BOE calls 'crisis' meeting

Thrugelmir

lemonjelly wrote: »

Anyone else find it intruiging that not so long ago banks were being lambasted for not holding reserves, yet now they are, they're still doing the wrong thing?

Not saying whether they're right or wrong, just find it interesting how much things have changed in such a short time.

I not sure that the banks are being lambasted by the BOE. The BOE very early this year recocognised that total debt levels had to be reduced. Yet didn't want lending to dry up as this would merely cause the economy to contract further quicker.

Maybe the QE policy is not having the desired impact. The Government has not taken any decisive budgetry action since the crisis started back in 2007. So the BOE's policy is in itselfs not getting support.

We seem to be sitting on a knife edge at the moment. As ideally the BOE would need to raise interest rates to support both sterling and control inflation. With exchange rates falling we are importing inflation into the system which we can't afford.

lemonjelly

Thrugelmir wrote: »

I not sure that the banks are being lambasted by the BOE. The BOE very early this year recocognised that total debt levels had to be reduced. Yet didn't want lending to dry up as this would merely cause the economy to contract further quicker.

Maybe the QE policy is not having the desired impact. The Government has not taken any decisive budgetry action since the crisis started back in 2007. So the BOE's policy is in itselfs not getting support.

We seem to be sitting on a knife edge at the moment. As ideally the BOE would need to raise interest rates to support both sterling and control inflation. With exchange rates falling we are importing inflation into the system which we can't afford.

Sorry, didn't mean to give that impression. I mean more "lambasted" (probably not quite the best word) being bandied about by the sensationalist media. 6-9 mionths ago the media were critical of balance sheets not being well reserved. Now, media criticizes the banks for boosting their balance sheets & not lending.

Thrugelmir

lemonjelly wrote: »

Sorry, didn't mean to give that impression. I mean more "lambasted" (probably not quite the best word) being bandied about by the sensationalist media. 6-9 mionths ago the media were critical of balance sheets not being well reserved. Now, media criticizes the banks for boosting their balance sheets & not lending.

But lend to who? Thats what intrigues me. Quoted companies are slashing dividends, cutting costs and having rights issues in order to rebuild their balance sheets and reduce debt levels. Smaller companies on the whole have more than likely cut back on expansion plans or are themselves seeking ways of raising investment capital as opposed to increasing debt.

You yourself know that consumers are struggling with debt levels. So this isn't an option either.

Wish there was more well researched journalism around. Precised 200 word summaries on the BBC website are infuriating!

lemonjelly

Thrugelmir wrote: »

But lend to who? Thats what intrigues me. Quoted companies are slashing dividends, cutting costs and having rights issues in order to rebuild their balance sheets and reduce debt levels. Smaller companies on the whole have more than likely cut back on expansion plans or are themselves seeking ways of raising investment capital as opposed to increasing debt.

You yourself know that consumers are struggling with debt levels. So this isn't an option either.

Wish there was more well researched journalism around. Precised 200 word summaries on the BBC website are infuriating!

Extremely valid point.
the media (:rolleyes:) report that business' are struggling due to tightening of credit. But you are correct - wrekin construction firm blamed the debt on banks refusing to lend. However I'm sure that when inspected, their assets and order book were nowhere near as healthy as first implied in news stories. The media withdrew from that quickly, and the bandwaggoning MP's had a wee bit of egg on faces.

Measured lending clearly seems to be an issue. The banks still don't appear to be lending to each other still, even though publicly they're saying it ain't as bad as it was first believed to be.

dopester

lemonjelly wrote: »

Extremely valid point.
the media (:rolleyes:) report that business' are struggling due to tightening of credit. But you are correct - wrekin construction firm blamed the debt on banks refusing to lend. However I'm sure that when inspected, their assets and order book were nowhere near as healthy as first implied in news stories. The media withdrew from that quickly, and the bandwaggoning MP's had a wee bit of egg on faces.

Measured lending clearly seems to be an issue. The banks still don't appear to be lending to each other still, even though publicly they're saying it ain't as bad as it was first believed to be.

All part of the obvious deflation. Who in their right mind is going to lend even more money to basket-case debt-loaded borrowers?

The second element being credit credit revulsion / conservation from those who prefer to build savings / not borrow.

A trend of credit expansion has two components: the general willingness to lend and borrow and the general ability of borrowers to pay interest and principal. These components depend respectively upon (1) the trend of people’s confidence, i.e., whether both creditors and debtors think that debtors will be able to pay, and (2) the trend of production, which makes it either easier or harder in actuality for debtors to pay. So as long as confidence and production increase, the supply of credit tends to expand. The expansion of credit ends when the desire or ability to sustain the trend can no longer be maintained. As confidence and production decrease, the supply of credit contracts.

The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less. These behaviours reduce the "velocity" of money, i.e., the speed with which it circulates to make purchases, thus putting downside pressure on prices. These forces reverse the former trend.

Generali

purch wrote: »

There have been a lot of mixed messages emanating from the UK authorities.

The Treasury and the Bank have long been singing from different hymn sheets, and this uncertainty has not helped in the markets.

Fundamentally the banks are required to do two different things which are wholly incompatable - they need to rebuild their reserves so that they become solvent again and they need to lend money to businesses and individuals to avoid the money supply falling and deflation kicking in.

One solution would be to let the banks go bust, nationalise them and wind them down and use some of the huge sums of money being put into proppping up the existing banks to set up a system of small banks and mutuals to replace the current system of massive, systemically risky banks. In effect instead of trying to rebuild the banks' reserves, the Treasury would be using the banks reserves to mitigate the cost of winding them up.