The history of the credit crunch continues to be rewritten

Today is a day for central bankers as both the Bank of England and European Central Bank declare the results of their latest policy decisions. However it will be a Super Thursday only in name as  the main news concerning the Bank of England this week has been the extension of Governor Carney;s term by seven months to January 2020. A really rather extraordinary move on both sides, as we mull not only the possibility of future monthly or even weekly future extensions,, and on the other side what happened to the personal circumstances that supposedly stopped him staying for longer in the first place?

Moving to the ECB the rumour yesterday was that its economic forecasts will be revised down slightly which is likely to reduce the rhetoric about the Euro area economy being resilient. But apart from that there is little for it to do apart from play down the recent news about money laundering via banks being rife in some of the smaller ( Malta and Estonia) Euro area countries. President Draghi may also repeat the hints he keeps providing that he has no intention of raising interest-rates n his term of office. This may have a market impact as more than a few have convinced themselves that a 0.2% rise is due this time next year. Apart from the fact that the ECB changes interest-rates by 0.25% and not 0.2% the apparent slowing of the Euro area economy makes that increasingly unlikely.

Rewriting History

This week has seen a lot of reviews of the crash of a decade ago but the most significant comes from the man at the centre of the response which was Ben Bernanke of the US Federal Reserve. He has written a paper for Brookings which to my mind illustrates why central banks have put so much effort into raising asset and in particular house prices.

Recent work, including by Atif Mian and Amir Sufi, proposes that the accumulation of debt during the housing boom of the early 2000s made households particularly vulnerable to changes in their net worth. When house prices began to decline, homeowners’ main source of collateral (home equity) contracted, reducing their access to new credit even as their wealth and incomes declined.  These credit constraints exacerbated the declines in consumer spending.

Or if you want the point really rammed home here it is.

Mian and Sufi and others attribute the economic downturn in 2008 and 2009 primarily to the boom and subsequent bust in housing wealth,

Thus central bankers including Ben decided that the response to the bust in housing wealth was to create another boom. Many of them including Ben himself did so well before the paper he quotes was written. For example the US Federal Reserve bought mortgage-backed securities as follows.

From early 2009 through October 2014, the Federal Reserve added on net approximately $1.8 trillion of longer-term agency MBS and agency debt securities to the SOMA portfolio through its large-scale asset purchase programs. ( New York Fed).

Thus we see than Ben Bernanke is being somewhat disingenuous in pointing us to a paper written in 2014 when he made his response in 2009! Anyway there is a statistic you may like in the paper.

that the total amount of debt for American households doubled between 2000 and 2007 to $14 trillion?

The banks

They would have been helped in a variety of ways by the response to the credit crunch. Firstly by the large interest-rate cuts and next by the advent of QE ( Quantitative Easing) which helped them both implicitly by raising the value of their bond holdings and explicitly via the purchase of mortgage debt. Some were also bailed out and that mentality seems to be ongoing.

 We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next fire from becoming a conflagration. We must also resist calls to eliminate safeguards as the memory of the crisis fades. For those working to keep our financial system resilient, the enemy is forgetting.

That is from an opinion piece in the New York Times from not only Ben Bernanke but the two US Treasury Secretaries which were Hank Paulson and Timothy Geithner. What powers do they want?

Among these changes, the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds. These powers were critical in stopping the 2008 panic.

In other words they want to be able to bailout and back stop the banks again. Or if you prefer take us back to the world of privatising profits and socialising losses. For the establishment in the US that worked well as the government made a profit and the banks were eventually able to carry on regardless. Indeed the next stage of fining banks also was something of an establishment merry go round as you can argue that it was just another way of the banks repaying the establishment for the bailouts.

On the other side of the coin ordinary people did lose money. Some had their homes foreclosed on them and others lost their savings. The unfairness of this arrives when we look at bank shareholders who had losses. In itself that is not a crime as by being shareholders they take a clear risk. But the rub is that the losses were driven by a combination of fraud and malpractice for which so few have been punished. If we move onto the bank fines we see that yet again punishment hit bank shareholders whereas bank executives might see a lower bonus but otherwise remained extremely well rewarded. We are back to the theme of the 0.01% being protected whilst the 99.99% bear any pain.

Putting it another way here is former Barclays boss Bob Diamond from the BBC website earlier.

Former Barclays boss Bob Diamond has said he fears banks have become too cautious about taking risks.

Mr Diamond told me the risk-averse culture means they can’t support the economy and generate jobs and growth.

Support the economy or bankers pay?


Here is perhaps the biggest rewriting of history as we return to the thoughts of Ben Bernanke at Brookings.

“There’s some folks who don’t like QE, and as each argument fails, they move down the ladder. And so now you have hedge fund managers writing in the Wall Street Journal how QE is creating inequality as if they cared.”

You may note that there is no actual denial that QE creates inequality. Frankly if you boost asset prices which is its main effect you have to benefit the asset rich relative to the poor. However back in March the Bank of England assured us this.

Monetary policy had very little effect on overall inequality

How? Well let me show you their example of inequality being unaffected.

 But it is worth noting that existing differences in net wealth mean that a 10% increase for all would equate to £200 for the bottom decile and £195,000 for the richest.

Apart from anything else this was awkward for the previous research from the Bank of England which assured us QE had boosted wealth for those with pensions and shareholders. I guess they were hoping we had forgotten that.


The last few days have seen quite a bit of rewriting history about the credit crunch as the establishment wants us to forget three things.

  1. It was asleep at the wheel
  2. Those who caused it got off scot free in the main and were sometimes handsomely rewarded whereas many relative innocents suffered financial hardship.
  3. The response not only boosted the already wealthy but contributed to an economic world of struggling real wage growth

The first problem will recur we know that in spite of all of the official claims to the contrary. As to the response one issue is that those in charge are invariably unsuited to the role. They are picked out of academia and/or the establishment and suddenly find that they go from a cosy slow-moving world to one that is exactly the reverse, so we should not be surprised if they act like rabbits caught in a car’s headlights. So on that score I think we should cut Ben Bernanke some slack but that does not eliminate points two and three which are critiques of the economic regime he implemented.

Also if we stay with central banks it could all have been worse as imagine you are at Turkeys central bank the CBRT deciding how much to raise interest-rates and you read this!

Erdogan says must lower interest rates ( @ForexLive )





The Economic Generation Game in the UK looks increasingly unfair to me

Today is one where one of the themes of this blog has hit the wider media. It is the argument that modern economic policy favours different age gaps and accordingly benefits some age groups much more than others. Specifically it tends to favour the older over the younger if we make a sweeping assumption. Whilst there may be elements of an explicit plan here actually I think that most of it is due to the fact that the establishment which as Malcolm Rikfind so (un)ably demonstrated on the BBC yesterday thinks it has a right to both money and power, looks to enrich itself and its acolytes. Financiers and the wealthy of course tend to surround those in power and inflate their egos in return for morsels of information about what will happen next. In a world where front-running central banks is the main game in town it obviously helps to know the next chess move! Accordingly both power and wealth tends to congregate and policies favour those with existing assets of which there are simply more of them as we get older.

An explicit move

The election period tends to see moves to favour older people simply because they are more likely to vote. An example of this was seen only yesterday. From the BBC.

Universal benefits for pensioners will once again be protected if the Conservatives win May’s general election, David Cameron has said.

Actually there is a bigger promise made by all the leading parties which tends to be ignored.

These benefits cost £3bn a year. That is small when you consider that all the main parties are willing to spend hundreds of millions of pounds during the next Parliament by sticking with the “triple lock” protection of the state pension.

Sorry about the BBC’s mathematics,apparently hundreds of millions is more than 3 billion in their world! But the fundamental point is that the cost of the “triple lock” is unknown but expensive should inflation be high or low (the 2.5% guarantee).

Also there are the Pensioner Bonds for those over 65 which offer savings rates of 2.8% for one year and 4% for three years when the respective Gilt yields are more like 0.3% and 0.6%.

Quantitative Easing

This has been a policy which has benefitted those with existing financial assets including some which have been saved from going bust as we examine an ever-growing list of moral hazards. You do not have to take my word for it as here is the Bank of England from July 2012.

Many more companies would have gone out of business.

But later comes the crux of the matter as the Bank of England puts a positive spin on what it has done.

As a result, the Bank’s asset purchases have increased the prices of a wide range of assets, not just gilts. In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

You may note that it does not mention the price of houses which across the wider population is the main player here. Perhaps that truth is simply too painful. However there was a confession that it had contributed to inequality.

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Or putting it another way.

Looser monetary policy also typically pushes up asset prices (sometimes referred to as the ‘wealth effect’), so those households with significant asset holdings will benefit by more than those without

Now there will be plenty of older people with few or no assets and some with negative ones and some younger ones with a portfolio but in general the older you are the more likely it is that QE boosted your asset position.

Funding for (Mortgage) Lending Scheme

This in many ways is the main player in an intergenerational transfer as in spite of being badged as a boost to business lending we saw mortgage rates fall and lending rise in response to it. Very quickly house prices rose benefiting existing owners who are in general of a certain age overall and making life more difficult for first time buyers who in general are younger and often much younger. It was a particularly perverted piece of language which saw such policies – there is also Help To Buy – as benefiting first time buyers.

In a type of timing that may not have been an accident this policy began in July 2012 or the same time as the Bank of England report when the average UK house price was £234,000 and as of December 2014 it was £272,000. Of course there may be other influences but ta the time house prices were simply drifting and it has hardly been either wage growth in either its nominal or real forms which has drive prices higher!

So existing house owners have a more valuable asset whilst new buyers have to pay more and out of an income which in general has risen by much less.

Wages and student debt

If we look from the perspective of the younger than their world is one where thankfully we are seeing more employment but the question at hand is the price of it. Wage growth as I have written on previous occasions has fallen considerably and whilst there is a new hope for real wages they have fallen by around 10% in the credit crunch era depending on the inflation measure used. Indeed a reply to the Financial Times article makes this claim.

Real wages for the under 25s have fallen so far that they are now back to 1988 levels,

If we move to the balance sheet ledger we see that more and more of our younger people are being weighted down by larger and larger amounts of student debt. From HM Parliament.

Currently more than £10 billion is loaned to students each year. This is expected to grow rapidly over the new few years and the Government expects the value of outstanding loans to reach over £100 billion (2014-15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014-15 prices) by the middle of this century.

This is of course before they are expected to join the queue to take out a mortgage to purchase a house (which is now much more expensive). I regularly mention that we are increasingly living in a world described by the novel Dune and this part seems much more Harkonnen than Atriedes to me.

The Financial Times

The FT has entered the debate by quoting from the UK Data Service which has 50 years of data. First we have the declining position of the young.

Despite the trials of inflation and unemployment in the 1960s and 1970s, people aged between 20 and 25 with average incomes after housing costs were better off than at least 60 per cent of population…..they can now expect only 37 per cent of the population to have lower incomes after taking into account housing costs in 2012-13.

Now the improving position of the older part of the population.

Replacing the young in the premier league of living standards have been people in their 60s and 70s. The average 65-70-year-old used to have lower living standards than 75 per cent of UK families. Now people in the same age group can expect to be almost in the top 40 per cent of family incomes.

There are a couple of caveats which come to mind here. Firstly these are relative rather than absolute numbers and secondly the FT quotes house prices as an influence on income rather than wealth. Perhaps it is implicitly admitting that buy to let is more of a player than many might consider but I will mull that one a bit. Or it might be the income from the funds released by those who have taken their profits.


In any analysisof this type there is always a broad brush and something of this from The Specials.

He’s just a stereotype
He drinks his age in pints
He has girls every night
But he doesn’t really exist

For example I am sure that there are predominantly older savers reading this wondering about the consequences of a Bank Rate which has stayed at an emergency rate of 0.5% for nearly six years now. The impact was reinforced by the implications of the FLS as savings rates were pushed even lower.

But the fundamental trend of a “can-kicking” strategy is that there is a transfer of wealth from the future to the present and that plainly benefits those alive now at the expense of those who will be alive then. There are many advantages to being young and they are alive at a time of great advancement in many ways but economics and fairness are not one of them.

Oh and I did like this reply to the FT which poaches some of my musical references theme but raises a smile.

Prince should have actually sung the song ‘Party like I am 99’

How much has expansionary monetary policy such as QE raised inequality?

Sometimes the strands of the news flow link together as if they have been constructed into a chain. One of these at the moment concerns the way that central banks have pumped money and funds into the world economy via Quantitative Easing. This is a hot topic on its own right now as we await the European Central Bank policy announcement on Thursday and I am sure that the midnight oil was being burnt in its Frankfurt towers over the weekend. That is of course without the event that redistributed wealth last Thursday when the Swiss National Bank abandoned its Swiss Franc cap against the Euro which then saw the Swiss Franc end the week some 18% higher against the US Dollar than it started it. Happy Days for those long the Swiss Franc but unhappy days for those short it or indeed brokerages with client short it as Alpari UK bit the dust.

What about inequality?

The theme of the 1% and the 99% or rather the 0.1% and the 99.9% has haunted the credit crunch era. Furthermore the issue of how much of this has been created by central bank policy has been hotly debated. I will return to that subject in a moment but let us first examine today’s report from Oxfam on world inequality.

Oxfam steps into the fray

Some of today’s release is certainly eye-catching to say the least.

In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet. Almost all of that 52% is owned by those included in the richest 20%, leaving just
5.5% for the remaining 80% of people in the world. If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years, as shown on Figure 2, with the wealth share of the top 1% exceeding 50% by 2016.

There is plenty of food for thought in a statement that the world’s richest 1% are soon to own a majority of world wealth. But was it always like this? Apparently not.

Data from Credit Suisse shows that since 2010, the richest 1% of adults in the world have been increasing their share of total global wealth.

Actually if you look at the chart in the report the statement above is simultaneously true and misleading. You see if we go back to the beginning of this century the top 1% were pretty much in the position they are now and they were then hit by the credit crunch but have regained ground since. I guess that global wealth held by the top 1% is less than in the year 2000 does not make as good a headline.

However of course there is another possible scenario at play here which is that the moves such as QE are in effect an attempt by the global elite to regain their previous position and maybe even improve it as we move forwards. Indeed the ultra-rich seem to be doing just nicely out of events.

The very richest of the top 1%, the billionaires on the Forbes list, have seen their wealth accumulate even faster over this period. In 2010, the richest 80 people in the world had a net wealth of $1.3tn. By 2014, the 80 people who top the Forbes
rich list had a collective wealth of $1.9tn; an increase of $600bn in just 4 years, or 50% in nominal terms.

Of course correlation does not prove causation but it is the mother and father of thousands of conspiracy theories! Although some care is needed here as in the credit crunch era conspiracy theories have developed a habit of actually being true.

What about QE and timing?

If we look back we see that extraordinary monetary policies do seem to fit with the timescale here. If we examine the moves of the Bank of England where QE began in March 2009 and some £200 billion was spent on bond purchases by January 2010 followed by later tranches making the total some £375 we do see that the timing is indeed consistent with the wealth increases above.

Of course on a world scale the biggest player by far has been the US Federal Reserve. The first effort now called QE1 came down the slipway in December 2008 and was followed by QE2, Operation Twist and then QE3. It’s balance sheet has expanded in total by £3.6 trillion on top of the just under US $0.9 trillion of the run up to the credit crunch. What has been in doubt throughout this period has been where the money went!

To this we can add on and off actions by the Bank of Japan which has been proclaiming “bold action” until it really let rip recently and the ECB with its trillion Euro LTROs.

Never believe anything until it is officially denied

We have seen a litany of denials that the policies of central banks have indeed led to rising inequality. Instead they tell us that such policies have boosted economic growth and “saved the world”. Every now and then even a main player such as Federal Reserve Chair Janet Yellen goes off message. From October 17th.

It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history,

The distribution of wealth is even more unequal than that of income, and the SCF shows that wealth inequality has increased more than income inequality since 1989.

She of course avoided the impact of the policies of which she has been an avid supporter.

The Bank of England in its enthusiasm to demonstrate some sort of benefit from QE ended up firing a bullet or two into its feet back in July 2012.

this in turn has led to an increase in demand for other assets, including corporate bonds and equities. As a result, the Bank’s asset purchases have increased the prices of a wide range of assets, not just gilts. In fact, the Bank’s assessment is that asset purchases have pushed up
the price of equities by at least as much as they have pushed up the price of gilts.

Who owns the most equities? The richest and wealthiest of course. So we see something of a QED for QE.

What about the bond party?

This is a more recent trend which most data will miss. But we are now seeing extraordinary surges in many government bond prices and it is not an exaggeration to say that some falls in yields have become collapses. Last week saw even ten-year yields in Switzerland dice with negativity and this morning has seen the same maturity in Japan have a yield of below 0.2%. I note these as Japan is into I think QE 13 and the Swiss currency cap was a type of QE in drag. Oh and a consequence of the Swiss policy was that it bought a lot of Euro area bonds.

Who is likely to be holding such bonds? You do not have to be a conspiracy theorist to believe that they and their advisers will be aware of the plans of central bankers. After all they will all be meeting up at the World Economic Forum in Davos later this week won’t they?


There is much to consider on the subject on inequality and the first issue is getting any sort of accurate data. The Oxfam Report quoted from above uses data collected from Credit Suisse which makes them an odd couple for a start! But there are issues with the methodology as Felix Salmon pointed out last year.

How is it that the US can have 7.5% of the bottom decile, when it has only 0.21% of the second decile and 0.16% of the third? The answer: we’re talking about net worth, here: assets minus debts. And if you add up the net worth of the world’s bottom decile, it comes to minus a trillion dollars.

My niece, who just got her first 50 cents in pocket money, has more money than the poorest 2 billion people in the world combined.

So perhaps the one thing we are left with is that the ultra-rich are getting richer. Also we are left wondering about Oxfam as an organisation which publishes such a report but also does this. This is from Forbes about Oxfam America.

Top Person: Raymond C. Offenheiser
Top Pay:4 $355,941

Fiscal Year ending on 10/31/10

So what have we learnt? That such analysis has a litany of problems. But that we do these days have more availability of information which means that we know more about this than we did. So was it always true? Probably. There is an element of irony in the impact of the credit crunch reducing inequality but we are left with the thought that whether it was deliberate or by chance that policies like QE have increased inequality since and are likely to continue doing so. Something to think about as we see them take the stage at the World Economic Forum at Davos from Wednesday.