Monday, 7 June 2010

Monetary Roundup - Eliminating "The Noise"

I thought it was good time to clarify some views on the monetary policies in Europe and around the world - as it is key to the housing market and will tell us whether or not policy makers are serious on fighting inflation.

In simple world, would policy makers allow a repeat of the 1970's period, where debt burden was somehow reduced by allowing high inflation to take place. For me the answer is "NO", I think we will head to period more like the beginning of 80's or 90's where asset price deflates to readjust to people's income as opposed to the contrary where income readjust upward to the asset level (i.e. 1970's).

In Canada, where a speculative bubble has developed in the housing market have started to tighten their rates :

"The Bank of Canada raised its key interest rate from a record low today, the first Group of Seven country to do so since last year’s global recession, and said further moves will be “weighed carefully” against future growth in Canada and elsewhere.", 01.06.2010 - Bloomberg
In the US, where the housing bubble has deflated in the past years and where usually the readjustment take place first, are starting to hint the exit strategy:

“In the medium term, like the Federal Reserve and many other central banks, the Bank of Korea will have to manage its exit from accommodative policies,” Bernanke said in pre- recorded remarks to a conference hosted by South Korea’s central bank in Seoul today. The Bank of Korea “will have to weigh the risks of a premature exit against those of leaving expansionary policies in place for too long,” 31.05.2010, Ben Bernanke
While the Fed will raise interest rates from a record low before the economy returns to “full employment,” Bernanke said officials don’t know when that process will start. The banking system isn’t fully healthy and lenders are “cautious” in providing credit, he said.
In Europe, the president of the European Central Bank, Mr Jean-Claude Trichet, is on communication campaign, making sure that the latest move by the ECB (huge guaranty for Greece and co) are not mistaken for a relax stance on inflation or misled with a Quantitave easing strategy.

Interview with Jean-Claude Trichet, President of the ECB,
conducted by Gerald Braunberger and Stefan Ruhkamp on 19 May 2010

FAZ: But by purchasing government bonds, you’ve crossed a red line. Has the credibility of the ECB suffered as a result?

Trichet: There has been no crossing of any line. Our line is price stability, and our credibility is derived from achieving this objective over the medium term. The Governing Council of the ECB observed that the effectiveness of the transmission mechanism for our monetary policy was being severely hampered. We are not increasing the money supply. By contrast with what other major central banks have done, we are not purchasing government bonds in order to inject liquidity into the markets. What we are doing is fundamentally different: we sterilise. We ensure an unchanged stance of monetary policy. This is why the liquidity supplied is immediately being absorbed again in its entirety. We have to do whatever we consider appropriate in order to ensure price stability. If we always listened to the criticism directed at us by politicians, social partners and financial pressure groups, we would be unable to fulfil our mandate.

FAZ: The crisis stems from excessive debts. We are now fighting the crisis with even more credit and even more money. How do we get out of this spiral?

Trichet: We have a number of ways of providing the banks with additional liquidity support, which will automatically be discontinued when the situation improves. Owing to the serious tensions observed very recently in the markets, we have now reintroduced some of these support measures. But you can be sure that we will exit those measures in a timely fashion in line with improvements in the functioning of the markets. We will never lose sight of our primary mandate of ensuring price stability over the medium term, with the right monetary policy stance. There is a clear separation here. By the way, note that the growth of the monetary aggregate “M3” is currently negative. I have been committed to price stability all my life. For me, inflation is a tax that would mainly hit the poorest and weakest in our society.
Another interesting interview:
Interview with Der Spiegel
Interview with Jean-Claude Trichet, President of the ECB,
conducted by Thomas Tuma and Christoph Pauly on 13 May 2010

SPIEGEL: In a talk he gave to the Spiegel a few months ago, Jürgen Stark, the ECB’s chief economist, said that the ECB was not permitted to buy government bonds. Who is right?

Trichet: I have already said that this is explicitly authorised by the Treaty. Over the past 11 ½ years, we have ensured price stability in Europe and have successfully met our target of keeping inflation below, but close to, 2%. We have done a good job fully in line with what the best central banks in Europe were doing before the euro. Those who believe - or, even worse, are suggesting - that we will tolerate inflation in the future are making a grave error. The Governing Council of the ECB did not hesitate to increase rates in July 2008 in a period of financial turbulence in order to ensure price stability. We were criticised at the time by the markets. This is a measure of our inflexible determination.

SPIEGEL: But the banks, too, are being spoilt by the ECB. As part of your so-called non-conventional measures, you have again made it possible for them to borrow countless billions. In doing so, are you not handing out even more play money to the financial markets?

Trichet: Again, we do what we believe we have to do in all consciousness in order to be able to deliver price stability over the medium term. We do not take into account pressure groups and lobbies. We supply liquidity to the banks so that they can finance the real economy and support the recovery, they know that.


Anonymous said...

To achieve the same goal, if the cost of taking away the cash from someone's hand openly is bigger than the cost of taking away from his pocket during his sleep, the central bankers will certainly steal but not grab him, as the later approach is considered un-democratic and usually bloodly.

Anonymous said...

Finland in double dip recession:

HousingFinland said...

a better site...

HousingFinland said...

Britain have more deflationnary downside than trying to fake that inflation is the threat...

Andrew said...

working thru the noise i see that:

1. the ECB are using play money to buy 3B Euro of bonds from the banks each day.

2. Most investors polled have no faith in Trichet

3. UK inflation is officially beyond the target rate by a few percent and who knows what it is unofficially

4. While Tricky Trichet is at the ECB, by his own admission devaluation of the Euro at the target rate is guaranteed, while he simultaneously says that inflation *would* be a crime against the poor.

5. Germans have no power because their banking system is so exposed to stupid lending decisions in ireland usa eastern europe southern europe and who knows where else. The french are in a worse position.

6. Governments like the UK will talk tougth to protect their borrowing ability while doing nothing other than what is absolutely necesssary - which means very little will change.

7. The low euro is likely to lead to booming economic conditions in the northern states and a high inflationary environment while nothing much can be done while they protect the banks and borrowers and their own buisiness and investment vested interests.

8. The poor and richer savers without assets who refuse to spend their money will be the losers while these same people remain in charge.

HousingFinland said...

Of course, Andrew, I think we agree on only one thing - I'm in total disagrement with you. almost all the points.

In fact, this article was created with you somehow in mind since I knew you will disagree with the world leading central bankers.

What you are saying is that:
-The European Central Bank cannot be trusted and no confidence shoud be given to it.

-hyperinflation is already in place or is about to be unleashed.

-Asset price never lose its value and savers get always ripped off.

I'm not sure where those asumptions are coming but most probably from anglo-saxon right liberal sites that all in all want to preserve a roten (financial) system where few profited and gain at the expense of future generations.

Remember, when I say few, I mean that the rest feel rich when in fact they have so much debt burden, they are at the mercy of the market. I suppose it is another way of controlling the mass.

I am amazed at the fact that you try to make sense of a situation has not made sense and that is currently dangerously instable - not sustainable and could quickly get out of control.

In Finland, it's a bit like the musical chair - the music has yet not stopped (even if it shortly did in late 2008)- but when it will the consequence can be pretty dramatic (hence the government current stance into spending, following a broken keynesian model.)

The Finnish central bankers- Erkki liikanen - if I'm not mistaken has warned late may that the housing market has reached unprecendent level and household should be very carefully when buying.

To my opinion, the damage is done - now they need to contain it. Nordea and other have pushed their interest cap strategy - clearly a moce to schedule a collapse in 3 years time (in the US it was called teaser rates if I'm not mistaking - the creation of a large sub prime population that can only afford housing due to very low rate that are currently unsustainable unless a generalized Japanese deflation anchors)

In Addition, if the stock market goes below the March 2009, it's game over and if at the same time - as is my baseline scenario - the housing market readjust sharply: It's going to be a very painfull.

Billpete002 said...

So I was reading a paper published for farmers in Finland (near the Savo region) and lo and behold is an article about the housing price bubble in Finland and how it is coming to an end.

I was certainly surprised to see it in a rural paper and what was even better it was on the last page of the paper - now I know most Finns in rural areas don't have expensive condos in Helsinki nor should care too much since they live on farms that are typically within the family for generations etc etc.

However, I began to think, why in this back water newspaper by someone claiming to be an economist (I have no reason to believe they are not), and yet Helsinki Sanomat, the website, and Helsinki Times mention nothing.

On to the article, in brief, it said what we already know, those who have paid attention to this blog, that the housing prices have risen to unsustainable levels. The article states that it is because of a housing shortage, however, he points out that selling housing is becoming more difficult, and the amount of houses on the market are growing, and yet the price is still rising.

He notes that the price will decrease once the interest rates rise and that that buying a house now, in less polite terms than he used, would be foolish.

Your thoughts?

HousingFinland said...

"He notes that the price will decrease once the interest rates rise"

More I do research on that subject and less I find correlation of house price downturn and interest rates.

In fact if interest rates were to rise it would mean that inflation becomes a threat because growth has started to accelerate.

If you look at 1990, price started before interest rates started to rise. It was when unemployment rose sharply that house price readjusted.

More recently, If you look at the US, when interest rates went up so were house prices, when interest rates started to go down sharply so did the housing price.

The trigger is always hard to forecast - last time in 1990, it was really the collapse of the major export partner that triggered the housing downturn.

Maybe it could be China... maybe after's likely.

Andrew said...


The central bankers created this mess. Super low interest rates got us here.

I am just the observer and a person navigating using their compass.

All of the central banks are committed to devaluing their currencies. It is their policy.

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