Fears are growing that the next crisis, if it should manifest, won’t come from any of the areas that spawned the 2008 crisis. To the contrary, it will emerge from areas we’ve not really had to worry about to date.
The key areas those in high places are now worrying about: the taken-for-granted presumed liquidity of the system.
This is an easy assumption for the asset management industry to make. For years investment banks have made a business of carrying liquidity risk on their balance sheets, mainly by internalising the inventory nobody else is prepared to hold. This sort of “we’ll buying anything just to make money from making markets” service as a result conditioned the buy-side to presume liquidity risk is something that just doesn’t really manifest anymore. Read more
On Monday Mark Carney, Bank of England governor, injected fear into the hearts of highly paid bankers everywhere by stating…
Standards may need to be developed to put non-bonus or fixed pay at risk. That could potentially be achieved through payment in instruments other than cash. Bill Dudley’s recent proposal for certain staff to be paid partly in ‘performance bonds’ is worthy of investigation as a potentially elegant solution. Senior manager accountability and new compensation structures will help to rebuild trust in financial institutions. In a diverse financial system, trust must also be rebuilt in markets.
His comments came on the back of growing regulatory concerns that banks avoid bonus caps by boosting fixed salaries and so offer less variable pay, weakening the link between performance and compensation. Read more
The latest edition of the BoE’s quarterly bulletin looks at the rise of cryptocurrencies and, as we’ve already discussed, expresses a cautiously optimistic attitude towards the technology that drives the system. Less so, however, about the potential of “bitcoin the currency” itself.
In this post, we’d like to look closer at the issue of cost and digital currencies.
You see, monitoring and supervising the global claims system is expensive business, since it takes a lot energy and resources to make sure wealth is allocated fairly to those who supposedly deserve it.
Those who are trusted to do this job tend to be compensated for that burden. Those who do that job really well, meanwhile, are usually paid a bonus by the economy to keep them involved. Historically, that job has tended to be given to a sovereign or to gold. Read more
Here’s an interesting point from Capital Economics’ Roger Bootle on Tuesday regarding a potential Scottish currency union. They could go down the unilateral adoption route.
To recap, independent Scotland wants to keep the pound via some sort of currency union, ideally based on the BoE continuing to accept Scottish assets as collateral in exchange for sterling liquidity.
The UK, however, is not willing to accept this because it would mean unrestricted UK support for Scottish banks, which may or may not now be regulated to the same standards. Read more
In his most forthright warning yet over the property market, Carney said policy makers “could do more” to tackle excesses if needed…
– Bloomberg, May 18 Read more
Alternative currencies are being issued left, right and centre these days. So what’s stopping Scotland issuing its own currency? (Did you not know that Spain already has SpainCoin?)
Well, what most people don’t realise is that Scottish institutions already issue their own currency because the Scottish pound is already a private currency. Nobody notices, however, because it’s so sophisticatedly pegged to the Bank of England pound thanks to Scottish banks being part of the BoE central bank system and collateralising every note they issue with a sterling asset of some sort.
For as long as the Scottish banks have the sterling collateral needed to maintain the 1:1 valuation, there is no reason for the value of the Scottish pound to disconnect from that of the UK pound. Read more
UK chancellor George Osborne announced on Monday that the Bank of England will initiate a scheme to help support export finance for UK exporters.
This, as the BoE explains on its website, will see the Bank accept UK Export Finance-guaranteed debt capital market notes as collateral for liquidity operations, encouraging (it is hoped) banks to make export-finance related loans to industry. So, similar to funding for lending, but on this occasion specifically lending to export businesses. Read more
The ECB’s deflation problem has been well covered.
Years of mass media conditioning that the UK has an inflation problem, however, have assured that the BoE’s flirtation with disinflationary pressure has by and large been overlooked.
But there are clues that this might become a problem soon enough. Read more
The transition to a new normal monetary policy, by David Miles, Monetary Policy Committee member, click to read in full
So just how fast will the the Bank of England raise interest rates? For clues and pointers on its latest thinking now that employment has rapidly approached the thresholds (markers, thumb rules?) of forward guidance , the Inflation Report is out. Click to get straight to it:
We know that living in a counterintuitive zero-rate world can lead to lay misunderstandings.
For example, there’s the paradox of thrift and the idea that saving can be bad. WHAAT? Then there’s asset nationalisation and government spending, and the idea these can be good for capitalism. WHAAT REALLY? Last and not least — after years of general indoctrination that inflation is always bad — there’s the fact that inflation can actually be a good thing.
This presumably explains why, when the ONS announced this week that UK CPI had slowed to 2 per cent, the story was almost universally covered in the UK press as a good thing and a sign of a wonderfully encouraging turnaround in the economy.
Indeed, UK chancellor, George Osborne, was immediately wheeled out across numerous networks to take credit for his fabulous economic work. Read more
As Mark Carney outlined at Wednesday’s press conference for the BoE inflation report, much-awaited ‘forward guidance’ will be linked to unemployment falling through the 7 per cent level. But it will also in some sense be related to the committee’s evaluation of how much slack there is in the economy.
Or rather, they’re linking rates to unemployment (targeting, in everyone else’s book) because they can’t explicitly target slack. Read more