tag:blogger.com,1999:blog-8764541874043694159.post4973292515650902759..comments2024-03-28T12:23:39.665+00:00Comments on Coppola Comment: Carney and the death of unreasonable expectationsFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger109125tag:blogger.com,1999:blog-8764541874043694159.post-62929884898332155692013-10-01T11:20:39.927+01:002013-10-01T11:20:39.927+01:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-17139959779237511192013-10-01T09:33:39.253+01:002013-10-01T09:33:39.253+01:00I don't "fail to understand" anythin...I don't "fail to understand" anything. <br /><br />"Utterly bizarre and disoriented thinking on a grand scale".....simply because I don't agree with you. You have no idea how to conduct a civilised rational debate, have you? I'm not accepting any more rudeness from you. You haven't even had the courtesy to identify yourself. <br /><br />I will not post any more comments from you. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-29195082734751000182013-10-01T09:21:33.740+01:002013-10-01T09:21:33.740+01:00Frances
"we've intentionally blown the b...Frances<br /><br />"we've intentionally blown the biggest government bond bubble in history".....Andy Haldane, Financial Stability and the Bank of England.<br /><br />Last time I looked, government bonds affect other credit prices and the cost of capital.<br /><br />Delighted you share in the delights of vast government bond and credit bubbles which will be exacerbated in coming years through ever cheaper money because of your "economic need"......<br /><br />You simply fail to understand that making money free encourages excess indebtedness...in ever greater cycles of asset price inflation and credit accumulation...NOTHING IS SOLVED!!!<br /><br />Utterly bizarre and disorientated thinking on a grand scale.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-54481320228480877422013-10-01T00:00:32.150+01:002013-10-01T00:00:32.150+01:00I said little influence, not no influence. But as ...I said little influence, not no influence. But as current rates are consistent with economic need and international market rates, I see no justification whatsoever for raising rates or selling gilts.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-42098504151574028132013-09-30T23:28:03.368+01:002013-09-30T23:28:03.368+01:00But you seem to think the BoE has no influence on ...But you seem to think the BoE has no influence on the price of money and the cost of capital, so why not?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-49739244359986984902013-09-30T18:30:02.106+01:002013-09-30T18:30:02.106+01:00I see absolutely no reason for it to do so. I see absolutely no reason for it to do so. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-7427925008464858282013-09-30T18:00:52.946+01:002013-09-30T18:00:52.946+01:00I assume you agree with the Bank of England increa...I assume you agree with the Bank of England increasing bank rate and selling its gilts accumulated under QE then?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-31182193730604640372013-09-30T12:20:58.188+01:002013-09-30T12:20:58.188+01:00Utterly bizarre!Utterly bizarre!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-34515364464481781242013-09-30T10:36:25.806+01:002013-09-30T10:36:25.806+01:00I think UK central bank intervention has very litt...I think UK central bank intervention has very little effect on the price of money and the cost of capital. US central bank intervention has far more. But the Fed Funds rate is set by the market, not by the Fed, and the Fed has had to work hard to keep short-term rates above zero - that's why it is paying interest on excess reserves. The simple fact is that the natural rate of interest on capital at the moment is very low because there is little demand for it. <br /><br />I have written extensively about QE and its effects, and I am not going to repeat that work here. I refer you to my posts on the subject. However, I must point out that QE does not create capital - it merely exchanges one form of capital for another. QE increases base money (bank reserves) but removes an equivalent amount of other safe assets from circulation.<br /><br />I'm not going to discuss further the question of low rates. Rates are low because there is little demand for capital. That as far as I am concerned is the situation.<br /><br />"At the same time they lobby against change and deny the full range of support from the hard working struggling families you suggest that you support". I do not work for the financial industry, and I have been extremely critical of the behaviour of senior management in many banks and financial institutions. Once again, you don't seem to have read my other work. Can I suggest you do so before you make any more wild accusations about my motives and my beliefs? Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-4197923481046992432013-09-30T09:11:28.066+01:002013-09-30T09:11:28.066+01:00Frances,
So in essence you feel that government i...Frances,<br /><br />So in essence you feel that government intervention has had no effect on the price of money and the cost of capital? Has QE had no effect? If so much capital around, why print so much more?<br /><br />"At the margin, a few basis points on the cost of capital can make the difference between a profitable and unprofitable investment". If this is the case, why do you wish for low rates to lull people into a false sense of the cost of capital? This is why we had a crash in the first place and why capital gets misallocated to speculative uses.<br /><br />I could perhaps be more specific but I imagined you would have grasped that my description of sociopathic scroungers relates to the leadership of an industry that would ordinarily be dead on the floor following their actions (and that of central bankers) but have rather sought to boost their compensation, rather than the capital of their banks, despite their institutions still being insolvent. At the same time, they lobby against change and deny the full range of support from the hard working, struggling families you suggest that you support.<br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-53740740448094204992013-09-29T23:04:44.241+01:002013-09-29T23:04:44.241+01:00There are indeed excess savings, and worldwide int...There are indeed excess savings, and worldwide interest rates reflect this. Interest rates have been trending steadily downwards for the last thirty years. Believe it or not, the present yields on USTs, which as I'm sure you know are the closest approximation to the risk-free rate of interest, are "on trend" - they were slightly below trend in 2012 but have now bounced up. Gilts have done exactly the same, not surprisingly because gilt yields are largely set internationally. The current base rate is consistent with short gilt rates, just as the short end of the UST curve is consistent with the Fed Funds rate, and all of them are "on trend". Unless you can think of a good reason why the long-term interest rate trend should now reverse, current interest rates accurately reflect the global demand for capital and there is zero reason to raise them. <br /><br />Productive investment requires there to be 1) potentially profitable investment projects 2) finance available at rates that will enable positive returns on those projects. The supply of 1) is restricted, partly because of low economic demand in Western economies and partly due to other factors such as the growth of less capital-intensive service industries, and 2) is simply not happening for smaller companies due to a very damaged banking sector, as I explained. Your assertion that the cost of capital does not matter for productive investment may be your experience, but I have to say it is not mine. At the margin, a few basis points on the cost of capital can make the difference between a profitable and unprofitable investment. <br /><br />The reason why banks are not lending to SMEs is because SME lending, being riskier, requires more capital. FLS includes a capital concession, allowing banks to use Tier 2 capital buffers to support additional lending, but for banks that are still building up their capital levels - or, like the Co-Op, have serious capital shortages - even this is too much. The fact that FLS has mainly gone into mortgage lending is entirely because of damaged bank balance sheets. Banks are under regulatory pressure to reduce their balance sheet risks, and property lending, even for BtL, is simply less risky. <br /><br />I am no supporter of Government policy regarding the housing market, nor indeed of QE - as you would know if you had read my other work. But the current low base rate is supporting the economy as a whole, not specifically the housing market. And as I've pointed out elsewhere - and contrary to popular opinion - international funding rates were already falling by the time FLS was introduced and it is questionable how much effect on deposit rates it has really had. Fundamentally, savers are earning a negative return because demand for capital is low. If some savers are struggling because of that, the appropriate response is fiscal, not monetary. <br /><br />Low mortgage rates are disastrous for lenders. Banks cannot reduce their funding rates below zero, so mortgage rates at 2% or less is a serious margin squeeze. Mortgage rates have actually been rising since 2012 because lenders can't cope with the hit to net interest income: some lenders have cut their rates as a consequence of FLS, but a lot haven't and some have even raised them (most recently West Bromwich BS, which last week raised rates by 2% on its portfolio of mainly buy-to-let prime residential SVR mortgages). Low rates are also disastrous for pension funds. So yes, I can argue that the financial sector has suffered because of low rates, and it has nothing to do with compensation levels.<br /><br />I think you should refrain from using phrases like "sociopathic scrounger" about people who work in the financial sector. The financial sector performs a useful function, and most people who work in it are ordinary people doing ordinary jobs for ordinary wages. <br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-26415839874239201892013-09-29T21:56:52.165+01:002013-09-29T21:56:52.165+01:00Frances,
If there are excess savings, rates will ...Frances,<br /><br />If there are excess savings, rates will reflect this without need additional central bank & government intervention. <br /><br />"Productive" investment does not require free money - this helps speculators. Activity requiring negative rates is NOT productive.<br /><br />I have never come across a business that makes an investment decision for productive activity that depends on a couple of points in cost of capital. BUT I have come across plenty of speculators (corporate, financial, property and individual) who play on this vis a vis asset prices. This is one reason why mortgage lending occurs (for BtL) with the FLS scheme but not SME lending - it is less price sensitive.<br /><br />So we end up in a speculative, financialised, distorted economy where all our capital goes into 1.69% mortgages on unproductive assets all because people like you believe that savers should earn a negative return to help out.<br /><br />It does not help out, it distorts incentives and will lead to greater aggregate indebtedness as demonstrated both pre and post crisis.<br /><br />Helping out should be a fiscal response. Playing with money is nothing but an activity of scoundrels.<br /><br />I do not operate in the financial sector and would never dream of doing so as I do not regard myself as a sociopathic scrounger. I am not convinced you can argue that the financial sector has suffered at the hands of low rates, or is it the level of compensation you regard as inadequate?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-62643223633710231482013-09-29T18:49:58.487+01:002013-09-29T18:49:58.487+01:00I am not "patronising" you. I merely poi...I am not "patronising" you. I merely pointed out something that in your previous comments you had completely failed to mention.<br /><br />However, I would appreciate it if you would please refrain from patronising me, and from attributing to me moral beliefs that you do not know I hold. If you wish to criticise the substance of my argument, please do so from a rational standpoint with appropriate use of facts - as I have done. Phrases like "you have a frighteningly simplistic moral view of the world without understanding the consequences" do not constitute rational critique of my argument. <br /><br />You don't say what your "sector" is, but the sector that is most adversely affected from an investment point of view by low interest rates is the financial sector. If it is the financial sector that you work in, you have my pity, but not my sympathy. The financial sector likes to think it is the driver of real activity in the economy, but it is not. Real businesses benefit from lower finance costs. It is unfortunate that the benefits of low policy rates have not reached smaller businesses because of a very damaged banking sector, and in my view further measures are needed to ease financing conditions for smaller businesses: but the damaged credit transmission mechanism is emphatically not a reason to raise rates. And neither are the screams of savers suffering from very low interest rates because the world has more capital than it is able to use productively at the moment. We need to improve investment before we can raise rates. Otherwise you are putting the cart before the horse, and both will end up in the ditch.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-27031295806515450282013-09-29T16:50:42.049+01:002013-09-29T16:50:42.049+01:00Frances,
I am a successful businessman so please ...Frances,<br /><br />I am a successful businessman so please don't patronise me. And I can assure you that artificial interest rates do no-one any good bar speculators, given others seem to have to pick up the tab.<br /><br />Business investment was low in the lead up to the crisis and has been low ever since despite the lowest rates in history. In my sector, this is because costs of investment have increased (through low rates and QE) and the margin available is diminished (too much capacity as too many players eke out returns below their cost of capital but are kept alive by free money.<br /><br />You have a frighteningly simplistic moral view of the world without understanding the consequences.<br /><br />Tell me what kind of activity it is you think free money is producing - maybe you want to ask US bank mortgage originators who are now losing their jobs after the refinance boom on artificially low rates.<br /><br />This is a more recent example of what happened in the Dotcom crash and in the housing/credit crash - free money is artificial investment and when it disappears, so does the activity. All this does is destroy lives and families - I have been here as well!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-2588777764745818572013-09-29T13:08:56.281+01:002013-09-29T13:08:56.281+01:00Contrary to your belief, low interest rates are no...Contrary to your belief, low interest rates are not about "giving in to debtors' demands". They are intended to encourage spending, which generates economic activity, and business investment. Businesses facing high finance costs don't invest: businesses facing poor demand don't invest. The last five years has seen a massive failure of business investment. It is now beginning to pick up, but demands by savers for interest rate raises are premature. Raise rates now, and the life will be crushed out of the very fragile recovery we are beginning to see. Your exclusive focus on housing misses this very important point. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-49751978329844086122013-09-29T08:26:52.664+01:002013-09-29T08:26:52.664+01:00Frances
How about the other side of the equation ...Frances<br /><br />How about the other side of the equation - do you believe that debtors "deserve" to be able pay negative real rates of interest?<br /><br />If savers demands under a system of government price fixing are "rent seeking", are not debtors demands nothing but welfare receipts and out and out scrounging?<br /><br />You seem to suggest our society can be built on LBO kings, corporates and BtL landlords who are releveraging should be in receipt of huge welfare receipts...<br /><br />Your comments (and particularly that above) are grossly naïve and ignorant of the facts - For example, BtL is driven almost entirely by interest rates. Low Interest rates are stopping the housing bubble deflating appropriately. It is als the case that LOW INTEREST RATES CREATED THE PROBLEM IN THE FIRST PLACE. FLS has reduced mortgage rates and driven house prices in London Boroughs in the last 6-9 months - LOW INTEREST RATES DRIVE THIS.<br /><br />This is the problem when government interferes with such a key price - savers end up having demands. However, if the price of money was determined freely by market participants, there would be no demands, it would be what it would be. It is called the price signal and it helps people appropriately allocate their resources.<br /><br />If this country wishes to grow, it must invest. If it wishes to invest, it must have a stock of savings. To have a stock of savings, it must offer a return. A perpetual negative real rate of return does not increase your stock of savings BUT it will lead to greater leverage and debt and THAT is exactly what is happening.<br /><br />You focus the article of demands of savers but uoi ignore the detrimental effect it has on the economy more broadly and indeed to society.<br /><br />Given that economists and certainly the Fed and BoE have covered themselves in failure, what makes you think they are well placed to determine this most important price?<br /><br />Ignorance of human behaviour and simply no lessons learnt. Your views are sgared by most policy-makers- it is truly frightening.<br /><br />Your belief in low interest rates will merely result in the <br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-74598906529130157552013-09-29T04:15:31.201+01:002013-09-29T04:15:31.201+01:00We have had interest rates at unprecedentedly low ...We have had interest rates at unprecedentedly low levels for the last five years. Where is the housing bubble? And don't cite London - the recent house price rises in London are largely due to two things: 1) cash purchases by overseas high net worth investors fleeing Eurozone trouble spots (no mortgages involved) 2) growth in buy-to-let, mainly due to tight credit conditions for first time buyers increasing demand for rental properties. Neither of these have anything to do with low interest rates. The fact is that the low interest rates of the last 5 years have not caused a housing bubble. <br /><br />The residential housing bubble that grew BEFORE 2007 has not fully deflated and further correction is needed. Government policy - not only Help To Buy and FLS, but above all failure to address unnecessarily restrictive planning laws - is preventing that from happening. It is the restriction of supply, not low interest rates, that above all maintains high housing prices.<br /><br />Current economic conditions require low interest rates. Savers' demand for higher interest rates simply because they are used to higher interest rates is rent-seeking, pure and simple. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-39106013319854278482013-09-28T22:56:01.358+01:002013-09-28T22:56:01.358+01:00Frances
How do you reconcile your contempt for go...Frances<br /><br />How do you reconcile your contempt for government housing policy with a belief in low interest rates (1.69% mortgages).<br /><br />Low rates = housing market ramp up.<br /><br />You like low rates = you are a supporter of the ramp up.<br /><br />You are a cheerleader of bubbles.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-11036224813908634802013-08-18T22:44:21.476+01:002013-08-18T22:44:21.476+01:00well said Henk
Tragedy is under current crazy mo...well said Henk <br /><br />Tragedy is under current crazy monetary policy the Rich are getting richer by the minute thanks to increase in asset prices and paying less and less tax while the Pensioners who rely heavily on savings interest are being systematically robbed deborahnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-83722381440879726152013-08-18T01:46:23.123+01:002013-08-18T01:46:23.123+01:00Frances, thank you for this interesting essay. How...Frances, thank you for this interesting essay. However, I dare to not agree ;-)<br /><br />I see money as a bearer of prices and prices are *signals*, signals that steer investments, savings, consumption, by the invisible hand.<br />The money system in my opinion must be optimized for getting these signals (prices and price changes) as clear and uncluttered through the system (economy). And the monetary system should be optimized only for that. So stable prices if nothing (demand, production, amount of people and so on) changes. If producers and traders need not worry about inflation in their decisions on investments, we have this optimal monetary environment for the productive class. <br /><br />No what I feel is that some see undesirable effects in society as a consequence of such hard money system. Some groups, debtors or minorities or whoever are not getting their 'fair' share.<br /><br />My point is that if that is the case (and in a democracy the majority is right, by definition), than the chosen wealth redistribution objectives must be arranged by taxes and only by taxes, but not with tampering with the money system itself (under the assumption it is optimized as per above). If you try to optimize the monetary system for other goals than clear price signaling, prices signals get distorted, leading to misallocations and malinvestments. Society as a whole becomes less efficient (net costs of booms and busts) and that has a negative impact, especially on the middle class and poor.<br /><br />(By the way, I don't believe the "a little inflation is good for employment" argument. It seems a case of 'correlation does not imply causation'. And even if people believe this stimulus is needed, it surely can be emulated by taxes and subsidies with the same net effect, right? With the added advantage that the price signal function of the money circuit does not get tainted). <br /><br />To summarize: use a monetary system that is as efficient as possible for trade and industry and use taxes and subsidies for reaching social goals, but please do not mix.<br /><br />Henk, Netherlands.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-23506489333475823842013-08-17T13:05:12.318+01:002013-08-17T13:05:12.318+01:00"Once you have lent the money to the bank it ..."Once you have lent the money to the bank it is not "your property" that you have entrusted to them for safe keeping." Interesting that does not apply the other way around when the banks lend "their property" to me.Save and safe are basically the same word.If the banks' "agreement" with depositors is really as you describe, it seems the account opening documents should be required to say so. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-74400273899686141802013-08-16T12:37:40.815+01:002013-08-16T12:37:40.815+01:00The end result of the Government engineered robber...The end result of the Government engineered robbery of savers by FLS will without doubt come back to bite them <br />Its very very clear that all current MPs have been told to fob off every constituent who complains <br />Carnage is a puppet of Osbourne and theres only one thing on their minds = robbery <br />A huge housing bubble is already underway and Canada is tanking thanks to Carneys work <br />What he did there is being repeated here total and deliberate theft from savers to reward feckless debtors and inflate away public debt when actually the Government should be putting its own house in order <br />Just one illustration this AM they got rid of 800 Civil servants and hired 1200 Consultants in their place at huge extra expense <br /><br />Who is paying for it ?????????????? Savers <br /><br />Not content with that DWP is providing false information to IFS so their reports on Financial inequalities are totally incorrect deborahnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-52902421193186730932013-08-15T02:21:09.109+01:002013-08-15T02:21:09.109+01:00Good post. I have to admit I found much of it unco...Good post. I have to admit I found much of it uncomfortable reading, but on reflection I'm pretty sure I deserved to.<br /><br />I do think there's a significant minority for whom your first category of saving - "for something that they expect to buy in the future" - is NOT short-term: housing for people living in or near London. Given the magnitude of the current bubble there, anyone not sucked into the HtB madness can only really save against either some future return to sanity or the day when they move away, possibly upon retirement. Potentially decades away, in either case.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-12000232682377592102013-08-14T01:01:02.129+01:002013-08-14T01:01:02.129+01:00Er no. If those really are savers' expectation...Er no. If those really are savers' expectations, then they do not understand the nature of their contract with banks.<br /><br />When you put your money in a bank you are lending it to the bank for an agreed return. You have no right whatsoever to dictate what the bank does with your money, and no right to demand any share at all in any returns it makes from its use of your money over and above the agreed amount. If the agreement with the bank is such that it can vary the amount of interest it pays you at its own discretion, then it can reduce the interest it pays you to 0.01% and you would have no right whatsoever to demand a higher interest rate even if the bank was earning 20% on lending. Your only recourse is to close your account, withdraw your funds and try to find somewhere else to put them that will pay you a higher interest rate. <br /><br />That, I'm afraid, is the nature of the deal with banks. Your comment is therefore wrong from beginning to end.<br /><br />Oh, and you have no guaranteed right to return of your money, either. Once you have lent the money to the bank it is not "your property" that you have entrusted to them for safe keeping. It is a loan, and your money is at risk. If the bank fails, your right is to a share of the bank's assets, which may or may not be sufficient to compensate you for your loss.<br /><br />In the UK we have deposit insurance which will compensate you for losses due to bank failure on amounts up to £85,000 in one banking group across all accounts. Above that, you may lose your money - as depositors did in the failure of Southsea Bank in 2011. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-59381190879698223662013-08-14T00:29:20.831+01:002013-08-14T00:29:20.831+01:00From your post: “But is it reasonable for savers t...From your post: “But is it reasonable for savers to expect that the purchasing power of their capital should be preserved, or even increased, over time?” Wrong question. It is not so much that savers “expect” the purchasing power to be preserved as they expect fair rent for the use of their property. When their money is lent out to others at interest, it is not fair that the banks make all the money. Savers are not expecting profit (unless they lock up their deposits in a CD), so much as fair rent. Fair rent means their money is not losing value in the bank. Otherwise, they might as well not put it in the bank. If they lock up their deposit, the rent should be an interest rate exceeding the rate of inflation.<br /><br />Your misunderstanding of savers' expectations is evident in this line, “But a positive inflation rate, even a small one, means that savers suffer erosion of their capital over time. The interest rate on savings is a compensation for that loss.” The bank has no responsibility to compensate savers for inflationary erosion. The bank does have responsibility to compensate savers for using their property to make money for itself. <br /><br />“If the economy is growing at 0.6%, the risk-free rate of return cannot be any higher than that.” This is just wrong. The basis for the savers' expectations is not the growth of the economy, but the piece of the action the bank is getting by lending out their property. The growth rate of the economy is immaterial. If the bank lends my money at 6%, and the rate of inflation is 2.9%, the saver should get that 2.9% part, and the bank can keep the remaining 3.2 % as its profit. If the saver has lock up their deposit, the bank should compensate the saver even more, and retain less as profit as its cost of doing business with funds not on withdrawal demand.Anonymousnoreply@blogger.com