Sunday, October 17, 2010

Why banks are not lending? – the more entertaining version

Uncle Ben goes shopping

Paddy explains it .... in a way that even i can understand..

Posted by techieman @ 01:32 PM (2610 views)
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44 thoughts on “Why banks are not lending? – the more entertaining version

  • OK, so why not cut out the middleman i.e. the banks, and give the money directly to individuals and businesses?

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  • This is a good point. In fact that’s what Australia did a couple of years ago when a taxman there sent a cheque to the taxpayers (I am not sure but I have heard it was around 500 Aussie bucks). This would mean that the government to kick start the economy should lower taxes. Much starter idea for many reasons than pumping money to bankrupt banks.

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  • last october japan gave all its citizens I believe around £4,000…not only did they not spend much of it,they withdrew the cash and kept it at home.

    Mind you after 19 years of falling stockmarkets and houseprices(down 70% in actual prices) they distrust economics full stop

    bizarre but true,however,statistics show that the japanese have never been happeier so there is a lesson to learn

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  • Can I have £4000 please? I’d use it to help pay off the old mortgage. And there you have it in a nutshell – we’re all skint.

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  • Well, it worked in Australia and knowing our spending habits (shopping as a cure for anything) I am pretty sure we would have spend it all.

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  • I’m with the Japanese on this one. (In case I hadn’t made that clear)

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  • Paddy just tells you that the banks aint lending and the people aint borrowing – as to why they used to be but aint now then that could be down to a number of reasons…. one being a shift in peoples attitudes. The multiplier -…. er isnt!

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  • Captain_mandrake says:

    @Alan
    I’ll give you £4000 if you can stop “Ant” pumping Pytel’s blog at every possible opportunity.

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  • truth is,banks would lend if asset prices fall…even in the nadir of 1991-1996 property market you could still get a 95% mortgage.

    government are really worried and they are trying to inflate the economy and trash the debt,but its not able too as rising unemployment rrestricts money flowing into the economy.

    Their worst nightmare is DEFLATION but that is likely to be the only outcome as japan model has found

    the nuclear options is to forgive the debt and start again,however,the implications on stablitity are unthinable…everything anyone ever believed in would be trashed for a whole generation and result in massive social unrest on a scale never seen before

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  • @techieman: I do not think there is an argument. The point is however that too high money multiplier is an overriding reason: it makes it practically impossible for banks to lend (they would hit another liquidity shortage if they did). So whilst you may consider a number of reasons, aport from too high money multiplier, they are incidental: even if they disappeared banks would not start lending until money multiplier is reduced to around 5 – 8. At present the most optimistic assessment is that it is 50, but may be 150 and 1500 too. In fact no one knows apart from stating that it is way too high.

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  • @techieman: the problem why banks are not lending (too high money multiplier) as technical as punctured tyre in a car. Even if its driver attitude was to keep on driving he would not get very far. Similarly in finance today: even if banks attitude was to lend and consumer (clients) to borrow it would resulted in a another crisis. Politicians and mainstream journalists (like Gillian Tett) like to focus on such incidental aspects without realising that the financial system, as we have known it, is broken. Like a punctured tyre. It has to be fixed first on a technical level (i.e. money multiplier must be brought down to workable level of 5 – 8, maybe lower, 2 – 4, due to lack of confidence).

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  • If banks do not lend then they will not make money, there profits will be forever decreasing. So at some point they will colapse again if they do not lend, however they do not have the money to lend and they can’t increase the multiplier any more!

    Rock and hard place springs to mind.

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  • @khards: … and if banks start lending they will hit another liquidity crunch. Damn if don’t, damn if you do. This shows that the system is broken, as Pytel writes.

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  • if banks lend backed by assets which are deflating,they will have to write down these loans increasing their need to raise capital

    The biggest scandal is how theswe people have the gaul to pay themselves bonuses HIGHER thasn the peak despite being insolvent

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  • They will pay themselves so much money that they bankrupt themselfs.

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  • @khards: they won’t bankrupt themselves. They are putting the money into real assets. Property, gold, commodities. They will bankrupt banks, pension funds… US (I mean “US” as our beings, our lives not the United States. Although they will do it too:-)

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  • Hirsche says…

    The banks aren’t lending.
    The people aren’t borrowing.
    Neither are the companies.

    That much is obvious to everyone.

    For Bernanke’s money printing experiment to work, money will have to be put directly into the consumer’s hands – and in quantity.

    This will be interesting.

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  • I don’t think that these stimulus measures will ultimately achieve much – they can generate a short term high, but with cold turkey to follow..

    ..trying to coax people who have already borrowed too much into borrowing more is an exercise in flogging dead horses, and the monstrous sovereign debts we are seeing is a recipe for future upset..

    – The current round of beggar-thy-neighbour economic policies is concealing some horrid truths..

    ..for example, how can Japan’s economy return to any semblance of normality, with normal returns on sovereign debt, without that country being propelled into default?

    There is a theoretical solution, one that depends on substantial GDP growth and a Herculean effort to cut public spending; but with an aging and shrinking population on the one hand, and a feeble political class on the other, neither requisite seems terribly likely..

    Given the extreme nature of Japan’s sovereign debt, any loss of confidence might snowball out of control with dramatic speed, setting of a round of sudden interest rate hikes around the globe, as central banks defend their positions..

    It is one of those scenarios that probably needs a little ‘black swan’ event to act as a trigger, so the timing is anyone’s guess..

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  • “Foreclosuregate” may well trigger that ‘little black swan event’.

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  • mark wadsworth says:

    What Ant says 3 and Uncle Tom at 19.

    Tax cuts can be progressive (increase personal allowance or VAT) or regressive (get rid of higher rate tax or VAT) or anything else you can imagine. If we really are to run up deficits, let’s try it this way. And then there are taxes that are good for the economy (like Land Value Tax), separate topic.

    Similarly, spending cuts can be progressive (sack all the heads of quangoes and scrap all the private sector subsidies) or regressive (cut teachers’ salaries and care for the elderly).

    So just because I favour tax cuts and less government spending doth not make me a ‘right wing lunatic’.

    As to QE, it’s all smoke and mirrors. If you want me to boil it down to a simple analogy, it’s akin to The Royal Mint buying back £5 notes from commercial banks for 501 pence in coins. This is the most regressive kind of public spending you can possibly imagine.

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  • Guess the classic example of burying money and paying people to dig it up might soon be considered. We might even follow the Japanese example and pay people to build roads and bridges that lead to nowhere…

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  • tenyearstogetmymoneyback says:

    I am sure that in the past Japan has given out vouchers which could only be spent on goods and within a certain timescale.

    Personally I wonder if a better idea would be to lower VAT / sales tax rather than increase it as proposed.
    On the industrial side you could be a lot more targetted, e.g. subsidises for buying more energy efficient equipment.

    :- Duncan

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  • It is misleading to talk in absolutes. For example, it is misleading to say that ‘the banks aren’t lending and that people/businesses aren’t borrowing’. They are lending and borrowing, just not as much as before. Credit cycles have been a constant feature throughout history. Sometimes we have mild highs and lows sometimes we have extreme highs and lows.

    It’s also misleading to describe “the banks” as having some mythical collective multiplier number (especially one that is pulled out of thin air). There is no such beast as “the banks”. There are lots of individual banks with lots or different business models in lots of different jurisdictions and countries. They all have different multiplier numbers. It is therefore ludicrous to make the blanket statement “the banks are bankrupt”. Some of them are healthy and some of them are not. If a number of unhealthy banks do end up going kaput, the remaining healthy banks will do well from the temporarily reduced competition. We will eventually come out of this cycle trough and the healthy banks with healthy multipliers will start to lend more money to businesses and people. It is almost childishly conceited to think that we live in some sort of banking ‘end of days’. The world will continue to spin and cycles will continue to ebb and flow.

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  • It is almost childishly conceited to think that we live in some sort of banking ‘end of days’.

    I would disagree (no surprise there!). This seems to a perfectly logical conclusion to draw when we observe the reactions of the central banks. They are resorting to increasingly desperate measures to keep the plates spinning and have been since Hank Paulson was (quite literally) on his hands and knees begging the US government for a bailout.

    Can you not contemplate a situation where the failure of just one major bank would cause a domino effect, as other players are forced to show their hands?

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  • Flash of course you are right but isnt it a bit (in the aggregate) like a damn. Yes they are lending of course, but not as much as before of course. BUT they have had their reservoirs flooded…. and yet , in the aggregate the damn is holding. The issue then is when the economy turns they will be flush with funds which will allow them to over-inflate the credit provision. i.e the damn bursts and the economy is flooded with credit. This is the deflation then high inflation scenario.

    The point is that this has been discussed on this blog BEFORE it actually happened. Uncle Tom @ 19 explains where we are now but the real interest is where we will be. What UT says is happening now was predicted, and thats my point. Of course it could all work out fine – but i would find it surprising if it did, without some nasty unforeseen events occuring….. now what those may be…..

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  • the only reason greece was bailed out was to save the banks…..things are so bad out there that we are printing money just to stop the system collapsing…this is not scare mongering or paranoid belief this is real and is actually happening.

    We have ‘solved’ the problem of debt by massively increasing it and our ‘economies’ are no longer based on essential living but on frivilous buying of essentially things we do not need

    Throughout world history,these things almost always end in collapse….egypt,roman empire,babylon/persia,spain,argentina…the list is endless….people just simply do not believe this is possible,but history says it has happened many many times before

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  • “Can you not contemplate a situation where the failure of just one major bank would cause a domino effect,”

    I can imagine a small percentage of banks being involved in a domino effect. There are too many different types of banks with different business models in different jurisdictions, for them to all rise and fall together. The banks that are not caught up in this so called ‘domino effect’ will prosper from the demise of their competition. Additionally, new banks will spring up to replace the small number of failed banks (plenty of large corporations are currently applying for banking licenses). As for being forced to “show their hands”, most banks are pretty transparent these days. The claim that ALL banks have countless hidden horror stories in their closets, is a fantasy. It is just not legally possible at this moment

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  • techie: apologies for the brevity, but it’s just a cycle.

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  • a cycle yes – but over what timespan or spans – isnt that the question? one cycle or a number of cycles converging?

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  • “it’s just a cycle”

    I’d describe it as an on-going credit crunch. When was the last time we had one of those?

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  • Flash the problem remains that the banks assets – more or less the capacity of mortgagees to pay their mortgage and the extent to which loan funds will be recovered on sale appears to be continuing to deteriorate. Any significant rise in unemployment and any siginificant HPC MUST move all major uk banks in the direction of insolvency.

    If you respond you will perhaps state that the banks are recapitalised and stress tested to cope with the worst the market can throw at banks. That may be the case but if you are going to say this it would be useful if you could specify where it would be possible to establish this. People’s sceptisism is at this juncture understandable. For many articulating this is not easy, but that does not necessarily mean they are not onto something. The problem arises where people insist on their generalities as insight into the future, and refuse to see that such insight is impossible.

    Techie how can reserves even once lent out be hyper inflationary, perhaps if the money was lent on the basis it did not have to be paid back ie gifted

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  • “stress tested to cope with the worst the market can throw at banks.”

    That’s quite topical, this evening….

    An Angry Ireland Calls Out Europe On Its Bullsh!t Stress Test

    A Labour MEP is to write to the EU Competition Commissioner to find out why the Commission gave Allied Irish Bank the all clear in July only for the bank to require billions earlier this month.

    Alan Kelly has said Europe’s failure to anticipate the development is very worrying.

    Mr Kelly said: “The fact that AIB passed the stress test raises many questions.”

    Zero Hedge 17.10.10

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  • hi b/wether

    well i think the mortgagee is the lender (yes i always used to get that wrong too). I said “This is the deflation then high inflation scenario.” i didnt mention the H word nor did i mention i agreed with it. I just said that is the scenario painted and thats why inflationists say we will have hyperinflation. I think we may eventually have high inflation but not hyper, but i think that folks have been surprised that inflation hasnt shown up in a meaningful way yet. Of course neither you nor i are. i remember when ZIRP was first implemented and then QE – and even now people here are saying we are going to become Zimbabwe…. and yet inflation is more or less at the “normal” level – even here and of course in the US its very very benign.

    No if there is going to be inflation (and there may well be) i would want to see the lead indicators – eg tight capacity and increase in M3/M4 come up first. Until those things show up (or even reverse significantly from a downtrend) then where is the inflation? Of course if you had asked an inflationist WHEN this will all happen – since they are so sure – and personally im not convinced…. then you would get the “eventually” answer. Well eventually we are all dead! :),

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  • “When was the last time we had one of those?”

    There have been loads of them. There was quite a big one in the spring of 1980 (probably precipitated the early 80s recession) and then later in the 80’s the savings and loan crisis caused another (probably, in turn, precipitated the early 90s recession).

    Historically they tend to last between two and three years. There is nothing new under the sun

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  • There have been loads [of credit crunches]

    At the risk of poking the tiger, I think you are being disingenuous. Any restriction in lending in the eighties was a mere cipher as to that which is being experienced now.

    (I’m dead poetic, me)

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  • bellwether: The aggregate value of bank assets can be considered to be relative to the solvency of our economic environment. If things like unemployment tick up and house prices fall then the value of SOME banks assets fall but to some extent they can remain constant, relative to the value of the economic environment. Another way of putting it is that the buying power of their assets can sometimes remain constant, despite nominal falls. I would also refer you to my comment about there being no such beast as “the banks”. Some banks gain from the same thing that causes others to fail. A bank like Standard Chartered continued to make money in the depth of the banking crisis because they had skilfully placed themselves in the right emerging markets and asset classes. They effectively bet against the asset position of their competition, so their assets went up in value when some other banks’ assets went down. Most banks also directly hedge themselves against falls in the value of assets (like loans on property), so their capital adequacy doesn’t necessarily suffer too badly. Ultimately, it would probably be good for the economy if a few weak banks failed due to an HPC or higher unemployment. The remaining banks would be even stronger and there would be space for the growth of some new more dynamic banks

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  • “Standard Chartered continued to make money in the depth of the banking crisis because they had skilfully placed themselves in the right emerging markets and asset classes.”

    cf.

    Will Standard Chartered’s decision to raise £3.3 billion ($5.24 billion) in new equity trigger a raft of similar European bank capital increases?
    http://online.wsj.com/article/SB10001424052748704361504575552393950872962.html

    I suppose this is a sign of strength.

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  • devo, I am hardly being disingenuous. You asked a (rhetorical) question “When was the last time we had one of those?” and I answered it. The expression ‘credit crunch’ is not new to me. The recessions of the 80s and 90s produced more unemployment and a higher loss of aggregate world growth than our recent recession. I often think that one of the major differences between this recession and others is that the economy is now fashionable. The blogs that throw petrol on peoples new found interest, didn’t even exist 10/20 years ago

    Standard Chartered raised new equity because they are on the aquisition trail. They have bought/are buying several strategic businesses. They are a success story and there is no way around that.

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  • The blogs that throw petrol on peoples new found interest, didn’t even exist 10/20 years ago

    I’ll give you that. (very magnanimous of you – Ed)

    However, you also say “the recessions of the 80s and 90s produced more unemployment and a higher loss of aggregate world growth than our recent recession”.

    And I would counter (as I have before) that the reason for the relatively benign effects of this depression ( ‘recession’ is inadequate) is largely due to the huge and unsustainable amounts of artificial stimulus thrown at the problem.

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  • The world has had plenty of ‘unsustainable’ stimulus (there were always critics, hence the ‘unsustainable’) throughout history. There are several first world countries that successfully built themselves on decades long ‘unsustainable’ stimulus. The historical success rate of ‘unsustainable’ stimulus is actually very high. We/others have had far bigger national debts and been in far bigger scrapes. Like I say, there’s nothing new under the sun.

    Thanks chaps. Got to go

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  • We/others have had far bigger national debts and been in far bigger scrapes.

    I don’t doubt it. However, the countries (and corporations) involved weren’t put under the intense and open scrutiny that they are now – courtesy of the internet. That’s the crucial difference:ultimately, there’s nowhere to hide.

    And with that sobering thought I will bid you good night.

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  • The number of people who scrutinise the economy via the web is relatively small and the quality of the scrutiny is not particularly good. I’d be far more worried if I was in the porn industry.

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