Credit Squeeze

[a_unique_person]

Don't look now, but there's a credit squeeze on.

IIRC, according to monetarists, this should be in the hands of the government central banks. However, it appears to be outside of their control.

http://www.smh.com.au/articles/2007/08/30/1188067277235.html



HOME loan rates are likely to rise by about a quarter of a percentage point in coming weeks as a result of a funding crisis sweeping global credit markets, the country's third-largest bank warned yesterday.
ANZ bank indicated that the higher cost of money in the United States, which had been used to provide cheap mortgages in Australia, would almost certainly push up repayments on a typical $300,000 loan by $50 a month if the lending crunch continued.
This was likely to initially affect those home owners who had borrowed from mortgage brokers and specialised lenders who had, in recent years, raised finance from sources other than Australian banks.

[drkitten]

Don't look now, but there's a credit squeeze on.

IIRC, according to monetarists, this should be in the hands of the government central banks. However, it appears to be outside of their control.


I'm not quite sure what you're suggesting here. A global credit squeeze is outside of the control of central banks of individual nation-states? Goodness me. I guess that whole Jewish-Mafia-Gnomes-of-Zurich aren't as powerful as you thought?

[a_unique_person]

I'm not quite sure what you're suggesting here. A global credit squeeze is outside of the control of central banks of individual nation-states? Goodness me. I guess that whole Jewish-Mafia-Gnomes-of-Zurich aren't as powerful as you thought?

I don't know what you think I think, but I suspect you have no idea.

[a_unique_person]

And the credit squeeze goes on. The central banks would like it to be over, the rest of the banks ditto. It appears to be out of their control.

http://www.smh.com.au/news/business/credit-squeeze-hits-aussie-banks/2007/09/06/1188783393027.html

http://www.abc.net.au/worldtoday/content/2007/s2030952.htm

[a_unique_person]

http://www.theaustralian.news.com.au/story/0,25197,22435410-643,00.html



SHARES in the cash-starved British bank Northern Rock lost a third of their value for the second straight trading day yesterday as frantic customers again lined up at branches to withdraw money.
In scenes more reminiscent of the Weimar Republic than one of the 21st century's strongest economies, thousands of deposit holders ignored assurances from the Brown Government and the Bank of England that their money was safe, prompting fears that up to half of the bank's 24 billion pound ($57 billion) deposits may be withdrawn.
The British Government weighed into the crisis by vowing to protect all savings held in the beleagurered bank.
The exceptional move was announced by Finance Minister Alistair Darling.

Meanwhile, fears that problems could spread led shares in another major British home loans specialist, the Alliance and Leicester, to plummet by over 30 per cent.

Darling announced the new move after talks with the Bank of England and the Financial Services Authority (FSA) over how to deal with the mounting sense of crisis.

”Should it be necessary we and the Bank of England would put in place arrangements that would guarantee all the existing deposits in the Northern Rock bank during the current instability in the financial markets,'' he said.

”That means that people can continue to take their money out of the Northern Rock bank ... but if they choose to leave their money in the Northern Rock bank it will be guaranteed safe and secure.''
Under normal regulations up to 33,000 pounds ($A78,834) of deposits are protected, but anything more is not guaranteed. The minister's announcement covers all savings, whatever the amount.

[Francesca R]

http://www.theaustralian.news.com.au/story/0,25197,22435410-643,00.htmlIt is pretty exceptional for the government to promise to effectively nationalise a commercial bank, even if they imply: "we promise to do this because we are sure we will not actually have to". The bottom line on this is that the public will pick up the tab for every poor decision Northern Rock may have made, if it goes under.

[Darat]

It is pretty exceptional for the government to promise to effectively nationalise a commercial bank, even if they imply: "we promise to do this because we are sure we will not actually have to". The bottom line on this is that the public will pick up the tab for every poor decision Northern Rock may have made, if it goes under.


Not quite - first of all there is for all UK banks the protection for the first £35,000 of any deposit - (I think you get back something like £34,000 if a bank totally went under).

Then if Northern Rock does go under it is the shareholders that would lose out first and foremost, and they still will. It is only the depositors that are being offered any additional protection. And according to all accounts the Northern Rock was only struggling to offer new money for new business.

Indeed don't forget until this broke it was expected to make around a £500 million profit this year and since it can still raise money if it needs to finance new business albeit at the apparently high interest rate the BofE will charge them (so far there has been no statement that it has had to use the BofE facility) I wouldn't be surprised to see it ends its financial year still making a profit - just a reduced profit.


ETA: I stand corrected!

The original profit was expected to be £647 million pounds, the new estimates put it at £500 million! (See: http://www.reportonbusiness.com/servlet/story/RTGAM.20070914.wnorthernrock0914/BNStory/robNews/home - last paragraph)

[Francesca R]

Not quite - first of all there is for all UK banks the protection for the first £35,000 of any deposit - (I think you get back something like £34,000 if a bank totally went under).That's about right. However this level of deposit protection has proved to be completely inadequate in the Northern Rock case. One of the main reasons for this is the beaurocracy and delay involved in trying to make a claim for deposit insurance. Apparently it can take at least six months, which means that if you think your bank is in distress, even (especially) if you are widow or orphan, the logical thing to do is to head straight down there and withdraw.

Then if Northern Rock does go under it is the shareholders that would lose out first and foremost, and they still will.Agreed. This doesn't do anything to calm depositors though.

It is only the depositors that are being offered any additional protection. And according to all accounts the Northern Rock was only struggling to offer new money for new business.By revealing information that there was some small difficulty a full scale rout has been started. This is very, very unfortunate but rational behaviour nonetheless. It's a testimony to the necessity of confidence in financial markets, and to the difficulty in upholding confidence at all times.

I must admit I don't know what I would have done here. The danger of not providing blanket protection, moral hazard and all, is that of a panic spreading which will kill off any democratically elected government. At the end of the day, is the public value of a stable banking system sufficiently high that bearing the risk of full depositor bailout is warranted?

Should the latest measure fail to stop the panic (and I hope and expect that it will) then the government will have no choice but to extend full deposit insurance to any and every UK bank.

[Francesca R]

Northern Rock bail-out may breach EU laws

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/cneu119.xml

EU officials stressed that the competition watchdog [ . . . ] so far appeared satisfied that London had acted within reasonable bounds.
However, the picture could change if Northern Rock or any other lender began to depend on some form of state support, whether in the form of guarantees or direct aid.

[Darat]

What a fantastic non-story "If they do something wrong then there may be consequences" ! :D

Don;t know why they didn't run with a "Gordon Brown could expect to serve a life sentence for murder! If he was ever found guilty of murdering anyone."

[a_unique_person]

A comprehensive look at the source of the problem.

http://www.abc.net.au/4corners/content/2007/s2032799.htm

Today they have cut interest rates, and the markets have taken off again.

[madurobob]

A comprehensive look at the source of the problem.

http://www.abc.net.au/4corners/content/2007/s2032799.htm

Today they have cut interest rates, and the markets have taken off again.
I found it very interesting that the NYSE took off at 2:00 - just after the rate cut announcement.

The three business news reports I heard early in the morning were claiming the rate cut was a done deal. They all lead with something like "The Fed is expected to cut the key lending rate by up to 1/2 a point".

Given that, why would the market not react until 2:00? I expected to see a gradual rise with a slight adjustment at 2:00

[Francesca R]

I found it very interesting that the NYSE took off at 2:00 - just after the rate cut announcement.

The three business news reports I heard early in the morning were claiming the rate cut was a done deal. They all lead with something like "The Fed is expected to cut the key lending rate by up to 1/2 a point".

Given that, why would the market not react until 2:00? I expected to see a gradual rise with a slight adjustment at 2:00Trying to rationalise intra-day market movements? :)

Word is that half the market expected 0.5% and the other half just 0.25%, so the latter group rushed the gates.

[rjh01]

What to predict what the markets will do? Then learn about chaos theory.

[Darat]

Or watch worried sheep in a field!

[Francesca R]

Par-boiling a frog can be a good proxy.

[madurobob]

Well, I used to cook a chicken, bury it under a rock, dig it up a month later and throw the bones in the air. But, by then I had often forgotten the question.

That latter group rushing the gates sounds reasonable, but the jump was pretty big.. and it cascaded to other markets as well. Much larger an impact than I would have expected in that scenario (the idea of any rate cut should drive the change, the amount of the cut should drive minor correction if outside expectations). That scared sheep idea fits more and more with the actual outcome than does the idea of a rational, efficient market. Maybe I needed to go to an agricultural school instead? Move to NZ?

[Ben Tilly]

Well, I used to cook a chicken, bury it under a rock, dig it up a month later and throw the bones in the air. But, by then I had often forgotten the question.

That latter group rushing the gates sounds reasonable, but the jump was pretty big.. and it cascaded to other markets as well. Much larger an impact than I would have expected in that scenario (the idea of any rate cut should drive the change, the amount of the cut should drive minor correction if outside expectations). That scared sheep idea fits more and more with the actual outcome than does the idea of a rational, efficient market. Maybe I needed to go to an agricultural school instead? Move to NZ?

Two things you're missing. The first is that while most people thought there would be a cut, a significant minority didn't. So they were shocked more than you'd expect. The other is that a rising stock market can be a sign of things that aren't good news.

What, you say? How can that be?

Well what happens if the market says that the real value of a company remains the same, but the value of the US dollar drops? Well then, the price of that company's stock measured in USD just went up! And in fact the US dollar did drop significantly this week against other currencies, so far this week 1.3% versus the Euro. That is not, granted, as much as the stock market went up. But it does explain some of the pop.

[geni]

Don;t know why they didn't run with a "Gordon Brown could expect to serve a life sentence for murder! If he was ever found guilty of murdering anyone."

Because that would rather go against thier setances are too short editorial.

[geni]

Two things you're missing. The first is that while most people thought there would be a cut, a significant minority didn't. So they were shocked more than you'd expect. The other is that a rising stock market can be a sign of things that aren't good news.

What, you say? How can that be?

Well what happens if the market says that the real value of a company remains the same, but the value of the US dollar drops? Well then, the price of that company's stock measured in USD just went up! And in fact the US dollar did drop significantly this week against other currencies, so far this week 1.3% versus the Euro. That is not, granted, as much as the stock market went up. But it does explain some of the pop.

The classic case being the zimbabweian stock market.

[JonnyFive]

Today they have cut interest rates, and the markets have taken off again.

Cut what rates? The discount window lending rate?

I found it very interesting that the NYSE took off at 2:00 - just after the rate cut announcement.

The three business news reports I heard early in the morning were claiming the rate cut was a done deal. They all lead with something like "The Fed is expected to cut the key lending rate by up to 1/2 a point".


The news reports are misleading. The Fed doesn't directly set the key lending rate (the rate banks charge each other for loans), it is set by the market. The Fed affects the key lending rate mostly through the sale or purchase of government securities. They use those open market transactions to impact excess bank reserves, which tends to adjust the key lending rate (also called the "federal funds rate," IIRC).

The Fed will often announce its goals with regards to the FF/key lending rate, which many news outlets misreport as the Fed directly changing the rate. In truth, it can take time for the corrections to make an impact, if at all.

The only interest rate the Fed can directly control is the discount window rate (the rate banks are charged for short-term loans from the Fed). Banks are discouraged from using those loans excessively, and it's an unreliable method of adjusting the market, so the Fed hasn't relied on the discount rate as a primary tool of monetary policy for some time. They do use it to signal their intentions sometimes, though, which counts for something.

[IllegalArgument]

What a fantastic non-story "If they do something wrong then there may be consequences" ! :D

Don;t know why they didn't run with a "Gordon Brown could expect to serve a life sentence for murder! If he was ever found guilty of murdering anyone."

Because people were betting, placing option, that it would or wouldn't move.

No one is betting that Brown will be found guilty of murder. :)

[Francesca R]

I found it very interesting that the NYSE took off at 2:00 - just after the rate cut announcement. [ . . . ]
That latter group rushing the gates sounds reasonable, but the jump was pretty big.. [ . . . ]
Two things you're missing. The first is that while most people thought there would be a cut, a significant minority didn't. [ . . . ]
The news reports are misleading. The Fed doesn't directly set the key lending rate [ . . . ]
Hurry up with this please! We need to move on to analysing what the market did after that. :)

[madurobob]

My bad - I was waiting for you to tell me!

Once we get up to what the market did tomorrow, then we'll be caught up.:)

[Francesca R]

Today (Saturday) I'm forecasting a sideways performance. I have instructed my broker to put together a "synthetic flat" exposure. I think it involves buying ans selling various options that knock out for a one tick move in any direction

[a_unique_person]

Cut what rates? The discount window lending rate?



The news reports are misleading. The Fed doesn't directly set the key lending rate (the rate banks charge each other for loans), it is set by the market. The Fed affects the key lending rate mostly through the sale or purchase of government securities. They use those open market transactions to impact excess bank reserves, which tends to adjust the key lending rate (also called the "federal funds rate," IIRC).

The Fed will often announce its goals with regards to the FF/key lending rate, which many news outlets misreport as the Fed directly changing the rate. In truth, it can take time for the corrections to make an impact, if at all.

The only interest rate the Fed can directly control is the discount window rate (the rate banks are charged for short-term loans from the Fed). Banks are discouraged from using those loans excessively, and it's an unreliable method of adjusting the market, so the Fed hasn't relied on the discount rate as a primary tool of monetary policy for some time. They do use it to signal their intentions sometimes, though, which counts for something.

Which was a part of my original question. IIRC, classic monetarist theory says the governments role is to set the base interest rate, to set the speed of the economy, (or something like that). That doesn't appear to be the case any more.

[geni]

Which was a part of my original question. IIRC, classic monetarist theory says the governments role is to set the base interest rate, to set the speed of the economy, (or something like that). That doesn't appear to be the case any more.

Never was exactly. At the very least that ignores the effects of tax policy.

[madurobob]

Today (Saturday) I'm forecasting a sideways performance. I have instructed my broker to put together a "synthetic flat" exposure. I think it involves buying ans selling various options that knock out for a one tick move in any direction
I'm sure your broker loves you!:D

[Francesca R]

I'm told it broke even before commission, but those were rather steep

[JonnyFive]

Which was a part of my original question. IIRC, classic monetarist theory says the governments role is to set the base interest rate, to set the speed of the economy, (or something like that). That doesn't appear to be the case any more.

The thing is that, in the US, it never was the case. The Fed never had the power to set the fed funds rate, and stopped using adjustments to the discount rate as a means of economic adjustment because it was a crappy, unpredictable way to adjusting things.

What do you mean by "base interest rate?" You mean the federal funds rate, right?

What do you mean by "speed of the economy?" Velocity of money? Growth of real GDP? Growth of technology? Growth of per-capita GDP?

Classic monetarist theory involves the motivating factor of market actors, not government action per se. Monetarists believe that the key motivator is the monetary base (currency in circulation + desposits at the Fed for the US), and that the interest rates serve as indicators for the impact of monetary policy.

Thus, under monetary theory, the role of the government is not to set the interest rate, but to impact the money supply. The interest rate (the fed funds rate - the key rate, whatever you feel like calling it) will serve as an indicator of the situation based on the rational behavior of the SSUs and DSUs (savers and spenders, basically) in the market.

Keynesian economics focuses more on interest rates and their impat on the market, but that still doesn't necessarily involve the government directly setting something like the fed funds rate.