Friday, January 8, 2010

Markets will believe anything

Bubble warning

The markets are beset by a series of contradictions. They are dependent on extraordinary amounts of government stimulus. But that stimulus is in turn ultimately dependent on the willingness of markets to finance governments at low rates. They should be willing to do so only if they believe that growth prospects are poor and inflation will stay low. But if they believe that, investors should be unwilling to buy equities and houses at above-average valuations. At some time—maybe in 2010—those contradictions will have to be resolved. And that will trigger another nasty bout of volatility.

Posted by mken @ 04:41 AM (2113 views)
Please complete the required fields.



32 thoughts on “Markets will believe anything

  • And the worst thing is that rather than tempering asset bubbles, central banks now appear to actively create and encourage them.

    Reply
    Please complete the required fields.



  • I think the article fairly describes where we’re at: the tipping point.

    People will wait until the election to see results on the deficit reduction. The sooner the election is, the sooner there will be some clarity. It could be that circumstances get so volatile that the date moves forward in the interests of tackling the economic problems.

    Some hope: I think that Gordon Brown will hang on as long as possible – and damn the lot of us.

    Reply
    Please complete the required fields.



  • “Some hope: I think that Gordon Brown will hang on as long as possible – and damn the lot of us.”

    Agreed – and doesn’t he look appalling now, managing to look completely washed up and yet remaining contemptuous of us all.

    Reply
    Please complete the required fields.



  • Blaming the PM for all this is pointless. However washed up he may appear, the rest of the politicians are no different. This is a global problem, especially of the West, and as the article points out, is nowhere near solved. The big question is how the crisis will develop. Will the burden fall on the population according to their means, ie tax rises; or will the least well off be those who, as before, suffer the worst through severe public spending cuts?

    Reply
    Please complete the required fields.



  • I agree with letthemfall @4. about blaming the PM for all of this. However, looking forward the key question is how is this going to be solved. My biggest worry at the moment is not GB, he is finished and one way or another will be old news in a few months time.
    It is the conservatives that worry me. They just don’t seem to have the leaders and generals to clear up the mess the UK is in. They should have finished off Brown many times and have failed to do so. However, given the power of the media to sway the masses, it may well be that their strategy is deliberatley luke warm up until the election and then they come in with a massively painful emergency budget. I still can’t see how we can avoid the pain that ireland went through indefinatley.

    Reply
    Please complete the required fields.



  • cat and canary says:

    @4 and @5, yep, agree also.

    We are in the murky realm of economic politics.

    I believe that after the election, neither party will still do enough to reign in public finances. There’s gonna be a downgrade before governments are forced to act.

    Reply
    Please complete the required fields.



  • Blaming the PM for all this is pointless.

    But like it or not, the policies of Gordon Brown are largely responsible for the state that the UK finds itself in.

    Reply
    Please complete the required fields.



  • I agree that we are saddled with a horribly incompetent and self seeking set of politicians, but GB has overseen this development. As hinted at @ 5 it will take more than one GE to sort out the sorry mess, hopefully the nadir has been reached.

    Reply
    Please complete the required fields.



  • As hinted at @ 5 it will take more than one GE to sort out the sorry mess, hopefully the nadir has been reached.

    I just don’t think that the people of the UK are ready to face any possible hardship. Anyway, here is a nice reminder of what Gordon Brown has done for the UK economy:-

    http://alcartwright.posterous.com/gordon-browns-10-worst-financial-gaffes

    Reply
    Please complete the required fields.



  • hpwatcher: “But like it or not, the policies of Gordon Brown are largely responsible for the state that the UK finds itself in.”

    Only in the sense that he followed policies that govts before him followed and any other UK govt would have followed in his place. I’d probably blame the electorate more than the Govt.

    Reply
    Please complete the required fields.



  • Only in the sense that he followed policies that govts before him followed and any other UK govt would have followed in his place. I’d probably blame the electorate more than the Govt.

    To a small degree – in that Labour governments have a habit of leaving behind an economic mess – but a lot is down to him, including… pensions, deregulation, failure to control the rise in house prices, selling gold, debt fuelled economy etc.

    But we don’t have to argue about it, just go ahead and vote for Labour in the next GE.

    Reply
    Please complete the required fields.



  • You seem to taking the partisan view here. I’m merely pointing out that the credit economy has been equally strong under Conservative govts. Labour no more leave economic messes behind them than the Torys. Despite decades of switching between the two parties, we still have an unequal and distorted economy. Similar problems exist in other countries, notably America, which is far more conservative than the UK.

    Reply
    Please complete the required fields.



  • You seem to taking the partisan view here.
    Not at all; I am basing what I say on experience; I have seen governments through the 1970’s, 1980’s, 1990’s and 2000’s.

    I’m merely pointing out that the credit economy has been equally strong under Conservative govts. Labour no more leave economic messes behind them than the Torys.
    And I am merely pointing out that I have never seen debt expension, like what I have seen in the past 10 years. Conservative governments – if I may remind you – tend to be very inflation focussed – no more so than under Thatcher. Under this government, there was rampant inflation, but Brown had HPI removed from the basket so it was virtually invisible.

    Similar problems exist in other countries, notably America, which is far more conservative than the UK.
    Their politics, and especially the monetary policy has been very liberal during the past few years, and continues to be so. I would even call it socialist….

    Reply
    Please complete the required fields.



  • I’ve seen them too. Recall the EMU crisis, the debt bubble of the 80s (Lawson boom), the housing and stock market crashes of the late 80s…
    This Govt has been very inflation-focused: that was the Bank’s criteria for interest rates. The CPI index was adopted for consistency with Europe; a Con govt would almost certainly have done the same. Debt expansion has indeed been huge, but I have no doubt it would have been the same under any govt. The US socialist? We obviously see the US in very different terms.

    Reply
    Please complete the required fields.



  • I’ve seen them too. Recall the EMU crisis, the debt bubble of the 80s (Lawson boom), the housing and stock market crashes of the late 80s…
    Rather small beer compared to what we have now. But the debt bubble had rather different causes, but the lessons were learnt very quickly and the cons didn’t try to reinflate – unlike Labour….who have tried to inflate and inflate and inflate……

    This Govt has been very inflation-focused: that was the Bank’s criteria for interest rates.
    Have you been taking something? The only thing the government and focussed on in maintaining high house prices, but I am seeing inflation everywhere, but with interest rates kept artificially low.

    The CPI index was adopted for consistency with Europe; a Con govt would almost certainly have done the same.
    A con government would not have been so close to europe, but you are guessing.

    Debt expansion has indeed been huge, but I have no doubt it would have been the same under any govt.
    I am not interested in your guesses.

    The US socialist? We obviously see the US in very different terms.
    Monetary policy has been very liberal, almost socialist. Look at Obama, and healthcare….only the other day I read about the possibility of the US Govt paying mortgages to help out those who can’t pay.

    Reply
    Please complete the required fields.



  • I am not blaming Gordon Brown, but I think Gordon Brown is too stubborn to come out with what we all know to be true. Keynes or not, we have GOT to cut the deficit. Simple.

    @let them fall: I disagree that the present Government has been inflation focussed. ON paper – yes. But CPI does not include the “engine of the UK Ecomnomy” – house price inflation. Had it have been, we’d have had housing in the figures – since this caused a HUGE boost. I also blame this Government from relaxing the rules on the delineation of banks functions between consumer and investment status without suitable controls. I blame this Government for absolutely no control over the FSupineA to act. Finally, it was this Government that allowed an environment of credit availability that was “self-certify”. I can’t think of anywhere in Europe where a lender would accept your say-so on how much money you have and how you can pay. I also blame this Government for “interest only” mortgages – again with no system in place to say demand that an investment vehicle is in place to repay the capital.

    I therefore blame the Government for total self-serving deceit when they blame it on the rest of the world that we’re in a mess. Sure – some will say would the Conservatives have done any better? Trouble is, it is the Government that are are PAID to do the job. This blame culture we have in the UK…. is to blame. The monkey is on Gordon Browns shoulder.

    Reply
    Please complete the required fields.



  • hpwatcher
    I am not guessing. Do you really believe that debt expansion, largely caused by the banks and their new tricks, would have been more closely regulated by a Tory govt? I suggest that your support for them colours your view. As you say, the credit problems of the 80s were smaller than those today. The scale of the debt now is the reason for reinflation, not a party-political whim. The general view, right or wrong, among the economics community is that this has staved off depression. Obama has only been in power a year. His health reforms are intended to make health care available to those who can’t afford to pay for it. You can call that liberal if you like. During the previous 8 years, a very conservative govt watched the debt problem explode in the US too. You can’t blame a “liberal” govt for that.

    Personally I support no political party. I think Labour has been negligent in allowing the banks to do what they did. But to believe it would all have been different under the Tories is a nonsense.

    Reply
    Please complete the required fields.



  • growler
    Whichever party you support, I wouldn’t expect too much if we get a change of govt. None has been very successful at managing the economy since the War.

    Reply
    Please complete the required fields.



  • as paul says @2, central banks have allowed these bubbles to arise. Then the aftermath is dealt with by increasing government debt to crisis levels rather than using the central bank’s credit creation power and related credit policy instruments. Is it any coincidence that leaders of central banks tend to be extreme supply siders who favour the dismemberment of the public sector by yet more privatisation, deregulation and liberalisation? Listen to what the tories are saying… privatised schools, prisons, armed forces here we come.

    Reply
    Please complete the required fields.



  • I am not guessing.
    You are guessing; there is no way that you could possibly know how another government would have behaved. There are lots of governments in Europe who didn’t behave in the way that this Labour has done in the past 10 years…..and those countries are now out of recession, and not facing the instability of a hugely bloated housing market.

    I suggest that your support for them colours your view.
    I suggest that you are incorrectly assuming that I would vote conservative.

    The general view, right or wrong, among the economics community is that this has staved off depression.
    Bit too early to say don’t you think? Who knows what’s coming next. Look at the news today: 85,000 job losses in America for December, not over yet……

    Obama has only been in power a year. His health reforms are intended to make health care available to those who can’t afford to pay for it.
    Well it isn’t exactly the policies of the extreme right is it?

    Reply
    Please complete the required fields.



  • Well if I am guessing then you are doing the same, only I would say there is more substance to mine, in that there is not really much evidence to suggest that Labour are intrinsically worse at managing the economy than the Tories, and certainly no reason to believe they would have regulated more strongly given the party’s free-market ideology. Indeed, Labour have pretty much continued Cons policies where markets are concerned. And then there is your assertion that the Bush govt (during which all these problems were building) was liberal, a perverse point of view.

    I agree with you about Europe though. The main reason they are not in the same position is they did not follow the US model like the UK; several of them are what you would call socialist.

    I make no assumption about your voting intention. But you have made it clear your preference for Con over Lab. I find them both pretty hopeless.

    nickb: I agree. The banks are only interested in maintaining their economic power. I can’t imagine for a moment the Conservatives setting about undoing that, but it seems the current govt is struggling with that too.

    Reply
    Please complete the required fields.



  • Well if I am guessing then you are doing the same, only I would say there is more substance to mine,

    Yeah, and my father is bigger than your etc

    And then there is your assertion that the Bush govt (during which all these problems were building) was liberal, a perverse point of view.

    Their monetary policy was liberal, which is clearly was; everybody could borrow whatever they wanted to.

    Reply
    Please complete the required fields.



  • Offer a better argument then.

    Ok, the monetary policy was liberal, by which you mean unregulated, though to be fair Clinton had much to do with that. Would the Tories have regulated the banks more? Hardly.

    Reply
    Please complete the required fields.



  • Offer a better argument then.

    I already have, but yours are completely based on guesswork.

    Moreover I’m trying to cut this pointless debate short, but seeing as you are so determined to have the last word…it’s all yours!

    Reply
    Please complete the required fields.



  • I’ll have the last word then 😉

    Labour messed up, the Tories got away with not having messed up

    We need to cut crazy debt problems

    Labour are too shy to say the truth – to save themselves.

    So the Conservatives deserve a go.

    Reply
    Please complete the required fields.



  • No I’m not determined to have the last word – and most debates here are pointless because they are usually so partisan – but since you’ve invited me to I will.

    To be fair to you I have re-read what you said on the subject and it boils down to this phrase of yours: “Labour governments have a habit of leaving behind an economic mess”

    We both agree that the problem is huge debt (everyone here does), but you are suggesting that under the Tories this would not have happened. I don’t think this view is supportable because the cause of the trouble was the freedom of the banks to use derivatives to blow up the giant bubble. Since the Tories are traditional free-market, anti-regulation, I cannot see how they would have been any different. And the strong home-ownership ethos was fuelled by the Thatcher Govt. This is not guesswork at all but a logical deduction. That is not to state anything with certainty, but I don’t think you have said anything convincing against.

    I don’t think we should make arguments like this hostile encounters, as often happens with some individuals here. I do get the sense you are “right-wing”, for want of a better word, in your political views. That is your prerogative of course, but perhaps I might suggest you take a leaf out of stillthinking’s book, who I hope won’t mind my saying holds similar political views to you, but nonetheless can debate these issues (and concedes points from time to time) without ill will. I say this with all due respect; online debates often come across as abrupt.

    Reply
    Please complete the required fields.



  • They’re both idiots. Everything they do is fringe, no changes deep in the structure. Privatize, nationalize, whoop di doo…train times change.

    Reply
    Please complete the required fields.



  • Letthemfall:

    The point Labour make is “the Tories wouldn’t have done any better, and if they get in, it’ll be worse for us all”

    The first point is a distraction: Who cares about the fact someone not in authority might have done worse. The responsibility was with Labour.

    The second point they make is what all parties make in office: The newbies have no idea, we know best.

    Given all the stats on the UK put us firmly at the bottom of the pile when two years ago we were hearing how we’d “emerge first” just shows that Labour do indeed have no control. If they did, the figures we read about today in comparison to other countries would not be as they are.

    Therefore, the evidence is there to see in broad daylight. There is dogsh#t on the shoes.

    That someone else might have stepped in it is irrelvant. They ain’t got the shoes on.

    Reply
    Please complete the required fields.



  • growler

    Well yes, both parties posture and rubbish the other, but at present there is little to choose between them. They both pursue similar policies, apparently in our interests, though plainly not in everyone’s interest, and presumably not in the interests of the majority of us here. That seems to be British politics, and it doesn’t really look like changing. I suppose one could say that standards of living have risen – but not equally.

    Reply
    Please complete the required fields.



  • Hi

    I agree – things have grown unequally. At the risk of a political point, it’s not usually a Labour statistic that causes such outcomes – unequally rising living standards.

    My view is that responsible people have not suffered. Lenders have got off lightly – they should have lost their shirts. Mortgagors cannot be blamed for taking out a deal that all the so-called professionals – endorsed by the FSA – tell them is fine. That’s what borrowers pay the fees for – a professional service. Trouble is, the advice they get is palpably NOT in their interests. As far as I’m concerned, this is negligence and should be treated just as severely as the garage that gives you an MOT when the brakes are not fitted.

    Moving on from this, is it not proof that there is incompetence if 3 years ago I am offered a bigger advance on a house that I am today – and my circumstances haven’t changed?

    Our great legal system also is to blame. In the 1980s boom, mortgage contracts were quite a bit different. Back then, if you couldn’t pay, you lost the house and if it went for less than you borrowed – tough on the lender.

    Today, the contracts state that any shortfall can be recovered from the borrower??? WTF. If you make a poor lending decision and employ armies of professionals to sell too much debt, how can we be in a position that the legal system supports the poor lending decision by recovering the shortfall? So – none of our institutions need to worry to much about Joe Bloggs’ possible problems. This should be against the law.

    So, whilst I’m probably on the right side of politics, I think we need to call a spade a spade and not worry about tax loopholes, but the “cover up incompentence” loopholes.

    And to all those that say we’d have had a disaster, I say we should have seen it before it was too late to do anything. This is the job of a good Government: Prevention is better than cure.

    Reply
    Please complete the required fields.



  • growler, the point that the Tories are unlikely to have done anything differently is very important, because only when people get it do we have any hope of real change.
    Unfortunately what is likely to happen is Cameron spending the next decade blaming everything on the last Labour government before we all get bored again and flip back the other way, another decade gone, no lessons learned, boom, bust, sleaze, resignations, spin, the illusion of change and all the rest.
    My opinion is that a hung parliament is by far the best outcome – perhaps then we may get some debate going beyond the usual left/right b*llocks.

    Reply
    Please complete the required fields.



  • @33: “hung parliament” – if that’s not an ironic statement in its own right 😀

    Actually, I agree with you. Maybe we should have a fantasy cabinet – a la football. I wonder who the most successful team would be?

    Much as I hate to admit it, Cameron will most likely (let’s give him a chance first though) poo-poo the opposition and then make no real changes. You might know my mantra – it’s tax all property gains as income (just like everythgin else) and no comeback on default for lenders. This will engender a lot more common sense without much further legislation.

    If there is a Tory majority hung parliament, it’s probably the best way. We need Vince in – he has respect from a lot of people and would do a good job as Chancellor.

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>