Steve Keen: Australian mortgage debt levels are “outrageous”

Steve Keen has a number of detractors who knock him for his incorrect forecast of collapse of the Australian housing bubble. But he was wrong for the right reasons…. the Australian financial system, based on highly-levered mortgages, is a house of cards. It was only rescued post-GFC by massive stimulus in China, resulting in a mini-boom in the Australian Resources industry.

Steve is at the cutting edge of economic theory. He and Richard Koo (The Holy Grail of Macroecomomics) were at the forefront of identifying the role that debt plays in the Aggregate Demand equation. We should take heed of his warnings.

“Our models predicted it [the GFC] couldn’t happen. It did happen. We therefore shouldn’t trust our models.”

“…What drives house prices is acceleration in mortgage debt…..Australians avoided collapse of the bubble by continuing to lend but mortgage debt is now 1.1 times GDP which is outrageous.”

Banks try scare tactics to avoid calls for more capital

ANZ chief executive Mike Smith is the latest banker to warn that the push to increase bank capital ratios will reduce access to bank finance. The AFR reports Smith as saying:

It is not just about banks, it is about the real economy – about corporations, business and individuals… It is one thing for a bank to ­complain about regulation but it is another thing for a corporation to say we are not getting finance because of this regulation that is being imposed on the banks.

Methinks bank resistance to increased capital requirements is more about protecting bonuses than about protecting shareholders or the broad economy. Shareholders would benefit from lower funding costs and improved stock ratings associated with a stronger balance sheet, while Bank of England’s Andrew Bailey had this to say about the impact of stronger capital ratios on bank lending:

I do however accept that there remains a perception in some quarters that higher capital standards are bad for lending and thus for a sustained economic recovery…… Looking at the broader picture, the post-crisis adjustment of the capital adequacy standard is a welcome and necessary correction of the excessively lax underwriting and pricing of risk which caused the build up of fragility in the banking system and led to the crisis. I do not however accept the view that raising capital standards damages lending. There are few, if any, banks that have been weakened as a result of raising capital.

Analysis by the Bank for International Settlements indicates that in the post crisis period banks with higher capital ratios have experienced higher asset and loan growth. Other work by the BIS also shows a positive relationship between bank capitalisation and lending growth, and that the impact of higher capital levels on lending may be especially significant during a stress period. IMF analysis indicates that banks with stronger core capital are less likely to reduce certain types of lending when impacted by an adverse funding shock. And our own analysis indicates that banks with larger capital buffers tend to reduce lending less when faced with an increase in capital requirements. These banks are less likely to cut lending aggressively in response to a shock. These empirical results are intuitive and accord with our supervisory experience, namely that a weakly capitalised bank is not in a position to expand its lending. Higher quality capital and larger capital buffers are critical to bank resilience – delivering a more stable system both through lower sensitivity of lending behaviour to shocks and reducing the probability of failure and with it the risk of dramatic shifts in lending behaviour.

The BOE and BIS tell us that higher capital ratios will improve bank lending, yet Mr Smith is trying to scare regulators with threats that it will have the opposite effect.

Read more at Andrew Bailey: The capital adequacy of banks – today’s issues and what we have learned from the past | BIS.

And at ANZ CEO Mike Smith Rebuffs Murray Inquiry Call For More Bank Capital | Business Insider.

BOE’s Carney Tells Bankers to Clean Up Their Acts | Real Time Economics – WSJ

By Jason Douglas

Bank of England Gov. Mark Carney said Tuesday the misdeeds of the financial sector risk undermining public support for free markets and called on bankers to radically improve their behavior, a sign of simmering frustration in policy circles over a string of misdemeanors.

In a forthright speech, Mr. Carney said recent scandals in currency and commodity markets highlight “a malaise in corners of finance that must be remedied,” saying such “corruption” has hurt trust in modern capitalism, according to the text of his speech.

His remarks echoed criticism of the financial sector earlier Tuesday by International Monetary Fund Managing Director Christine Lagarde, who accused banks of delaying much-needed reforms to the financial system, which were agreed to in the wake of the crisis that tipped the world into recession in 2009…..

Read more at Bank of England’s Carney Tells Bankers to Clean Up Their Acts – Real Time Economics – WSJ.

BBC News – High-frequency trading and the $440m mistake

……There are two rather more predatory strategies. One is called algo-sniffing. Here, a super-fast computer tries to find other computers going about their everyday business of buying or selling shares, and figures out what they’re going to do and when.

The algo-sniffer can then get ahead of the game and exploit the slower computer. And of course you could have algo-sniffer-sniffers and algo-sniffer-sniffer-sniffers in a high-frequency arms race. No wonder speed can be so important.

And finally, a particular sub-category of the algo-sniffer is the spoofer, which deliberately makes fake offers designed to lure other computers to show their hands, then cancels the offers. Spoofing might be illegal, or at least against the rules of stock exchanges, but it’s hard to prove that it’s going on.

Andrew Haldane, executive director for financial stability at the Bank of England:

“What we have out there now is this complex array of multiple mutating interacting machines, algorithms. It’s constantly developing and travelling at ever higher velocities. And it’s just difficult to know what will pop out next. And that’s not an accident waiting to happen, that’s an accident that has been happening with increasing frequency over the last few years.”

via BBC News – High-frequency trading and the $440m mistake.

King Says BOE Ready to Act –

[BOE Governor Mervyn King] kept the door open for more stimulus in his speech Tuesday. “With inflation falling back and wage growth subdued, there is scope for interest rates to remain low and, if necessary, for further asset purchases, to prevent inflation falling below the 2% target,” he said. The annual rate of inflation in the U.K. dipped to 4.2% in December from 4.8% a month earlier, and is expected to slow sharply this year.

via King Says BOE Ready to Act –

Bank of England Expands Quantitative Easing –

The Bank of England said Thursday it will buy £75 billion of government bonds in a fresh bout of quantitative easing aimed at stimulating the U.K.’s stagnant economy.

….The decision sent sterling sharply lower. The pound plummeted to a 15-month low against the dollar, trading at $1.5286 from $1.5459 before the decision. Prices for government bonds surged.

via Bank of England Expands Quantitative Easing –