Sunday, September 6, 2009

Desperation

Bank considers new measures to stop lenders hoarding

The Bank of England may introduce negative interest rates for the first time in British history this week, economists said.

Posted by devo @ 11:28 PM (1470 views)
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22 thoughts on “Desperation

  • Fallingbuzzard says:

    Utter nonsense. Banks need further recapitalisation. Thats why they can’t lend. They need to be fully nationalised. Partial nationalisation is like a death by 1000 cuts!

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  • Negative interest rates are a bad idea. They’ve never been used in over 350 years, in spite of many many previous booms and busts for good reason.

    With Mervyn King’s appetite for increasingly wild dice-throws, our central bank is starting to look increasingly desperate and wacky.

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  • paul RTFA. This is interested paid on deposits in BoE accounts. not interest charged on loans. negative interest rates are common around the world. HSBC has negative interest rates on gold deposits for instance (you pay a fee to keep gold in their vaults.

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  • Negative interest rates as discussed here relate only to bank’s money deposited with the BoE right? So that would mean it would cost banks to lodge reserves with the BoE, so they would not want to lodge so much?

    Um, would this not result in banks investing their money elsewhere, being less keen on lending (which requires reserves), and raising interest rates on that lending to protect profits? Or am I missing something?

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  • What about just going round the banks and stealing their money?

    Oh, they have been doing that for the past 8 months via QE.

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  • hpwatcher, don’t you mean “stealing OUR money”?

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  • @ 1 paul,

    Sweden keeps it rate negative to boost growth – 3 days ago, not 350 years.

    http://www.google.com/hostednews/afp/article/ALeqM5gL4w6qjBZvfAWDKzy5ANgm1i5MEg

    With the negative rate, banks are effectively fined if they hoard unused funds in the central bank’s coffers — a way of punishing them for a conservative lending policy at a time when the authorities want to ensure the economy gets easy credit.

    Bank of England governor Mervyn King recently refused to rule out following the Swedish example.

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  • If the central bank want to release the money that they created from the sink* that is made up of those reserve accounts, which is certainly the case, then this is surely the most logical and direct method.

    Newly created money was made to purchase securities, mainly gilts, and this money just circulated a tight pool within banking and ending up in these deposit accounts where it all now lays idle; the point of QE was to increase the monetary base, yet without velocity that does not occur – these institutions obviously need a push in the ‘right’ direction and this is the most direct way to implement such a distortion to the natural tendency.

    I have no idea why anyone would consider this particularly wacky. After all, until recently ( 2006, I think ) banks did not receive interest on their reserves at the BoE.

    * sink: the opposite of source.

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  • debtfree – I think Paul was referring to the fact that the BoE has never had -ve rates in it’s 350 year history, although he also seems to be confusing the refinancing rate and the deposit rate ( the former being the headline ‘base’ rate ).

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  • hpwatcher / bystander
    – hah, no, that’s the thing!
    It’s their money by virtue of the fact that they have a monopoly on it’s supply.
    That is why central banking is inherently bad.
    Either you barter or you use their money, you have no other commonly acceptable options ( try to define your own money and see what happens – no one will accept it and if trade does pick up, no doubt the full force of the law will be shown. )

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  • @ 7

    good point 51ck-6-51x

    the central bank creates the money and it’s just being circulated around. nobody owns the money, they do.

    it really is quite absurd, there is only one source and it’s unlimited. it’s like a game where the rules change all the time so nobody can ever win.

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  • mark wadsworth says:

    Let’s put this in perspective…

    (a) The QE game is about refinancing commercial banks on the sly – one department of HM Treasury (Debt Management Office) issues bonds to banks on a Tuesday and then another department of HMT (Bank of England) buys them back at a slightly higher price on Thursday. The annualised profit is difficult to calculate, but if you churn successfully each week, it appears you can make (say) three per cent profit.

    (b) As a separate issue, banks are nervous about lending and prefer to deposit with BoE, even if they’re only earning 0.5%. The government doesn’t like this, because they want to keep house price bubble inflated. If they make interest rates negative, they are then clawing back a small bit of the more or less risk free profit opportunity that QE offers.

    Do not forget, total QE spend so far = £150 billion, increase in amount commercial banks have on deposit with BoE is up by about £120 billion since March – there is a pretty clear link.

    (a) was ostensibly meant to counteract (b) but the two more or less cancel out.

    So, all things considered, it would be better to scrap QE, abandon the MPC and allow markets to set interest rates. If those are negative, then so what? There’s nothing unusual about this – it is quite common for there to be negative real interest rates, i.e. where the interest you earn less income tax is less than inflation (however measured). And if interest rates go up, so what? That just speeds up house price crash and general deleveraging that has to take place (see separate post today about Japan!!).

    If in doubt, leave things to the markets, is my motto – and sure, there will be some losers from this, we can far better compensate them via the welfare/pensions system regardless of whether they are homeowners or not.

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  • MW said, “If in doubt, leave things to the markets, is my motto”
    – Sums up my position too.
    Why not leave monetary issuance to a market too?
    That is: Don’t just remove the MPC, remove the central bank – step one on the road to freedom in my opinion.

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  • the number cruncher says:

    If you leave it to the markets the first thing they do is create a monopoly

    This is the fundamental problem with free market economics and means we end up with the ridiculous sate capitalism we have today that feeds profits to the idol rich, while taxing those that work hard.

    When will humanity realise that a free market system ends up with capitalist concentration and monopoly just as we found out that communism meant totalitarianism.

    Now this is really going to cook the noodle of all free marketeers: to achieve a free market we must have strong government NOT weak government.

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  • @ 13 51ck-6-51x

    Couldn’t agree more after reading some of Bruce Wiseman this morning.

    He wrote an excellent article called The Financial Crisis : A look behind the wizards curtain.

    http://brucewiseman.net/index.php?option=com_content&view=article&id=51:look-behind-the-wizards-curtain&catid=34:finance&Itemid=27

    Well worth a read, it nails the blame directly with Central Banks and BIS in Basel, Switzerland.

    Extract from article

    Mortgage lending slammed to a halt as if it had run headlong into a cement wall, credit lines were cancelled and credit card limits were reduced and in some cases eliminated altogether. In short, with their balance sheets butchered by Basel II, banks were themselves going under and those that weren’t simply stopped lending. The results were like something from a financial horror film—if there were such a thing.

    Prof. Peter Spencer, one of Britain’s leading economists, makes it very clear that the Basel II regulations “…are at the root cause of the crunch…” and that “…if the authorities retain the strict Basel regulations, the full scale of the eventual credit crunch and economic slump could be disastrous.”

    “The consequences for the macro-economy,” he says “of not relaxing [the Basel regulations] are unthinkable.”

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  • mark wadsworth says:

    @ Number Cruncher

    “If you leave it to the markets the first thing they do is create a monopoly”

    The ultimate monopoly is land ownership (mortgage lenders and banks just ride on the coat tails of that). You can’t compete away land ownership, of course, but what you can do is tax the monopoly profits to be made therefrom via Land Value Tax; that keeps values down, keeps mortgages down, enables us to cut other taxes, i.e. on employment income and business profits etc.

    Most other monopolies arise from government imposed barriers to entry, so are easily got rid of. Other semi-natural monopolies (like rights to 3G spectrum, airport landing slots) can also be dealt with via Land Value Tax.

    Problem solved.

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  • @debtfree

    The banks balance sheets are only being butchered by Basel II because Basel I wasn’t effective.
    Basel I caused the credit crisis by letting SIVs exist. Basel II just shone the light on the fact that these SIVs were not worth what people thought they were.

    Basel II is “a good thing”, well at least better than Basel I

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  • the number cruncher says:

    @mark Wadsworth

    True wisdom – music to my ears Mark.

    Creating a free market first requires a land value tax. A true free market needs wealth circulated wealth back into the real economy not hoarded for monopolistic gain. A free market needs excellence in education for all, and a free market must allow people to fail and pick themselves up. But a free market must punish those who try to subvert it.

    The real enemy of free markets are capitalists who just want to live of existing wealth. The tax system should punish these people most soundly, while rewarding those who work hard.

    The biggest triumph of the selfish elites in this country is to persuade the common man that a capitalist economy is a free market economy; it is not! How many ignorant fools who work hard for their living have been beguiled into thinking that is that the unemployed, migrants and work shy who are their enemies when it is the idol rich.

    A BBC journalist told me the other week that only 1 in 50 millionaires in the country actually earned their wealth – have a long hard think about that.

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  • Cracking post @18, number cruncher.

    16. mark wadsworth said…

    “Most other monopolies arise from government imposed barriers to entry”.

    Usually as a result of lobbying by existing market leaders. The natural instinct of anyone, whether it be in government or business, that has gained power is to consolidate and protect it. It is this that must be prevented, so therefore as the number cruncher says, regulation must be stronger rather than weaker to keep the market ‘free’. Land value tax seems like an ideal way of achieving this in the most efficient ‘non-regulatory’ manner. The one group that is the biggest barrier to the free market are the corporations doing well out of the current system, not the government (although they are approaching being the same thing).

    As a side note, one of the most amusing things that I have encountered on this blog is noting the economic right-wing’s recent wake-up to the negative effects of the dominance of big business, when the left have been shouting about it for decades…

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  • mark wadsworth says:

    @ Shipbuilder “Most other monopolies arise from government imposed barriers to entry … Usually as a result of lobbying by existing market leaders.”

    Sure, but that doesn’t mean it is inherently wrong for their to be ‘market leaders’ or ‘big corporations’ (there are such things as economies of scale – do you think that Joe round the corner could employ a couple of mechanics and knock out family cars for £10,000?), what is inherently wrong is for political parties to cave in to lobbyists, it’s called corruption. I personally can’t fault the big corporations for doing it, I blame the policians.

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  • Mark – depends what you mean by big – there are plenty of companies – TVR for example, that can produce a competitively priced car without having to buy in the major components from competitors – economies of scale tend to tail off at a certain size. Corporations get to a size, where their influence becomes virtually impossible to resist and it may be by perfectly legal means and partly because they have been able to shape the law in the past to suit themselves. The film/book ‘The Corporation’ explains this side of things better than I can. When a multi-national is potentially richer than your country, what politician is going to resist? Few would argue that bigger government is better, so why is bigger business better, when it can have potentially a bigger impact on our lives and with no moral obligations, or community loyalties?

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  • I read the Corporation ( and still have a copy if anyone wants it ) and watched the film in a local squat cum community centre. I agree that a large, powerful entity can be callas and even down-right evil ( just think of the accounting for cost of life in a car design project ) – but we must analyse the why. It seems any given situation tends to come back to regulations ( including, dare I say it, laws ) and the uneven playing field carefully maintained by the state. This is on the whole unnecessary. There is nothing wrong with healthy competition. In a truly free market ( no, we have not experienced such lately!!! ) there is far less advantage to be gained from becoming larger than is efficient, especially once taxation and barriers to entry are lifted, but competition will tend to encourage such things as over expanding to push out your weaker rivals, but in the end this is a Good Thing as stronger breeds evolve – just like in nature, and just like in nature self-regulation is the key ( look at how humans take it upon themselves to step in and save species – this happens with companies too – do we have some overlord regulating how genes evolve?! ). I trust people on the whole. People will always stand up for what they believe is right, and the same holds in a truly free market. There is little chance of a monopoly without protest – the only things we really need to watch are food and water – anything else can be successfully boycotted – remember a monopoly does not make sense if your customer does not like it unless there is a reliance upon your product OR a system of control in place to stop the customer’s concerns affecting business ( such as the state, it’s police and it’s army ).

    Note I also believe that in a truly free market we would witness the rise of the co-operative, where healthy synergies thrive and collusion is shunned. This all boils down to the inherent transparency of an unregulated system… without the trust by proxy of state we must keep our wits about us and trust once again becomes the most prized commodity.

    Shipbuilder, I know you wholeheartedly disagree, and I’m sure some others do too. You may already do so, but if not I think you should take some time to read up on those points of view with which you disagree. May I suggest The Machinery Of Freedom by David Friedman?

    Freedom is not the daughter, but the mother of order. – Pierre-Joseph Proudhon.

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