The story of the credit crunch can be looked at through the prism of the central banks. Their modus operandi is supposed to be action followed say two to three years later by a withdrawal of the action but the latter fizzled out at best. The ECB back in 2011 with its two interesr-rate increases and the US Federal Reserve with its interest-rate rises and promises of so called normalisation of a couple of years or so ago. That is before we get to the Riksbank of Sweden which has raised interest-rates into what already looks like a worse economic contraction than 2009. The exact details now are harsh on it as we were in a pre pandemic era but they were raising rates into the trade war slowdown. With its previous policy of running negative interest-rates in an expansion the Riksbank looks all at sea now.
In a broad sweep we got a wave of interest-rate cuts to what was then thought of as ZIRP or Zero Interest Rate Policy although most places actually stopped short of 0%. Remember when these were badged as emergency measures? Then the era of Quantitative Easing began as central banks bought sovereign bonds in ever larger quantities as it became apparent that the interest-rate cuts were not cutting the mustard. Later we got the era of credit easing as the central banks had yet another go at what the original interest-rate cuts were supposed to achieve.
The Pandemic Response
Even before the Corona Virus there were signs of the system creaking as we saw the ECB ease policy yet again last autumn. We got a sign the cupboard was getting a bit bare in the way it only cut interest-rates by 0.1% as who really believes that makes any real difference at all? Another way of looking at the conceptual problem is the way it found itself restarting QE less than a year after it had ended it. The proclamations of the “Euro Boom” had disappeared pretty much as quickly as the stimulus did as we saw that Germany was finding the trade war heavy going and economic growth had essentially gone.
The response of the ECB to the pandemic has been to expand its new QE programme from the original 20 billion Euros a month to an average of a bit over 5 billion Euros per day. There was no further interest-rate cut which suggests it thinks it is at the “lower bound” for interest-rates which in practical terms can be defined as the lowest interest-rate they think they can apply without causing a run on the banks. As so often policy is driven by “The Precious! The Precious! “. Indeed one aspect of QE can be looked at like that as for example the large holdings that the Italian banks have in Italian Government Bonds are about the only profitable activity they seem to have. They are being rather spoon fed this as we saw after the “bond spreads” comment by ECB President Christine Lagarde at least a hint of how much lower Italian bond prices would be without The Frankfurt Whale.
There is a sub plot here however and as it does not happen often I thought I would point it out. By effectively blocking further interest-rate cuts the Euro area banks are doing the real economy a favour as in my opinion further cuts here are only likely to make things worse.
US Federal Reserve
In terms of interest-rates then the normalisation efforts ended up taking something of a U-Turn and then a full retreat as we find it back just above 0% ( strictly the range is 0% to 0.25 %). So back to where it started but the main change in the Pandemic era is this.
“(Reuters) – The Federal Reserve’s balance sheet increased to a record $5.86 trillion this week and the central bank reported greater use of some of its newly launched liquidity facilities, all part of its efforts to keep markets functioning smoothly amid heightened volatility related to the coronavirus pandemic.
In the three weeks since the Fed’s effort to limit the economic damage from the outbreak kicked into overdrive, the central bank’s balance sheet has mushroomed by roughly $1.5 trillion. It is now the equivalent of a quarter or more of the size of the U.S. economy before the crisis struck, and will certainly grow larger in the weeks ahead as the Fed keeps piling on assets and the economy likely shrinks.”
As you can see that is quite a change as for example the previous peak was of the order of US $4.5 trillion and the normalisation efforts brought it back below US $4 trillion. But according to Reuters there is more.
“The central bank continued to snap up Treasury securities, mortgage bonds and other assets, according to data released on Thursday. The Fed’s holdings of mortgage-backed securities increased to $1.46 trillion from $1.38 trillion. Treasury holdings rose to $3.34 trillion from $2.98 trillion.Use of the Fed’s central bank liquidity swap lines, which allow foreign central banks to exchange their local currency for dollars, rose to $348.5 billion Wednesday from $206.1 billion the previous week.”
Thus the Federal Reserve is offering liquidity about as fast as it thinks it can and I am omitting some of the smaller programmes as on this scale even billions are relatively insignificant
Bank of England
It too felt it had scope for interest-rate cuts and brought Bank Rate down to 0.1% which is its estimate of their lower band or as much as it feels the banks can take.You may note that either the UK banks are in worse shape than the Euro area ones or it feels the ECB has made a mistake.
Moving onto QE it has announced an extra £200 billion which will take the total to £645 billion. It is cracking on with this as it has bought some £4.5 billion on 3 days this week. Last night it announced it will increase its Corporate Bond holdings to £20 billion which will at least give us a laugh! Why? Well it really struggled to buy £10 billion last time although I am sure the Danes were grateful as it help prop up their shipping company Maersk, for example.
Comment
My To Infinity! And Beyond! theme has turned out to be rather prescient but let me now switch to the real winners here. The first is governments who via the impact of all the QE purchases are able to borrow extraordinarily cheaply. For example my home country the UK has a ten-year yield of 0.32% in spite of fiscal promises such as the writing off of £13.4 billion of NHS trust debt yesterday. Germany has announced quite a fiscal expansion yet is being paid to borrow with a ten-year yield of -0.43%. So the winners of the era of central bank “independence ” have been those who made them independent.
Next on the list are the banks who continue to have liquidity dripped and poured into them as well as subsidies handed out. However if you look at their share prices you see that the real winners hear have been their management who have been able to profit in spite of the lack of a viable business model.
As for the rest of us, well if the tales I am receiving about small business borrowing are true we are somewhere between not so much and none at all.
Notayesmanseconomics's Blog 
One of the criteria for a currency is that it must be a store of value, if central banks are “creating” trillions a day at the press of a key and committing themselves to keep printing UNLIMITED amounts, how does that translate into any fiat currency being a store of value?
The Bank of England and the UK government are going to rue the day they blew this property bubble, what is going to happen to the millions that will lose their jobs and are unable to pay their mortgage in the coming depression?
Will they be allowed to continue living in their houses/flats?If not where are they going to live? – there aren’t that many council properties available. Or will their payments(from the UK taxpayer naturally) be converted to rent and the bank ends up owning them by default?Thereby another stealth bailout of the banks who will end up owning hundreds of thousands/millions of properties with the mortgages paid by the UK taxpayer!
re: ..”, how does that translate into any fiat currency being a store of value?”
short term store , sometimes very short term a la Zimbabwe
no wheel barrows needed , just a SMART phone …. yours does have a divide by infinity function , yes ?
Or will their payments(from the UK taxpayer naturally) be converted to rent and the bank ends up owning them by default?
yes , its a good plan for control don’t you think ?
Absolutely, communism under another “caring” wrapper.
And what of the people that still have to go to work and pay their mortgage, how long before everyone just decides the little extra they get by bothering to get out of bed in the morning just isn’t worth the trouble and the effort when you add in all the other freebies the unemployed get, free prescriptions, council tax, etc etc, the end result is everyone depends on the state, how convenient is that for control?
There may even be a debt jubilee, where the debt monkeys are allowed to continue living in their house but the debt is written down, in that case at the end of the term who owns the house? the bank, the government or the mortgagor or will it be a combination or some permutation of the three?How will people that borrowed responsibly or those who have no mortgage on their property be treated under such a regime?
Add in a cashless system, (notes and coins spread viruses so it will be justified to banish them)and the state can turn off your chip any time it likes, if you say the wrong thing about the government/immigrants/LGBTQ+, how is that for control over people!!!
“… if you say the wrong thing about the government…”
sorry Shaun this is a little politics but its Scary how easy people become “informants” for the state like East Germany and the National Socialist Germany
“It’s been estimated that only 15 per cent of Gestapo cases started because of surveillance operations. A far greater number began following a tip-off from a member of the public. Every allegation, no matter how trivial, was investigated with meticulous and time-consuming thoroughness.”
again for the Soviets ………
Warnings from History continue to be ignored
Forbin
“Show me the man and I’ll show you the crime”
Hello Shaun,
“East Africa locust swarms gather as corona virus curbs delay pesticides”
Famine, Disease , Death with Kaos and War waiting in the wings
Wow ! and the Banks are worried about liquidity ? how foolish of me to think others concerns should take president.
Forbin
Hi Forbin
Yes there was a time that people were worried about the locust swarms reaching Pakistan which I believe was ill equipped to cope with it. Well that was as Paul McCartney might say, yesterday. Also there was the Swine Flu epidemic for pigs especially in China.
I doubt QE has much effect on any of these….
Great blog as usual, Shaun.
Regarding interest rates, it is interesting to see how the Bank of Canada’s position on the overnight rate has evolved since October 2016, when it issued background information to the 2016 renewal of the inflation-control agreement. At that time, the BoC decreed that the effective lower bound (ELB) was -50 basis points (bps), i.e. it endorsed negative interest rates, although it had never resorted to them in the past. The actual overnight rate then was 100.
The same background information document noted: “At the time of the 2011 renewal, the Bank estimated that measured CPI inflation was biased upward by about 0.5 percentage points (Sabourin 2012). More recent estimates indicate that the bias is now about 0.3 percentage points (Sabourin forthcoming). This finding suggests that the estimated true rate of inflation that is consistent with 2 per cent measured inflation has risen from 1.5 per cent to about 1.7 per cent. The higher estimate of the true rate of inflation would tend to increase the average level of nominal interest rates. While this effect is small, it captures some of the benefits that would be associated with a higher inflation target [i.e. the greater fire power in the event of a recession linked to those extra 20 bps].”
On March 27, Governor Poloz made an unscheduled announcement of a drop in the overnight rate by 50 bps to 25 bps, which he said was the ELB. When questioned about it by journos he said that the European experience with negative rates hadn’t been encouraging, so the BoC wanted to go back to 25 bps as its ELB. Implicit in this statement was that the BoC was keeping a 50-bps range around the overnight rate, with the deposit rate as its lower bound and the bank rates as its upper bound. The overnight rate could not go below 25 bps, say to 10 bps, because that would put the deposit rate into negative territory.) So, the BoC has revised its effective lower bound upwards by 75 bps, which is a pretty huge change of position.
Regrettably, Governor Poloz has not suggested that the target rate of inflation be reduced to 1.8% with the 2021 renewal agreement to put the “true” rate of inflation targeted back to where it was before. One might ask, when the BoC is so nonchalant about reversing its position on this 75 bps of fire power related to the ELB, it should wish to retain this alleged 20 basis points of fire power identified with hiking the targeted “true” rate of inflation.
Hi Andrew and thank you
It is interesting that the UK felt that its banks ( my understanding was that the issue was with the building societies to the extent that still matters) could not take less than 0.5%. We made some changes ( Term Funding Scheme) and now the Bank of England thinks it is 0.1%. The Bank of Canada development seems more sensible as it was silly to say 0.5% as Governor Carney did when Switzerland went to -0.75%. Overall I am pleased the BoC has rejected negative interest-rates with the caveat that central bankers have changed their mind on this subject in the past.
As to inflation I think it is only central bankers ( and those who aspire to a job at one) who think that inflation is over recorded. Most people think it is under recorded! But at least the Bank of Canada is heading in the right direction with its new estimate.
shaun,
To pick up on the link from the SUN yesterday and your response, I am ever so puzzled where someone could see interest rates getting anything like 3% when the recession could cause another decade of austerity. Although you intimated the current BOE members would not be seeking that, why would someone even think raising interest rates to circa 3% in 2022 when the world its in a complete meltdown and raising rates will only cause more financial distress?
You normally see interest rates rise to combat inflation, well the coronavirus is causing huge damage worldwide and I think so for years to come. The world population is bound to get poorer not richer for a few years to come imo.
the rise in rates will be to counter the damage to US shale oil – they’ve been the ones keeping the market supplied ( even if with borrowed money )
they were staggering along before the lemonade bug – with demand cratered and price still around $30 they are in cardiac arrest ….
come the 2025 range -+3 years and we’ll be back to inflation from high oil prices
like you say , I think sooner , 2022 …… yay! or not , as the case maybe
we live in interesting times…………….
Forbin
No I wouldn’t raise them to 3% Peter………………..I would put them up to 6% in a blink of an eye.And reset this country to capitalism with a bang, and see how long other countries would take to follow.
Just like the Paradox of Thrift (saving damages consumption and thus growth), this is the Paradox of Confidence and is related to the Liquidity Trap. If savings rates at least cover inflation (even the fraudulent level) then savers, who outnumber mortgage holders 2-1, will spend their income, creating consumption demand. If rates are too low, especially below Trap levels, they will save more from their income, which dampens consumption demand – when the clowns think lower rates will guarantee more demand in a false mangling of monetarism.
The reduced spending by mortgage holders on higher rates is thus offset by much more spending by savers.
Hi Shaun
Nobody in our world can comprehend infinity.
Somewhere in the near future radical things
will happen, lets hope that we all respect each
other and a new capitalism in it’s true meaning
can restart.
The late great Bill Withers put it this way…
JRH
Hi JRH
Yes his demise is very sad news. In the last few years BBC 4 have had a couple of good documentaries on him which I have enjoyed and they have reshown a concert from the 1970s when he was at the peak of his powers. RIP and thank you Bill.
The other winners are the short sellers on the stock market while showing complete contempt for the pious wishes of the BoE governor – its almost as though those responsible have more influence with the government than he does.
Hi arrbee
Care is needed with any position in pretty much any market now. With all the manipulation those with inside knowledge of government or central bank action have quite an advantage. That was illustrated yesterday by the response of crude oil to the claims by President Trump that oil production could be cut by ten million barrels a day.
In fact after the recent weekend plunge and now this we may be getting complaints soon that there is no liquidity in oil markets as there must have been traders hurt by these.
It is all a case of Steve Priest on too many cans of Red Bull – they really do not have a clue what to do. I must admit that the comment about my former Danish employers made me chuckle – arrogant bunch of *****. One of the Danish seccies exclaimed one day “ You British, you think you are so important”. At the time Maersk vessels in the Gulf during the Iran-Iraq war were being told to tag along behind the US and U.K. escorted convoys. The Danish Navy (a corvette with no organic helicopter) was having its engines fixed.
After listening to King, I suspect many of these people in charge do not understand economics. I suspect that it stems from many being my contemporaries. At school, I remember discussing Friedman and monetarism with friends, who were taking Economics A-level. They dismissed it as too simplistic and believed in the false Keynesianism and “mixed economy” preached in the 70s. Keynes advocated govt spending and borrowing when the economy was in a deep trough, but it had come to mean that govt spending would expand and improve the economy – we wouldn’t pay for it in taxes as borrowing would be paid by future generations or inflated away.
There is a concept in nautical archaeology called Ruling Theory, which is Groupthink writ large – it takes hold of a whole generation and everything event is interpreted within it. Of course, after the 70s boom, inflation, bust and stagflation, the RT of false Keynesianism was swept away and replaced by monetarism. However, these people did not understand it. Friedman’s core tenet, using Fischer’s equation, was that broad money in excess of the capacity to supply produces inflation. The liberalisation of financial services in the late 80s expanded credit availability and clowns like Lawson failed to raise rates to control the money supply, so we had inflation, rate rises and the 92 recession. Off we went again – rates were too low and the consequent asset bubble was mainly in shares in the dot.bomb boom and bust. The bust was not as severe as there wasn’t the level of upping the mortgage, which had fuelled the Lawson boom. Rates were slashed in the wake of the dot.bomb bust and Al Quaeda attacks. Crucially, the late 90s had seen a huge growth in derivatives, the notable problems being Leeson and LTCM, and more false Keynesianism as govts believed they could borrow and allow some inflation to eat away at the debt – remember “we have ended boom and bust”? The elephant in the room was Japan, which had suffered a big property crash, slashed its rates to almost nothing and then endured a lost decade.
Anyway, off we went again and this time, it was quite a short cycle. Derivatives expanded and magnified the risk – but the key failing was rates were far too low as they created another asset boom (which kept the voters happy). Govts and CBs felt they could manipulate asset prices, whether they were houses or shares. The problem was that they did not understand the liquidity trap – the level at which rate changes just pump money into assets and make no real change to consumption. Japan they thought this was virtually ZIRP, but actually it is around 2.5% for western economies and the peculiarities of the UK put it closer to 4%. Despite all the warnings, rates were raised too late and the 2008 crash happened.
Now my generation were in charge. How many times did we hear that no-one had “understood” the liberal economics or what to do in the crash. So, they resorted to the false Keynesianism mixed with a curious idea called New Monetarism. Rates were cut as you would expect in a bust, but they did not understand the liquidity trap, so they were cut too far. The intended result was achieved – a steady and large rise in both house prices and share values (such that the Chinese-Yank CFA did not understand the decoupling of share values and fundamentals). This was good for the more affluent, but the expectation was that house owners would start the remortgaging of the late 80s to add to consumption. At the same time,
many govts went on a spending spree fuelled by ultra low rates – the Tories have actually doubled UK debt since 2010. The problem was they forgot the liquidity trap – extra remortgaging requires confidence, which had largely evaporated, but the trap sucked money out of consumption to support the fake asset prices. As a result, there was little consumption inflation and as most private sector jobs depend on consumption somewhere, there were few pay rises. Govts thought they had found the magic money tree – no inflation from money printing, they declared, so monetarism must be wrong. They of course ignored asset inflation, which was cited as proof of the recovering economy. So, in this Japanese-style stagnation, they hit on New Monetarism. If excess money raised demand, then surely printing money would raise demand and if there was little inflation, then this would lift the economy. Thus we get the nonsense of 0.25% cuts to “stimulate” the economy ( sometimes they admit it is to raise asset prices for the affluent) and the QE – buying bonds as CBs actually do to adjust rates anyway. The latter has gone unnoticed by most people, because they think rates are set by CB edict.
So, there it is – basically, clowns educated in fake Keynesianism really not having a clue, but raising asset prices to suit their affluent chums, who own most of them. Interestingly, I remarked on higher rates (not happening) or a black swan (corona) shaking the foundations of the latest ruling theory. However, I see on YouTube that Taleb, author of the eponymous book, is saying that corona is not a black swan, because we have had previous epidemics like swine flu, so it was a known risk that could at least have been mitigated in advance. I defer to the author, but it does make my point about King/Kay that uncertainty is not inherently uncertain, but often an excuse for ignoring (deliberately or ignorantly) a known risk.
I was amused by another Youtube video suggesting Johnson was going to throw Cummings under a bus (see what they did there). So, to cheer us up, here is a jolly tune
Hi dave
I remember the LTCM bust quite well as those of us in the short sterling options pit were mostly hit hard by it. On one Friday afternoon someone who knew what was happening elsewhere hoovered up many of our option offers and it took me about a fortnight of trading tactically as well as I can to get back where I started. Oh well!
Leeson was a different kettle of fish as I am partly responsible as I was one of a 4 man team who did options and futures for Baring Securities and we left. They had no-one and so they promoted the lad who collected the dealing tickers. What could go wrong?
Ewan McGregor played him in the film – who would play you?