BoE Base Rate, What if...
Discussion
BigLion said:
Leverage overtly alone was not the issue - it was the fact that junk status mortgages were neatly packaged up and given triple aaa ratings by credit ratings..before then being sold around the securitisation market in such a way no banks (indirect) exposure to geography / financial institution was known...so yes leverage, but not in the Northern Rock sense which simply worked with Lehmans to help create a run on everything 
Most banks have deleveraged their entire balance sheet since 2008 and the retail side has been reigned in significantly.
Ps that crayon comment made me chuckle, harsh but funny
I'd agree, the problem was elongated collateral chains (with a strong dose of SPVs and shadow banking) and a reliance on short term (overnight) funding was the issue. Most banks have deleveraged their entire balance sheet since 2008 and the retail side has been reigned in significantly.
Ps that crayon comment made me chuckle, harsh but funny
I'm not so sure that leverage has decreased overall though. It's hugely subjective, of course; but I'd say it's just moved around a bit. Sure low margin gets decimated; but balance sheet just goes elsewhere (leverage ratio promotes risk imho).
My view is that once banking regs and punishment for the excess of CDO squared and sub prime packaging etc is fully implemented (globally), the rise in central bank rate will be a small proportion of the bank spread or add-on.
And all that before Block Chain cuts costs to zero.
Edited by stongle on Tuesday 26th April 18:37
stongle said:
Willy waving? Don't think so. I do apologise for a rambling post though, was a touch whimsical.
My point. Anyone thinking a financial crash is a good idea or to preempt one is a moron.
Leverage hasn't reduced yet, it's taken years to get close to an agreement on how to do that, and there is still regional variations on implementation (thus presenting arbitrage opportunity). It will reduce gradually, a rapid run for the exit creates contagion effects that may push others firms into default.
And on, and on... There won't be some mystical wiping of the slate, just misery for millions.
And yes, I did end with a conundrum, but it's very real. We need to prevent the banks and reckless behaviour from tipping another crash; but they need to perform a utility function. At the rate regulation is going you could end up with 4 US banks and al the others are branches of the civil service. You won't need to worry about base rates then, just the banks spread.
I assume by contrarian you refer to yourself. You certainly have an unusual stance on property ownership.
Again a blend of sensible posting and then some kind of personal dig which sours your post.My point. Anyone thinking a financial crash is a good idea or to preempt one is a moron.
Leverage hasn't reduced yet, it's taken years to get close to an agreement on how to do that, and there is still regional variations on implementation (thus presenting arbitrage opportunity). It will reduce gradually, a rapid run for the exit creates contagion effects that may push others firms into default.
And on, and on... There won't be some mystical wiping of the slate, just misery for millions.
And yes, I did end with a conundrum, but it's very real. We need to prevent the banks and reckless behaviour from tipping another crash; but they need to perform a utility function. At the rate regulation is going you could end up with 4 US banks and al the others are branches of the civil service. You won't need to worry about base rates then, just the banks spread.
I assume by contrarian you refer to yourself. You certainly have an unusual stance on property ownership.
No financial crashes are not ideal but they do happen. To pretend one won't is also moronic since we've seen they do happen time and again through history.
Yes leverage will unwind. We're doing it actively since 2007. Deflate the debt via inflation. Without inflation then devaluing the currency serves the same purpose... but at some stage there will be a correction in the realisation of the new value of money.
So like I originally noted, you either end up with a crash of the values of things, or the value of the money crashes. Do it fast or slow, the net result is the same in the end.
I'm not a contrarian by choice, but by the nature of my observation. I look at what I see, and I see GDP going down and debt going up. And it's not getting better.
That can't continue forever and the worse it gets the higher the chance of an uncontrolled correction.
It seems lots of people are happy to perpetually look at government projections that just get re-adjusted year on year and assume they now must be right. I don't think they're right. I have a contrarian view because it makes sense to assume they'll be wrong again, given their track record of being wrong for almost a decade straight.
My stance on property ownership is unusual?
I suppose you're either usual or unusual... I'm glad I'm not just doing what everyone else does because everyone else is doing it lets put it that way. Tulip anyone?
Mr Whippy said:
Again a blend of sensible posting and then some kind of personal dig which sours your post
My stance on property ownership is unusual?
I suppose you're either usual or unusual... Tulip anyone?
It's not a dig. Having a different view creates a debate or a market. I find the glee in your earlier post re a crash ill considered. Immediately post Lehman, the banks went very, very close to the edge. The next crash, who knows. A crash is an immediate or quick event, not a multi year easing of leverage (or asset values).My stance on property ownership is unusual?
I suppose you're either usual or unusual... Tulip anyone?
Your view on houses, I tend to disagree with your extrapolation of personal circumstance to the market trend. That saying, it's not a uniform market and you have found value in renting.
Inflation (limited), is as you say desirable in the economy. Whether monetary policy really works anymore is subject to debate. I don't see any data that supports significant raising of BOE rates in the short to medium term. Bank spreads would probably (speculative) outstrip any rate hike.
How this ripples out will probably be regional specific. It could have a cooling effect on house prices in some areas (pretty negative in a consumer debt led society). Or no effect at all in South East (shortage of supply, developer land bank and foreign money).
fblm said:
Mr Whippy said:
I'm not a contrarian by choice...
Predicting a downturn of unspecified magnitude at some point in the future doesn't make you a contrarianThere is a strong herd mentality and no one wants to be the one standing out. That is good for stability until it's not, as everyone runs for the door at the same time.
My attitude is contrarian to the herd mentality, but I don't do it arbitrarily, it's based on observation of repeated negative economic adjustments over almost a decade.
Mr Whippy said:
I don't think I said I was a contrarian, just that it seems those contrarian attitudes are frowned upon in mainstream financial circles.
There is a strong herd mentality and no one wants to be the one standing out. That is good for stability until it's not, as everyone runs for the door at the same time.
My attitude is contrarian to the herd mentality, but I don't do it arbitrarily, it's based on observation of repeated negative economic adjustments over almost a decade.
Im not sure thats true, plenty of economists publish notes going against the flow, calling the top or bottom of something many times over, hoping at some point they are right and hit the headlines in order to make a name for themselves. Its largely nonsense, as they are wrong 100 times before they happen to be right.There is a strong herd mentality and no one wants to be the one standing out. That is good for stability until it's not, as everyone runs for the door at the same time.
My attitude is contrarian to the herd mentality, but I don't do it arbitrarily, it's based on observation of repeated negative economic adjustments over almost a decade.
gibbon said:
Mr Whippy said:
I don't think I said I was a contrarian, just that it seems those contrarian attitudes are frowned upon in mainstream financial circles.
There is a strong herd mentality and no one wants to be the one standing out. That is good for stability until it's not, as everyone runs for the door at the same time.
My attitude is contrarian to the herd mentality, but I don't do it arbitrarily, it's based on observation of repeated negative economic adjustments over almost a decade.
Im not sure thats true, plenty of economists publish notes going against the flow, calling the top or bottom of something many times over, hoping at some point they are right and hit the headlines in order to make a name for themselves. Its largely nonsense, as they are wrong 100 times before they happen to be right.There is a strong herd mentality and no one wants to be the one standing out. That is good for stability until it's not, as everyone runs for the door at the same time.
My attitude is contrarian to the herd mentality, but I don't do it arbitrarily, it's based on observation of repeated negative economic adjustments over almost a decade.
From my observations then there is the herd who are mostly clueless, and the contrarian minority who are also mostly clueless.
I think it's reasonable to not have any faith in economists and financial types until they have a track record of being right about the future, and not only right about the future in hindsight which even I can do
stongle said:
I find the glee in your earlier post re a crash ill considered.
A total collapse would allow society to improve banking for the future.Banking should be much more passive to society and our way of life, not able to completely destroy it and have us living in fear of it.
Humans seem incapable of learning valuable lessons unless there are significant costs.
Economists should either fix these fundamental problems, or live happily with the risks. To live in fear of them is just bonkers if they are the architect of them.
Andrew Sentance article: The risks of keeping interest rates so low
http://pwc.blogs.com/economics_in_business/2015/11...
http://pwc.blogs.com/economics_in_business/2015/11...
Mr Whippy said:
A total collapse would allow society to improve banking for the future.
Banking should be much more passive to society and our way of life, not able to completely destroy it and have us living in fear of it.
Humans seem incapable of learning valuable lessons unless there are significant costs.
Economists should either fix these fundamental problems, or live happily with the risks. To live in fear of them is just bonkers if they are the architect of them.
To continue the quote-athon....Banking should be much more passive to society and our way of life, not able to completely destroy it and have us living in fear of it.
Humans seem incapable of learning valuable lessons unless there are significant costs.
Economists should either fix these fundamental problems, or live happily with the risks. To live in fear of them is just bonkers if they are the architect of them.
That's a fairly mainstream view, and here I'll be contrarian. The rush to make banks utilities is actually promoting too big too fail risks. We'll be left with 4 big banks, and the civil service. Similar story for CCPs, in fact the headlong rush to embrace Central Counterparts appears a bit like Turkeys voting for Christmas (they have their hands in your pockets and will ramp your margin requirement making you insolvent - bit like Lehman's if we are NOT learning the lessons of the past).
Poor or ill judged banking regulation can be very damaging; look at the development of corporate debt liquidity since banks starting tracking their liquidity profiles. Leverage Ratio punishes low risk / low return areas of banks and encourages risk taking (or shadow banking balance sheet solutions).
You simply cannot uninvent history and financial innovation because you don't like it. TO assume that a crash will level the field or clean the slate just wont happen if even 1 bank remains. We will NOT learn from our mistakes and the genie doesn't go back in the bottle.
In your utopian view, where is the line drawn? Nothing would function. You couldn't make a loan unless you had match booked the maturity profile of your liabilities. Excessive / reckless carry trading is bad; but its one of banking's primary functions (of sorts). Even if you wanted to go back to the bowler hatted days of seeing the bank manager for a mortgage, over time the system will revert.
I'm pro banking regulation, as long as its the right sort and delivers the correct incentives. Oh, and its implemented consistently otherwise, why bother.
Regulations and peoples view on finance are far too digital (BoE rate rises to revert to OP). Its 50 million shades of grey. To suggest that BoE rates rocket (or rather cost of money); is way out on the speculative spectrum. Of course anything can happen; but the likelihood is minimal.
I just don't buy into your Hugo Drax fantasies (unless you really do have a space station?), sorry.
In my utopian view issues would be seen and fixed by both the banks and the regulators atively.
The people who can do something, are clearly rearranging deck chairs when it's too late, and doing nothing but self-arrgrandising their genious when it's not.
I'd imagine their current failure to act is because to de-risk means to reduce yields, and in a world where leverage is too high and debts are too high, less yield adds risk.
A conundrum indeed.
Which is why I think we're buggered. We went too far, and now we're stuck.
But using the same old tried and tested approaches to fix things won't work when they failed in the first place.
I simply believe humans that end up in government and banking, for whatever reason, are too stupid to actually solve this problem. A decade should have been long enough but it's just as bad as it was in 2007.
The people who can do something, are clearly rearranging deck chairs when it's too late, and doing nothing but self-arrgrandising their genious when it's not.
I'd imagine their current failure to act is because to de-risk means to reduce yields, and in a world where leverage is too high and debts are too high, less yield adds risk.
A conundrum indeed.
Which is why I think we're buggered. We went too far, and now we're stuck.
But using the same old tried and tested approaches to fix things won't work when they failed in the first place.
I simply believe humans that end up in government and banking, for whatever reason, are too stupid to actually solve this problem. A decade should have been long enough but it's just as bad as it was in 2007.
Mr Whippy said:
I think it's reasonable to not have any faith in economists and financial types until they have a track record of being right about the future, and not only right about the future in hindsight which even I can do
I'm not sure a track record of being right about the future should engender any kind of faith. As Taleb was at pains to point out; with enough people playing, someone will have a faultless track record predicting the future by flipping a coin. Among the cacophony of financial predictions there are plenty of outliers all looking to make a name for themselves, one day they get it right and everyone forgets that they were wrong the entire previous decade and every year since... (ps no one has faith in economists, least of all the 'financial types' you lump in with them!
)fblm said:
Mr Whippy said:
I think it's reasonable to not have any faith in economists and financial types until they have a track record of being right about the future, and not only right about the future in hindsight which even I can do
I'm not sure a track record of being right about the future should engender any kind of faith. As Taleb was at pains to point out; with enough people playing, someone will have a faultless track record predicting the future by flipping a coin. Among the cacophony of financial predictions there are plenty of outliers all looking to make a name for themselves, one day they get it right and everyone forgets that they were wrong the entire previous decade and every year since... (ps no one has faith in economists, least of all the 'financial types' you lump in with them!
)
I suppose fundamentally this comes down to free-market thinking or Keynesian thinking.
I just see little evidence that planned economics make much difference as we appear to be at the mercy of being perpetually wrong and just slowing the inevitable at great cost.
Flipping the situation on it's head and simply spending money to fix the problems caused by the system naturally correcting would seem better than spending loads of money trying to stop the system correcting but eventually not doing so?
Mr Whippy said:
In my utopian view issues would be seen and fixed by both the banks and the regulators atively.
The people who can do something, are clearly rearranging deck chairs when it's too late, and doing nothing but self-arrgrandising their genious when it's not.
I'd imagine their current failure to act is because to de-risk means to reduce yields, and in a world where leverage is too high and debts are too high, less yield adds risk.
A conundrum indeed.
Which is why I think we're buggered. We went too far, and now we're stuck.
But using the same old tried and tested approaches to fix things won't work when they failed in the first place.
I simply believe humans that end up in government and banking, for whatever reason, are too stupid to actually solve this problem. A decade should have been long enough but it's just as bad as it was in 2007.
Yields? Already in the toilet. With rising regulatory costs (to cover idiosyncratic risk models), banks are starting to close businesses as quick as they can. Repo is a case in point. That has a knock on effect to LDI driven funds (such as pensions), so into the real economy.The people who can do something, are clearly rearranging deck chairs when it's too late, and doing nothing but self-arrgrandising their genious when it's not.
I'd imagine their current failure to act is because to de-risk means to reduce yields, and in a world where leverage is too high and debts are too high, less yield adds risk.
A conundrum indeed.
Which is why I think we're buggered. We went too far, and now we're stuck.
But using the same old tried and tested approaches to fix things won't work when they failed in the first place.
I simply believe humans that end up in government and banking, for whatever reason, are too stupid to actually solve this problem. A decade should have been long enough but it's just as bad as it was in 2007.
A decade isn’t long enough? Are you joking? They are still writing the implementation of BASELIII. Its not just banks, that are the issue it’s the whole eco-system – regulators, banks, economists, consultants, accountancy firms (whom I have a special loathing of) – a bag of sand per day for a pimply out of uni wet behind the ears auditor, pull the other one. Remember its these firms (in particular) that add legitimacy to the whole procrastination effect / re-arranging the chairs on the Titanic (and still the fees keep rolling in).
I think (on reflection of your posts); you either want to invent time travel; or uninvent arbitrage. If you can do either, I’m with you. In the meanwhile I’m off to short some unicorns and go long pixie dust.
On topic, if you make bank products more expensive by correctly pricing risk (by resolving the regional regulatory arbitrage / taking the pi$$ problem), you actually make it more difficult for central banks to manage inflation in incremental or smaller movements in base rate.
fblm said:
Mr Whippy said:
...just slowing the inevitable at great cost.
What is inevitable and what great cost are we paying to slow it?The cost is things like NIRP and ZIRP on the wealth of peoples savings, and generating debt that future generations will pay for.
The only way to "elegantly" go from a period of high growth/expectation to one of zero/negative growth is to taper spending and that means spending more money than you're making because you don't want to cut spending as fast as GDP is dropping.
We're going to end up in a race to the bottom soon, as everyone is competing to taper their currency devaluation the fastest. And that probably isn't too stable either.
The big question is, is the cost of that higher than the cost of just printing money to fix the problems after an uncontrolled correction?
I believe it is.
Mr Whippy said:
The cost is things like NIRP and ZIRP on the wealth of peoples savings, and generating debt that future generations will pay for.
But the cost of ZIRP on most peoples cash savings is negligible. On the other hand the effect of ZIRP on most peoples wealth and income (property/pensions/investments/their job) is strongly positive. I mean who really cares if its 0% or 2%? Secondly deliberately allowing a massive crash in order that you can 'fix it' afterwards in plain insane. Like saving money on oil so you can fix your engine when it seizes! As to the relative cost I guess we have an intractable difference of opinion. Anyway sorry I have to get back to Dirt Rally 
Mr Whippy said:
I simply believe humans that end up in government and banking, for whatever reason, are too stupid to actually solve this problem.
Could you be more specific in your definition of 'stupid' please?I would argue banking and politics are two of the most aspirational vocations in terms of remuneration, influence and power, does that not inherently mean the 'stupid' will rarely rise to the top to any notable degree? You may argue ethics and methods with said people, but 'stupid'? Well, please define what you mean by that.
What industry do you work in out of interest?
Edited by gibbon on Thursday 28th April 07:38
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