A re-run of the S & L disaster
John Plender Financial Times 13/9 2004
Falling from grace
The American model of unfettered capitalism is under strain,
but John Plender still believes it is better than the alternatives
Financial Times, March 27, 2001
It is positively limp-wristed when compared with the depths of the mid-1970s.
John Plender Financial Times; Jul 15, 2002
Land of the rising yen
John Plender, FT, September 21, 1999
Resistance to systemic risk may be eroded
Has a newly resilient international banking system acquired near-immunity to crises?
Or could a financial bolt from the blue still expose global finance to a devastating systemic shock?
John Plender FT 15/2 2005
Since manias and panics are endemic in financial markets, the eternal financial verities surely still apply. That said, the conventional wisdom among establishment bankers is that the vulnerabilities are all some way into the future.
In its most recent Global Financial Stability Report, the International Monetary Fund said: "Short of a major and devastating geopolitical incident or a terrorist attack undermining, in a significant and lasting way, consumer confidence, and hence financial asset valuation, it is hard to see where systemic threats could come from in the short term." Last December the Bank of England's Financial Stability Review referred to a contrast between "low near-term risks and heightened longer-term volatilities".
The case for playing down the near-term worries is, first, that the global economy is stable and growing... Yet banking is a cyclical business, in which the seeds of future trouble are sown precisely at times such as this.
A useful starting point is to consider the causes of financial crises. According to Timothy Geithner, president and chief executive officer of the Federal Reserve Bank of New York, in a recent speech:
"Most financial crises involve a shock whose origins lie in the realm of macroeconomic policy error, often magnified by the toxic combination of poorly designed financial deregulation and an overly generous financial safety net. Probably the most important contribution policymakers can make to financial stability is to avoid large monetary policy mistakes or sustained fiscal and external imbalances that increase the risk of large macroeconomic shocks."
Measure the US, which holds the key to global financial stability, against that template and warning lights immediately flash. The US economy does indeed suffer from big imbalances, in part because monetary policy under Alan Greenspan, the Fed chairman, has delivered freakishly low interest rates to stave off economic stagnation after the bursting of the extraordinary equity market bubble in 2000
The huge US fiscal and current account deficits...
Meanwhile, interest rates that are still very low by historic standards are doing strange things to a financial system that is highly deregulated.
An overly generous financial safety net has potentially been extended by default as a result of the growing concentration of financial assets and liabilities.
The top five bank holding companies in the US own 45 per cent of all banking assets - nearly twice their share 20 years ago. The markets assume the Fed would come to the rescue, acting as lender of last resort, if any of the five hit trouble. Also seen as too big to fail are Fannie Mae and Freddie Mac, the home loan institutions. Their balance sheets have been bloated by the Fed's low post-bubble interest rates, which have fuelled housing booms across the nation. Such concentration means that the impact of any failure would be far greater than in the past.
Outstanding US household sector debt of just under $10,000bn in the third quarter of 2004 was at an all-time peak both in absolute terms and relative to gross domestic product. This is no great threat in the short run because of the remarkable structure of the mortgage market, which allowed borrowers to lock in low rates at the bottom of the cycle. More than 80 per cent of the mortgage debt stock is reckoned to be at fixed rates and around 60 per cent of mortgage debt was financed or refinanced in the 18 months before the Fed started raising interest rates in June last year. The problem comes when there is a recession and rising unemployment hampers debt servicing.
As Charles Goodhart, Boris Hofmann and Miguel Segoviano have shown*, the authorities’ attempt since the 1980s to regulate banks through capital adequacy requirements is pro-cyclical, amplifying rather than damping fluctuations in the business cycle. The better the value and riskiness of banks is measured, the greater the pro-cyclicality of the capital regime, the academics find.
Bank Regulation and Macroeconomic Fluctuations, Oxford Review of Economic Policy, Winter 2004
Bubbles, crashes and power shifts
One of the fascinating things about the extended media commentary on the 75th anniversary of the Wall Street Crash is that
no one has a definitive answer as to the cause.
John Plender Financial Times November 1 2004
Modern finance theory denies the existence of bubbles on the ground that markets are efficient. Interesting, then, to read a new book* by Richard Dale of Southampton University on the South Sea Bubble that turns up new evidence showing there were established valuation techniques at the time and that aberrant investors genuinely lost touch with fundamentals. I found him pretty convincing.
The First Crash: Lessons From The South Sea Bubble, Princeton University Press
Resistance to systemic risk may be eroded
Has a newly resilient international banking system acquired near-immunity to crises?
Or could a financial bolt from the blue still expose global finance to a devastating systemic shock?
John Plender FT 15/2 2005
Since manias and panics are endemic in financial markets, the eternal financial verities surely still apply. That said, the conventional wisdom among establishment bankers is that the vulnerabilities are all some way into the future.
In its most recent Global Financial Stability Report, the International Monetary Fund said: "Short of a major and devastating geopolitical incident or a terrorist attack undermining, in a significant and lasting way, consumer confidence, and hence financial asset valuation, it is hard to see where systemic threats could come from in the short term." Last December the Bank of England's Financial Stability Review referred to a contrast between "low near-term risks and heightened longer-term volatilities".
The case for playing down the near-term worries is, first, that the global economy is stable and growing... Yet banking is a cyclical business, in which the seeds of future trouble are sown precisely at times such as this.
A useful starting point is to consider the causes of financial crises. According to Timothy Geithner, president and chief executive officer of the Federal Reserve Bank of New York, in a recent speech:
"Most financial crises involve a shock whose origins lie in the realm of macroeconomic policy error, often magnified by the toxic combination of poorly designed financial deregulation and an overly generous financial safety net. Probably the most important contribution policymakers can make to financial stability is to avoid large monetary policy mistakes or sustained fiscal and external imbalances that increase the risk of large macroeconomic shocks."
Measure the US, which holds the key to global financial stability, against that template and warning lights immediately flash. The US economy does indeed suffer from big imbalances, in part because monetary policy under Alan Greenspan, the Fed chairman, has delivered freakishly low interest rates to stave off economic stagnation after the bursting of the extraordinary equity market bubble in 2000
The huge US fiscal and current account deficits...
Meanwhile, interest rates that are still very low by historic standards are doing strange things to a financial system that is highly deregulated.
An overly generous financial safety net has potentially been extended by default as a result of the growing concentration of financial assets and liabilities.
The top five bank holding companies in the US own 45 per cent of all banking assets - nearly twice their share 20 years ago. The markets assume the Fed would come to the rescue, acting as lender of last resort, if any of the five hit trouble. Also seen as too big to fail are Fannie Mae and Freddie Mac, the home loan institutions. Their balance sheets have been bloated by the Fed's low post-bubble interest rates, which have fuelled housing booms across the nation. Such concentration means that the impact of any failure would be far greater than in the past.
Outstanding US household sector debt of just under $10,000bn in the third quarter of 2004 was at an all-time peak both in absolute terms and relative to gross domestic product. This is no great threat in the short run because of the remarkable structure of the mortgage market, which allowed borrowers to lock in low rates at the bottom of the cycle. More than 80 per cent of the mortgage debt stock is reckoned to be at fixed rates and around 60 per cent of mortgage debt was financed or refinanced in the 18 months before the Fed started raising interest rates in June last year. The problem comes when there is a recession and rising unemployment hampers debt servicing.
As Charles Goodhart, Boris Hofmann and Miguel Segoviano have shown*, the authorities’ attempt since the 1980s to regulate banks through capital adequacy requirements is pro-cyclical, amplifying rather than damping fluctuations in the business cycle. The better the value and riskiness of banks is measured, the greater the pro-cyclicality of the capital regime, the academics find.
Bank Regulation and Macroeconomic Fluctuations, Oxford Review of Economic Policy, Winter 2004
