Showing posts from October, 2014

Goodbye QE, hello rate rises? Not so fast.....

A Landmark - L.S. Lowry

My latest at Pieria debunks the notion - heavily promoted by hawkish analysts and impatient journalists - that the FOMC's announcement that QE has ended means that interest rate rises are imminent. And it raises a worrying question. The FOMC -and others - talk about "normalising" policy. But what does "normal" even mean? Is there such a thing as a "normal" setting for interest rates? We do not know.....

Read the post here.

Germany's dark future

Inflation is falling fast in Germany. Today's figures show a fall in annualised CPI growth to 0.7%. And this is in the supposedly powerful core of the Eurozone. Out in the periphery, things are much worse.

But whereas disinflation or even outright deflation in periphery countries has little effect on Eurozone aggregate inflation, German disinflation is an entirely different matter. Thomson Reuters has helpfully produced a chart showing the relationship between German and Eurozone inflation:

Nicely correlated. In fact it is so well correlated that it is probably fair to say that ECB monetary policy is really determined by inflation expectations in Germany.

In the last year there has been some divergence because of the awful performance of Spain and Italy and the stagnation of France, which has led the ECB to attempt to introduce a credit easing programme against the wishes not only of the Bundesbank, but of German politicians. But although disinflation in Germany doesn't seem w…

Two very stressful posts

At Pieria, I deliver my verdict on the EU's stress tests. The ECB did a good job with the AQR, but the EBA's stress tests were not stressful enough.

And then I turn my attention to the UK's forthcoming stress tests. On Forbes, I complain that despite the Bank of England's intention to make its stress tests both more severe and more realistic, it fails on both counts. The UK's stress tests are just as flawed as the EU's.

Oh dear.

Financial hurricanes

Recently I wrote a post discussing the (sizeable) role of the Eurodollar market in the 2007-8 financial crisis, or rather in the credit boom that led to the crisis. In order to explain the vast increase in transatlantic two-way flows (round-trips) from 1997 to 2007, I used this diagram from Hyung Song Shin's 2011 paper on the "global banking glut":

But there's a problem. This diagram appears to show that all money lent by both US and European banks came from US households. Where did they get their money? It wasn't wages. We know that US wages have been stagnating for two decades. No doubt some will suggest it came from Asian savers - the "global saving glut" that is apparently caused by thrifty Chinese households. But how could thrifty Chinese households provide US households with money? Most Chinese households save in yuan. It is Chinese government and corporations that lend to the US, and it is not households they lend to. Mainly, it is the US governm…

Bulgarian Stalemate

The latest in the Bulgarian bank saga. The audit report on Corporate Commercial Bank is out. It's very grim reading, but does that mean the bank will be closed down? Not necessarily.....

Find out more here. (Forbes)

Hypo Alpe Adria: the small bank at the centre of some very big storms

Two posts that centre on the troubled Austrian bank Hypo Alpe Adria. For a small bank in a small country, it is causing an AWFUL lot of trouble.

Firstly, the ongoing saga of HAA's Balkan network, which the Austrian government is attempting to sell. As the bidding enters its final stages, it becomes apparent that the eventual owner will be determined more by politics than money:
The present tension between the EU and Russia creates a difficult dilemma for the Austrian authorities. On the one hand, they should get the best deal for Austrian taxpayers, which would imply that they should accept the higher bid even though it involves a sanctioned Russian bank. On the other hand, allowing a sanctioned Russian bank to buy financial companies in the Balkans would seem contrary to the spirit if not the letter of EU sanctions.... Despite my earlier warning, a consortium backed by a sanctioned Russian bank is still in the running to buy HAA's Balkan network. Read about it here

European banks and the global banking glut

My latest post at Pieria considers the sizeable role of the Eurodollar market in the unsustainable growth of credit that led to the 2007-8 financial crisis. 
In a lecture presented at the 2011 IMF Annual Research Conference, Hyun Song Shin of Princeton University argued that the driver of the 2007-8 financial crisis was not a global saving glut so much as a global banking glut. He highlighted the role of the European banks in inflating the credit bubble that abruptly burst at the height of the crisis, causing a string of failures of banks and other financial institutions, and economic distress around the globe. European banks borrowed large amounts of US dollars through the money markets and invested them in US asset-backed securities via the US's shadow banking system. In effect, they acted as if they were US banks, but in Europe and therefore beyond the reach of US bank regulation...... What was it that drove the expansion of the Eurodollar market and encouraged European bank…

Rochester & Strood: it's not about UKIP

Rochester High Street. The shop that has become UKIP's campaign HQ is (appropriately) on the far right-hand side. Photo: Mabbs

This is not my usual sort of post. It is overtly political, completely biased and very angry. I can no longer simply comment dispassionately upon dysfunctional UK political parties and rapacious sensation-seeking media. They have come to my home town and are intent on destroying it. 

The decision by UKIP to set up their campaign in a quaint building on Rochester High Street was calculated to attract the maximum media attention. Surrounded by Dickensian shops and olde-worlde buildings, and within walking distance of a picturesque ruined castle and a lovely Norman cathedral, it was photographers' heaven. And the BBC fell for it. Every report so far on the Rochester & Strood by-election campaign has used either Rochester High Street or Rochester Castle as a backdrop. Well, the Castle is beautiful:

Rochester Castle. Photo: Survation

The result is tha…


The resounding victory of Douglas Carswell in the Clacton by-election has caused something of a stir. Carswell, formerly a Conservative MP, resigned his seat after defecting to the UK Independence Party (UKIP), then stood as UKIP's candidate in the ensuing by-election. His success at the polls gained UKIP their first Westminster seat. 

It is far from clear how much of Carswell's victory was due to his personal popularity - by all accounts he had 15,000 personal pledges of support - and how much was due to support for UKIP. But another by-election on the same day, in the Heywood & Middleton constituency in Rochdale, suggests that rising support for UKIP, or perhaps more accurately falling support for the main parties, might have been a considerable factor. In Heywood & Middleton, Labour barely scraped back in. They won with a margin of only 617 votes - with UKIP in second place. Both the Conservatives and Lib Dems were trounced.

Meanwhile, across the Thames from Clacto…

QE has (nearly) ended, but how will the Fed unwind it?

This post is about the US, obviously - though the same considerations apply in the UK as well.
The Fed’s large-scale asset purchases (LSAPs, popularly known as QE) have been tapering off for some time now and are expected to end this month. But even though the Fed won’t be making any new purchases, it will still have the largest balance sheet in history. All the securities it has purchased in three rounds of QE and Operation Twist are sitting on its balance sheet. And the banking system is awash with the excess reserves created as a consequence of those purchases.

It is clear now that monetary base creation on this scale does not cause runaway inflation, as was feared by many. And it does appear to have prevented the US from experiencing severe deflation in the aftermath of the financial crisis. But as the US economy recovers, the question arises whether the Fed should start shrinking its balance sheet – unwinding QE. So should it unwind QE, and if so - how?

Read on here.

When the Nile floods fail

I recently watched a BBC documentary on the fall of the Egyptian Old Kingdom. A thousand years of stability and prosperity came to an abrupt and chaotic end, apparently out of the blue. Most Egyptologists blamed dynastic change and political unrest. But something didn't quite add up. The end of the Old Kingdom coincided with terrible famines. To be sure, conflict can cause famines. But these were exceptional: thousands of deaths for years on end, people resorting to cannibalism, whole cities being abandoned.

New research cast doubt on the "political change" theory for the collapse of the Old Kingdom. Sudden catastrophic climate change occurred at that time, causing a mini Ice Age in Europe and widespread famine around the world. In Egypt it resulted in the total failure of the annual Nile floods, upon which the Egyptian economy critically depended. No wonder it collapsed. But it took archeological research over 4000 years later to identify the massive exogenous shock th…

Cameron's fiscal bribery

The Conservatives are promising to eliminate the entire deficit by 2018 and run an absolute surplus thereafter. And when the deficit is gone, they are promising widespread tax cuts. All of this if they are re-elected, of course.

But in this post at Pieria I look at what they would have to do to deliver these promises, and conclude that it's not at all clear how they can eliminate the deficit in that timeframe, let alone deliver tax cuts. There's a very large hole in their fiscal plans.

What's gone wrong at Wonga?

Oh dear, Wonga.....
The UK’s biggest payday lender, Wonga, is in trouble.  Its profits  have fallen by 53%. But that is the least of its worries.  Actually its biggest headache is the FCA. And Wonga is not the only payday lender in trouble. The whole industry is disintegrating. Find out why here.