Stop pretending America’s housing boom had nothing to do with lending standards

Why did Americans (and Spaniards and Irish) borrow so much against housing in the 2000s, only to find themselves stuck with more debt than assets? It sounds like a simple question, but it’s surprisingly difficult for economists to agree on an answer.

The standard approach is to attribute the excesses to changes in the behaviour of lenders, who, for whatever reason, became much more eager to give mortgages to people they previously would have avoided with terms they previously would have considered reckless. (For more on the European cases, see here.)

For example, about a third of all mortgage debt originated in 2005 and 2006 was either subprime or “alt-A”, according to data from Inside Mortgage Finance, compared to the stable 1990-2003 average of about 10 per cent. Subsequent experience tarnished these product segments so badly they effectively disappeared. Read more

FT Opening Quote: Mixed fortunes after Brexit

Pimco nabs Man Group head, Anglo American’s post-referendum boost. FT Opening Quote, with commentary by Chris Newlands, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more

Further reading

Elsewhere on Wednesday,

- The great pensions cock-up.

- German macroeconomics revisited.

- Jonathan Freedland: “… at the Republican convention in Cleveland, Trump has taken this defiance to a new level. Not content with demonstrating that he is unbound by the strictures of ‘political correctness,’ he has seemed determined to show that he is unbound by the standards of basic political competence.”

- Everything you need to know about the Ethereum “hard fork”.

- And, from the BoE: The macroeconomics of central bank issued digital currencies, aka ‘print bitcoins’. Read more

FirstFT – Trump seals nomination, London’s most expensive apartment and how to make your commute more bearable

Trump wins majority of the votes at the Republican party’s convention in Cleveland Read more

US political party platforms might matter this year?

A little bit, possibly, for the financial industry.

The main evidence for that can be found in the last-minute addition of a populist proposal to the Republican party platform adopted officially yesterday:

“The Dodd-Frank law, the Democrats’ legislative Godzilla, is crushing small and community banks and other lenders. The Federal Communications Commission is imperiling the freedom of the internet. We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.”

That’s a change from the Republicans’ live-and-let-live approach to regulation. Of course, it’s unclear how much that matters — US political parties’ platforms have become a bit of a joke in recent decades, portrayed nicely in a piece from academics Daniel DiSalvo and James Ceaser. Read more

Brexit, the Target2 angle

Everybody knows much of the City of London was vehemently opposed to Brexit because of fears of what might happen to banks’ interests if so-called “passporting” rights into and out of the European system were lost.

What is less talked about, however, is Brexit’s impact on the European payments clearing system, Target2 — and how the passporting issue connects by way of Target2 to the realm of sovereign monetary policy.

At the absolute heart of the matter is the status and treatment of payment systems worldwide, and whether or not they can really be treated as something independent and thus distinct from national monetary policy (and hence open to commercial competition) — or as integral to sovereign interests. Read more

It’s 1998 all over again, all over again

It’s 1998 again in emerging markets, and it’s good:

The best parallel with recent events – major shock (this time, the UK vote), DM central bank liquidity reassurance and market surge – is, in our view, the collapse of Long-Term Capital Management (LTCM) in September 1998. In addition to a bailout for LTCM, the Fed ‘turned on a dime’ then and cut rates by 75bp in two months; risk markets took off. While MSCI GEMs fell much more before Sept. 1998 (Asia and Russian crises) than recently, EM rose by 31% in two months after LTCM and by 120% by March 2000. As usual, the USD played a role; after a four-year 34% rally to August 1998, the $ TWI fell by 11% after LTCM. The extremes will be hard to repeat, but the earlier episode confirms how liquidity is a ‘great healer’…

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Markets Live: Tuesday, 19th July, 2016

Live markets commentary from FT.com 

Your post-Brexit asset performance update

From Deutsche’s House View:

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Koo: Why US Quantitative Easing “worked” better than other QEs

This is a guest post from Richard Koo, chief economist of the Nomura Research Institute and, amongst many other things, author of “The Holy Grail of Macroeconomics, Lessons from Japan’s Great Recession”, which lays out his balance sheet recession thesis in detail.

The post is an updated extract from his most recent note for Nomura and reproduced here, with his permission, for your arguing pleasure…

The US, the UK, Japan, and Europe all implemented quantitative easing (QE) policies, but the understanding of how those policies work apparently differs greatly from country to country, leading to very different outcomes. With the US economy doing better than the rest, there has been some debate in Europe as to why that is the case. Read more

China, money supply and John Maynard Keynes

By Jennifer Hughes in Hong Kong

Last time China’s companies held this much money to hand, it presaged an investment boom and better growth. But no-one is predicting that this time round.

China’s M1, or its narrow money supply, jumped 24.6 per cent in June while M2, the broader measure, rose 11.8 per cent. The gap between the two is now at its highest since January 2010 – and it is rising sharply. Read more

Further reading

Elsewhere on Tuesday,

- China slowdown story has moved into a new phase as government props up ailing private sector?

- QE metaphor du jour: “So could it really be that, all along, central bankers have been treating us like slime mould?”

- The man who ghostwrote The Art of the Deal is having some regrets: “I put lipstick on a pig,” he said. “I feel a deep sense of remorse that I contributed to presenting Trump in a way that brought him wider attention and made him more appealing than he is.” He went on, “I genuinely believe that if Trump wins and gets the nuclear codes there is an excellent possibility it will lead to the end of civilization.”

- The diary of a desperate mother trying to put food on a Venezuelan kitchen table.  Read more

FirstFT – West warns Turkey on crackdown, Trump’s ghostwriter tells all and the perils of full-time work

US and EU leaders warn Turkish president to use restraint against coup plotters Read more

I will build a great, great (note about Trump’s) wall

ICYMI, this might be the greatest note of the year so far*:

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SoftArm, and some “red flags”

From a Liberum SELL note on Arm published before Masayoshi Son’s SoftBank offered to buy the UK chip designer for just over £24bn:

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Herbalife: avoiding the p-word

Herbalife, the nutritional shake multi-level marketing enterprise involved in a three-year battle over the legitimacy of its business model, has agreed to change the way it does business as part of a settlement with the Federal Trade Commission announced Friday.

The Los Angeles-based group also agreed to pay $200m compensation to customers to settle a complaint that it, among other things, caused substantial injury to customers through an unfair compensation scheme in which the only true way to profit was through recruitment.

There was no mention of the term pyramid scheme, but keep in mind that a multi-level marketing enterprise is at heart nothing more then a product and a compensation scheme. Messy legalities about what makes one operation legitimate and the other illegitimate have shifted for the benefit of those exploited. Read more

Markets Live: Monday, 18th July, 2016

Live markets commentary from FT.com 

FT Opening Quote: Softbank bets on post-Brexit Britain

Softbank’s blockbuster offer for Arm Holdings, British Land’s wariness and Boris Johnson’s Brussels debut as foreign minister. FT Opening Quote, with commentary by Naomi Rovnick, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more

Ten per cent of respondents throw the word ‘never’ around quite casually…

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Further reading

Elsewhere on Monday,

- Gavyn Davies on Japan’s flirtation with helicopter money.

- The Herbalife Rorschach Test.

- McKay Coppins on how the world taunted Donald Trump into running.

- A critique of Jeremy Corbyn by his former shadow minister Thangam Debbonaire which is… not great tbh. Read more

FirstFT – Crackdown in Turkey, how to make Brexit manageable and the ideal diet for a positive mind

Response to failed coup moves to president’s inner circle Read more

Thought for the weekend

Doo doo, doo doo. Right. Good.

- David Cameron reflecting (via a hot mic) on his resignation as Prime Minister Read more

If Spain didn’t need capital controls, why would anyone?

Until relatively recently, academics and Western policymakers overwhelmingly supported the official position of the European Union. Nowadays we live in a world where the head of the International Monetary Fund — who also happens to be the former Finance and Economy Minister of France — publicly says the “inherent volatility” of cross-border capital movements is a problem. Read more

Liquidity regulations could help Fed policy transmission, or maybe just non-bank lenders

Obvious statement: Banks are crucial for the transmission of monetary policy into the US economy.

Not-so-obvious theory: Bank lending might become more important in that transmission because of post-crisis liquidity requirements. This one is interesting because it comes straight from the blog of the New York Fed, the guys in charge of US monetary policy implementation.

But if reserves do return to normal levels, that means even more credit risk could be pushed off of banks’ balance sheets. And that could leave an even bigger role for non-bank lenders and asset managers. Read more

Alphachat: Vox-pop from Camp Alphaville; “Overrated/Underrated” with Tyler Cowen; and the JPM pay bump

Alphachat is available on Acast, iTunes and Stitcher. Read more

There’s no Markets Live session on Friday

Bryce has taken a snap Summer Friday; Murphy’s deepening contact relationships in NW8. Normal service will resume on Monday. Read more

FT Opening Quote: Carney holds fire

BOE rates unchanged and European banks count the costs of Brexit. FT Opening Quote, with commentary by Lex Editor Robert Armstrong, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more

Further reading

Elsewhere on Friday,

- Aswath Damodaran: Tesla is a story stock, it’s just not clear what the story is.

- Cameron’s failure was austerity.

- Everything you need to know about Theresa May’s Brexit nightmare in five ten or so minutes. Read more

FirstFT – Terror attack on Nice, how the CIA hoodwinked Hollywood and an easy way to influence people

Attacker kills more than 70, injures 100 as truck ploughs into crowd celebrating Bastille day Read more

This is how Santander was treating its customers in the US

America’s Consumer Financial Protection Bureau has just fined Santander Bank $10m for “illegal overdraft practices”.

The headline number doesn’t suggest misbehaviour of an outrageous magnitude — not to readers used to seeing bank penalties in the billions — but the wrongdoing itself is… well judge for yourself: Read more