Banks & Interest Rates Archives - Page 53 of 64

November 5, 2012

Bank of England should leave forecasting to Ladbrokes « The Market Monetarist

The Market Monetarist makes a novel suggestion as to how to avoid central banks from making biased forecasts:

“…..even better as I have suggested numerous times that the central bank simply set-up a prediction market. In Britain that would be extremely easy – I don’t think there is a country in the world with so many bookmakers. The Bank of England could simply ask a company like Ladbrokes or a similar company to set-up betting markets for key macro economic variables – such as inflation and nominal GDP. It would be extremely cheap and the forecast created from such prediction market would likely be at least as good as what is presently produced by the otherwise clever staff at the BoE.”

That could work …..until punters learn that the bets they place indirectly influence central bank monetary policy. It might pay market participants to place large bets on low or high inflation if they stand to benefit from the central bank response.

via Bank of England should leave forecasting to Ladbrokes « The Market Monetarist.

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

November 5, 2012

Treasury yields warn more of the same

Inflation has fallen over the last quarter-century, so one would expect to find Treasury yields have fallen, but there is more than just benign inflation at work. The Fed has also been suppressing long-term interest rates, with QE1, QE2, Operation Twist and now QE3.

10-year Treasury Yields

The yield on 10-year Treasuries is now below the Fed’s long-term inflation target of 2 percent, offering savers a negative return on investment unless they are prepared to take on risk. The Fed’s aim is to induce investors to take on more risk, in the hope that increased capital spending will stimulate employment and lead to a recovery. But they risk leading savers into another disaster, with falling earnings or rising yields ending in capital losses.

Corporations are reluctant to expand and will remain so until they see a sustainable increase in consumption. Fueled by new jobs — not short-term credit. Low interest rates without job growth could cause another speculative bubble, with too much money chasing too few opportunities.

Without jobs, no monetary policy is likely to succeed.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 4, 2012

Nationalbanken Defends Sub-Zero Bemoaned by Banks | Bloomberg

Peter Levring and Frances Schwartzkopff write that Denmark’s central bank has taken an unusual step to defend the krone from capital inflows similar to those experienced earlier by Switzerland.

The central bank has kept its deposit rate at minus 0.2 percent since July, in an effort to fight off a capital influx and maintain the krone’s peg to the euro.

Deposits held at the central bank are charged a fee of 0.2%, rather than paid interest as in the US.

At the same time, the industry is still paying its customers to hold their deposits in an effort to attract stable funding and reduce reliance on wholesale financing. That’s turned deposit banking in Denmark into a losing business.

The measure would encourage banks to increase lending, loosening credit standards to avoid the charge on excess reserves. It would also reduce the rate paid on call deposits, while increasing bank competition for more stable time deposits.

via Nationalbanken Defends Sub-Zero Bemoaned by Banks: Nordic Credit – Bloomberg.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 31, 2012

Why the Fed should not target inflation

Scott Sumner, Professor of Economics at Bentley University, proposes that the Fed target nominal growth in GDP (“NGDP”) rather than inflation as Ben Bernanke has long advocated:

“Even he [Bernanke] must be surprised and disappointed with how poorly [inflation targeting] worked during the recent crisis.”

The primary problem, Sumner points out, is that measures of inflation are highly subjective and often inaccurate.

“The problem seems to be that, according to the Bureau of Labor Statistics, housing prices did not fall. On the contrary, their data shows housing prices actually rising between mid-2008 and mid-2009, despite one of the greatest housing market crashes in history. And prices did not rise only in nominal terms; they rose in relative terms as well, that is, faster than the overall core CPI. If we take the longer view, the Bureau of Labor Statistics finds that house prices have risen about 8 percent over the past six years, whereas the famous Case-Shiller house price index shows them falling by nearly 35 percent. That is a serious discrepancy, especially given that housing is 39 percent of core CPI……..

There are errors in the measurement of both inflation and NGDP growth. But to an important extent, the NGDP is a more objectively measured concept. The revenue earned by a computer company (which is a part of NGDP) is a fairly objective concept, whereas the price increase over time in personal computers (which is a part of the CPI) is a highly subjective concept that involves judgments about quality differences in highly dissimilar products.”

Inflation targeting also encourages policymakers to think in terms of monetary policy affecting inflation and fiscal policy affecting real growth — “a perception that is both inaccurate and potentially counterproductive”.

“Advocates like Bernanke see [inflation targeting] as a tool for stabilizing aggregate demand and, hence, reducing the severity of the business cycle. This is understandable, as demand shocks tend to cause fluctuations in both inflation and output. So a policy that avoids them should also stabilize output. I have already discussed one problem with this view: The economy might get hit by supply shocks, as when oil prices soared during the 2008 recession……..”

Linking monetary policy (and the money supply) to nominal GDP growth would offer a far more stable growth path than the present system of inflation targeting.

via THE CASE FOR NOMINAL GDP TARGETING | Scott Sumner (pdf)

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 31, 2012

Global QE

Observation made by Philip Lowe, RBA Deputy Governor:

Since mid 2008, four of the world’s major central banks – the Federal Reserve, the ECB, the Bank of Japan and the Bank of England – have all expanded their balance sheets very significantly, and further increases have been announced in a couple of cases. In total, the assets of these four central banks have already increased by the equivalent of around $US5 trillion, or around 15 per cent of the combined GDP of the relevant economies. We have not seen this type of planned simultaneous very large expansion of central bank balance sheets before. So in that sense, it is very unusual, and its implications are not yet fully understood……

via RBA: Australia and the World.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 29, 2012

Five steps to fix Wall Street

Some more thoughts on the five steps former FDIC chair Sheila Bair suggested to reform the financial system.

Break up the “too big to fail” banks
My take is that breaking up may be difficult to achieve politically, but raising capital ratios for banks above a certain threshold would discourage further growth and encourage splintering over time.
Publicly commit to end bailouts
Just because the bailouts were profitable isn’t a good reason to give Wall Street an indefinite option to “put” its losses to the Treasury and to taxpayers.

As Joseph Stiglitz points out: the UK did a far better job of making shareholders and management suffer the consequences of their actions. Sweden in the early 1990s, similarly demanded large equity stakes in return for rescuing banks from the financial, leading some to raise capital through the markets rather than accept onerous bailout conditions.
Cap leverage at large financial institutions
I support Barry Ritholz’ call for a maximum leverage ratio of 10. That should include off-balance sheet and derivative exposure. Currently the Fed only requires a leverage ratio of 20 (5%) for well-capitalized banks — and that excludes off-balance-sheet assets.
End speculation in the credit derivatives market
Bair pointed out that we don’t get to buy fire insurance on someone else’s house, for a very good reason. How is speculating using credit derivatives any different?

Again Ritholz makes a good suggestion: regulate credit default swaps (CDS) as insurance products, where buyers are required to demonstrate an insurable interest.
End the revolving door between regulators and banks
When regulators are conscious that, with one push of the door, they could end up working for the organizations they are today regulating – or vice versa – “it corrupts the mindset”

A similar revolving door corrupts the relationship between politicians and lobbyists. Enforcing lengthy “restraint of trade” periods between the two roles would restrict this.

via 5 Steps Obama or Romney Must Take to Fix Wall Street.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 25, 2012

Australia: RBA running out of options

The Reserve Bank of Australia must be viewing the end of the mining boom with some trepidation. Cutting interest rates to stimulate new home construction may cushion the impact, but comes at a price. Consumers may benefit from lower interest rates but that is merely a side-effect: the real objective of monetary policy is debt expansion. And Australia is already in a precarious position.

Further increases in the ratio of household debt to disposable income would expand the housing bubble — with inevitable long-term consequences.

Housing Finances

While debt expansion is not in the country’s interests, neither is debt contraction (with growth below zero), which would risk a deflationary spiral. The RBA needs to maintain debt growth below the nominal growth rate in GDP — forecast at 4.0% for 2012-13 and 5.5% for 2013-2014 according to MYEFO — to gradually restore household debt/income ratios to respectable levels.

Credit Growth by Sector

If the RBA’s hands are tied, similar restraint has to be applied to fiscal policy. First home buyer incentives would also re-ignite debt growth. The focus may have to shift to state and local government in order to accelerate land release and reduce other impediments — both financial and regulatory — to new home development. Lowering residential property development costs while increasing competition would encourage developers to cut prices to attract more buyers into the market. While this would still increase demand for new home finance, lower prices would cool speculative demand fueled by low interest rates.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 25, 2012

We should go further unbundling banks | Andy Haldane | Bank of England

Andrew Haldane, BOE Director of Financial Stability, addresses the too-big-to-fail problem in a recent article and makes the point that reducing complexity would increase investor trust in the banking system and improve liquidity.

…….Today, the Volcker proposals in the US, the Vickers proposals in the UK and the Liikanen proposals in Europe envisage a similar unbundling of banking portfolios. Despite the alarm some have expressed, if implemented faithfully and simply such structural solutions ought to help solve the too-complex-to-price problem, to say nothing of too-big-to-fail. Alongside efforts to strengthen macro and micro-prudential regulation, these initiatives would help mobilise bank funding and lending, just when it is most needed for the economy.

We should go further unbundling banks | Andy Haldane | Bank of England (pdf).

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 24, 2012

'The Chicago Plan' criticism by Marshall Auerback

Marshall Auerback wrote a short piece criticizing the recent IMF study of the “Chicago Plan” first put forward by professors Henry Simons and Irving Fisher in 1936.

“Now there are some good things about a 100% reserve backed banking system. To the extent that we require all institutions to hold liquid reserves of equal value to their deposits then the fear of a bank run is eliminated.

But you would have massive credit constraints and, in the absence of a countervailing fiscal policy that promoted more job growth and higher incomes, there would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces.”

What he seems to miss is that 100% reserves would be required against demand deposits (checking accounts) and not against savings or time deposits. All that an efficient capitalist system needs is financial intermediaries who can channel savings into credit. It is not essential for them to have the ability to create ‘new money’.

“Note that the current practice is that loans create deposits. Clearly, under a 100-percent reserve system, all credit granting institutions would have to acquire the funds in advance of their lending.”

That is true. And requiring 100% reserves against demand deposits would restrict banks ability to make loans without holding reciprocal savings/time deposits or share capital and reserves. In effect they would be prevented from creating new money by making loans where they don’t have deposits. That is the whole purpose of the proposal: to prevent rapid credit expansion by banks.

“The truth is that the debt explosion that has brought the World economy to its knees was not the fault of private sector credit creation per se.”

Really? What else but private sector credit fueled the housing bubble? The debt explosion was encouraged by lax regulation but the financial sector is far from blameless for its actions.

via ‘The Chicago Plan’ does not deserve to be revisited. – Macrobits by Marshall Auerback.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 23, 2012

Financial ecosystems can be vulnerable too – FT.com

By Robert May

[Andy Haldane, Financial Stability Director of the Bank of England] argues that complexity may obscure more than it illuminates. He illustrates this by comparing predictions about the chances of failure for a sample of 100 global banks in 2006, based on simple leverage ratios (assets/equity) with the corresponding complex, Basel III-style risk-weighted one. The simple metric wins decisively.

via Financial ecosystems can be vulnerable too – FT.com.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.