Leith van Onselen posts this chart comparing housing wealth to disposable income. Australia and New Zealand are the worst offenders, with ratios close to 5:1, while the US never reached 3:1 even at its sub-prime peak.
Finally, Bank Regulators Have Had Enough | ProPublica
Jesse Eisinger observes US bank reactions to efforts to raise their minimum capital requirements. Many argue that the new rules will harm their competiveness.
Jamie Dimon, the chief executive of JPMorgan, raised the ominous specter that global rules are out of “harmonization” and that United States banks are now held to a higher standard.
“We have one part of the world at two times what the other part of the world is talking about,” he said. “And I don’t think there’s any industry out there that would be comfortable with something like that in a long run.”
To rebut that, I bring in a banking expert: Jamie Dimon. This side of Mr. Dimon’s mouth has repeatedly boasted about what a competitive advantage JPMorgan’s “fortress balance sheet” is, how the bank was a port in the 2008 storm…….
By raising capital standards and installing tougher derivatives rules, regulators are helping banks that are too foolish (or rather, the top executives who are too narrowly self-interested in increasing their own compensation in the short term) to recognize their own interests.
Increasing bank capital requirements would lower their perceived risk and decrease their cost of capital, giving them an advantage over international rivals with less stringent standards.
Read more at Finally, Bank Regulators Have Had Enough – ProPublica.
Canadian housing bubble looks ripe for popping | Toronto Star
Adam Peterson writes the Canadian housing bubble is headed for a “slow-motion” crash:
My gravest concern is that Canada is fast approaching a 5:1 home-price-to-income ratio, a benchmark achieved by the U.S. at the peak in 2006. Since the correction, the U.S. ratio now hovers at approximately 3:1.
To compound the problem, household debt in Canada has breached 150 per cent of income and continues in the wrong direction; households are not cushioned against a blow.
Australian household debt is also hovering around 150% of disposable income.
While the price-to-income ratio varies between 4 and more than 6 depending on whether you use national averages or median data.
Read more at Canadian housing bubble looks ripe for popping | Toronto Star.
US banks face tougher capital requirements
Yalman Onaran and Jesse Hamilton at Bloomberg report on a new joint proposal by the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency:
The biggest U.S. banks, after years of building equity, may continue hoarding profits instead of boosting dividends as they face stricter capital rules than foreign competitors.
The eight largest firms, including JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS), would need to retain capital equal to at least 5 percent of assets, while their banking units would have to hold a minimum of 6 percent, U.S. regulators proposed yesterday. The international equivalent, ignoring the riskiness of assets, is 3 percent. The banks have until 2018 to fully comply.
The U.S. plan goes beyond rules approved by the Basel Committee on Banking Supervision to prevent a repeat of the 2008 crisis, which almost destroyed the financial system. The changes would make lenders fund more assets with capital that can absorb losses instead of using borrowed money. Bankers say this could trigger asset sales and hurt their ability to lend, hamstringing the nation’s economic recovery.
While the authors term the new regulations “harsh” on bankers and likely to freeze bank lending, existing lax capital requirements give bankers a free ride at the expense of the taxpayer. Their claims are baseless:
- existing bank leverage is way too high for a stable financial system;
- US banks are flush with funds, holding more than $1.8 trillion in excess reserves on deposit with the Fed and $2.6 trillion invested in Treasuries and quasi-government mortgage-backed securities, so talk of a lending freeze is farcical;
- banks can function just as well with equity funding as with deposit funding;
- higher capital ratios will make it cheaper for banks to raise additional capital as lower leverage will reduce the risk premium.
So why are bankers squealing so loudly? In a nutshell: bonuses. Higher capital requirements and no free ride at taxpayers’ expense would mean that shareholders claim a bigger slice of the pie, with less left over for management bonuses.
For a detailed rebuttal of bankers’ claims see Anat Admati and Martin Hellwig.
The big four Australian banks should take note. They currently maintain between 4.1% (CBA) and 4.5% (WBC) of capital against lending exposure. Raising the ratio to 6.0% would require 33% to 50% new capital.
Read more at U.S. Banks Seen Freezing Payouts Under Harsh Leverage Rule – Bloomberg.
Basel committee willing to rethink complex bank rules | FT.com
Brooke Masters reports:
The Basel Committee on Banking Supervision said in a discussion paper released on Monday that it shares the concern of critics who believe the main measure of bank safety – the core tier one capital ratio – is too complicated and makes it difficult to compare banks.
Its own research shows banks are using wildly different models to calculate the risk-weighted assets that make up the denominator of the ratio, resulting in some institutions holding 40 per cent less capital against the same kinds of banking assets as their peers.
Read more at Basel committee willing to rethink complex bank rules – FT.com.
Making banks hold more capital is not going to wreck the economy
Mark Gongloff quotes Anat Admati and Martin Hellwig of the Max Planck Institute, authors of the recent book The Bankers’ New Clothes: What’s Wrong With Banking And What To Do About It, from their point-by-point rebuttal of bankers arguments that they should not be required to hold more capital:
“Many banks, including most of the large banks in the United States, are not even using all the funding they obtain from depositors to make loans,” Admati and Hellwig write. “If banks do not make loans, therefore, the problem is not a lack of funds nor an inability to raise more funds for profitable loans, but rather the banks’ choices to focus on other investments instead.”
Read more at No, Making Banks Hold More Capital Is Not Going To Wreck Lending Or The Economy | Huffington Post.
NYSE Euronext to Take Over Libor | WSJ.com
Libor, the scandal-tarred benchmark that underpins interest rates on trillions of dollars in financial contracts, is being sold to NYSE Euronext, NYX -0.78% the U.S.-based company that runs the New York Stock Exchange. The deal, designed to restore Libor’s international credibility, was announced Tuesday by a British government commission and the NYSE.
From DAVID ENRICH and CASSELL BRYAN-LOW.
Read more at NYSE Euronext to Take Over Libor – WSJ.com.
Denmark’s fat tax fiasco | Institute of Economic Affairs
Christopher Snowdon reviews Denmark’s attempt to reduce obesity by taxing saturated fats:
The economic and political failure of the fat tax provides important lessons for policy-makers who are considering ‘health-related’ taxes on fat, sugar, ‘junk food’ and fizzy drinks in the UK and elsewhere. As other studies have concluded, the effect of such policies on calorie consumption and obesity is likely to be minimal. These taxes are highly regressive, economically inefficient and widely unpopular. Although they remain popular with many health campaigners, this may be because, as one Danish journalist noted, ‘doctors don’t need to get re-elected.’
Read more at The Proof of the Pudding: Denmark’s fat tax fiasco | Institute of Economic Affairs.
Rude Awakening Awaits Western Economies | WSJ
Michael J. Casey at WSJ interviews HSBC group chief economist Stephen King, author of When the Money Runs Out: The End of Western Affluence:
Mr. King’s thesis….. is that we in the West are in line for a shock when we discover that the high-growth rates to which we’re accustomed aren’t coming back. In the U.S., we’ve been wrongly budgeting for a return to 3.5% average real growth rates that persisted through the second half of the 20th century — an affliction suffered by both policymakers and households that he calls an “optimism bias” — and yet even before the financial crisis destroyed trillions of dollars of wealth the economy was only clocking gains of 2.5% per year. Forget worrying about the post-crisis onset of a Japan-style “lost decade,” Mr. King says. “We have been through a lost decade already. ”Among the reasons for this long-term shift to a slower potential growth rate, he cites the exhaustion of a various one-off productivity gains that boosted growth after World War II: the entry of women into the workforce; the liberalization of world trade; a tripling in rates of consumer credit founded on an unsustainable increase in housing prices; and education. These gains are no longer to be had, he says, but policymakers are blind to that fact and so are burdening the economies of the U.S., Europe and Japan with long-term debts.
While I agree that we are unlikely to see a resumption of the rapid debt growth of the last 3 decades, this should contribute to lower inflation and greater stability, without a credit-fueled boom-bust cycle, that could partially offset the negative effects. I also question whether productivity gains are really exhausted, or if this is a temporary after-effect of low, post-GFC capital investment. There is ample evidence that the global economy is slowing and productivity gains will fall — if one is prepared to ignore evidence to the contrary such as the rise of automation, advances in genetics, nanotechnology, sustainable energy and slowing global population growth — which should alleviate the poverty trap that many countries are still in. The researcher has to beware of confirmation bias, where they gather data to support a preconceived opinion.
Read more at Horror Story: Rude Awakening Awaits Western Economies – Real Time Economics – WSJ.
It’s Time to Levy the Land | naked capitalism
There are growing calls for increased use of land value taxes to replace income taxes and corporations taxes as a major source of government revenue. Yves Smith points out:
Income and sales taxes add to the price of doing business, and hence reduce their supply and competitiveness. Most economists – even Milton Friedman – recommend that the more efficient tax burden is one that collects economic rent – property rent, fees charged for using the airwaves, monopoly rent, and other income that is basically an access charge. If you tax land rent, for instance, this doesn’t raise the price of housing or office space. The rent-of-location is set by the market place……
I agree with Michael Hudson that our income tax system encourages the use of debt, over-use of which was one of the primary causes of the recent GFC:
Our tax system favors debt rather than equity financing. By encouraging debt it has prompted a tax shift onto the “real” economy’s labor and capital. The resulting interest charge and tax shift mean that we’re not as efficient and low-cost producers as we used to be…..
But I have two concerns:
- Introducing new taxes without abolishing the old leaves scope for government to increase tax revenues as a percentage of GDP over time. And few things are more inefficient — and more harmful to growth — than government spending.
- Focus on land value taxes alone, while neglecting other rent-producing assets such as patents, copyright ownership, rights to airwaves, and even brand ownership may skew investment towards, and inflate the price of, these lower taxed assets.
Read more at It’s Time to Levy the Land | naked capitalism.