ECB, wtf ? | 39 comments (39 topical, 0 editorial, 0 hidden)

Re: ECB, wtf ? (4.00 / 4)

Perhaps the only major result of ECB intervention in the past few years has been the boosting of asset prices, as the market is awash with cheap money.

Bingo. Cheap financing does not mean affordable assets. Quite the contrary. Prices are bid up to the return margin of those can get the cheap financing. Everyone else is priced out of the market for everything of any consequence, and the Serious People are amazed to see no positive results from their cash dumping. Instead, those who could get the financing end up hoarding the assets at speculative prices (See "Onset of Implosion of Every Financial Bubble Ever".), and everyone else is living hand to mouth, except for a fortunate few who hoard a few bucks/euros/yen because they can't actually spend it on anything. In spite of what the Austro-Chicago tools preach, that is a liquidity trap and a deflation spiral, and giving more cheap money to the Ueberklass won't correct it (but then the Ueberklass doesn't thing anything needs correcting).

by rifek on Sat Mar 12th, 2016 at 10:47:19 PM EST

Re: ECB, wtf ? (4.00 / 2)

I cannot think of a single other observation about the effects of QE that is as cogent as this comment! For me THIS was the BINGO moment: "Prices are bid up to the return margin of those can get the cheap financing." But it is hopefully not quite true, or, at least, doesn't mean that prices will increase to infinity. Please explain what the limits of the 'return margin' are when money is available at zero interest. Is it just the amount of such money made available? And what does this imply for Keynes' 'euthanasia of the rentier'?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 13th, 2016 at 11:55:40 PM EST
[ Parent ]

Re: ECB, wtf ? (none / 0)

Interesting things happen when a system is taken to one of its natural limits. Some of the variables go to zero.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 13th, 2016 at 11:57:20 PM EST
[ Parent ]

Re: ECB, wtf ? (none / 0)

I haven't been able to get this subject out of my mind. Rifek's comment clarifies so much. But some things are evident. We need to know the terms on which the QE money is supplied to those fortunate few. I doubt that it is just like giving them cash. And, if a bank uses the money to make a loan then reserve requirements still apply, but the 'mulitplier' is like for Repo 101: one over the reserve requirement. And what is the duration of this money and is it accompanied by a reverse repo agreement? But even with a 5% reserve requirement the effectiveness of the face value of the QE money would be 20 times the face amount. And then there SHOULD be at least the same prudential requirements for due diligence, but we have seen how concerned the Fed is with that.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 14th, 2016 at 01:00:51 AM EST
[ Parent ]

Re: ECB, wtf ? (4.00 / 3)

If you factor in certain tax provisions, much of it is indeed a giveaway. And much of this is hidden, e.g. subsidies and regulatory waivers by local governments for "job creators" or the IRS's refusal to penalize the REITs (the entities supposedly holding all those wonderful junk mortgages) for failure to comply with the Code's trust closure deadline requirement.

by rifek on Mon Mar 14th, 2016 at 04:09:07 PM EST
[ Parent ]

Re: ECB, wtf ? (4.00 / 2)

same here. I read that sentence and boom, wow. Speechless. So much truth and insight in such a short statement.

Also agree that if interest rates are zero then I guess many asset prices will go nearly to infinity, at least those assets on which people with access to cheap financing are bidding - New York or London appartment prices anyone????

by crankykarsten (cranky (where?) gmx dot organisation) on Mon Mar 14th, 2016 at 12:33:40 PM EST
[ Parent ]

Re: ECB, wtf ? (4.00 / 3)

Yea, but asset prices are not just influenced by current interest rates, but by the expectation of future average interest rates over the lifespan of the loan in question. It is the realisation that interest rates won't be going up any time soon which is driving asset prices, as much as the current interest rate and the (relatively) free availability of low interest loans to already asset rich buyers.

The other factor is that the increasing accumulation of capital by the 1% is resulting in a "savings glut" with little prospect of much of a return on any investment, let alone bank deposits. Thus inequality in an of itself can drive asset prices higher leading to even greater inequality - until the next asset price bust in any case. Most recent purchasers of property in ireland have been private wealthy individuals with no need to borrow in any case, or hedge funds with gazillions to spend in search of a big return.

Small businesses and mortgage buyers are still finding it difficult to get bank loans for working capital or home purchase. The banks are still sitting on a lot of money - hence the need for negative interest rates to encourage them to do what a bank should be doing in any case.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 14th, 2016 at 01:23:55 PM EST
[ Parent ]

Re: ECB, wtf ? (none / 1)

True that "intreset prices are not just influenced by current interest rates, but by the expectation of future average interest rates over the lifespan of the loan in question." And, per Chris Cook in another forum where I posted my comment, most of this QE is in the form of T-Bills, which are of less than 52 week duration, so this is short term money. That potentially increases the risk. TBTFs can use QE money to fund SPVs that invest in the stock market, which they can exit quickly and for which they can hedge the downside risk. This can lead to greater volatility in stock prices, but worse, the TBTFs have been living off of term arbitrage forever and it is not hard to imagine them using some of this money to invest in longer duration investments. And, of course, hedges are only as good as the firm selling them.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 14th, 2016 at 01:33:33 PM EST
[ Parent ]

Re: ECB, wtf ? (none / 1)

AFAIK Deutsche bank is close to being a zombie bank due to its huge losses on CFD and other financial exotica and thus Merkel is v. constrained in what she can do to bail out Greece or stimulate the German economy even if she wanted to. The German taxpayer having to bail out Deutsche bank would be a disaster for their self-image of prudence. Basically Deutsche bank appears to have followed Goldman Sachs et al in the speculative investment field but didn't get out in time. Typically German: Too slow to do everything and nothing near as prudent as their self image suggests. Better to blame the Greeks...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 14th, 2016 at 02:10:07 PM EST
[ Parent ]

Re: ECB, wtf ? (none / 1)

I didn't know about Contracts for Difference. Well, it seems DB, for a change, did its CUSTOMERS a favor, some of them at least.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 14th, 2016 at 03:39:50 PM EST
[ Parent ]

Re: ECB, wtf ? (none / 1)

The straw that stirs the drink in the US is mortgages. With a few exceptions (locations mortals can't afford to buy under any circumstances), price fluctuations are dictated by availability of financing. Cheap financing, real estate goes up. Truer with residential than commercial at least initially (residential borrowers are more rate-dependent, and residential lenders have more tax and regulation breaks than commercial), but as a real estate booms proceeds, commercial speculation increases, and the flips get quicker. In the end, the return period for both residential and commercial shortens dramatically, and on the residential side, mortgage interest is the biggest tax break you can have, so it has a built-in return.

by rifek on Mon Mar 14th, 2016 at 04:22:16 PM EST
[ Parent ]

Re: ECB, wtf ? (4.00 / 3)

"Return margin" for the borrower is getting a return after operating expenses and debt service.

by rifek on Mon Mar 14th, 2016 at 04:00:19 PM EST
[ Parent ]

Re: ECB, wtf ? (none / 0)

Thanks for the clarification. A good accountant should know. But, for the purposes of their dealing with the fruits of QE, how large can their operating expenses be? I guess they could write off the costs of contributions/bribes.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 14th, 2016 at 04:21:11 PM EST
[ Parent ]

ECB, wtf ? | 39 comments (39 topical, 0 editorial, 0 hidden)

Top Diaries

The seven deadly sins of the DUP

A Cordon Sanitaire

Ireland and the 6 Nations Rugby Championship

The importance of being England

The cost of doing business

British Anglicanism, Disinformation and Harry

The Protocol and the Founding Principles of the EU

City Agriculture - January 19, 2023

Recent Diaries

Ireland and the 6 Nations Rugby Championship

Februari 2023

CIA's Research in Behavioral Modification

A Cordon Sanitaire

Energy (and Other) Events Monthly - February 2023

We Are All From Mars Now

The seven deadly sins of the DUP

The cost of doing business

The importance of being England

US War Powers, Regime Change and Third Option

US War Powers, Regime Change -- Part 2

US War Powers, Regime Change -- Part 1

City Agriculture - January 19, 2023

War In Ukraine A Failed Process by NATO

No Peace In Sight

Another Execution

The Protocol and the Founding Principles of the EU

Judeo-Fascism Arises - Kahane

Baerbock Solidair with UA in Kharkiv

Mary Robinson and Fallacy of War and Peace

Occasional Series