Posts Tagged ‘Central bank’

Last year Mario Draghi, president at the ECB, said the Eurozone central bank was ready to do “Whatever it takes to save the euro.” The markets loved it, and have been loving it ever since, but they forgot about the prefix, because Mr Draghi also said a few things at the beginning of the “whatever it takes statement.” In fact, he said: “Within our mandate.” That was a pretty important proviso. It is like celebrating because someone says you have done something that is good, but ignoring the fact that it was prefixed by not.

That was last summer. Now it seems that at last Super Mario Draghi has done something other than talk with prefixes that get ignored.

Yesterday the ECB voted to cut interest rates to half a per cent. So at last they are at the same level as the UK – not so long ago they were 1 per cent.

Mr Draghi said the “ECB was ready to act,” and those words got the markets all excited again.

But why has it taken so long? Inflation in the Eurozone was just 1.2 per cent in April. Across the region, and for the time being, inflation is as about as threatening as a puppy wearing a muzzle.

Well, there is an answer to the question. One ECB member voted to keep rates on hold. Jörg Asmussen, a German economist, who is normally thought of as a Draghi supporter, voted to keep rates on hold. He felt the rate cut would have little impact. Jens Weidmann, President of the German Bundesbank, held similar doubts but voted with the rest of the pack on this occasion.

So what’s next? Will the ECB really announce quantitative easing (QE)? Just remember last year Mr Weidmann likened QE to a Faustian pact. See: Quantitative Easing 

It hardly seems likely that when the topic of creating money comes up at the ECB Mr Weidmann will vote in the affirmative.

© Investment & Business News 2013

The Bank of England has made tweaks to its funding for lending scheme – all told they seem to be encouraging, but is there a catch?

Firstly, the UK’s Central Bank has extended the window of its funding for lending to 2015.

Secondly, it has made changes so that banks can use the monies made available under the scheme to lend to financial leasing and factoring companies. In short, the Bank of England is encouraging lending to companies that provide financial support to other companies.

Also – and this took most by surprise – banks will be able to acquire £5 of cheap lending from the Bank of England for every £1 they lend to SMEs (that’s firms turning over less than £25 million). In other words the Bank of England is saying: “I will lend you a fiver at a really low interest rates and really good terms, if you lend £1 to Sid and Tom, and Jack, and indeed Joan. An even more generous scheme is available for banks which lend in the next few months.

The big snag with all this is that many banks are still undercapitalised, and no matter how much cheap money is waiting for them in loans they can’t make these loans unless they have more capital. And the way to get more capital into banks is for them to make more profits, which are then largely retained in the business, which may mean they need to engage in more investment banks paying huge bonuses. Either that or they simply need to reduce lending altogether.

However, changes to the funding for lending scheme also allow scope for banks to lend more money to buy-to-let investors.

The Bank of England does not get it.

SMEs don’t necessarily need more debt. And banks dare not make too many loans to business, because these are inherently risky. Buy-to-let, however, is seen as less risky. A rise in buy-to-let activity may lead to a rise in house prices, which may increase the amount of collateral available as security against bank loans to businesses.
But that is not what the UK needs. It needs lower house prices.

As for business, it doesn’t need more debt. It needs more investment in the form of equity; more venture capital and business angels; more investors sharing in profits, rather than making money from an interest rate on loans provided.

If the funding for lending scheme was to revolutionise the lending to VC and business angel networks, that would be a different matter entirely.

197

Who needs central bankers anyway? It’s a view often expressed by the more adamant supporters of the markets.

This is what Nassim Taleb had to say on this very matter in his book ‘Anti Fragile’: “Ask a US citizen if some semi-anti governmental agency with a great deal of independence (and no interference from Congress) should control the price of cars, morning newspapers and Malbec wine….He would jump in anger as it appears to violate every principle the country stands for, and call you a communist post-Soviet mole for even suggesting it. Then ask him if the same government agency should control foreign exchange, mainly the rate of the dollar against the euro and the Mongolian tugrit. Same reaction: this is not France.

Then very gently point out to him the Federal Reserve bank of the US is in the business of controlling and managing the price of another good , another price called the lending rate, the interest rate in the economy (and has proved to be good at it). The libertarian presidential candidate Ron Paul was called a crank for suggesting the abolition of the Federal Reserve or even restricting its role. But he would he also have been called a crank for suggesting the creation of the agency to control other prices.”

Losing candidate for Vice President at last year’s US election Paul Ryan is also an arch critic of central banks, and about as anti QE as you can get.

Now enter stage right a new currency. It’s called the Bitcoin, and was launched in 2009 by a developer with the pseudonym Satoshi Nakamoto. It’s a virtual coin, existing solely on the Internet. You can buy goods and services in Bitcoins, and your store of Bitcoin wealth exists in a kind of virtual wallet.

Although the Bitcoin may not have been designed specifically for this purpose, it is often used to purchase illegal goods.

The supply of Bitcoins – if you like the money supply – is controlled by algorithms. There is no central bank; instead a peer to peer network controls this currency via the forces of the market. At the beginning of this month the monetary base was said to be around $1 billion.
So this is an experiment in libertarian economics. Will this new fiat currency replace those that are artificially controlled by central banks?

There is a snag. And the snag comes in the guise of a bubble. The price of a Bitcoin – or if you like, its exchange rate – has doubled in two weeks and, according to the ‘FT’, the monetary base is now worth $1.5 billion.

UBS stockbroker Art Cashin said in a note to clients: “Trading tulips in real time…It is rare that we get to see a bubble-like phenomenon trade tick for tick, but all that may be changing before our very eyes.”

The Cypriot crisis has not helped, with the currency’s supporters describing it as an alternative to conventional currencies.
But is the rate at which is value is soaring sustainable? Probably not. Is it a bubble: probably.

But the question is: does it matter?

In a world of no central banks, and currencies that are solely controlled by markets, failure is essential for correcting errors and for punishing over-exuberance. According to libertarian economics, market forces ensure recessions are only ever short lived affairs.

But are the libertarians right? Perhaps they are, but just remember that in nature – that ultimate example of a free market – growth is not automatic; change often only occurs after some kind of natural disaster, and sometimes evolution can throw up inefficient quirks such as peacocks, whose colourful appearance makes the male attractive to potential mates, but easy prey.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here