I'll get to your issues in due course...I have been away from these pages because I have been busy. I will tell you that Central Banks do not, can not, create credit demand. If they could they would, they have been trying to do that for almost six years now but they only have governments as takers...as if you need to encourage that demand in the first place. Private credit demand is not CB driven, it is fiscal policy driven. If the fiancial crises proves anything, it proves that.
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Understanding central banks and monetary science Part 1
- Thread starter FireWalker
- Start date
M
morganist
Quote from Ed Breen:
I don't know how anyone can confuse a credit crunch with a bank run. A bank run is when a bank's depositors or counter parties want to withdraw their funds or dealings with a bank. They do this because they fear the bank will not be able to borrow money to fund withdrawals becuase they fear the bank is or will become insolvent.
A credit crunch on the other hand is when banks raise leverage ratios on collateral assets in order to underwrite new loans or when banks withdraw from lending on asset classes entirely.
So a 'bank run' is something that happens to a bank as its deposit customers withdraw and a 'credit crunch' is something that happens to borrowers when the bank begins to withdraw from lending. How can you confuse those two things? You need to start hanging out with different people.
Well you have just summed up the British government so I think you are right.
http://morganisteconomics.blogspot.co.uk/2012/07/the-ostrich-removes-its-head-from.html
The above article explains and this was a dinner with the 'top economists in the country' including one government minister.
Also I don't actually agree with you about the credit crunch. You say it is the borrowers stop sell credit. I would see it as the lenders stop buying it. It is when the credit derivative market demand dires up that a credit crunch starts at least that is what happened the last time. That then increases the interest rate outside of the the central banks control due to the bank that took on the borrowing having to hold onto the debt making them liable for the risk so they have to push the interest rate up.
The Bank of England only has control of half of the interest rates in the UK. The rest are market set and this is why so many have had an increase in mortgage payments while the base rate has fallen. I would argue as to whether the central bank has control of the interest rate.
Read the below.
http://morganisteconomics.blogspot.co.uk/2011/09/negative-interest-rates-will-they-work.html
M
morganist
Quote from Ed Breen:
I'll get to your issues in due course...I have been away from these pages because I have been busy. I will tell you that Central Banks do not, can not, create credit demand. If they could they would, they have been trying to do that for almost six years now but they only have governments as takers...as if you need to encourage that demand in the first place. Private credit demand is not CB driven, it is fiscal policy driven. If the fiancial crises proves anything, it proves that.
If you read the articles you will see I never claimed the central banks created credit demand as you call it. Although that is debatable. You are also negating the impact that the lending term extensions create this is something done within the regulatory process and enables credit expansion. In any event I think you misunderstanding my point.
One further thing I would say about the UK is the demand for credit is almost unlimited. If people can get it they will take it. The CB actions merely allow it. The problems I saw that were generated by the sub prime were from the increased default rate and the increase in risk that created. As that went up it deterred interest in the credit default market and pushed up the interest rate. In that I think we agree the mechanism that control the interest rates at least non base rate linked was the lack of credit demand.
M
morganist
Quote from Ed Breen:
If they could they would, they have been trying to do that for almost six years now but they only have governments as takers...as if you need to encourage that demand in the first place.
This is an issue of risk not insolvency, although you are right the insolvency created the risk, also the central bank controlled base rate loans were not affected, apart from the later interest rate lowering to meet inflation targets.
See below about risk.
http://morganisteconomics.blogspot.co.uk/2011/11/risk-is-reason-economy-is-not-growing.html
I will look at your stuff later, but I want to be very clear and simple here now, Central Banks do not, can not, create demand for private credit. We have seen them reduce interest rates to Zero in the U.S. and still private credit continues to contract. We have seen our CB increase its balance sheet to triple what it was in 2007 and still private credit continues to contract. The economists at the Federal Reserve have published serious papers that show that Central Bank interest rate modulation and Central Bank increase of base money supply does not have a transmission mechanism to increase bank lending or increase the general price level and so does not, can not drive private credit formation. Private Credit demand arises in the private sector economy based on the whether the fiscal context encourages innovation, risk taking and capital investmenet. The CB controls cost to some degree on the short side and supply but it has no control over credit demand.
M
morganist
Quote from Ed Breen:
I will look at your stuff later, but I want to be very clear and simple here now, Central Banks do not, can not, create demand for private credit.
This is not something I have claimed. They merely allow the demand to forfilled. There is as I stated almost complete elastic demand for credit in the UK. What I explain is the mechanisms used by the central bank to allow the demand to be forfilled.
I think what you are confusing is the deterant I explain which occurred during the sub prime crisis was the on the behalf of the purchasers of the credit derivatives. In short people did not want to buy other peoples debt because of the newly obvious risk. This reduced the demand for credit did not come from the decline in the demand to borrow but in the reduction of demand to buy borrowers debt. You are in my opinion making out that the market force of credit decline is the desire of the borrower or potential borrower to not want to borrow. I am saying it is the lack of desire of the purchaser or potential purchaser of the debt to buy it. This was created due to the obvious risk, which has not gone.
The demand to borrow is still high in the UK people cannot get money so the government is setting up schemes. However it is demand to buy other people's debt that has gone. Can you see what I saying it has nothing to do with the CB apart from they allowed too much debt in the first place to be lent. It is the market mechanisms that have failed.
I don't look at U.K. economic statistics so I can't comment on your assertion about demand for debt in the U.K. What statistic do you look at to determin demand for debt?
I look at the 'H' series reports for the U.S., the aggregate banking reports and the Fed Balance Sheet (published by the St. Louis Fed.). That tells you were the money is. It shows that private credit in general has been contracting...the aggregate declines. This has happened despite all efforts by the U.S. Fed to stimulate private credit formation. Seth Carpenter, an economist at the Federal Reserve Bank of Washington, DC. has studied the effectiveness of interest rate reduction and increase of base money supply with regard to private credit formation and general price increase...you can google his paper simply by searching 'Seth Carpenter Monetary Transmission Mechanism'...if you can't find it let me know. The paper shows that supply of base money and reduced interest rates by the CB are ineffective in driving credit formation. Credit formation needs to be pulled through by borrower demand.
Understand that demand and bank supply is for debt that can be underwritten at current underwriting standards. This is where you and I may come closer together on this credit demand thing. Essentially, from an underwriting point of view, private credit expansion is limitted by the value of collateral assets used to secure the private loans. The value of the collateral assets depends greatly on expectations about future growth and how asset values are likely to change over time. Since the financial crises this expectation about collateral asset value has declined. In addition, asset values are not expected to grow in the future at the same rates they were expected to grow in the past. The result is that banks now underwrite less credit on present asset value and they underwrite less leverage on those assets. When borrowers have been leveraged according to higher asset values and growth expectations that are precrises, they find that they cannot underwrite the same converage on new loans...so they borrow less and in some cases they cannot raise the amount of credit that makes sense for thier investment plan. While we can assume that there would be more demand at higher asset values and at higher leverage ratios that is simply no longer the case and so, current demand must be measured against what is currently underwritable.
Bottom line on this is that credit expansion is limitted by current collateral asset values and expectations for future growth (or decline) in those values. This constraint is entirely driven by the fiscal outlook which has the greatest impact on asset value.
In the U.S. and as far as I can tell, its really an international market, there is strong demand presently for properly underwritten loans and securitized loans...in fact there is a shortage of such investments. This is refelcted in the sale of the U.S. Fed's Maiden Lane and assorted 'other assets'. With the fed buying of RMBS presently there is increasing demand for these products. Bank earnings in the U.S. reflect the ability of banks to sell their previously troubled securitized assets at prices that are higher than the levels they were previously wirtten down to. This has been allowing the banks to book increased 'earnings' even thought their operating earnings are declining.
I think you have to consider the idea of 'demand' to mean demand for 'credit assets' that are underwritten according to post credit crises standards. These assets are sought after in the present flat yield curve environment.
I look at the 'H' series reports for the U.S., the aggregate banking reports and the Fed Balance Sheet (published by the St. Louis Fed.). That tells you were the money is. It shows that private credit in general has been contracting...the aggregate declines. This has happened despite all efforts by the U.S. Fed to stimulate private credit formation. Seth Carpenter, an economist at the Federal Reserve Bank of Washington, DC. has studied the effectiveness of interest rate reduction and increase of base money supply with regard to private credit formation and general price increase...you can google his paper simply by searching 'Seth Carpenter Monetary Transmission Mechanism'...if you can't find it let me know. The paper shows that supply of base money and reduced interest rates by the CB are ineffective in driving credit formation. Credit formation needs to be pulled through by borrower demand.
Understand that demand and bank supply is for debt that can be underwritten at current underwriting standards. This is where you and I may come closer together on this credit demand thing. Essentially, from an underwriting point of view, private credit expansion is limitted by the value of collateral assets used to secure the private loans. The value of the collateral assets depends greatly on expectations about future growth and how asset values are likely to change over time. Since the financial crises this expectation about collateral asset value has declined. In addition, asset values are not expected to grow in the future at the same rates they were expected to grow in the past. The result is that banks now underwrite less credit on present asset value and they underwrite less leverage on those assets. When borrowers have been leveraged according to higher asset values and growth expectations that are precrises, they find that they cannot underwrite the same converage on new loans...so they borrow less and in some cases they cannot raise the amount of credit that makes sense for thier investment plan. While we can assume that there would be more demand at higher asset values and at higher leverage ratios that is simply no longer the case and so, current demand must be measured against what is currently underwritable.
Bottom line on this is that credit expansion is limitted by current collateral asset values and expectations for future growth (or decline) in those values. This constraint is entirely driven by the fiscal outlook which has the greatest impact on asset value.
In the U.S. and as far as I can tell, its really an international market, there is strong demand presently for properly underwritten loans and securitized loans...in fact there is a shortage of such investments. This is refelcted in the sale of the U.S. Fed's Maiden Lane and assorted 'other assets'. With the fed buying of RMBS presently there is increasing demand for these products. Bank earnings in the U.S. reflect the ability of banks to sell their previously troubled securitized assets at prices that are higher than the levels they were previously wirtten down to. This has been allowing the banks to book increased 'earnings' even thought their operating earnings are declining.
I think you have to consider the idea of 'demand' to mean demand for 'credit assets' that are underwritten according to post credit crises standards. These assets are sought after in the present flat yield curve environment.