Monday, 22 December 2008

More Tools ? What the Bank Really Needs is Balls


The estimable Robert Peston writes today that the Bank of England doesn’t reckon it has the tools for the job. Apart from the obvious point that we have only one genius to blame for this, we should consider what the Bank’s Gieve says in the Pesto interview:

"we need to develop some new instruments which sit somewhere between interest rates, which affect the whole economy and activity, and individual supervision and regulation of individual banks"

Pesto himself plumps for counter-cyclical capital adequacy:

"it would have to be a mechanism to prohibit or at least discourage a lending splurge during a period of sustained economic growth, such as a formulaic stipulation that banks have to hold more capital relative to their loans and assets during the good years"

As stated before, I have a simpler suggestion: enforce the current CapAd rules, with some serious analytic attention being paid to risk. Under Basel and the CAD, CapAd should be a function of the individual bank's exposure, and market conditions. OK, in good times some aspects of the latter are, or seem to be, benign. But properly analysed, exposure in a crap book like Northern Wreck’s is ugly at the best of times: and it wouldn’t be difficult to identify appropriate market-condition warning signals – based on the rather interesting "case-study" we have before us.

But enough of the technicalities. In simple terms, what the Bank needs is "some new instruments that sit somewhere between" ... the stomach and the kneecaps. The equipment the BoE is really lacking is balls.

ND

16 comments:

Bill Quango MP said...

Heard a little of Mr P on the radio.
He was saying that inflation was not a good enough for the MPC.
"The economy was overheating but inflation was at only 3 - 4.1%."

But anyone who read a blog, or bought a newspaper knew that inflation was running at a much much higher rate for much much longer than the government said.
If mortgage payments were included?

By all means tighten the rules but as the whole of country knows by now the real problem was the Wizard of Oz pulling all the political levers behind the curtain.

Houdini said...

"it would have to be a mechanism to prohibit or at least discourage a lending splurge during a period of sustained economic growth, such as a formulaic stipulation that banks have to hold more capital relative to their loans and assets during the good years"

We would be sitting pretty right now if the Governmenthad done this itself instead of a massive spending splurge.

I thought this was already in place but had been relaxed to allow Labour to see the economy grow too quickly for it's own good?

DorsetDipper said...

I thought under Basle III that banks had a requirement to do stress tests on their risk positions, and the FSA checked that banks were doing these properly.

So when do we get to see the FSA reports on B&B, HBOS and Northern Rocks' stress tests?

not an economist said...

The principal cause of the expansion in bank credit on the scale that happened over the last 10 years was lax monetary policy - i.e., interest rates set at too low a level given market conditions.

I would therefore suggest that what the BoE needs to do is push interest rates up when there is evidence of a boom growing be it a general one or one that is sector specific (e.g., in the housing sector). Fannying about with things like "counter-cyclical capital adequacy" rules are at best second rate alternatives as its likely that the market will find its way around such things.

If its argued that evidence shows that the monetary authorities are unprepared to use the interest rate weapon in the event of an unsustainable boom then I have to ask why it is felt that they will be anymore inclined to use the alternatives Peston suggests. The same difficulty applies to both tools: i.e., the difficulty of distinguishing an unsustainable boom from genuine, sustainable, economic growth. That difficulty is more a matter of the economic theory underpinning the actions of the monetary authorities than anything else.

Anonymous said...

If you seriously believe anything that peston writes, you're 5.9 cans short on a six pack.

Recognise him for what he is, a gov mouthpiece, a shill.

Of course the "authorities" knew and understood what was/is happening.

I'm tired of this, hand-on-heart whoodathunkit BS.

If they plead incompetence, sack the bast*rds.

Sirens were sounding 2.5 years ago at a minimum.

MSM was quoting astronomic debt levels, credit cards, etc, and a dumb silence followed?.... get real.

Why do you think ONS has been bast*rdised?
Why did chief tit have a "business cycle" for gov borrowing?
Why were inflation measures altered?
The UK has been in a TRUE recession since 1995, the only thing that grew as rapidly as gov, corporate, and personal debt, were the lies from that conniving b*stard now at No10., - and the entire political class and senior civil serpent ranks who kept their mouths shut were entirely complicit.

When netted for debt growth, and TRUE inflation, there has been NO GDP growth since 1995! Even peston admits to debt at 300% of national annual UK GDP, and yet no-one puts the picture together?

Who pushed for basel amendments?
Who agreed them?
Who looked the other way when banks were levered at anything up to 70:1?
Who blamed short sellers for crashing bank shares 3 months ago?
Who was correct, the short sellers, or the as*holes at the FSA?
Who shouted the loudest? Could it have been the Banks themselves? They wanted to maintain inflated share-prices in spite of balance sheets that belonged, and still do, in the local joke shop?
Is that fraudulent trading?, fraudulent accounting? What about the auditors?
If it's wrong for companies that want a credit ratings to pay the rating agencies, why isn't it wrong for companies to pay the auditors? "Moral Hazard" grows hand in hand with general acceptance of growing corruption!

So who are still the bare faced liars?

The banks will need at least one more round of capital injections, maybe more, if current methods continue to be used, and they will ultimately fail anyway.

At some point is chief tit gonna ask the taxpayers if this is the way they want to go? You even get peston pleading about a new form of capitalism.
Capitalism my ass!

Is chief tit even capable of comprehending any other viable way to sort the current mess, other than maintaining the status quo on the tax payers, and their grandchildrens backs, and then making a political power grab, piled high with moral hazard and brazen corruption, all in the name of the tax-payers.

Hell, he just drafted back from the EU one of the most corrupt and corruptible politicians in this country, and lorded the bugger, to boot!
What utter hocus pocus.

Think back a few months to that other hurried appointment, Malloch Brown, also lorded, to aid communist milipede at the FO, a structure that disappears when the EU happens!
Hey, lording is good, they get to vote without having to go through the hassle of a by-election!

And we accuse Madoff of running a giant ponzi scheme?

It's far more than just the BofE needing balls, just don't let peston make them the scapegoats. And it's far more than this POS gov.

The entire global trade is out of whack, as demonstrated by SU admirably in his last post, although he vastly understates the Yen carry trade, and the CB leverage that was added to it by the hedge funds. Everyone looked the other way.

One of the symptoms was the growing rich-poor disparity.
Inflation is falsely quoted in order to lower interest rates to help the banks who get concerned about the growth of private capital and its investment potential as a competitor for their pushing DEBT of a fiat, soon-to-be-worthless-paper, currency. Fiat DEBT displaces savings in this model: Socialist govs oblige by raising taxes that kill private savings.

The politicians knew, the regulators knew, the banks knew, hell the entire WORLD knew, EXCEPT the sheeple.

Hell, even Castro warned about the situation in 2003.

If you think this entire scenario is not orchestrated, you don't even know what a six-pack is.

CityUnslicker said...

re anon 5.06. i am never a beliver in orchestrated conspriacy. They always get found out in the end, like Madoff.

Far more I agree with you that collectively the banks and their mates at FSA/BOE piled up cash, knowing the bubble would pop but all would be ok for them and theirs if several millions were already in the bank. this is personally rational, if somewhat lacking in morality.

BQ raises the key point here. The stats used are backward looking and false. With this no policy can be any good as it is based on little evidence. I would have more faith if the bank ignored the false stats and went on its considerable experience for making decisions.

Finally, I think the real danger is that the Treasury hogs the power and equates current government/country as one and the same - robbing the private sector to pay for its public sector woe.

Nick Drew said...

DD - exactly

NotAnEcon - exactly !! rigorous enforcement is 9 tenths of the battle

anon - interesting rant, err, hypothesis. Actually (since we have to start somewhere, and kind-of discounting the lamp-posts option) I reckon that Dunnell and Scholar and a bit of integrity at the ONS might just be the place

Anonymous said...

CU, Stats.
Yup, they knew the stats were rear view mirrors, - rather destroys the argument against conspiracy though, doesn't it.

You know the world of investing ;
you would never say never in that world, so why adopt a fixed position that serves as blinkers, when the world is collapsing other than for a small % of the global population who seem curiously well placed to benefit from said collapse?
This is more than UK.
Follow the money, who benefits?

Nick, strange you would call it a rant, as if giving it such a label would somehow destroy its accuracy and legitimize your blinkered view. Strange debating methods I must say!

Yes, integrity at the ONS would be nice, but I'm not holding my breath while ever the tit is in No10 saving the world.

How about addressing the meat of my argument, it should be easy if it's only a rant!

“We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K.”
Eddie George, Bank of England, September 1999.

So ask yourself, why would a rise in the price of gold take down several trading houses??
Why would fiat trading houses be monumentally short gold?

Cumon, think!

Now the oil price last summer, - it raced from $90ish, to $147ish, and at that point there was a simultaneous call from CBs to hedgies demanding a greater deposit on the loans.
Why?
And the price now, - $35ish
So Iran, Venezuela, Russia, and a few other unfriendly nations are screwed.
So exactly what elastic band are economists attributing to the price of oil?
Don't forget, existing field attrition rates are 9.5%ish, and the recent releases from international energy bodies say global demand has not yet sunk by that amount.

Cumon, think!

Baltic dry is down 94%ish, and letter of C leave goods dockside.
Which nations are gonna starve first?

Cumon, think!

So the west goes through QE in the near future.
Which previously short banks, that were shorting gold at exchanges all around the globe so as not to attract too much attention, are now scarfing up gold as quick as they can?

Cumon think!

You think greenspan didn't know the consequences of his policies? And he's now pleased to admit oversight?
Quick, there's some flying pigs heading our way.
Who tried in 2000 to free US banks for greater leverage and merger of activities, and got refused?
Who tried again in 2003/4, and won?
The result, global toxic paper.
The man?
Paulson!
Ring any bells?
And who was the cheerleader for "financial innovation"?
Greenspan!
Ring any bells?
Paulson knew the consequences, he CAMPAIGNED FOR THEM.
You think these characters don't meet and talk with their foreign counterparts.
How many times has paulson visited china, both officially and when he was GS?
Going on for a Hundred!
Head man at B of Canada, - ex GS, B of Australia, ex GS.
Cumon, think!
Geithner, obamas man lived in china and speaks the language.
Cumon, think!

You're entitled to your views, and this is partly your real estate, but really............

You really got to stop being so myopic.

Let's be clear about one thing for the record.

QE can trigger hyper-inflation from a deflationary condition, without going through inflation.
Hyper inflation is a currency event, not a primarily economic event, - massive sudden devaluation when tipping point leads to sudden capital flight.
Velocity of money goes exponential.

It wouldn't be a bad idea to follow PM longs and position for a f*ck-up by the tit.
Banks are doing it now.

Fiat cannot function in deflation.

Civil War

The legislative activities of the UK gov prove they were fully cognizant of the implications of their collective financial insanity.
-----------------------------

So, - now you've thought about eddie, and the fed and b of e controlling gold price, and thought "WHY", can you understand the reflation of 2000/2006?

Following that to NOW.
Once again a crash, - hey each one seems to get bigger, - strange, that!
And here we are, the entire world trying to reflate, but it gets more difficult each time, strange, that!

And the liabilities, the "national debt", gets bigger and bigger, so that an ever increasing portion of the gov budget goes to the "national debt", strange, that!

Are you with me?

So, more and more DEBT injected into this stalled, debt-awash economy can't be the answer, can it?

Last reflation lasted, what, 4 years before it blew up again.
How long, IF we manage to reflate without blowing the lid off, is this current reflation going to last?
Even with "lordly" control?
Eighteen months?

And now BofJ says it will buy equities to stabilize the markets, something the US has been doing in the futures for years.
And international currencies and commodities have never been manipulated to this level before!
And gov/beeb/peston calls it capitalism?
Central planning, five year plans, favoured industries/companies flourish, while others go to the wall.
Where have I heard that before?

Add in the UK and EU legislation/structures, and those evolving in the US.......
And Bingo, you got it!

Guy H said...

That would be the same John Gieve responsible for this as head of the Home Office:
http://www.timesonline.co.uk/tol/news/politics/article690660.ece

We are supposed to be surprised the Bank of England had no idea what it was doing, blame the fact on secretive capitalists, and join in the chorus for these imbeciles to control all bank lending directly.

Lord Asda said...

Wel, I can't go with the world conspiracy great minds theory..
If so..Why pick the insignificant Afghanistan to be the fall guy for war. Twice?
Why go into Iraq and then fuck it up? If it is an orchestrated oil grab..where's the oil?
And now, why deflate the price of oil so the total cost of the disaster is not going to be recouped?

Is it a world conspiracy, much as Hitler believed, or is it just a bunch of people having ill thought out ideas and a load of others going along with it for political,personal,financial or religious gains.

Hitler really did believe that the Jewish lever pullers were destroying Germany's foreign exchanges. He refused to even consider devaluing the RM that would have alieviated much of his problems. He never let up on an arms race that consumed the entire four year arms budget every year from 1936, and consumed expensive to import commodities such as rubber and oil, further damaging his countries fragile economy. All because he wanted more agricultural land too.
There was no conspiracy then, none now either, just megalomaniacs surrounded by self servers, yes men, fearful individuals, gamblers, con men,idealists, vengeful losers and chancers.

And it was ever thus.. from Caesar to Saladin to Charlemagne to Napoleon to Lincoln to Kaiser Bill to Stalin to Pol Pot.

Nick Drew said...

anon: you are Dan Brown and I claim my 5 grams of gold

Anonymous said...

Nick.

that's called debate, addressing the points??

Forgive me a snicker.

Yawn.

Life Insurance Canada said...

In all western countries it's the same scheme. Central banks believe they can just change the interest rate and control the economy like in some extremely stupid game (I think technically it doesn't require more than few clicks on the bank's PC). And then they are like "Ooo, what's happening? We cut the rate and are still in recession!" It is most funny in Hungary, where central bank rises and cuts the rate like on the rollercoaster without any effect. Central banking is sick...
Regards,
Lorne

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