BoE Base Rate, What if...

[stongle]

C'mon never let accuracy get in front of a sweeping generalisation. He could be the Daily Mail's business and economics editor (or Hugo Drax). ;-)

Edited by stongle on Thursday 28th April 07:13

[sidicks]

BigLion said:

Leverage alone was not the issue per we - it was the fact that junk status mortgages were neatly packaged up and given triple aaa ratings by credit agencies..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

Tranching of risk means that it is quite appropriate to incorporate 'junk' mortgages within a AAA-rated asset, provided the other parameters are set correctly - in this case the assumed correlation was flawed in some products, it that the approach as flawed.

The main issue was that investors bought these structures on massive leverage, often without understanding the underlying risks, which meant they were forced to liquidate when collateral calls became too great, this tinted the whole securitisation market - as far as I am we, no European AAA securities have not paid their promised coupons and principal amounts.

[BigLion]

sidicks said:

BigLion said:

Leverage alone was not the issue per we - it was the fact that junk status mortgages were neatly packaged up and given triple aaa ratings by credit agencies..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

Tranching of risk means that it is quite appropriate to incorporate 'junk' mortgages within a AAA-rated asset, provided the other parameters are set correctly - in this case the assumed correlation was flawed in some products, it that the approach as flawed.

The main issue was that investors bought these structures on massive leverage, often without understanding the underlying risks, which meant they were forced to liquidate when collateral calls became too great, this tinted the whole securitisation market - as far as I am we, no European AAA securities have not paid their promised coupons and principal amounts.

Thanks for reiterating exactly what I wrote

[sidicks]

BigLion said:

Thanks for reiterating exactly what I wrote

My interpretation of your post was that it was inappropriate to include 'junk' securities in AAA-rated assets.

[BigLion]

sidicks said:

BigLion said:

Thanks for reiterating exactly what I wrote

My interpretation of your post was that it was inappropriate to include 'junk' securities in AAA-rated assets.

Organisations buying securitised assets in the belief they were triple AAA rated

However the triple AAA rating was incorrectly applied to the overall tranche being purchased

Whether it was fraud or not from credit rating agencies is up for debate

[sidicks]

BigLion said:

Organisations buying securitised assets in the belief they were triple AAA rated

However the triple AAA rating was incorrectly applied to the overall tranche being purchased

Whether it was fraud or not from credit rating agencies is up for debate

As per my post, given no European AAA has defaulted, how can you say the rating was incorrectly applied - the rating is a measure of credit / default risk, not mark-to-market volatility?

[BigLion]

sidicks said:

BigLion said:

Organisations buying securitised assets in the belief they were triple AAA rated

However the triple AAA rating was incorrectly applied to the overall tranche being purchased

Whether it was fraud or not from credit rating agencies is up for debate

As per my post, given no European AAA has defaulted, how can you say the rating was incorrectly applied - the rating is a measure of credit / default risk, not mark-to-market volatility?

Something like 80% of Triple AAA mortgage securities (which were circa half to 3/4 of all mortgage securities globally at that time) were downgraded from AAA to junk status by end of 2008 - so what was left post 2008 at AAA was genuinely high quality tranches - however by then the damage had been done as additional capital was then needed etc. etc..

[sidicks]

BigLion said:

Something like 80% of Triple AAA mortgage securities (which were circa half to 3/4 of all mortgage securities globally at that time) were downgraded from AAA to junk status by end of 2008 - so what was left post 2008 at AAA was genuinely high quality tranches - however by then the damage had been done as additional capital was then needed etc. etc..

Where did you get that stat from?

[BigLion]

sidicks said:

BigLion said:

Something like 80% of Triple AAA mortgage securities (which were circa half to 3/4 of all mortgage securities globally at that time) were downgraded from AAA to junk status by end of 2008 - so what was left post 2008 at AAA was genuinely high quality tranches - however by then the damage had been done as additional capital was then needed etc. etc..

Where did you get that stat from?

It was in the Financial Crisis Inquiry Report, the very well received "The Credit Rating Crisis" National Bureau of Economic Research (2009) and other widely available sources. Having worked in the industry during that time I saw it happen myself.

[BigLion]

Quick google to help illustrate >


Credit rating agencies — firms which rate debt instruments/securities according to the debtor's ability to pay lenders back — have come under scrutiny during and after the financial crisis for having given investment-grade ratings to MBSs and CDOs based on risky subprime mortgage loans that later defaulted. Dozens of lawsuits have been filed by investors against the "Big Three" rating agencies — Moody's Investors Service, Standard & Poor's, and Fitch Ratings.[190] The Financial Crisis Inquiry Commission (FCIC)[191] concluded the "failures" of the Big Three rating agencies were "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown".[192] Economist Joseph Stiglitz called them "one of the key culprits" of the financial crisis.[193] Others called their ratings "catastrophically misleading", (the U.S. Securities and Exchange Commissioner[194]), their performance "horrendous" (The Economist magazine[195]). There are indications that some involved in rating subprime-related securities knew at the time that the rating process was faulty.[196][197]

The position of the three agencies "between the issuers and the investors of securities"[198] "transformed" them into "key" players in the housing bubble and financial crisis according to the Financial Crisis Inquiry Report. Most investors in the fixed income market had no experience with the mortgage business—let alone dealing with the complexity of pools of mortgages and tranche priority of MBS and CDO securities[198]—and were simply looking for an independent party who could rate securities.[199] The putatively independent parties meanwhile were paid "handsome fees" by investment banks "to obtain the desired ratings", according to one expert.[199]

In addition, a large section of the debt securities market — many money markets and pension funds — were restricted in their bylaws to holding only the safest securities — i.e securities the rating agencies designated "triple-A". Hence non-prime securities could not be sold without ratings by (usually two of) the three agencies.[200]

From 2000 to 2007, one of the largest agencies—Moody's -- rated nearly 45,000 mortgage-related securities[201]—more than half of those it rated—as triple-A.[202] By December 2008, there were over $11 trillion structured finance securities outstanding in the U.S. bond market debt.[201] But as the boom matured, mortgage underwriting standards deteriorated. By 2007 an estimated $3.2 trillion in loans were made to homebuyers and owners with bad credit and undocumented incomes, bundled into MBSs and CDOs, and given top ratings[203] to appeal to global investors.

As these mortgages began to default, the three agencies were compelled to go back and redo their ratings. Between autumn of 2007 and the middle of 2008, agencies downgraded nearly $2 trillion in MBS tranches.[204] By the end of 2008, 80% of the CDOs by value[205] rated "triple-A" were downgraded to junk.[206] [207] Bank writedowns and losses on these investments totaled $523 billion.[203][208][209]

Critics such as the Financial Crisis Inquiry Commission argue the mistaken credit ratings stemmed from "flawed computer models, the pressure from financial firms that paid for the ratings, the relentless drive for market share, the lack of resources to do the job despite record profits, and the absence of meaningful public oversight.".[61]

[Mr Whippy]

gibbon said:

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?

"Too stupid to solve this problem"

Is that defined enough?

If they are clever enough to fix the problem, then why aren't they?

If other things are stopping them exercising making good decisions like politics, self interest, then are they not examples of stupidity in reference to 'not fixing the problem' too?

So stupid. Either not being smart enough to fix the problem. Or stupid for not doing something which they are capable of, and making poor decisions instead.

Like I suggested earlier, there is either malice or incompetence here. Which one is it?


My industry? Drawing and colouring in.

[sidicks]

Mr Whippy said:

"Too stupid to solve this problem"

Is that defined enough?

If they are clever enough to fix the problem, then why aren't they?

If other things are stopping them exercising making good decisions like politics, self interest, then are they not examples of stupidity in reference to 'not fixing the problem' too?

So stupid. Either not being smart enough to fix the problem. Or stupid for not doing something which they are capable of, and making poor decisions instead.

Like I suggested earlier, there is either malice or incompetence here. Which one is it?


My industry? Drawing and colouring in.

Or, more reasonably, the problem is too complex to to be resolved easily.

[stongle]

sidicks said:

Or, more reasonably, the problem is too complex to to be resolved easily.

The problem is too big. Mr Whippy's digital approach to this, underestimates the size of the problem immensely. Its easy to say, lets make "big bang" or overnight changes but it doesn't work that way (and that is the fault of economists, accountants, consultants, regulators and alike more than the banks). The phasing of regulations, with little jurisdictional coordination just creates arbitrage opportunity and that for banks is akin to curry for a pi$$head.

[Mr Whippy]

sidicks said:

Mr Whippy said:

"Too stupid to solve this problem"

Is that defined enough?

If they are clever enough to fix the problem, then why aren't they?

If other things are stopping them exercising making good decisions like politics, self interest, then are they not examples of stupidity in reference to 'not fixing the problem' too?

So stupid. Either not being smart enough to fix the problem. Or stupid for not doing something which they are capable of, and making poor decisions instead.

Like I suggested earlier, there is either malice or incompetence here. Which one is it?


My industry? Drawing and colouring in.

Or, more reasonably, the problem is too complex to to be resolved easily.

The problem, in hindsight to economists, became clear in 2008.

So we've had about 8 years now and things still seem to be far from ideal.

Is the problem too complex to be resolved easily over an entire business cycle?


It still reeks of incompetence to me. Yes it's a binary outlook but jeez it's not like we've given people enough time.

Maybe it's not one person, or one group of people. It's a systemic incompetence from government to banks to economists because they know the worst that can happen is they only lose their job.
That said, I'm not sure if things are any better in China and they could possibly lose their lives for incompetence

[walm]

Mr Whippy said:

Is the problem too complex to be resolved easily over an entire business cycle?

I think the answer to that is very obviously yes.

For example, it is by no means a simple fact that if the central banks had done the opposite and not printed money or dropped rates that we would be any better off today than we are now.

Almost certainly the pain of the great recession would have been felt more deeply and for longer.
Whether or not the speed of recovery would have been greater is almost impossible to determine.

[gibbon]

Mr Whippy, do you really think the answer is so obvious? These are not binary choices with gauranteed outcomes, the causes and effects are best estimates and the mechanisms are not 100% efficient. It is also subjective as to what constitutes a 'good' economy and the 'right' government policy locally, never mind globally.

So yes, its a complicated problem, without a defined answer, so much so that the question being asked is also somewhat complicated, subjective and elastic.

If you dont comprehend that, then i suggest that maybe you dont understand the problem.

However a suspect im wasting my time and will have to respectfully agree to have a different view of the world.

[Mr Whippy]

gibbon said:

Mr Whippy, do you really think the answer is so obvious? These are not binary choices with gauranteed outcomes, the causes and effects are best estimates and the mechanisms are not 100% efficient. It is also subjective as to what constitutes a 'good' economy and the 'right' government policy locally, never mind globally.

So yes, its a complicated problem, without a defined answer, so much so that the question being asked is also somewhat complicated, subjective and elastic.

If you dont comprehend that, then i suggest that maybe you dont understand the problem.

However a suspect im wasting my time and will have to respectfully agree to have a different view of the world.

I understand all that.

So is what we see the best that could have been expected?

Why have projections been repeatedly set lower and lower as time has passed? Is the strategy not working? You'd think after a few revisions down they'd 'get their aim in'


And that goes right back to the original point I made which didn't seem to sit well with some.

The ultimate outcome of all this tinkering is either a fast or slow crash or devaluation of wealth.

The longer we go forth in the doldrums and the longer we can't fail to even project into the near future with any accuracy, I believe we move towards the risk of faster versions of either of those two outcomes.

It seems the latter is the flavour that would be preferred.

So, BofE base rate will only move up once inflation rises due to a devaluation of wealth, and subsequent acceleration of economic activity.

Rates won't just arbitrarily go up since it'll just accelerate the GDP decline or negate any remaining growth.

The debts need to be devalued till rates will go up, and they haven't been yet.

[BigLion]

Breathtaking naivety by Mr Whippy. If we lived in a dictatorship change and implementing solutions is easier - life is about solutions that are sub-optimal as we have to compromise and quite often as you get close to something good the people involve change and you have to go back through the process.

Put that at a national and global scale with very low transparency and self-interests at play, stick in a whole bunch of variables that and put your finger in the air on forecasting them and you can see how hard life can be.

With the greatest of respect you sound like the classic Taxi Driver starting of the conversation with "If I was prime minister..." - if you have a viable solution publish a paper on it and earn billions or if not, stick to art as its cleaner and easier !

Edited by BigLion on Thursday 28th April 16:12

[Mr Whippy]

BigLion said:

Breathtaking naivety by Mr Whippy. If we lived in a dictatorship change and implementing solutions is easier - life is about solutions that are sub-optimal as we have to compromise and quite often as you get close to something good the people involve change and you have to go back through the process.

Put that at a national and global scale with very low transparency and self-interests at play, stick in a whole bunch of variables that and put your finger in the air on forecasting them and you can see how hard life can be.

With the greatest of respect you sound like the classic Taxi Driver starting of the conversation with "If I was prime minister..." - if you have a viable solution publish a paper on it and earn billions or if not, stick to art as its cleaner and easier !

There are a raft of viable solutions.

But I'm not sure they're being used for the right reasons at the right times.

For instance.

Had we doubled the GBP money supply over the last 9 years since 2007 via helicopter money, would we have a debt crisis right now?

From my simple maths, we'd have salaries around double what they are now, the national debt would be more than halved, and people would be running around like it was christmas buying things and boosting GDP massively?

OK, older people would be shafted by a period of high inflation, but won't they be shafted by the end of all this any way?

[walm]

Mr Whippy said:

Had we doubled the GBP money supply over the last 9 years since 2007 via helicopter money, would we have a debt crisis right now?

From my simple maths, we'd have salaries around double what they are now, the national debt would be more than halved, and people would be running around like it was christmas buying things and boosting GDP massively?

OK, older people would be shafted by a period of high inflation, but won't they be shafted by the end of all this any way?

I thought BigLion was being harsh calling you naive earlier.
Now I see that he was being generous!

I would step back from the keyboard if I were you!