From page 2 of the Bank of England's Systemic Risk Survey 2013 H1:
There are three new entrants to the top seven risks: the risk of property price falls (cited by 25% of respondents, up 11 percentage points), operational risk (up 10 percentage points to 24%), where 'cyber' security was most frequently mentioned, and risks surrounding the low interest rate environment (the fastest growing risk, up 16 percentage points to 24%).
Participants' perceptions of an increased risk of property price falls (in particular residential property price falls) could be consistent with views of prices becoming overinflated or about to become overinflated. Responses in the low interest rate category focused on the risk that artificially low interest rates are creating distortions in asset allocation, potentially leading to overinflated risky asset prices.
The complete and utter po-faced state of denial here is staggering.
It is the self same Bank of England which is pushing down interest rates with the sole aim of driving up asset prices (as distinct from their values), which for the man in the street means land prices i.e. a house price bubble.
Some older savers are rightfully unhappy with miserably low interest rates and annuity rates, but happily, the Bank of England has blinded or bribed a larger majority with the Fool's Gold of a house price bubble. And if ever their lovely bubble looks in danger of popping, well, there's only one thing for it isn't there? Reduce interest rates even further in the vague hope that they can fob off the priced out generation by telling them at least interest rates are low and there's always the Help To Sell scheme to help them onto the ladder etc.
Under Wadsworth's Square Law of Nequity, it is overall far, far cheaper to allow house prices to fall and to write down individual loans to the new lower value of the homes on which they are secured (so that nobody is stuck in nequity for years) than it is to try and keep a house price bubble inflated. The former is a knowable and affordable sum of money and this solves the problem. The latter is a huge and unknowable sum of money that merely results in larger costs in future.
But for some reason, they can't and won't contemplate that.
Tuesday 18 June 2013
"Key risks to the UK financial system"
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19 comments:
"But for some reason, they can't and won't contemplate that."
Politics, pure politics: the former guarantees failure at the next general election, the latter gives them a fighting chance of fooling enough people to get back in. If you were a helpless power-junkie, what would you do?
Similarly with the BoE: they do what they do, because that's what they've been told to do and they say what they say because that's the truth, more or less and anyway, who, apart from you, reads that stuff.
B: "If you were a helpless power-junkie, what would you do?"
I'd scrap all wasteful got spending and replace the entire tax/welfare system with LVT/CI, whether I get chucked out at the next election is of no interest or relevance. As Powell said "All political careers end in failure".
As to BoE, clearly they are just part of the whole political-financial bloc which runs this country.
got = govt.
QE is sometimes known as OMT (“Outright Monetary Transactions”). However the latter is a terminological inexactitude: OMT actually stands for “Open Mouth Transactions”. Will everyone please use the correct terminology in future?
RM, for all its faults, QE is not a straight bung.
All it boils down to is swapping long term, fixed rate govt debt into shorter term floating rate govt debt.
Total govt debts do NOT (necessarily) increase as a result of QE.
Mw re your last response, the phrase 'monetising debt' has me worried. Clearly pound notes are 'debt', (...I promise to pay the bearer on demand..) as are Gilts. So how exactly is QE monetising debt? And if it is then it must be inflationary.
Mw re your last response, the phrase 'monetising debt' has me worried. Clearly pound notes are 'debt', (...I promise to pay the bearer on demand..) as are Gilts. So how exactly is QE monetising debt? And if it is then it must be inflationary.
L, this notion about debt being "monetized" is complete and utter nonsense, as ALL debts are "money" anyway.
A government long term bond is interchangeable with a government short term bill, which is interchangeable with an entitlement to a future payment (like a tax refund or an invoice for goods and services delivered to the government), which is interchangeable with bank notes and coins.
The total volume of deficits and debts are something to worry about, the maturity thereof is of secondary importance.
MW. It might be handy then, if 'money' wasn't a state monopoly?
I do not see asset price fluctuations as ' risk'. As long as they are not driven by state interventions. Such fluctuations are simply markets seeking the right price, and in many ways are opportunities. The 'risks' quoted are all the result of government failure.
" It might be handy then, if 'money' wasn't a state monopoly?"
Didn't used to be. All banks used to issue their own banknotes (as the word implies) and in Scotland, some of them still do. In fact, there is little difference between a cheque made out to "cash" and money (apart from the uncertainity as to the solvency of the issuer of the former.
B. Have you read that book about the success of private money in England between about 1750 and 1820? I am on hols and cannot recall the authors name, apologies.
Lola: would that be "Free Banking in Britain: Theory, Experience and Debate 1800-1845" by Lawrence H. White? Which was about free banking in Scotland btw.
L, and of course "money" is not a state monopoly, never has been, never will be (as Bayard hints).
Anybody can print all the "money" he likes by simply running up debts. You can scribble an IOU, you can take on a mortgage, max out on your credit card.
That's all fresh "money" out of nowhere. And clearly, for every financial liability there is a corresponding financial asset. You hold an IOU from somebody, the bank has a mortgage asset, the credit card company has a receivable.
It just so happens we all measure money in the same units, i.e. GBP in this country, EUR in the Euro-zone etc.
But if you wanted, you could scribble an IOU denominated in Thai Baht, or write "I promise to water your plants while you are on holiday" or assume any other obligation. That's still "money".
L, no but I did see a picture of a banknote issued by my branch of Nat West, in the days when it (the building) was a bank called "Stuckey's Bank". The building used to have a splendid Victorian interior, all mahogany and iron, until the Nat West vandalised, sorry modernised it in the '70's.
In case anyone's interested, here is an example:
http://i.dailymail.co.uk/i/pix/2012/09/04/article-2198035-14D37D56000005DC-647_634x336.jpg
I don't think a promise to water your plants is money unless I can onward exchange that promise to someone else to mend my bicycle. Money seems to have to have universal acceptability. Which the promise to water your plants hasn't. Certainly a simple IOU expressed in something of universally acceptable value would be money. And wasn't that what discount houses were for?
L, you could get someone else to water your plants and Mark could water the plants of the man who would then mend your bicycle, assuming, of course that the bicycle repair man was going on holiday in the near future and had plants that needed water. Despite appearances, as a currency, it's not very liquid.
PS, I posted a picture of the banknote, but it seems to have been removed as spam.
L, no, my promise to water your plants is not very "fungible" because to encash it, you'd need to find somebody else in the vicinity whose plants I am willing to water instead (as Bayard explains), and that person would have to trust me to actually water his plants etc.
Thus to save hassle, we express things in common units of measurement called "money".
But let's assume I have given you an IOU for £100 and I am a professional plant waterer, that's what I do for a living, and I charge £10 per visit. In that case, to all intents and purposes, I have pledged you ten hours of my working time.
If you boil it down, we are and always will be a barter economy, we just choose to express things in common units - hence and why the right wingers talk about "tax freedom day", you work X months of the year for the government and Y months of the year for yourself.
(what they overlook is that the government in turn gives everybody X - 1 months' worth of other people's labour).
B, I have unspammed.
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