PeakOil is You
Trader's Corner 2007
Re: Trader's Corner 2007
by Doly » Tue 18 Sep 2007, 07:25:20
$this->bbcode_second_pass_quote('MrBill', 'A')necdotal evidence of a real vacation property slowdown in Spain are starting to surface as well as this weekend's run on Northern Rock, a UK home and loan financial institution.
Mr Bill, I think the Northern Rock affair deserves much more than a little footnote. If I worked in a bank right now, I'd be panicking.
I'm sure you are going to tell me that the fundamentals of Northern Rock didn't justify a bank run, and people over-reacted. You're probably correct. But the facts are, we live in the real world, not in the world of financial experts.
Most people don't have a clue about the economy. Most people are so far from financial experts that my friends are starting to look at me as an "expert" because I appear to know the terminology. For many people in the UK, the bank run on Northern Rock is the first news they've had that something might be amiss. And, clueless as they are, their logic goes something like this: "If clueless poor little me has figured that something is wrong, something must be TERRIBLY WRONG." And they begin acting accordingly.
If this is the start of a massive crisis of confidence on banks (and by this I mean not that your average investor trusts them a little less and sells shares, but that your average clueless Joe starts thinking that keeping your money in a bank is a risk)... well, hell is breaking loose in a very BIG way. Imagine what would happen if everybody who has a pension fund that allows them to get the money out now tries to do so. Or say it's only 20% that try.
It sounds like financial armageddon to me. In fact, it sounds exactly like how peak oil was supposed to affect the economy.
Mr Bill, your comments?
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Doly - Expert
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Re: Trader's Corner 2007
by MrBill » Tue 18 Sep 2007, 09:09:25
Doly, the fundamentals of Northern Rock didn't justify a bank run, and people just over-reacted, as they tend to do because we live in the real world, not in the world of financial experts.
Most people don't have a clue about the economy. Most people are so far from financial experts that they rely on CNBC or CNN for their business news. For many people in the UK, the bank run on Northern Rock is the first news they've had that something might be amiss. And, clueless as they are, their logic goes something like this: "If clueless poor little me has figured that something is wrong, something must be TERRIBLY WRONG." And they begin acting accordingly.
Or something like that...
Actually, the management of Northern Rock and the BOE were pretty darned slow in telling people exactly how they were affected, about bank insurance, who was covered, up to how much and to give assurances that the BOE would act as lender of last resort. I will give you that. They were remiss for not acting more decisively, sooner, and that no doubt lead to more panic than needed to be.
However, the English are quite used to property booms and busts. They have had enough of them. And the UK has certainly enjoyed its fair share of housing inflation compared to other markets. No one was complaining when prices were rising by 25% per year. Oops, except for those poor workers that could no longer afford to get onto the property ladder.
As a matter of fact, up to now, I have given the BOE's Mervyn King full marks for not taking his eye off the ball, and focusing on inflation concerns rather than caving into financial markets to provide relief for bad borrowing/lending decisions.
$this->bbcode_second_pass_quote('', 'B')ank of England Governor Mervyn King has spent the past month trying to stay above the fray as the U.S. subprime-mortgage collapse roiled credit markets. Now he's getting dragged in, whether he likes it or not.
Two days after King, 59, told lawmakers on Sept. 12 that central banks should avoid giving the impression they will help lenders that made bad decisions, the Bank of England provided emergency funds to Northern Rock Plc in the biggest bailout of a British bank in three decades.
King's credibility is in question for his refusal to emulate other central banks and take early action to help cash-strapped lenders. With Northern Rock's failure, he is finding himself subject to the same charge of excessive caution being leveled at U.S. Federal Reserve Chairman Ben S. Bernanke, whose office adjoined King's at the Massachusetts Institute of Technology in the 1980s.
King held back until markets forced his hand. Last week he said that too much help ``encourages excessive risk-taking, and sows the seeds of a future financial crisis.'' With three-month money-market rates close to a nine-year high, the bank on Sept. 13 made its first additional cash loan to banks. The next day, it rescued Newcastle, England-based Northern Rock after rising credit costs left the U.K.'s third-largest mortgage provider unable to make new loans.
Northern Rock's customers have ignored assurances that their deposits are secure. While Chancellor of the Exchequer Alistair Darling said today their deposits are ``backed by the Bank of
England,'' customers have removed at least 2 billion pounds ($4
billion) since Sept. 14., the British Broadcasting Corp. reported.
While Brown and the Bank of England have overseen Britain's
longest period of economic growth in two centuries, consumer debt has also surged over the last decade: Households are now shouldering a record 1.3 trillion pounds in debt. In addition, the
Bank of England's benchmark rate of 5.75 percent is the highest
among the Group of Seven nations, and London house prices fell the most in three years in September, a report from Rightmove Plc showed on Sept. 14.
King, an architect of the bank's inflation-targeting strategy, has won plaudits for helping end the U.K.'s decades-long fight with rising prices. He became chief economist in 1991 and was named governor in 2003.
Most people don't have a clue about the economy. Most people are so far from financial experts that they rely on CNBC or CNN for their business news. For many people in the UK, the bank run on Northern Rock is the first news they've had that something might be amiss. And, clueless as they are, their logic goes something like this: "If clueless poor little me has figured that something is wrong, something must be TERRIBLY WRONG." And they begin acting accordingly.
Or something like that...
Actually, the management of Northern Rock and the BOE were pretty darned slow in telling people exactly how they were affected, about bank insurance, who was covered, up to how much and to give assurances that the BOE would act as lender of last resort. I will give you that. They were remiss for not acting more decisively, sooner, and that no doubt lead to more panic than needed to be.
However, the English are quite used to property booms and busts. They have had enough of them. And the UK has certainly enjoyed its fair share of housing inflation compared to other markets. No one was complaining when prices were rising by 25% per year. Oops, except for those poor workers that could no longer afford to get onto the property ladder.
As a matter of fact, up to now, I have given the BOE's Mervyn King full marks for not taking his eye off the ball, and focusing on inflation concerns rather than caving into financial markets to provide relief for bad borrowing/lending decisions.
$this->bbcode_second_pass_quote('', 'B')ank of England Governor Mervyn King has spent the past month trying to stay above the fray as the U.S. subprime-mortgage collapse roiled credit markets. Now he's getting dragged in, whether he likes it or not.
Two days after King, 59, told lawmakers on Sept. 12 that central banks should avoid giving the impression they will help lenders that made bad decisions, the Bank of England provided emergency funds to Northern Rock Plc in the biggest bailout of a British bank in three decades.
King's credibility is in question for his refusal to emulate other central banks and take early action to help cash-strapped lenders. With Northern Rock's failure, he is finding himself subject to the same charge of excessive caution being leveled at U.S. Federal Reserve Chairman Ben S. Bernanke, whose office adjoined King's at the Massachusetts Institute of Technology in the 1980s.
King held back until markets forced his hand. Last week he said that too much help ``encourages excessive risk-taking, and sows the seeds of a future financial crisis.'' With three-month money-market rates close to a nine-year high, the bank on Sept. 13 made its first additional cash loan to banks. The next day, it rescued Newcastle, England-based Northern Rock after rising credit costs left the U.K.'s third-largest mortgage provider unable to make new loans.
Northern Rock's customers have ignored assurances that their deposits are secure. While Chancellor of the Exchequer Alistair Darling said today their deposits are ``backed by the Bank of
England,'' customers have removed at least 2 billion pounds ($4
billion) since Sept. 14., the British Broadcasting Corp. reported.
While Brown and the Bank of England have overseen Britain's
longest period of economic growth in two centuries, consumer debt has also surged over the last decade: Households are now shouldering a record 1.3 trillion pounds in debt. In addition, the
Bank of England's benchmark rate of 5.75 percent is the highest
among the Group of Seven nations, and London house prices fell the most in three years in September, a report from Rightmove Plc showed on Sept. 14.
King, an architect of the bank's inflation-targeting strategy, has won plaudits for helping end the U.K.'s decades-long fight with rising prices. He became chief economist in 1991 and was named governor in 2003.
Source: Bloomberg
So now King is being criticized for doing his job. Focus on the UK's domestic inflation, which was too high, and try to avoid fuelling the expectations that the BOE would drop interest rates to help out homeowners or property speculators that made poor investment decisions (or infact took equity out of their UK homes to invest in vacation properties in Spain, Portugal, France, Cyprus, etc.).
No, I am sorry, Doly, the BOE's King and the BOC's David Dodge get full marks for acting like responsible central bankers. Let the market find a solution first, like a take-over of cash strapped Northern Rock by one of its better capitalised rivals (like BoA aiding Countrywide Financial), and then step in to clean up the mess later, if it does not work out. That is far preferable to bailing out financial institutions at the drop of a hat and creating yet more moral hazards. It may look like lunacy from the outside, but markets are more robust than you give them credit for.
In the meantime, individuals clammer for more investment products, insist on self-directed retirement funds and the chance to buy ETFs on everything under the sun, so it is incumbent on them to finally learn about the risks of the products they are trading. They should know whether their money is at risk or not when they open their bank accounts.
You will be happy to know that deposit insurance in Germany is up to EUR 24 million per customer (excluding some intruments like commercial paper). Implemented after the failed German bank Bankhaus Herstatt in 1974 the Germans learned their lesson and implemented laws to protect investors and make banks pay into true (private) insurance schemes to fund these bailouts, if and when necessary, that do not rely on central bank or government emergency assistance.
The Anglo-Saxens do not always get everything right, and they're not always first either. They have a lot to learn from others, too.
UPDATE: Doly wrote:
$this->bbcode_second_pass_quote('', 'I')t sounds like financial armageddon to me. In fact, it sounds exactly like how peak oil was supposed to affect the economy.
This 'credit crunch' has to do with unpoliced easy money policies and nothing to do with 'peak oil' or even resource scarcity in general. They are not even related issues.
The Fed dropping interest rates all the way to 1% in 2004 started an economic boom as early as 2002 that, along with the BOJ's ZIRP and FX reserve build-up by Asian central banks, ignited a powerful bull cycle of growth an monetary expansion while driving down long-term interest rates and the premium for risk. It was very expansionary.
That growth lead to high commodity prices not vice versa. The low premium for risk along with strong growth lead to more risk taking and this current credit crunch.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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MrBill - Expert
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Re: Trader's Corner 2007
by Doly » Tue 18 Sep 2007, 09:35:06
$this->bbcode_second_pass_quote('MrBill', '
')No, I am sorry, Doly, the BOE's King and the BOC's David Dodge get full marks for acting like responsible central bankers.
')No, I am sorry, Doly, the BOE's King and the BOC's David Dodge get full marks for acting like responsible central bankers.
You aren't really replying to my post, Mr Bill. I didn't mention the BOE reaction at all in my post, mostly because I don't know enough yet to figure out if they did the right or wrong move.
I wasn't talking at all about the BOE, but about the average person on the street, that is not sophisticated at all in financial matters. My question is: what happens if all these people suddenly decide that the best place to have your money is under your mattress? I'm not kidding, some NR customers were saying exactly that.
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Doly - Expert
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