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Showing posts from September, 2013

The illogical pricing of property

In my latest post at Pieria I discuss the way in which treating houses as investments creates unsustainable rises in house prices, and outline two possible futures:
"The dream of property ownership has been fostered by Government in the UK for a very long time. Perhaps not as long as in the US, where FDR's New Deal in the 1930s promoted the goal of every American owning their own home: but certainly for over 50 years. Owning a house has become the principal icon of membership of the middle class.  "Yet owning a house is becoming ever more difficult as house price rises outstrip wages. In the US, this tendency was interrupted by the 2007/8 crash, though house prices are now rising again. But in the UK, house prices have risen to the point where in much of the country only the very well-paid can afford property on a single income, and in parts of London and the South East even well-paid couples struggle to afford a family home...."
Read more here.

The FLS early warning system

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The Bank of England has produced usage data for the Funding for Lending Scheme (FLS). And very interesting it is too. Here is the full list of lenders that have signed up for the scheme, the amounts they have taken and their net lending position:

FLS usage and lending data1


The Excel spreadsheet behind this gives information on exactly when the FLS funding was drawn - which is important, given the fact that funding costs generally have reduced considerably since FLS was introduced:




















(chart taken from Bank of England's Inflation Report May 2013, p.12)

There is much less incentive now for banks to take FLS funding than there was in 2012 when market funding costs were very high.

I was therefore particularly interested to note those lenders that are both contracting net lending and tapping the FLS for cheap funding. Here they are:

Bank of Ireland
Co-Operative Bank
RBS
Santander UK
West Bromwich Building Society

Also of interest are the Manchester Building Society and Clydesdale Bank, wh…

The ignorance of markets

In my latest post at Pieria, I complain about trading strategists who don't do their homework:

"There is considerable debate about whether markets are efficient, and whether investors are rational. To me it is self-evident that investors at times are anything but rational and markets at times are anything but efficient, but I will leave the economists to argue about that. If anyone really wants to know more about the limitations of the efficient markets hypothesis, read this post by Euronomist. And for more on whether or not human beings really are rational utility maximisers - as is implied by the rational expectations hypothesis - read this post by John Aziz.

When it comes to monetary policy, though, all too often we are not dealing with inefficiency or irrationalilty, but simple ignorance....."

The rest of the post can be found here.

Stand By Your Bank

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In my post on the "ethical" Co-Op, I argued that the Co-Op Group management is treating subordinated debt holders in the Co-Op Bank shabbily. Various people questioned this on the grounds that as the Co-Op Bank is a public limited company, the Co-Op Group's investment in its bank is limited to its stake and it is not obliged to provide additional capital: it could simply "walk away" and allow the bank to fail. This comment challenged me to explain why this is not the case:
The thing I still don't understand is why you think the Group can't walk away from the bank if it is a subsidiary Ltd company, as seems the case. Is there some legal entanglement beyond the usual corporate pyramidal structure? What is the mechanism through which you think the banks' liabilities can "move up" the limited liability barrier? This is not a question of ethics here, just basic corporate law.Let's imagine the group withdraws the current offer and stops contr…

Psychological games and financial crises

At Pieria, the financial crisis remembered.....

Five years on from the collapse of Lehman, I explain the psychological game-playing that caused the 2007/8 financial crisis - and that still continues today.
"One of the interesting features of financial and economic crises is their suddenness. It's as if the world is happily strolling along a well-trodden path on which someone has built a man-trap. We don't see the crash coming and we walk straight into it. Yet when we look back on what happened, we see all too clearly that the signs were obvious - we just didn't notice them. "Economists have made numerous attempts to explain this apparent blindness without a great deal of success. The fact is that financial crises do not come out of the blue, and some people do see them coming. The world is warned about its folly, but chooses to ignore. Those who shout "WATCH OUT - THERE IS DANGER AHEAD" and try to suggest alternative courses of action are dismissed as C…

The plausible executive and the ruined bank

My latest post at Pieria looks at the mess the Co-Op Bank has got itself into. The former CEO, Neville Richardson, says it's not his fault. But if it isn't his fault, whose fault is it? And just how bad is this mess, anyway?

"The Co-Op Bank's former CEO, Neville Richardson, gave evidence to the Treasury Select Committee on the circumstances surrounding the failure of the Verde deal. In the course of that evidence, he made the following claims about the Co-Op Bank's finances:
the Britannia building society, which the Co-Op took over in 2009 (and of which he was previously the CEO) was not the primary source of the toxic assets that have blown a large hole in the Co-Op Bank's capital;When he left the Co-Op Bank in mid-2011 it was profitable, well-managed and there were no signs of credit problems in its asset base.I admit I found this somewhat hard to swallow. But since he makes these claims on the basis of figures derived from the Co-Op Bank's report and acco…

Savings, investments and a dose of realism

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On the Save Our Savers website today is this article by John Phelan. It explains why savings are essential to the economy and why - in his view - central bank and government policies that discourage savings are misguided. And why QE is no substitute for "proper" savings.

I've heard these arguments a lot recently and they always seem to stem from the idea that there is only one sort of "savings", namely retail deposits in banks and building societies. And indeed, the usual definition of "savings" does mean cash, in its various forms, so bank deposits are "savings" whereas pensions are not - they are "investments". I'm not sure people necessarily make such a clear distinction in everyday parlance. But Phelan's argument is an economic one. How does economics define savings?

In economics, "saving" is the residual of income left after consumption. If S = saving, Y = income and C = consumption, S = Y - C. Note that S is…