I hope the Guardian will forgive me for posting the following from their web iste this morning. My defence is that the issues raised are pretty fundamental:
A prolonged period of ultra-low interest rates poses the threat of a fresh financial crisis by encouraging excessive risk taking on global markets, the International Monetary Fund has said.
The IMF said that more than half a decade in which official borrowing costs have been close to zero had encouraged speculation rather than the hoped-for pick up in investment.
In its half-yearly global financial stability report, it said the risks to stability no longer came from the traditional banks but from the so-called shadow banking system — institutions such as hedge funds, money market funds and investment banks that do not take deposits from the public.
José Viñals, the IMF's financial counsellor, said: “Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges.”
So, the IMF has proved it can spot the risks. Half marks for that.
But they get no marks at all for then going on to discuss changing interest rates as if that is a solution. It isn't, not least because it will tip millions of households into debt, bring on mortgage foreclosures and create another banking crisis on not time at all, and that's before the impact on spending and investment. To go down that route is insanity.
So the answer has to be different and those alternative answers are available. First, there's a need for a financial transaction tax (FTT or Robin Hood Tax) to curb the activities of the shadow banking sector. And if that FTT had an inbuilt clause (the so-called Spahn variation) which increased rates in the event of financial volatility precisely designed to slow down contagion in the event of financial panic, so much the better. This simply works by making trades in that situation very much more expensive and so prevents wild market excesses.
Second, if business will not borrow to invest and yet there is unmet capacity in the economy (and there is) and real need to be met then the obvious answer in an era of exceptionally low interest rates is that government must invest instead. It really is that glaringly obvious. It's not rocket science. It's just plain common sense.
What is so hard to work out is why the glaringly obvious is so hard for the IMF to spot.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Richard, most shadow banking involves lending, which is outside all the FTT proposals I’ve seen. An FTT would certainly kill high frequency trading, but that’s a small niche that doesn’t employ much capital. So not sure what your point is.
I think you undersell the HFT component
HFT is clearly not what José Viñals is talking about – “financial risk taking” doesn’t really describe HFT. The main problem with shadow banking is that risky lending, which used to be carried out by regulated banks, is now increasingly being undertaken by the shadow banking sector. Regulators can’t see it, but the risk is still there. That’s the problem, and the FTT has nothing to do with it.
The IMF target was specifically financial speculation
Stop talking utter nonsense
There is no need to be rude. If you read the report you will see no mention of HFT. The shadow banking activities they discuss are investment – i.e. fund inflows – which are nothing to do with HFT and not generally taxed by the FTT. The premise of your post was incorrect, and it would be mature of you to acknowledge that rather than throw insults around.
My premise was correct
The concern was with speculation and the risks resulting from it
Have you read the report? If so, be so kind as to point out which of the activities they discuss would be subject to the FTT.
The October 2014 Global Financial Stability Report (GFSR) finds that six years after the start of the crisis, the global economic recovery continues to rely heavily on accommodative monetary policies in advanced economies. Monetary accommodation remains critical in supporting the economy by encouraging economic risk taking in the form of increased real spending by households and greater willingness to invest and hire by businesses. However, prolonged monetary ease may also encourage excessive financial risk taking. Chapter 1 concludes that although economic benefits of monetary ease are becoming more evident in some economies, market and liquidity risks have increased to levels that could compromise financial stability if left unaddressed. The best way to safeguard financial stability and improve the balance between economic and financial risk taking is to put in place policies that enhance the transmission of monetary policy to the real economy–thus promoting economic risk taking–and address financial excesses through well-designed macroprudential measures. Chapter 2 examines the growth of shadow banking around the globe, assessing risks and discussing regulatory responses. Although shadow banking takes vastly different forms within and across countries, some of its key drivers tend to be common to all: search for yield, regulatory circumvention, and demand by institutional investors. The contribution of shadow banks to systemic risks in the financial system is much larger in the United States than in Europe. The chapter calls for a more encompassing (macroprudential) approach to regulation and for enhanced data provision. Chapter 3 discusses how conflicts of interest between bank managers, shareholders, and debt holders can lead to excessive bank risk taking from society’s point of view. It finds that banks with boards of directors independent from management take less risk. There is no clear relation between bank risk and the level of executive compensation, but a better alignment of bankers’ pay with long-term outcomes is associated with less risk.
And if you go on to read Chapter 2 you will see that the search for yield is resulting in high risk investments being made by the (largely offshore) shadow banking sector, and that ultimately the risk is borne by onshore institutional investors. The risks remain as before, and borne by the same people (us!) but out of sight of the regulators. A real problem, but nothing to do with HFT and nothing to do with the FTT.
That’s your interpretation
Please read the report. If you don’t have time to plough through Chapter 2, the diagram on page 69 is a really clear illustration of the role of shadow banking, and why it’s a concern. It’s fascinating, and troubling, and there’s plenty you could write about here… but your post was based on a misunderstanding. It would cost you nothing to admit that.
I am well aware of the risks of shadow banking – I have been involved with academic studies of it
So I accept your point
I am bemused you do not accept mine
The fact that the world’s pension funds are handing over vast sums to traders in the financial markets to speculate with (they think this is “investment”) is not helping matters. The proposals emanating from the Capital Institute in the USA for “evergreen direct investing” by pension funds and from John Clancy in the UK for public sector pension fund investment in social infrastructure would go some way to reducing the harmful effects of financial speculation being fed by pension funds. Lets remember they control 1/2 the worlds invested capital.
The IMF refuses to countenance anything other than a deflationary monetary response because it is addicted (rather like a junkie on heroin) to the nostrums of neo-classical, neoliberal economics, and will not concede that Governments should respond to recessions with deficit spending in order to reduce cyclical unemployment. J.M. Keynes might as well not have bothered. Christine Lagarde has only just conceded that deficit spending is appropriate in the battle against Ebola! (Her West African auditors were astonished, and made comment about the marked contrast with the usual IMF narrative.)
This over-mighty body has held sway over the world for far too long. Its power must be destroyed.
Ciaran Davis
I’m sorry, I may be missing something, but I don’t understand how you say these activities will not be caught by an FTT. You first said they were, merely, “offshore” in which case I can’t see why an FTT wouldn’t catch them. You now say they are “shadowy” but don’t go into detail. Are we talking Bitcoins here, or Hawala banking or what? I’m bemused.
Richard
As previously said, I think interest rates need to rise &, if that were the correct economic remedy (I appreciate it might not be) its silly to preclude it simply because people will lose their houses.
There should be a fund available to all Local Authorities to buy the homes of people that can’t meet their mortgages. Those people can then remain in the house, in perpetuity, paying rent to the Council instead of interest to the bank. If their circumstances improve its always open to them to buy the house back from the council at the market rate. If not, when they move out, the house will become part of the social housing stock.
Your recommendation implies that buying a house is a one-way bet. It doesn’t benefit poor people. It benefits the Kirsty Allsops of this world.
and god knows just one Kirsty Allsop in the world is one too many.