Wednesday, December 12, 2007
Concerted action
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

The major central banks have announced significant steps to try to address funding pressures in the money markets. Markets have responded favourable. This is the start of the Bank of England's statement:

Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.

The Bank of England has already scheduled long-term repo open market operations (OMOs) on 18 December and 15 January. In those operations reserves will, as usual, be offered at 3, 6, 9 and 12-month maturities against the Bank’s published list of eligible collateral. But the total amount of reserves offered at the 3-month maturity will be expanded and the range of collateral accepted for funds advanced at this maturity will be widened.

The total size of reserves offered in the operations on 18 December and on 15 January will be raised from £2.85 billion to £11.35 billion, of which £10bn will be offered at the 3-month maturity.

The full statement is here.


All I can say is - this better work. God help the banking system if it doesn't.

Posted by: Minh at December 12, 2007 06:56 PM

So what's the event here then, Central Banks are making more money available and the only reason it will be taken up is
"the range of collateral accepted for funds advanced at this maturity will be widened." -- and even that is hopeful.

Do we know what this wider list of collateral is ? So now bankers are shifting assets (good, bad, and sham) off their balance sheets and on to the central banks.

The implications of this are some bank closures, a re-functioning of the banking system, and inflation.

Posted by: assetpriceinflation at December 13, 2007 08:28 AM

Does anyone have a list of which entities can actually take part in Open Market Operations. I'm not sure which counterparties this will really help.
I would think the banks will be using it, as they have the necessary collateral, but not sure that the Building Societies can be involved. And arent they the institutions who need access to the funding more than anyone else?
In other words, will this really feed down to reducing 3m Libor and helping the people it is intended to....

Posted by: Simon at December 13, 2007 11:40 AM

CPI is geared for an upward movement, possibly 2.7% over the next 6 months. MK is satisfied that all the central bankers are now of the view that it may not be better to cut rates (greenspan put) when the problems with the credit markets squeeze financials out of business.

For how long can central banks prop up the deficit caused by lack of confidence between banks when only what they provide is short term liquidity?

We are in for uncertain times and can only look forward to markets seizing up and giving gold a huge rally....

Posted by: Hitesh Damani at December 13, 2007 10:11 PM

I don't know if it will work, seems like a short term solution to a long term problem if you ask me. A recession is pretty inevitable.

Posted by: Central Bank Crisis at December 14, 2007 01:27 PM

The market reaction since the event has been interesting, and to my eyes a little worrying. The bank stocks never really rallied after the announcment, which was odd and should have been a clue as to what was going to happen.

The problem the central banks now have is that they have drawn a line in the sand and they are making a stand. As Minh has said with his first comment, 'god help us if it doesn't work'.

We are now in a recession and the central banks know it, it's just that the figures are not yet showning it. The problem they now have is that it is going to be very hard for them to react without losing what little credibility they have left, as inflation is not going away...

It's gone from being 'interesting times' to very dangerous times. I'm still thinking that an economic meltdown is potentially just around the corner and we'll be lucky to avoid it...

Posted by: James Trouble at December 14, 2007 02:01 PM

Run for the hills! We're all doomed!

At least, that's what we should be doing based on some of these comments. This situation has provoked so much unfounded hysteria, it's unbelievable.

Minh, I have the feeling you're a bond trader. Am I right?

Mr Trouble, how do you know we're in a recession already? Your claim is completely at odds with all the economic data we have available. If you truly believe what you're saying, you should spend less time contributing to blogs like this one and start preparing for life as a caveman. There have been numerous financial crises before, but hey, we're still here!

Posted by: Crisis, what crisis? at December 14, 2007 10:08 PM

Nothing surprising about the market reaction.

This is an insolvency not liquidity crisis.

Next stage for is property crash (already evident), followed by recession. Then vicious circle of property price declines and more pronounced recession.

I wonder if you are starting to come round yet David?


Posted by: T Gumbrell at December 14, 2007 11:47 PM

I can't see the day when I'll ever come round to your views. As for the market reaction, I have to say some of the comments here are a bit strange. The last thing central banks wanted to see was a soaring stock market in response to their announcement, or a sharp rise in bank shares. We'll see the effect on money market rates when the operations have actually been carried out and, more importantly, when we get into the new year.

Posted by: David Smith at December 15, 2007 10:03 AM

David, I doubt very much the BofE concidered bank shares in their decision, of course not. But the banks shares have been suffering since August because of this finanacial crisis, and this 'line in the sand' that the central banks have drawn should have had a bullish impact on bank shares, if the market believed the central banks are sorting the problem out? I use their reaction because I believe it highlights what a very serious and difficult to solve situation the central banks are in because they need the markets to believe their actions are going to sort out the problem are going to work for them to work. If the markets don't buy into it, their actions will fail...

And like you David, I don't think the central banks want to see shares soaring, as Mervin King commented on a couple of weeks ago or so, I think in front of the select commitee, when he said he thought it was a little strange how strong stock markets were, concidering the situation we are in. Words to that effect, I don't have the text in front of me, and I'm afraid I can't pull it out as I don't have much free time at the moment as I have started preparing for life as a caveman, clubs to make, spears to sharpen, that sort of thing ;-D

As you say David, we won't know the full effects of all this untill the new year, and even then we won't know the full effect it will have on the economy as a whole for many months to come...

I can't remember disagreeing with you much in the 6 years or so I've religiously read your column David, but I do find myself in T Gumbrell's camp of thought at the moment. Property crash, recession, 3 or 4 years of doom and gloom, oil fueled stagflation, labour crashing at the next election and it will take a decade at least for them to recover. Unfounded hysteria or facing up to the reality of the situation?

Intersting times...

Posted by: James Trouble at December 16, 2007 11:41 PM

As a journalist, and this goes for many people in the markets, the easiest thing is to bend with the wind, to say we're all doomed, and then, six months later, to say we weren't doomed after all. Nobody knows how this credit crisis will pan out, myself included, but it doesn't seem to me to make any sense to assume the worst.

While I'm at it, the credit crisis has provided a convenient fillip for the house price crash school. While some people warned that US sub-prime problems would hit the banks and the US economy, nobody - nobody - predicted that it would develop in the way it has. UK housing was slowing before the credit crisis, and the crisis has plainly exacerbated that slowdown and put downward pressure on prices. But, on that too, I'm not prepared to change my view until the dust has settled.

Posted by: David Smith at December 17, 2007 09:25 AM

David, I think that is a very good and sensible stand to have as a journalist who has a fine reputation at stake, very sensible. The same goes for market comentators who have their job to protect and not a huge amount to gain from being a maverick pulling away from the flock. You'd lose alot of face to call a market collapse that doesn't happen, and have people pulling you up on any outragious calls in years to come, as you have pulled up others recently on the thread about oil prices.

However, and slightly off topic, I don't think that's a good way to live life in general. Always relying on old information to base very conservative future decisions on. It's always best to prepare for the improbable, no matter how unlikely, in this case a major recession/depression/financial crisis (quite likely IMO and almost 100% certain had the central banks stood by and done nothing) as the improbable will always happen eventually given enough time...

Posted by: James Trouble at December 17, 2007 11:10 AM

Out of interest, could I ask David as well as others who contribute to these threads what sort of chance do you all put on a serious crisis for the economy in the next year? eg a 20-30% house price decline and the central banks unable to cut interst rates because inflation entrenched and the resulting recession lasting for 3 or 4 years by which time George Bush will be out of power and oil prices can 'normalise' again as giopolitical tensions calm...

Posted by: James Trouble at December 17, 2007 11:22 AM

I'd say it's almost certain a major house price correction will happen in the next 12 months.

A 2-up, 2-down ex-council house in Barnsley is not worth £120,000. Particularly, when the average salary of the area is under 20% of that.

They're still not teaching 'sums' and 'common sense' at universities, I see.

Posted by: Piers Ponsenby-Smythe at December 17, 2007 01:56 PM

So, are: (a) UK house prices now falling? (b) is the UK economy in recession? I remember a certain journalist that argued that (a) was impossible without (b)

House prices are determined by supply and demand, but it's only effective demand that matters. Potential demand is irrelevant (demand that is not backed up by money). The main reason why UK house prices soared was that lending multiples were increased and lending standards were relaxed at a time when base rates were low due to repeated Greenspan 'puts'. BTL, with the cash for the depositing coming from MEW, self-cert lie to buy, 125% LTV etc etc created the increase in effective demand required to bid up house prices in a spectacular fashion.

If there is a full blown credit crunch potential demand will remain high due to immigration, divorce and miscellaneous other reasons. However, the crucial point is that effective demand will crash if credit becomes harder and more expensive to obtain. Average prices will fall back; in line with whatever the new lending multiple happens to be.

The credit crunch, if it really happens, will cause house prices to crash. The economy is likely to go into recession.

A question for you: in the light of your recent post, do you still believe that oil will return to $40 a barrel?

Posted by: Nigel Watson at December 17, 2007 02:10 PM

Don't be a twerp. There have been plenty of occasions, even in recent years, when house prices have fallen, so I would never have made such a ridiculous claim. What you may be confusing it with is what I continue to say, which is that house prices don't crash in the absence of a recession. There's a very big difference.

As for oil. Yes, we'll see $40 one day, just as we saw $50 earlier this year, and had never been above $40 until three or so years ago. Whether that will be the sustainable level is more questionable.

Posted by: David Smith at December 17, 2007 02:25 PM

"house prices don't crash in the absence of a recession"

I disagree.

House prices are currently falling. Are we in recession yet? Definitely not.

Falling house prices combined with the credit bubble bursting will cause a UK recession

Posted by: Nigel Watson at December 20, 2007 10:19 AM

No, there's no cause and effect here, and please don't say housing equity withdrawal.

Posted by: David Smith at December 20, 2007 10:33 AM