tag:blogger.com,1999:blog-8764541874043694159.post8865518228001146840..comments2024-03-28T12:23:39.665+00:00Comments on Coppola Comment: The fatally flawed FLSFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-8764541874043694159.post-28253660640323534122013-10-13T21:28:36.030+01:002013-10-13T21:28:36.030+01:00My income has nose dived 70% solely thanks to FLS
...My income has nose dived 70% solely thanks to FLS<br />The same thing has happened to numerous friends who are now forced to sell homes they love and no they are not big expensive homes but small simple ones<br />Without a shadow of doubt this governments deliberate attack on the millions of pensioners who have absolutely no option but to depend on savings income is criminal and treachury<br />Many of them are widows who rely on life interest and cannot touch the capitol<br />I can but hope the backlash against this government whose 3 principal members promised faithfully to help savers <br />Instead they have totally decimated our lives and there is absolutely not onebiota of merit in FLS or destroying pensioners who were comfortable and at least able to spend and treat their grandchildren reduced to the most abject povertydeborahnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87004462051634880722013-03-07T01:34:49.973+00:002013-03-07T01:34:49.973+00:00@SK people who live off gilt coupons are already f...@SK people who live off gilt coupons are already functionally supported by government. Reshuffling this support towards means tested channels should be cheaper as some have non gov income. Equivalently the government could just make gilt coupons means tested :-).cighttp://commentisglee.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-23757159865884267192013-03-06T20:57:16.784+00:002013-03-06T20:57:16.784+00:00I was wondering if in the UK, you have all loans g...I was wondering if in the UK, you have all loans guaranteed by the government? I know in the USA, they are not yet all guaranteed, but I believe that is what the banks and the Fed ultimately want. All loans guaranteed would make them rated highly, even though they are pigs with ribbons on them. <br /><br />I wonder if the Fed is using the threat of negative interest rates as a catalyst for the government to take on this risk? Banks want risk free lending, Frances, as you have said elsewhere on this blog. So, is that the ultimate central bank blackmail and won't this wreck havoc on governments, forcing them to cut all other spending?Gary Andersonhttp://seekingalpha.com/article/1251311-how-the-fed-is-in-a-box-in-terms-of-creating-sound-collateralnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-60876892789311909782013-03-06T18:30:47.748+00:002013-03-06T18:30:47.748+00:00I am not disagreeing with you about the negative e...I am not disagreeing with you about the negative effects to savers, although as I have now said several times it is by no means clear to what extent the fall in retail deposit interest rates is due to FLS. However, I dispute your conflation of wealth and income. When people's preference is to save - which is the case at the moment - they do not spend earned interest unless they have to. If they can, they add it to wealth. Therefore it is by no means clear that reducing rates to savers depresses demand, except in the case of the small group of savers who depend on interest on savings for their essential income. I am unconvinced that wealth effects necessarily encourage people to spend when the general economic mood is risk-averse and thrifty. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-20208639687639362362013-03-06T18:14:08.809+00:002013-03-06T18:14:08.809+00:00Of course I read your blog carefully before commen...Of course I read your blog carefully before commenting. Regardless of the technicalities, the purpose of the FFL is to lower the cost of money to banks and thereby increase their expected return on lending. This competes with retail savings deposits and reduces the price banks are willing to pay on them, which reduces the real incomes of all savers. This reduction in real incomes reduces aggregate demand. The question is whether or not any anticipated increase in loans could offset this fall. It is the net effect on aggregate demand that matters and that has not been addressed; it is assumed that the FFL will have only positive effects or, at worst, no effect. In fact the net effect may be to depress aggregate demand in the economy.<br /><br />Do you really think that changes in wealth and in real income in particular "has nothing to do with spending decisions"? Perhaps your next blog could elaborate on that rather worrying suggestion.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-89604594678118521252013-03-06T14:51:32.553+00:002013-03-06T14:51:32.553+00:00It seems you have not read my description of how F...It seems you have not read my description of how FLS works, nor the link to the BoE's explanatory note. The government does not offer "money" under the FLS. It lends UK T-bills for a fee in return for less liquid collateral. Those T-bills can be used in the funding markets to reduce the cost of PRIVATE sector funding. Neither the government nor the BoE dish out money under the scheme. The fee for FLS T-bill borrowing is 0.25% rising by stages to 1.5% as a borrower reduces lending. Market funding costs have to fall by at least that much as a result of using higher-quality collateral for FLS to be worth while. The problem is that market funding costs have fallen ANYWAY, so there is much less benefit from FLS collateral. The FLS itself may have contributed to the general fall in sterling funding costs, but as I noted in the post, the extent of this is unknown. <br /><br />Regarding interest on savings. Eh? People always spend the interest on their savings when they get it, do they? I don't think so. Only people who rely on that interest for income will spend it. The rest will capitalise it. Of course money is fungible, and of course people see earned interest as part of their total wealth. But that has nothing to do with spending decisions. <br /><br />If FLS had worked as expected, the demand from increased borrowing should have outweighed the loss to savers. But you do not know to what extent the fall in rates to savers was due to FLS. There are other factors as well. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-84805646748359995322013-03-06T14:04:43.193+00:002013-03-06T14:04:43.193+00:00Money market rates may have fallen since the start...Money market rates may have fallen since the start of the FFL, but the money offered by the government under the FFL must be priced at less than the market rate because it has conditions attached to it that do not apply to money from the market. Any such sub-marketrate funds will crowd out higher priced retail rates, and reduce the price offered to retail depositors. I think the BOE has now accepted this point.<br /><br />More importantly, you seem to be suggesting that the marginal reduction in demand from the aggregate loss to savers (due to reduced retail interest rates), which can also be seen as a net gain to banks from attracting retail savings deposits, is less than the marginal increase in demand as a result of increased lending by banks - which you describe as a flop. Certainly your suggestion that only a small group of people actually spend the interest earned on their savings suggests that you either don't agree that money is fungible or that you believe the rest don't see earned interest as part of their total wealth.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-41707671936470350342013-03-06T13:00:58.621+00:002013-03-06T13:00:58.621+00:00FLS is just another half-thought solution from the...FLS is just another half-thought solution from the Treasury/BoE with main aim to support the ridiculous high house prices.<br />Any FTB buying into it, is destined to end up in negative equity (unless ofcourse the BoE decides to destroy all pensions and private savings by keeping the rates low for another two decades).<br /><br />The treasury should stop the half-baked solutions and should examine otherways of getting the economy rolling.<br />Perhaps:<br />-Reduce income taxes and introduce LVT taxes. This way low/middle incomes will have more disposable income while all the unearned land wealth will be taxed.<br />-Tax land banks so builders will start building.<br /><br /><br /><br />I do disagree about the savers impact. The ISA/Fixed bonds rates have decreased substantially. Last year some banks were offering 4.25-5% and now i have not heard anything been offered above 2-3%. <br />If this continues, it will have long term implications since people who would have saved would need now to drop into benefits and will have to be supported by the goverment.<br /><br />SKAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-12491125979310748272013-03-06T12:19:08.057+00:002013-03-06T12:19:08.057+00:00I agree that FLS may have had some effect on rates...I agree that FLS may have had some effect on rates to savers, but I think most of the fall in deposit rates is due to the general depression of funding rates since FLS started, which as I said in the post is in my view mainly because of the calm in the Eurozone and very low policy rates. In fact banks at the moment are increasing the proportion of their lending that is funded from retail deposits.<br /><br />I don't agree that the negative effect of reduction in returns to savers necessarily outweighs positive effects of borrowing. Most savers don't spend the returns on their savings - they are capitalised into savings balances. The only people that do generally spend the returns are middle-income retired people, which is a relatively small group compared to the economy as a whole. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-46780935605890271802013-03-06T11:45:29.102+00:002013-03-06T11:45:29.102+00:00The nonsense runs even deeper than Frances claims....The nonsense runs even deeper than Frances claims. That is, the immediate response to the crunch, which was brought about by excessive and irresponsible lending, was to cut interest rates so as to – er – encourage more lending.<br /><br />If we replaced M.P.s with inmates of lunatic asylums, my guess is we’d be better off.<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-33525961689788131282013-03-06T10:22:22.580+00:002013-03-06T10:22:22.580+00:00Excellent! Just wondering why you didn't menti...Excellent! Just wondering why you didn't mention the fact that FFL substitutes government money for private savings and thereby depresses retail savings rates and the income of savers. Clearly this transfer of income (from savers to the banks) has had a negative effect on consumption and hence growth. In short, the negative effects of the reduction in returns to retail savings outweighs any positive effects of increased borrowing.Anonymousnoreply@blogger.com