than half the population does not know who sets interest rates in
Britain, according to opinion polls conducted on behalf of the Bank of
England. Asked whether the monetary policy committee (MPC) sets rates,
a mere 4 per cent replied 'yes'. Just over a third (36 per cent) said
'Bank of England', which provides five of the nine members of the MPC
under the chairmanship of the governor.
When one considers the amount
of publicity the Bank has had since independence day in May 1997, these
are pretty amazing findings. But perhaps it is not that surprising. The
official bank rate announced by the MPC - raised from 4.75 per cent to
5 per cent last week in line with market expectations - must mean
little to the huge number of people in this credit-mad nation who take
up offers in the post to borrow at annual percentage rates in the
usurious high teens.
The then chief executive of Barclays Bank caused a stir when he told a
parliamentary committee that people were crazy to borrow at the rates
charged by credit card operators such as himself; but then most of the
population don't enjoy the lines of credit afforded by top City
salaries and 'remuneration packages'.
back in the 1970s remuneration packages at well below current levels
and other 'perks' were justified, or rationalised, on the grounds that
the top marginal rate of personal income tax was 83 per cent and top
salaries had been restrained by a series of incomes policies. Tax rates
fell sharply during the 1980s, and incomes policies disappeared from
view, but the disparity between the salaries and perks of the financial
and industrial elite and the rest of the country expanded exponentially.
suspect if the Bank added 'what is an incomes policy?' to its
questionnaire, well over 50 per cent of respondents would say 'don't
know' - it has been so long since we experienced them. Similarly with
On Wednesday Mervyn King will introduce the
MPC's quarterly inflation report for the 56th time. His polished
performance is rehearsed the day before, so that he is prepared for
almost every conceivable question from the press about the reasoning
behind interest rate changes, future prospects and so on. A hardy
annual, or rather quarterly, is a question (or several) about house
prices. The governor always goes out of his way to emphasise that the
task assigned to the MPC by the Chancellor is to aim at 2 per cent
inflation (not a percentage point more; not a percentage point less)
and not to target (I have given up fighting this word's use as a verb)
Nevertheless house prices, and the confounding of
many a forecast that they would collapse, are a hot topic of
conversation, not to say speculation, and the governor recently
indicated to the House of Lords Economics Committee that he was uneasy
that the official index 'targeted' by the MPC - the consumer price
index (CPI) - excludes housing costs.
It was bad enough that the
CPI was 2.4 per cent above a year earlier in September (against the
target of 2 per cent); but the all-items retail prices index (used for
wage negotiations, and, in September, the indexing of certain benefits)
was 3.6 per cent.
The all items index includes mortgage payments,
and I seem to recall that one of the historical reasons for introducing
the other indices was the effort somehow to overcome the unfortunate
fact that increases in interest rates, designed to cool the economy
down and reduce inflation, have the perverse immediate effect of
raising the all-items index and making the inflation picture look worse.
rates were raised last week because most members of the MPC, led by the
Bank's politburo, are worried not only that inflation is above target,
but that it may boost demand for higher wages ('second-round effects'
of the oil price rise of recent years, which has only partly been
offset by the recent decline). The MPC is trying to influence
'inflation expectations' by demonstrating its determination to err on
the side of safety. This has been the tenor of speeches by several
members recently, the lone dissenter (now that Stephen Nickell has
retired from the scene) being David ('Danny') Blanchflower, who is
based in the US and commutes monthly. Blanchflower, like Nickell, is an
expert on the labour market, and knows a rising unemployment trend when
he sees one. He is also no doubt aware, as that other transatlantic
commuter Sir Alan Walters was in the 1980s, of the overvaluation of the
pound, which may well be associated with the poor industrial prospects
painted by recent business surveys.
The fact of the matter, as
former MPC member Christopher Allsopp has pointed out, is that the 3.6
per cent rise in wage earnings (in the three months to September, at an
annual rate) is remarkably low, and hardly inflationary, especially in
the light of manufacturing productivity increases of 3.5 per cent
(second quarter, annual rate). Indeed, the main factor stoking up
inflation expectations may be the majority on the MPC itself, who keep
drawing attention to what might happen to inflation, thereby risking a
There are lots of forecasts of
continuing growth, but it may be that the CBI-type surveys and the
insolvency, bankruptcy and debt mountain statistics are telling us
Credit where credit is due - and there is plenty of it
about: so far the MPC has done better than I expected. But there is a
huge imbalance between supply and demand in the housing market, and
rising interest rates are hardly calculated to increase supply, while
being very likely to send the pound even higher.
would be paradoxical if it turned out that the MPC had indeed stoked up
inflation expectations by its recent speeches and actions.
JANUARY 11th 2007
by surprise. That's the good news. Good to
know the Bank of England has the wit to feel free to adjust rates at
times other than the totally predicatble. The bad news is that even so
the innocent will be hit harder than the guilty. It is global demand,
more than truly domestic, that is causing UK inflation. It is clear
that many prices including food has been rising due to the pressure of
demand. The demand is from the booming part of the UK economy servicing
the influx of spending power in the hands of those using these islands
as a tax haven and a business centre, and those lucky and able enough
to provide these services. The rest of the country waits in vain for
the trickle-down to save them. But by putting up interest rates, the
Bank hits those who are 'on the wrong side of the drag curve'. Another
divisory pressure on society. If it did the job, this would be more
acceptable, but raising the UK bank rate will not stem the pressure of
global demand on local assets and supplies by those who can afford to
demand less. Inflation, as I stated at the beginning, is caused by
supply and demand being unrealistically related (as in the case of
stimulated locusts arriving on the wind from afar).
APRIL 17th 2007
I am getting tired of repeating that rising prices do not always
indicate 'inflation'. Today we are told that
forced to write
chancellor explaining why inflation jumped to 3.1% in March above the
target of 2%."
Inflation is a symptom, a disease of the currency. It causes a currency
to lose its value. So why, when the UK Pound is rising against the Euro
and approaching a record high against the dollar are we talking about
inflation? Why should UK citizens be faced with punitive interest rates
when our currency is competing well against the two major world
If, for some reason, it should be decided that demand in this country
is home grown, and an interest rate rise is required, can we at least
stop calling the reason inflation. Unfortunately such an interest
rate rise will not stop the global investment in UK propert and will
only encourage further purchasing of the UK Pound as repository of
The Bank of England should realise that it is chasing its own tail. We
have decided on a very open trading and investment environment while
demanding the Bank treat our economy in isolation and apply ruies that
only make sense in a closed equation that no longer exists.
We should STOP PLAYING WITH INTEREST RATES. Realise that to run a
country responsibly you have to take the reins of economic power in
political hands on occasions. We decided to stay out of the Euro, that
has its advantages and its problems. They have to be faced. Some wage
demands are being caused by rising costs of essentials. Raising
interest rates will not deal with that. Oil prices are rising in
dollars. Raising UK interest rates will make it cheaper in Pounds but
is that desirable when we are aiming to make economic engines more
popular? The position is ambiguous. Interest rates should be left where
they are at this time and adjusted only with regard to interest rates
in other major economies to keep a realistic value of the currency.
JUNE 20th 2007
Nice to see that at least one broadsheet (The Independent, even though
I have ceased to purchase it as I no longer wish to subsidise the use
of the front page as a poster to advertise the prejudices of the
editor), has decided to raise the issue that the reason for the rise in
house prices in key areas is due to demand by holders of offshore funds
exempt from the pressure of either tax or UK interest rates, As usual,
the UK newspapers are the last to catch on to anything important
happening in the 21st century, just as they were in the 20th. It is of
little concern that successful entrepreneurs who risk their money
creating new businesses can make a lot of money and keep some of it.
That helps build the national wealth. But if they then pile it all into
UK property and services in a privileged financial status and
environment that causes the Bank of England's policy committee to raise
interest rates according to a blind formula that penalises the average
citizen, that is bad. It has been going on for some time, and it could
have been foreseen before it even started. If journalists wish to keep
government up to scratch they need to do more than notice that arms
deals of more than 20 years ago were done under rules that might not be
approved of today and then cause such trouble that our major defence
manufacturer risks losing huge contracts in both Saudi Arabia and
America to competitors who have no scruples whatsoever. Homer Simpson
has nothing on Fleet Street.
JULY 5th 2007
Interest rates have gone up again to 5.75%. I think this is damaging,
and if it is the only way that inflation can be tamed then we have to
find another, as this makes no sense. Government debt as well as
personal debt has to be curbed, and in theory (not my theory) this is
one of the ways to do it. But there are parts of the equations that lie
outside the theory and values that fall outside the equations
altogether. Of course it will have a desired effect in some ways, but
it will also create new problems which we do not have established means
to solve. The global economic model is not what it was and, as I have
pointed out in several contexts, the UK economy has divided into two.
We have avoided a boom and bust cycle by having boom and bust
simultaneously. The rise in interest rates will bring pain to those who
need it like a hole in the head and those whose inappropriate borrowing
has been encouraged by banks and institutions who were only to happy to
lend their surplus profits from the booming sector in the 'sub-prime'
market, secured by property.
Indebtedness is a greater problem than inflation as a UK national
problem. Inflation is at the moment being caused more by global
economic forces and international funds than by UK consumer demand
sensible to UK interest rates. Government spending and government
borrowing is complex in its effect under current circumstances. Some
spending is not inflationary, some borrowing is less inflationary than
other borrowing. However it should not be the purpose of Bank of
England independence to relieve both Bank and Government of
responsibility for managing the economic limits. Other European
countries have severe economic problems too but they face them in most
cases with more social solidarity.
AUGUST 8th 2007
It was fondly thought that a collapse in the US sub-prime market would
not 'travel' so as to hit European and world markets. How wrong. Just
as global forces can cause national inflation in specific areas, a
collapse in a big enough specific national area can affect global
liquidity. The US sub-prime market is very large and many organisations
and funds world wide are invested in bonds linked to it.
AUGUST 16th 2007
About time a reality check kicked in. Key economies are strong but a
major cause of inflation (true inflation - financial obesity caused by
artificial demand) has been pricked. This should prevent the Bank of
England from further pathetic playing around wih interest rates - the
job is done for them. The central banks should stand back now and only
act in concert in the last resort. It is going to hurt, but the wild
west of hedge funds has got to end in a shoot out. There is going to be
blood on the ground, some of it innocent collateral damage, but if it
had gone on for longer it would have been worse massacre in the end.
SEPTEMBER 1st 2007
One result of this shakeout is that although a serious cause of
inflation has been removed, there will be a cost to pay even if the
central banks do not raise, and some even lower, interest rates. The
high street banks will be much more careful in their dealings. Savers
may not get do any better and borrowers will pay more. There will of
course, one hopes, be intelligent exceptions and also (hoping again)
they will not always favour those who need them least.
Well, well, it is good to see that top bankers are aware of the
This is from The Independent,
Stephen King: To protect the innocent you may need to bail out the
Published: 03 September 2007
should you protect the innocent even though you may, in the process,
let off the guilty? A pacifist would presumably say "always" because
war, by its very nature, leads to the slaughter of innocents (or, in
our world of media spin, gives rise to "collateral damage"). Those in
favour of zero tolerance for all forms of crime might have to say
"never" because no judicial system is ever going to weed out those who
truly are guilty from those who are wrongfully accused. And then, to
make things more complicated, there are those occasions when saving the
life of one innocent person requires the loss of another (think human
shields or life-threatening child-birth).
policymakers consider such issues, they junk their natural moral
absolutism and turn to the ethics of Utilitarianism, typically defined
as the "greatest happiness of the greatest number". Utilitarianism is,
of course, far from perfect, a point made forcibly by Aldous Huxley in
Brave New World, but, for those who govern, it has the advantage of
allowing decisions by numbers. Policymakers can think in terms of costs
and benefits and reach a conclusion which offers the illusion of
Policymakers' responses to the sub-prime crisis and the possibility
of a credit crunch will, ultimately, depend on their views about the
protection of the innocent and the punishment of the guilty.
Admittedly, the choices won't be quite as wrenching as those faced in
other spheres of public life but it's already becoming apparent that
the Utilitarian calculations shaping policy decisions are beginning to
shift. At first, the attitude towards the sub-prime problems was one of
zero tolerance. There would be no bail-out because both lenders and
borrowers should have known better. In a matter of days, though,
policymakers' attitudes began to evolve.
When things first started to go wrong, the crisis was lodged firmly
within the banking system. Many banks and other financial institutions
owned collateralised debt obligations (one of a variety of structured
products). The values of some of these structures were underpinned by
sub-prime debt. These underpinnings clearly weren't terribly strong. It
wasn't long before faith in asset-backed collateralised debt
obligations was gone and, with it, liquidity dried up. No one wanted to
lend to anyone else, because no one knew what exposures others had to
CDOs and, indirectly, to the riskier end of the US housing market.
Liquidity crises, though, do not discriminate well between those who
deserve to go bust and those who don't. Although, at first, the
attitude from central bankers was from the Dirty Harry school of
thought ("You gotta ask yourself one question – "Do I feel lucky?" –
well, do you, bank?"), this approach quickly mellowed as the dangers of
a liquidity crunch became all too clear. Central banks injected
liquidity, the Federal Reserve cut its penalty discount rate and the
liquidity crisis began to ease.
The debate has since moved on. The big fear now is the onset of a
credit crunch. In simple terms, a credit crunch can be regarded as a
tightening of monetary conditions for a given level of policy rates. In
other words, lending standards in the financial system tighten
independently of any decisions made by the central bank. For the man or
woman on the street, this may imply higher borrowing costs, bigger
required down-payments for the purchase of a property, a lowering of
maximum income multiples for mortgages, tougher foreclosure conditions
and so on. Put another way, even if interest rates aren't particularly
high by historic standards, the ability to borrow (and to renegotiate
terms on a favourable basis) is reduced.
This, in turn, may have a series of negative effects on the broader
economy. If people cannot borrow so easily, demand for the new car or
the loft conversion may begin to decline. Tighter mortgage terms may
mean people have to spend more of their income repaying their mortgage,
leaving less available for the trip to the local restaurant or ball
game. In time, these downward multiplier effects may lead to rising
unemployment and, eventually, the onset of recession.
It's for this reason that President Bush chose to step in last week.
His proposals to expand the role of the Federal Housing Administration
in order to help with the refinancing of sub-prime mortgages and his
call for lenders to show greater flexibility towards some of their more
distressed customers are recognition of the potential severity of a
possible crunch (and its associated loss of votes): "I've made this a
top priority to help our homeowners navigate these financial challenges
so that as many families as possible can stay in their homes."
Soothing words, perhaps, but they don't quite deal with the
underlying policy problem. Central bankers (more so in Europe than in
the US) have been worrying for a number of years about the degree of
excessive risk-taking within the financial system, whether reflected in
rapid money supply growth, incredibly high correlations of returns
across both asset classes and geographies, the innovation of structured
products or the emergence of private equity (which, supposedly, turns
base metal into gold). We may now have the makings of a credit crunch
but, arguably, its foundations were laid during the earlier credit
"bubble" – when financial conditions were unusually lax for a given
level of official interest rates. Perhaps central bankers were also in
the wrong, refusing to raise interest rates quickly in the light of the
US housing bubble (and similar housing bubbles elsewhere), all too
happy to argue publicly that the gains in house prices were simply a
reflection of welcome financial innovation rather than of lax lending
If a credit crunch develops, it will ultimately reflect a revised
view of the risks associated with the various products that sprang up
in the earlier credit boom and which did so much to secure a healthy
growth rate and a high level of employment in the US. At the moment,
there is no desire to provide any bail-outs for the institutions (or,
indeed, the reckless borrowers) which now are seen to be at the
epicentre of additional risk-taking. As Ben Bernanke, the chairman of
the Federal Reserve, put it, "It is not the responsibility of the
Federal Reserve – nor would it be appropriate – to protect lenders and
investors from the consequences of their financial decisions."
Fine words and, for the most part, entirely understandable. A
bail-out of the reckless, the gullible and the unscrupulous should not
really be part of public policy. It creates the classic moral hazard
problem, allowing people to believe that the public purse will always
be opened to "reward" bad behaviour (the financial market version of
this is the "Greenspan put", the idea that interest rates will always
be cut to ward off financial distress, thereby encouraging people to
take stupid risks). At the end of the day, though, people know that the
economy, or the banking system, is "too big to fail". After all, the
Savings and Loans industry was bailed out from 1989 onwards, even
though its problems resulted, once again, from the behaviour of the
reckless, gullible and unscrupulous.
In wartime, policymakers have to accept the death of innocents. In
peacetime, society demands the protection of the innocent. Sometimes,
though, it's not possible to provide that protection without bailing
out the guilty. The moral hazard problem won't easily go away. After
all, there will always be those asking themselves Dirty Harry's
question – "Am I feeling lucky?"
Stephen King is managing director of economics at HSBC:
Although the forecast below may be true for parts of the UK, and prices
will fall in some places, wherever property looks like a good
investment for overseas buyers the prices will hold and even rise.
House price growth to hit zero in 2008
- Friday, November 16 02:33 pm
LONDON (Reuters) - Annual house price
inflation in will fall to zero next year as affordability constraints
are compounded by tighter lending conditions, the Nationwide building
society forecast on Friday.
If realised, this would be the weakest year for the property market
in more than a decade.
tailwinds are turning into headwinds and house price inflation is
expected to drop from the current rate of 9.7 percent to zero percent
by this time next year," Nationwide said.
Nationwide said the
main reasons for the subdued outlook are a slowing economy, tighter
credit conditions, prices beyond the reach of many first-time buyers
and lower price expectations.
It said interest rate cuts and a
lack of supply would provide some support to the market but would not
prevent a significant slowdown.
Lower buy-to-let demand is also likely to take the steam out of the
forecast is similar to that of the Council of Mortgage Lenders which is
predicting house price inflation will slow to 1 percent next year.
(Reporting by Christina Fincher; Editing by Ian Jones)
Gordon Brown is right to resist the Police Federation's insistence that
the government must implement the award of the arbitration committee on
Police pay. Of course the Treasury could afford it, but it could not
affaord the knock-on consequences, consequences there is little doubt
the PM has researched. Yes, it is uncomfortable to undermine the status
of the arbitration committee and that would weaken its utility in the
future. But the fact is the basis of Police pay has to be re-examined,
and the arbitration committee is not the authority that decides our
financial and monetary policy. It made a reccommendation which, on this
particular occasion, the government has delayed for good reasons.
Menwhile there is a storm raging in the global investment markets - or
should we say a black hole that threatens. Care, cooperation and steady
nerves may succeed in preventing its arrival.
This article in The Independent
sets out some parameters.
Cautious optimism for a new plan: The $100bn bail-out but will it
make a Difference?
the G7 central banks agreed to give unprecedented support to distressed
capital markets, Stephen Foley in New York and Sean Farrell ask whether
the move will help stave off global recession
Published: 14 December 2007
of the world's most important central banks had joined together to
promise they would rescue the stricken credit markets, but investors
can't decide between euphoria and more despair.
credit markets didn't suddenly thaw, banks didn't instantly start
lending to each other again, the crucial inter-bank interest rate that
measures these things stayed stubbornly close to its highs. But
yesterday's gloomy predictions that the interventions are failing are
as premature as Wednesday's elation.
What exactly do we mean when we ask, will it work? There are two
main measures. First and foremost, the central banks are trying to
avoid any more banking blow-ups such as the one at Northern Rock in
September. That has been a particularly acute concern as the end of the
year approaches, an important moment in the accounting calendar when
banks may need to top up collateral for loans and recapitalise other
parts of their business.
Secondly, and more broadly, the central banks hope to thaw the
frozen credit markets and bring down market interest rates. Banks and
the money market funds that grease the financial system have become
more reluctant to lend to each other, because they have their own
requirements for the money and because they fear their rivals may not
be able to pay them back. That has a cascading effect through the
credit markets: businesses have found it harder and more expensive to
borrow cash to fund their operations, mortgages are harder to come by,
the wider economy is threatened.
On Wednesday, central bankers unveiled a raft of creative ways to
encourage institutions to come to them for funds instead of relying on
each other, in the hope that this will, eventually, reduce the fear
that has paralysed the markets. Where normally the central banks would
hand out loans at a predetermined, punitive, interest rate via what is
called the "discount window", they will next week begin offering more
than $100bn (£49bn) of loans by way of an auction. As well as
the stigma, it should also reduce the interest rate on borrowings from
the central banks, and that might be enough to tempt in participants
looking for a bargain.
Andy Hornby, the chief executive of HBOS, said he did not understand
the market's negative reaction yesterday. "I only see upside in it. It
is good to see concerted action. These are worldwide markets. All
wholesale markets are by implication global."
He predicted that banks will participate in the auctions, the first
of which are being held by the ECB and the Fed on Monday, with the Bank
of England following on Tuesday. "There will be general demand for
more," Mr Hornby said.
John Ewan, the director of the British Bankers' Association, said
that other members were also cautiously optimistic about the new plan.
"Banks don't want to use the discount window because, whatever the
reason they use it, they can be perceived as having trouble funding
themselves. And as we know, it is a short step from the perception of
Bank X being in trouble to Bank X really getting into trouble," Mr Ewan
said, making a nod to the run on Northern Rock.
"The sums involved in the central banks' intervention are relatively
small in comparison to the size of the losses suffered on sub-prime
mortgages, which are estimated in the hundreds of billions of dollars.
But central banks have left themselves room to intervene again in the
coming weeks if it is necessary. More of the same would be welcome, but
the members I have spoken to are happier than they were two days ago."
Jonathan Wilmot, the fixed-income researcher at Credit Suisse, said
he suspected the Fed was keen to encourage arbitraging. In other words,
that banks would participate in the auction in the hope of raising
funds at a low level, then lending them straight back out to other
institutions at what is currently a high inter-bank lending rate, known
as Libor. That extra supply would then drive Libor down closer to the
target interest rates that the Fed, the Bank of England and others use
to manipulate their economies.
But the Libor interest rate did not crash yesterday, disappointing
many who had expected that the central banks' announcement on its own
would be enough to ungum the credit markets. In the eurozone, the cost
to borrow for three months remained completely unchanged at 4.95 per
cent, 95 basis points more than the ECB's benchmark interest rate of 4
per cent, compared with 57 basis points a month ago. The difference
averaged 25 basis points in the first half of the year, before losses
on securities on US sub-prime mortgages contaminated credit markets.
Sterling Libor dropped a modest 12 basis points.
In a note to clients, Mr Wilmot wrote that reducing the rates at
which banks lend between each other "will depend on the willingness to
lend and not hoard new deposits received [from central banks]. The jury
will remain out on this measure until we actually see how banks behave
with this money."
The BBA's Mr Ewan concurred. "There is not likely to be a moment
where we can say 'gosh, chaps, it's almost like June again'. Libor is
more likely to come drifting down rather than drop suddenly."
Mr Wilmot and his colleagues at Credit Suisse yesterday also
highlighted other ways that the central banks' new plan will alleviate
pressure on financial institutions. By widening the types of assets
that can be used as collateral to include some types of mortgage-backed
credit derivatives (called collateralised debt obligations, or CDOs),
the Federal Reserve will be reducing the unwanted supply of these
riskier types of assets in the market.
Best of all, the face value of many CDOs is higher than they would
actually fetch in the market, so handing them to the Fed as collateral
for a loan is much better for a bank than selling them. At the very
least, banks are delaying crystallising their losses, and may avoid a
big loss all together if prices rebound in the new year.
John Lonski, an economist at the credit rating agency Moody's, is
another with a "jury-is-out" viewpoint, but he suggests that credit
markets are gripped by an irrationality that might not properly be
shaken until the outlook for the US economy is clearer. Junk bonds are
pricing in a significantly sharper rise in corporate debt defaults than
seems likely, he says, and the value of mortgage-backed derivatives
suggests a higher rate of defaults by borrowers than seems possible.
And yet, markets continue to demand big interest rate cuts by the Fed
to stimulate the whole economy.
In other words, the markets simply are not listening to central
"We continue to see a high level of risk aversion in the banking
sector, but it does not appear to be reflected in the observable
"It's a battle. The Fed clearly does not think the outlook is as
dire as the financial markets believe," Mr Lonski said.
"Of course, we are looking at the deepest cutbacks in financial
services sector employment since the early Nineties, so perhaps it is
understandable that Wall Street has a gloomy view of the prospects for
Off-balance-sheet rescue plan
The casualties of the credit crisis are littered all around – among
them, rescue plans meant to ease the crisis.
than two months ago, Hank Paulson, the US Treasury Secretary, was
trumpeting an idea meant to prevent tens of billions of dollars of
losses on the secretive off-balance-sheet vehicles created by
investment banks such as Citigroup, Barclays and others.
said it was leading a consortium of financial institutions to create an
$80bn-$100bn fund that would buy up mortgage-backed debts that few
other Wall Street investors now want to buy. The plan was thrashed out
at meetings organised by Mr Paulson, but even his intervention could
not rouse significant support.
All week, Citigroup and its two
partners, Bank of America and JP Morgan Chase, have been trying to drum
up money for the fund, but it is clear that it will have to be scaled
back. Executives at two banks, Sumitomo Mitsui of Japan and the
US-based Wachovia, played down the importance of the fund, while many
others behind the scenes have turned down a chance to participate.
aim of the fund, called the Master Liquidity Enhancement Conduit
(M-LEC), is to prop up dozens of off-balance-sheet vehicles – known
variously as structured investment vehicles, SIVs. SIVs raise money at
low interest rates in the short-term debt markets to buy longer-term
investments, mainly mortgage-related securities, which pay a higher
interest rate. The value of the longer-term assets has collapsed,
however, and SIVs are finding it hard to find outside investors to
refinance them. The M-LEC is meant to step in as a buyer of last resort
for assets that might otherwise have to be sold at fire-sale prices.
say that banks are finding other, albeit more painful, ways to resolve
their leaking SIVs. HSBC has bailed out its vehicles by taking the
assets on to their balance sheet.
The PM and Chancellor have been at a press conference discussing future
plans and policy with particular reference to inflation. There are
plans to go for three-year pay settlements in the case of public
service employees, where appropriate, to bring stability. This has
resulted in an interesting cross-wiring of the logic in discussions on
inflation between the government, the unions and media commentators.
A rise in energy costs is taken by some as automatic, de facto
inflation. I have discussed this elsewhere on this web site. A rise in
energy costs can (indeed has been) the cause of rising prices; but it
is not necessarily inflationary in a particular economy or context. A
rise in automotive fuel costs in the UK may well mean that individuals
will have to reduce their non-essential travel, whether motoring or
public transport. They may have to reduce their non-essential
purchases. It has already been proved that most of us not only eat too
much but throw away one third of the food we buy. A rise in the cost of
energy could and should reduce excessive demand and unnecessary
consumption and wastful purchasing. The result will be a reduction in
demand, which is anti-inflationary.
For this reason the inflationary and deflationary forces that RESULT
from inflation of oil/gas/coal prices need to be taken into account. We
are in for a belt-tightening period. The PM and Chancellor are
explaining politely that printing money to avoid facing reality is not
clever, as anyone who has studied what is happening in Zimbabwe will
tell you. Since millions of UK families are heavily in debt, keeping
interest rates down is vital, and that means removing inflation as one
of the reasons for rate rises. I do not go along with the direct and
only linking of inflation to the setting of interest rates by our
Monetary Policy Committee but it has to be accepted that it is key.
Coming soon will be a decision on nuclear power generation. Those who
think we should not replace our current nuclear stations, let alone
build any more, should try to get their heads round some reality.
Fossil energy source cost inflation is a global reality. We have
outsourced most of the procuction of our non-essential purchases and
even some essentials to Asia. We need to use our organisational
experience and skills to create a nuclear power base worthy of our
capabilities and suitable to our needs.
JAN 13th 2008
In the 1980s I was for a
moratorium on Nuclear Power. I believed the cost and indeed the energy
expended in building, maintaining and decommissioning nuclear power
stations and dealing with the acquisition and processing of fuel and
dealing with waste was high enough to be a significant factor in
deciding in favour of other sources of power. However, the French
proved that nuclear (fission) power can produce more than it
consumes, regularly and safely.
The waste disposal problem must now be clearly separated into NEW and
OLD. We have to accept we made a pigs ear (under great pressure to
economise) over the handling of waste in the past. Maybe some of that
mixed and bulky waste should be buried deep down. New waste is a
different matter. I think it should be kept in surface storage which
can be completely and economically protected physically against any
unauthorised or violent access. In terms of volume it will not be
large. In the future it may be treatable and even usable.
JANUARY 22 2008
The Governor of the Bank of England states that he expects a slowdown
in the economy as part of a necessary global adjustment. I think he
also said that inflation would not necessarily fall to its target
level. But here I am not sure that 'inflation' is being properly
defined. In this file we have already defined it as a growing demand
outsripping supply, or a collapsing supply failing to meet an existing
demand. It is clear, however, that demand backed by purchasing power is
about to decrease in the UK, the US and some European countries.
Demand in the expanding Asian economies that are taking over some of
the role of 'workshop of the world', a title once held by the UK and
the US, can admittedly cause inflation in energy and some commodity
prices. It must be this inflation that the Governor is refering to. If
so there is no need for the Monetary Policy Committee to raise interest
rates to counter it. It is not home grown. They can continue to lower
rates. A fall in the value of the Pound is of coyrse two-edged and will
make imported inflation worse, but we do still have exports and it will
help these. On the whole I am in favour of the Pound falling and the
citizens of the UK wasting less food and favouring domestic industry,
farming and suppliers a bit more.
MARCH 13th 2008
One indicatior of GLOBAL INFLATION is the price of gold in a
representative basket of currencies. The US dollar has to be counted
representative of course because of the size of the US economy in terms
of hardware, food and global services. I haven't worked it out yet but
I would say we have some real global inflation as many virtual stocks
of wealth have evaporated. Hedge funds are imploding. We live in
MARCH 17th 2008
There is no need for the Bank of England to raise interest rate to curb
inflation of fuel prices It is not sterling demand for fuel that is
causing the price rise, it is global demand in other currencies.
With house prices no longer contributing in their previous excessive
way to inflation outside the official index, and fueland food prices
beyond our control, it is wrong to seek to reduce the purchasing power
of indebted British citizens in the absurd hope it will cause prices of
anything to fall. We badly need more home energy production from
Nuclear, clean coal, solar, wind and water with the emphasis on
Nuclear, water and clean coal.
MAY 20th 2008
It is being pointed out that global inflation is being exaggerated
because traders in commodity futures can mske money by causing
inflation in commodity prices - a speculative bubble. There is truth in
this because of the credit crunch and all the reasons that make
investors flee other markets. It will be self-correcting, but it is
certainly true that whereas the futures market had traditionally been a
mechanism to even out troughs and peaks and give stability, when the
world and his wife climbs into the futures market (via the
professionals who handle their pension funds etc. etc) and the banks
follow suit (on their own account and that of their clients), and the
sovereign funds and the mafia and the drug dealers all get in on the
act, then there is going to be a bubble effect. Oh well, we will see...
Eventually, this mess should result in an understanding that we need to
rorganise the theory of taxation. Tax should be levied on energy
consumption and on waste (of materials, food and all matter that has
absorbed energy in its production). All other forms of taxation cold
then be abandoned other than user taxes where appropriate, a simple
peronal income tax and VAT. VAT
should be applied directly to commodity trading to control it and to
raise revenue. Of course international agreement will be required. It
will never be possible to avoid some booms and busts, total stability
is achieved only in death, but the present mess is not clever and does
not help us to deal with the global problems we face.
JUNE 9th 2008
The penny is dropping...
seen as pivotal in global battle against inflation
Sunday, June 8, 2008
The fate of the dollar will be pivotal for global financial markets
this week as the world's two most powerful central banks battle the
commodity-driven inflation that has been spurred by the dollar's long
The dollar has been left on a knife-edge after a week in which the
Federal Reserve and the European Central Bank appeared to compete for
the prize of the toughest inflation fighter.
As a stream of global economic data sent conflicting signals on
rising inflation and slowing growth, the outlook for all financial
markets has rarely been hazier.
"Concerns about inflation have increased considerably among all
central banks," said Dale Thomas, head of currency management at
Insight Investment in Britain. Both the Fed and the ECB, he said, "have
signaled they will have tighter monetary policy than people had
Thomas said the desire to have a strong dollar was undermined by the
fact that apart from the United States, the rest of the world is
The United States "wants all things without taking pain," he said.
The Fed chairman, Ben Bernanke, fired a rare warning shot on Tuesday
about the inflationary threat from a weak dollar, setting off an
across-the-board rally in the dollar.
Two days later, the ECB president, Jean-Claude Trichet, shocked
financial markets by saying interest rates could rise next month,
unleashing a wave of euro buying.
The only clear losers were government bonds, as investors expected
the Fed to leave interest rates unchanged instead of cutting them
further and the ECB to raise the cost of borrowing next month.
Currencies could figure prominently when Group of 8 finance
ministers meet Friday in Osaka, Japan, the last in a series of
high-level gatherings ahead of the annual meeting of G-8 leaders in
Investors will seek more clarity on monetary policies of major
economies from speeches from central bank chiefs in the United States,
the euro zone, Britain and Japan.
Data on housing markets, retail sales and prices in the United
States and Britain could further paint a stagflationary picture of
rising prices and slowing growth.
After Trichet's signal on interest rates, 2-year government
borrowing rates in the euro zone surged to an eight-year high, above
10-year borrowing rates. The resulting yield curve inversion is at its
widest since the introduction of the euro in 1999.
Stocks, as measured by MSCI's world equity index, benefited from a
rout in bonds, drawing in funds that fled government securities, before
weak U.S. jobs data sapped risk appetite on Friday.
On Thursday, the euro rallied more than 3 U.S. cents from a
three-and-a-half-year low, re-igniting a rally in oil prices that had
fallen earlier in the week when the dollar rose.
Thursday "was disastrous in terms of global cooperation," said Nick
Parsons, head of market strategy at nabCapital.
"We had just got to the point with Bernanke talking up the dollar,
with euro/dollar moving lower and oil prices $14 off their highs,"
Parsons said. "I do not think, despite the widening in spreads with the
U.S., that euro/dollar is going to make new highs."
Before the G-8 meeting, Parsons said, "there will be a sustained
effort on the part of the politicians and finance ministers to be
talking down the euro/dollar."
After moves in U.S.-euro zone interest rate differentials, the
financial fair value model from Barclays Capital suggests that the euro
may be undervalued by as much as 1.5 percent against the dollar.
A central bank that backs its words with action will ultimately have
its wish for a stronger currency granted, said Thomas, the currency
strategist at Insight Investment. In this case, the ECB, which is
likely to raise interest rates next month, will see a stronger euro.
"That's what happened historically and that's what will happen this
time," Thomas said. "Not everyone can have a stronger currency. We are
likely to test new lows in the dollar."
In addition to speeches expected this week from Bernanke and
Trichet, financial markets will receive interest rate decisions from
Japan and Canada.
The Bank of Japan is unlikely to raise the cost of borrowing from
the current rate, 0.5 percent, the lowest among industrialized nations,
until early next year.
But the Bank of Canada is expected to cut interest rates by a
quarter percentage point from 3 percent before winding down its
aggressive easing campaign.
Investors will also keep their eyes on the annual conference of the
British Bankers' Association on Tuesday; The Bank of England governor,
Mervyn King, is expected to attend.
The British financial sector suffered last week after Bradford &
Bingley issued a stark warning on the mortgage market and reduced the
price of its emergency fund-raising.
"We have barely scratched the surface of the deleveraging that is
needed on all the banks," said Neil Dwane, chief investment officer in
Europe at RCM, an equity arm of Allianz Global Investors.
"We are about to have a normal bad debt lending cycle."
A survey on British house prices is also expected this week after a
series of reports suggested that the property market downturn was
The thing to do with interest rates now, as I have said before but
repeat, is TO LEAVE THEM ALONE at 5%, which is where they should be.
The government needs to intervene in other ways tactically in the
economy as required to fit the UK economy for survival in the global
situation, while also avoiding internal disasters that would affect
social cohesion. Not easy, but the current government and civil service
is quite as capable as any alternative bunch of doing this. The idea
that we should swap the Labour team for Tory or Liberal in the near
future seems to me pointless. There is no doubt we shall see economic
events which if they persist could be called recession, but
classifiying the situation does not make it any better or worse. The
only annoying thing is that there will be some bastards who will be
making a fortune out of these events, and they are not the craftsmen,
artisans, designers and builders who make the world a civilised and
beautiful place. Nor will they be those investors who back the
aforementioned when they identify them. They are are instead the
wheelers and dealers who play with money, regardless of any criterion
than the bottom line in the rolling short term.
OCTOBER 3th 2008
Although I have argued for a long time that the UK interest rate should
be left alone, and that 5% is a good place to leave it unless there is
a big change in circumstances, I would not throw a hissy-fit if next
week it was dropped to 4.5% due to special circumstances. But my
argument is still that if the circumstances are that special and this
would really help and is necessary, then why not 4%?
5% is where were want to be. Interest rate change is not the answer to
the systemic problem.
OCTOBER 5th 2008
While the Bank of England's independence can remain a fact as far as
management is concerned, and its policy can remain in the hands of its
policy committees, there is no doubt that in the present crisis careful
coordination is required with the goverment in power. This is clear
when we consider that even the Tory opposition has decided to
coordinate its policy with that of the government. The terms of
reference of the Bank's Monetary Policy Committee can therefore take
account of expected and current values other than that of domestic
inflation measured by sometimes arbitrarily selective criteria.
Government will have to share and coordinate its plans with the MPC.
I am glad to see reality is coming home.
BRAVO!! A half percent interest rate coordinated internationally
with Europe and the US - that's the
way to do it!
I am moved. I didn't know if they were up for it*, either the drop or
the essential coordination. Well done. And the rest of the package is
the best that can be done for now.
*Bear in mind, when I write all the
stuff on this site I never discuss matters with anyone or even meet
anyone involved with any decisions, before during or after my entries,
(with very few exceptions - I do sometimes accidentally meet and share
a meeting of minds some time afterwards, with someone relieved to be
able to do so). These files are a solitary exercise built on an
autodidactic base, for a purpose that will become apparent later.
NOVEMBER 6th 2008
As noted in the Recession diary on this site over the last month, Bank
of England Interest Rate had to drop further and could do because the
US and Euro rates were also dropping. I expected a 1% drop today, but
not the 1.5% taking it well below the Euro rate. But the MPC clearly
knows what it is doing now and why. 1.24 Euro to the Pound is the rate
at the close of business. I am impressed by the clarity of this
Bank of England Reduces Bank Rate by 1.5 Percentage Points to 3%
6 November 2008
Bank of England’s Monetary Policy Committee today voted to reduce the
official Bank Rate paid on commercial bank reserves by 1.5 percentage
points to 3%.
DECEMBER 15th 2008
Noting the descent of the Pound Sterling toward parity with the Euro,
Yvette Cooper (I think it was she, or was it the other one) said the
Monetary Policy Committee was "not targetting Sterling, it was
targetting inflation" . The Pound would be left to its own devices to
stabilise naturally over time. It had been proven in the past that
spending reserves to support the Pound was money wsated.
Now that is perfectly true, but what she seems to have overlooked is
that one reason for targetting inflation is to preserve the relative
value of the currency. Tightening monetary policy for UK citizens,
consumer, producers and investors, cannot control global inflation
except in concert with all other major economies. That implies MPC
monetary policy was used to target UK inflation and ensure the strength
of the pound.
If the Pound falls too far, we bring about de facto price rises in the
prices of all imported goods, services and comestibles. Since we use a
lot of those, letting the Pound fall is felt to be inflationary for UK
citizens (but see my opening para in this file). Of course it is not
of inflation in global goods, services or comestibles so in that sense
the MPC can be said to behaving responsibly. Their job is to target the
cause of inflation to prevent its future arrival.
If you have understood what I have just written you will appreciate
that what is inflationary pressure for the MPC is nothing of the sort,
necessarily, for UK consumers.
Our exporters can do well as the £ falls if the cost of imported
raw materials is a small part of the selling price of their goods in
Sterling. In this way the current situation can encourage business to
use UK labour. But, let us face it, no business is going to switch its
country of production of ACTUAL GOODS to follow fluctuating exchange
rates when it takes a long time to establish a good workforce, premises
and reputation. WE NEED SOME STABILITY as I point out every day and
enshrined in my autobiographical poem on this site as my message for
the decade. It may seem paradoxical that we need stability to make a
great leap forward but understanding paradoxes is the secret of the
future survival of humanity. You can listen to me, or you will be
listening to some noises soon that you do not like.
If the UK is to become a place where no actual hardware goods are
produced but we rear our own animals and grow our own crops for food
and those not employed in that sit at computers managing the global
trade and finance of the rest of the world, then you can ignore my
warnings. If you can construct a model of the global and national
economy where that makes stable sense, let me know. You could do it,
but not with current UK population consisting of people of whom the
majority who know little or nothing about farming or the countryside on
the one hand and can't compete mathematically or literarily with the
best of the rest in the global community on the other.
FEBRUARY 15th 2011
I have felt it unnecessary to say anything since my last entry on the
subject of inflation although in other parts of this web site you will
see that while I have accepted the quantitative easing policy of the
Bank of England I have always put great emphasis on the need for
international coordination, IMF participation and future control, and
serious attention to problems in the EU which have to be fixed. Now, we
have some silliness again whereby a rise in prices caused by global
demand and a rise in global production costs, combined with a
deliberate rise in VAT and a natural rise in UK petrol price, is being
classed by the single word INFLATION. The irony is that while an
increase in UK interest rates would not have stopped this and an
increase now will only make life tougher with little effect on the
price rises, the refusal of the MPC to move off the extreme low level
of interest to a 1% level where it should be is now made more
difficult. The whole mechanism has become decoupled. In short there is
NO manipulative solutionj to our woes and the standard of living for US
citizens will now FALL and that is that. The bleatings of Milliband
junior are pointless and any aggressive actions by the Bob Crowe school
of industrial economics will be counterproductive.
MAY 11th 2011
The Governor or the Bank of England has pointed out the obvious: that
rising fuel prices will be a significant reason for what we still call
'inflation', because the world demand, together with both long term and
temporary short term restrictions on supply, is driving up up the price
of oil and, as a result, gas. The decomissioning pf Japanese nuclear
plants has added to the problem. It is not a UK domestic inflationary
problem at source, so once again fiddling with the bank rate is
The predicted 'fall-back' is uncertain too. It will need an upturn in
applicable energy supplies and a reduction in global demand to
stabilise oil and other linked energy market prices. Other commodities
come into play. Only a new type of growth can see the UK into a
low-inflation regime. We are in pretty deep doo-doo. However, that may
be just what is needed.
I am afraid that the Quantitative Easing, which was very necessary, is
now going in the wrong direction. There is a mismatch between the
supply and who has it, and the demand and who wants it. The investment into commodities per
se, instead of the production of commodities let alone the greener
production of commodities which is the only win-win formula, is having
a very bad effect on growth, let alone green growth.
We are in danger now of making a mistake smilar to, but worse than what
caused the previous bubble and crash. Just as the global market which
rather perilously allowed the increasing world population to feed
itself while destroying the planet and much of nature, kept some sort
of peace by shuffling aid and repression in alternate waves, now the
collapse of the same market has not resulted in a fall in food prices
but a rise. The resulting violence causes real poverty where before
there was just hard times.
JANUARY 17th 2012
How much wiser and sadder now are the economic gurus. They are
realising at last that the games they were playing were workable only
in a a structure that now has no adequate political context to support
it. Inflation which should rise in the absence of penal interest rates
is falling as the producers and retailers of goods struggle to sell
their output in a world where the mass demand (required by the very
productivity they lauded as the key to wealth) is not backed by
purchasing power. The fatal flaw is revealed for all to see. Efficiency
is based on fewer people needed to supply goods and services. In a
world of ever-increasing population, what are even the existing people
to do, let alone the extras? New frontiers are needed as fast as they
can be found and invested in, while the exisiting environment is
preserved and nurtured. But instead, our industry has been on a
desperate search for cash profits which they see as the only road to
survival in a dog-eat-dog world, while investors now frightened of
property seek safety in gold.
The good news in all this is that the politicians and the governors of
national banks, particularly those faced with sovereign debt in one
place and sovereign surplus in another, are getting the message. Now
they have to get it over to their electorates. Not that easy in free,
democratic societies where those without responsibility can attract the
ear of the public as easily as those with it, and election is regarded
as as good a qualification as studying for and passing exams, and exams
in an arbitrary philosophy or nationalist creed are regarded as equal