Via FT.com / US / Economy & Fed – Fed signals pullback in liquidity supports, we learn:
The Federal Reserve on Wednesday upgraded its assessment of the US economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010.
Stocks eased slightly after the Fed statement, while the yield curve in the bond market steepened.
Which brings us on to Roger Koppl’s Big Players and the Economic Theory of Expectations.
I am indebted to Cobden Centre supporter Bruno Prior for introducing me to Koppl’s work which extends the tradition of Ludwig von Mises, Friedrich Hayek and others, unusually, applying empirical methods to demonstrate the application of the theory.
Koppl demonstrates, with extensive reference to other scholars, that investment and all other economic actions depend on “subjective” expectations. He then presents a theory of expectations which assumes people interpret their situations in unpredictable ways. This theory includes a theory of “Big Players”:
Big Players are privileged actors who disrupt markets. A Big Player has three defining characteristics. He is big in the sense that his actions influence the market under study. He is insensitive to the discipline of profit and loss. He is arbitrary in the sense that his actions depend on discretion rather than any set of rules. Big Players have power and use it.
We learn that Big Players reduce the reliability of expectations, thereby disrupting markets. They encourage herding and produce perverse effects on entrepreneurship: traders must pay attention to the Big Player and not the fundamentals.
And so we find today, for example, the markets moving in response to the Fed not the realities of the economy…
Via Labour’s dishonesty is leading us down the road to sovereign default, Liam Halligan launches a scathing attack on Alistair Darling, Gordon Brown and British political class:
Over the past 10 years, Labour has turned a budget surplus into a deficit equal to 13pc of GDP – the biggest in our peacetime history.
Government borrowing is at its highest since the Second World War and almost twice the previous post-war peak. And yet, and yet … when he stood up to deliver the PBR on Wednesday, the Chancellor, Alistair Darling, managed to make a ghastly situation even worse.
Cobden Centre Advisory Board member and Chief Executive of Tyler Capital, James Tyler, sets out the case for 100% reserve banking.
In October 2008 the Federal Reserve briefed a secret congressional committee that the US economy had, at one stage, been only a few hours away from a total meltdown in the financial system.
How did this come to pass, and how can we prevent it again?
Fractional Reserve Banking (FRB) is an inherently unstable complex system.
Each and every bubble and crisis has some kind of link to FRB, going back thousands of years.
Even where financial crises are caused by natural disasters (the San Francisco earthquake of 1906 being a prime example), the financial crisis only followed because banks did not have enough reserves to pay out worried depositors – due to fractional reserves.
In a nutshell, depositors wanted what they thought was their property back, only to find it did not exist.
Over 70% of people in the UK believe that money placed in an instant access account remains their property. This is not the case.
Fractional Reserve Banking
- Person ‘A’ deposits £100 of cash into his instant-access bank account.
- At this point, he signs over property rights to the bank – the bank gives him a promise to return on demand
- The bank retains a small reserve (say £3), and lends out £97 to Person ‘B’
- Both ‘A’ and ‘B’ both have a claim to instant access on this money.
- In one move, the bank has turned £100 into £197 of useable money
- ‘B’ buys a Widget from WidgeCo for £97
- WidgeCo deposits the £97 with his bank ‘Z’.
- Bank ‘Z’ now lends out around £94 to person ‘C’ keeping just under £3 as a ‘reserve’
- Person ‘C’ borrows to buy computer, and pays £94 to ‘D’
- Money supply has started its process of mushrooming:
- ‘A’ Has the right to £100
- ‘B’ has spent his claim to £97, and owns a widget
- WidgeCo has a claim to £97
- ‘C’ Has spent £94 and owns a computer
- This process continues until there is no more money to lend
- If any one person with a claim to their money exercises their right, the inverse pyramid collapses.
- If person ‘A’ claims any more than £3 of his money, the inverse pyramid collapses.
In 2007/8 this money pyramid almost collapsed.
Continue reading “How to avoid future encounters with financial meltdown”
Via Now State takes over bankers’ contracts – Telegraph:
The new rules, which critics are likely to suggest amount to a State-enforced “incomes policy” for banks, will be contained in the Financial Services Bill to be announced in the Queen’s Speech.
The bill will give the Financial Services Authority (FSA) the power to cancel bankers’ contracts to prevent them receiving payments that it believes would cause instability in the financial system.
The FSA could stop bankers receiving bonuses that it believes are too high, or cancel remuneration packages that it thinks reward undue risk-taking.
It is hard to see this proposal as anything other than political posturing given the forthcoming election. Are we to establish a new quango/ regulator “Ofpay”? What will be the cost of that? What access will individual bankers be allowed to their assessors? How can the state decide which bankers have performed socially-useful functions and made positive contributions to the long term good of the bank concerned? Working in a structured finance role in a dealing room environment is like being an MEP in the EU. You have to be part of a team. Management will only negotiate with voting blocs! One member of the team has to play the internal politics as in many other businesses, but this is of course an unproductive waste of time as far as shareholders are concerned. How much more unproductive time will be spent trotting off to Ofpay to explain your achievements?
The root of the problem is the unreliable nature of banks’ reported profits. If the p&l was a sound number, surely the state could rely on employers to reward? This news affirms my fear that the Government knows that the front-ending of prospective profits from derivatives trades and treating them as today’s “profit”, along with similar bank specific accounting wheezes, produce unreliable reported accounts. That is the mischief the legislators should be focussing on.
Get that right and wages will look after themselves.
UK Household Savings Ratio (click to enlarge)
Equity Strategist Ewen Stewart makes the case that the national debt will within 5 years be over £150,000 per family of 4 with debt repayments of twice the present defence budget, up from £31 billion in 2008/9 to £70 billion in 2013/14. He explains the root causes of our difficulties and indicates a route to recovery.
It’s all over. What a fuss about nothing. The economy will soon be growing again and, look, the FTSE100 is up almost 50% since the March low. Even house prices, according to the Halifax, have risen 6 months in a row. The doom mongers were wrong. Central Banks and Keynesian public spending programmes, together with QE, have worked. Brown indeed has saved the world!
Well that would be one interpretation and a very short sighted one too, for this recovery shows all the hallmarks of a drug addict who claims to be going straight injecting a further mighty dose of the substance that has caused such decay in the first place to prolong the party.
The problem is that the underlying fault lines in the UK economy remain and, thanks to the Government’s response, are even more pronounced.
The underlying problem is, in my view, an addiction to debt, a banking system which is over-leveraged, and now government finances that are out of control. This country that has been living considerably beyond its means for a very long time. Artificial efforts to prop this up, through printing money or inappropriately low interest rates, at best are a short term delaying tactic and at worst risk stoking a loss of confidence and ultimately inflation.
It is my central conjecture that much of the economic growth over the last decade was less the result of genuine private wealth creation but more the result of a number of unique factors which were both unsustainable in their nature and damaging to long term growth. If this view is correct the scale of the over-leverage and the action required to alleviate the problem become even more pronounced.
Continue reading “Happy days are here again? Another view from the City”
Gordon Kerr explains the futility of the Government’s planned asset fire sale.
The Government plans “a fire sale of assets worth £16 billion” to raise funds for our national coffers. All of the assets mooted -– the Tote, the Dartford Crossing, the Channel Tunnel rail link –- generate cash. In normal market conditions, they would be highly valued by the private sector. But these are not normal market conditions and, even if they were, the sale would be absurd.
Since these assets all generate cash, there is no net gain to the public purse from selling them. When their cash yield is greater than the interest cost of Government debt, the public purse is better off holding them than selling them to pay off debt.
More importantly, the sales are likely to be only partial. Recent experience has shown that the Government cannot bring itself to allow major infrastructure companies to fail. If Dartford Crossing plc teetered on the brink of collapse, the government would almost certainly support it but that which the private sector produces better than the public sector should be in wholly private hands, free of all taxpayer-backed guarantees.
Lenders to these “privatised” businesses would benefit from at least an implicit government guarantee. The government will be selling the upside of investing in the assets to the private sector whilst underwriting the bulk of the risk.
This amounts to selling assets to oneself, while giving away free money.
Via CentreRight: We’re all fiscal conservatives now?:
There is an enormous weight of expectation riding on George Osborne’s speech on Tuesday. But in the meantime, it looks as if voters – even Labour ones according to our poll – have not only accepted that public spending at the level we have seen cannot continue, but don’t even want it to.
Our Founder and Chairman, Toby Baxendale has commented there:
What we need is not just a debate about what services should be cut back, but actually about how we should fund services i.e. alternatives to the blanket taxpayer funding that we have become accustomed to since the War.
Here is one suggestion I offer to the readers of Conservative Home; how about the privatisation of the entire welfare budget to Friendly Societies?