banking at Oxford and Tokyo University before serving as research fellow at BoJ wrote a highly illuminative book titled ‘Princes of Yen’ in 1994, based on his in-depth survey by hearing from dozens of banking executives in Tokyo, clearly revealing how cheap credit was ‘pushed’ by the BoJ as quota in the form called ‘window guidance’ in a financial environment already inundated with credit, to which there was no resisting the BoJ authority, for fear they could be cut off from the supply of credit in the future when credit is running short. Banks in turn had no choice to push such cheap credit to their clients, inflating the great property bubble during 1985-1990. The book also describes intimate relationship between the successive BoJ governors and the FRB. Incidentally ‘Princes of Yen’ , despite its huge popularity, has been discontinued (carrying ten times higher price than original list-price in the used books market), while the author was expelled from BoJ.

    One more thing, both BoE and BoJ were given ‘independence’ coincidentally in 1997.

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  • stillthinking says:

    JU, but wasn’t the cheap credit being forced out the only possible defense for Japan to the the revaluation by the Loeuvre Accords? Which was fairly hostile to Japan. Cheap credit being an effort to stimulate demand, such as is being tried badly in the UK.

    So what would be the purpose of deliberately pushing excessive money into the economy for the UK or Japan? A misunderstood expansion policy?

    I will try and get the book.

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  • stillthinking says:

    Sorry, just to go on. Quiet guy, I don’t believe the BoE was ever independent. Aside from being political appointees, they were forced to follow a dictated narrow set of rules, Mervyn King is on record for saying house prices should be included in measurements of inflation (the Governor, supposed leader) but they never were, the BoE was forced to follow inflation measurements pretty much purely on shop inflation at a time of a production shock and a growing trade deficit, and finally, they definitely aren’t independent now, and presumably one fundamental aspect of independence is that it cannot be revoked.

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  • theboltonfury says:

    TC – when do babies stop crying? 5 solid months now.

    BTW – I agree with JU

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  • bolton & TC

    Sounds like we have something else in common, my youngest is 6 months, fortunately this one doesn’t cry too much.

    I hate to tell you this friends of ours had one that cried for 18 months solid, then was fine. Be patient.

    I’ll read this article and posts properly in the morning, looks quite interesting.

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  • This is an utterly distractionary argument. Inflation was high, so interest rates had to be raised, but actually, inflation was nowhere near as high as the real rate which included housing costs.

    Therefore the articles argument that high interest rates were punishing UK industry when the reality was that there was and is little UK industry anyway.

    It is therefore a divisive strawman argument – that the economy was suffering under high interest rates (completely forgetting that inflation was high, but undermeasured) so current low interest rates are better. And then finally a last whoop for revving up the money printing presses. A wolf in sheeps’ clothing.

    False economics, false argument.

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  • bolton – I hate to be the lucky bugger but mine is 6 months and hasn’t cried for ages. Sleeps 12 hours straight.

    I just wish I could sleep as well.!!

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