While quantitative easing has received much press, qualitative easing has been neglected. Qualitative easing consists of policies that deteriorate the average quality of the assets that a central bank holds. This can occur both with and without quantitative easing.
By selling high quality assets (i.e., foreign exchange, government bonds, or gold) to buy low quality assets (i.e., asset backed securities, or granting loans to a tumbling banking system), there may be qualitative easing without an increase of the central bank´s balance sheet (i.e., without quantitative easing). This was the strategy of the Fed before Lehman Brothers collapsed in September 2008. When the purchase of low quality assets is not sterilised, there is quantitative and qualitative easing at the same time. This has been the strategy of the ECB during the financial crisis and the Fed after Lehman.
Why is the average quality of the assets of a central bank important? There are four main reasons.
As you read this, the Chinese government is doing an extraordinary thing… something nearly unheard of in the modern world.
It is encouraging citizens to put at least 5% of their savings into precious metals.
The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year’s meltdown in the stock market, people believe it. After all, Chinese citizens don’t receive government retirement money… and they don’t have company pension plans like people in many other countries do.
This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it’s cheaper per ounce).
Through tomorrow and Saturday, ESCP Europe and The Cobden Centre are hosting a Colloquium on Sound Money. The Colloquium is to be directed by Founding Fellow Dr Anthony J Evans and chaired by Corporate Affairs Director, Steve Baker.
A team of academics, banking professionals, entrepreneurs and politicians will meet to discuss:
What is Money?
The Interest Rate and Intertemporal Coordination
The Gold Standard and the Great Depression
Deflation and Prosperity
Free Banking vs 100% Reserves
Central Banking
Proposals for Reform
The authors whose work will be under consideration are Carl Menger, Joseph Salerno, Frank Shostak, Ludwig von Mises, Friedrich A Hayek, Joan and Richard James Sweeney, Murray Rothbard, Lawrence Reed, Lawrence H White, George Selgin, Vera Smith, Tim Congdon, Richard Salsman and Jesús Huerta de Soto.
Is an Austrian style boom followed by a bust just about to happen in China? See this video sent to us by Catlin Long, MD of Morgan Stanley and make up your mind yourself!
Today’s financial crisis – and the resulting damage to the UK’s broader economy – is of monumental historic importance. The future of the free world may not be at stake as it was in Churchill’s day. What is in jeopardy, though, is the prosperity of the British people for at least the next 15 to 20 years. In the balance, is nothing less than this country’s place among the world’s top-ranking nations.
The fall-out from “sub-prime” clearly can’t be compared to the horrors of the Second World War. But readers should be in no doubt that current events and our leaders’ reaction to them will affect Britain’s future path more than any episode since then.
Via Reclogging the US credit system, Caitlin Long warns us that there is another impending credit fuelled bubble that is due to be created to accommodate the commercial property market renewals in the next few years. Either a new bubble will emerge as this large level of re-issuance is financed by new bank credit creation, or there will be another bust of epic proportions should this not happen.
Either-way, if it gets funded, this will cause more mis-allocation of capital to this and associated sectors postponing the recovery. If it does not get funded, then we could be back with another Lehman style “event” with all its terrible consequences.
The US financial system faces a daunting challenge in the next five years: $4,200bn of debt that is largely of speculative quality comes due in the commercial real estate and non-investment grade debt markets. At best, this wall of maturing US debt will strain credit capacity. At worst, it will prolong the credit crunch and restrain economic growth.
The next two years are crucial, since delay by banks and other lenders in recognising losses on commercial real estate loans could lead to a pile-up of debt maturities in the credit system in 2012 as this is when loans to highly leveraged corporate borrowers begin to mature en masse.
Such a 2012 reclogging of the credit system, if it happens, could force businesses to liquidate bad investments or pressure the Fed to re-open the monetary and credit spigots, potentially complicating the Fed’s exit from its existing stimulus programs.
The biggest risk to refinancing capacity for this wall of maturing debt, though, is the Fed raising interest rates to control inflationary pressures and dollar depreciation, if necessary. Higher interest rates would preclude marginal borrowers from qualifying for refinancing, regardless of whether credit capacity exists.
Cobden Centre Advisory Board member and Chief Executive of Tyler Capital, James Tyler, sets out the case for 100% reserve banking.
Background
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?
The Problem
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
‘D’ has a claim to £94
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.
WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman’s sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation’s premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
Institut économique Molinari appears in the Wall Street Journal. IEM is run by Cobden Centre Senior Fellow Dr. Cécile Philippe.
An antitrust backlash is hitting Google, after it supported the European Commission’s action against Microsoft. Italian authorities launched an investigation into Google in September and the search giant now finds itself the target of European antitrust policy, which has become a form of Russian roulette, with a price to be paid by innovative companies and, down the road, by consumers.
This is not happening by accident. Based on a static and unrealistic view of competition, European competition rules strike by definition at companies that, by dint of their efforts to innovate, succeed in capturing substantial market shares. It is thus hardly a surprise to see the high-tech sector in the antitrust spotlight.
