Tuesday, 20 May 2008

What do you make of this......?


I thought we had a good discussion going on the sad and sorrowful decline of sterling against the euro.

Here is a chart that might add something to the debate: it follows recent net flows of private debt securities. It went from a nice positive number in quarter 3 to a nasty negative number in quarter four. Thus, it would appear that those foreigners just don't want to buy our debt anymore.

So go on asteve, nick, mark, traderboy. simon, oldftb and others, tell me what is happening here. Nothing good, that is for sure.

33 comments:

VADO said...

L.O.C.

Loss of confidence

CWS said...

Absolutely right VADO. Housing market crash=economic recession, time to get out of sterling assets.

aSteve said...

Interesting... what exactly does the most recent bar show? Does a negative number make sense? Is this disposal of securities previously foreign owned... or is it a net figure suggesting recent UK net investment in overseas debts?

The graph also looks odd when compared with the European securitisation report "Winter 2008"

http://www.europeansecuritisation.com/pubs/ESFDataReport-0208.pdf

Looking at the total quarterly issuance for 2006 & 2007, we get

36;32;47;77;63;62;30;17 billion Euros.

This is very odd, if your figures are accurate, since you suggest that, for 7 of those 8 quarters, foreign investment measured in Sterling substantially exceeded total issuance measured in Euros according to the most credible source I can find. This is clearly a nonsense.

So, in summary - either there is some flaw in data in your graph, or we've uncovered something new and interesting.

N.B. My interpretation is that the latest BoE inflation report's graph of global securitisation is supportive of, but not conclusive about the data in the above document.

What's your source?

Alice Cook said...

Asteve,

First, the source: the BoE, financial stability report, table 1.3.

The BoE probably got it from the ONS. It is from the balance of payments, therefore a net number makes complete sense.

The BoP has inflows and outflows, with domestic residents holding foreign assets and foreign residents holding domestic assets. When you add up everything coming in and subtract everything going out, you get a negative number.

On a more general point, I don't normally give my data sources, usually 'cos its boring. However, if at any time, anyone has a query about where the numbers come from, just ask. I will always name the source.

Alice

simon said...

Sorry Alice,

I believe sterling is in terminal decline, but that's all I will say on this.

Except, whatever you do, do not, invest in sterling based products.

Alice Cook said...

asteve,

Some further thoughts. The numbers in the chart do not show gross issuance of debt. Rather this the net flow of existing and new debt. This, again, can be negative.

Alice

aSteve said...

;) It wasn't supposed to be a dig, but I hope you can see the apparent anomaly.

I presume you mean Chart 1.3 "Foreign portfolio investment in the United Kingdom and sterling ERI"?

If so, the BoE chart appears to be in US$ - while your graph states Sterling. This goes a long way towards reconciliation with the Euro figures I've been looking at.

So far, so good. The next thing to note is that, in addition to foreign portfolio investment, there will have been foreign direct investment. We won't have a clear picture unless we can look at both.

A potential explanation for the non-intuitive negative figure for the final quarter is that previous "portfolio" investment started to be actively managed... which caused it to be re-classified as "direct investment". This is, of course, just supposition... another possibility is that a sum was somehow transferred back into UK ownership. It appears to be reported as a gross figure.

I suspect that, by comparing the Euro denominated issue of securitised debt - subject to appropriate EUR/USD exchange rates for the quarters in question, we can infer the sum of foreign direct investment and national investment... If we could distinguish between foreign direct and domestic investment, we could establish a trend in the volatility of the markets for debt securitised against UK assets. My hunch is that there used to be little call for domestic investment in securitised debt - since domestic banks could simply choose to keep their own lending "on balance sheet" instead. Maybe the negative amount relates to securities now held by Northern Rock as a consequence using emergency financing from the BoE?

Alice Cook said...

asteve,

OMG, you are right, it should be in USDs. I have just corrected it. I found the chart in the FSR and liked it. So, I quickly posted it.

However, I have the BoP on file. There are some interesting things there, which I could post in the coming couple of weeks.

Two subjects that will come up shortly are: oil balance and Net international position. The key point will be that the UK CA has some deep structural problems.

Alice

London estate agent said...

I look at this chart and I say "so what!". Go on, admit it Alice, this chart means nothing.

(Now is a good time to buy!)

London estate agent said...

just read your exchange with asteve. So you now can tell the difference between a pound and a dollar - one is a coin, the other is a note.

Very sloppy.

aSteve said...

Alice, Sometimes I know what I'm talking about... but only sometimes... I can't be trusted. :o)

Comparing the figures between foreign direct investment and issuance would definitely be *VERY* interesting. If they correlate closely, having converted Euros/US$ then we have conclusive proof that, effectively, all investment in securitised debt has been exploitation of foreign investors. If we can keep an eye on foreign portfolio investment - and it remains low (and looks likely to remain low for GDP-releated reasons) it would give a basis to estimate gross mortgage lending in future (independent of any recession) and to make a prediction of minimum house price falls based upon transaction volumes and credit availability. This could prove to be the first house price inflation estimate with a transparent basis. ;)

The only snag I see is that UK residents may have pensions invested with European pension companies (AXA for example) and this might undermine our case that the investment really is foreign... in the traditional sense... not sure on that score.

London Estate Agent... the chart certainly doesn't mean nothing! Independent of scale, it clearly demonstrates an abrupt end to passive (long term) inwards foreign investment into the UK. This will prove devastating for anyone wishing to sell into UK markets... and, yes, that includes you... and it also spells a death-knell for quite a number of the city types that have, in the past, buoyed your market. Try not to have nightmares - I'm sure you'll adapt just fine. ;)

Anonymous said...

For my part, I confess to not knowing enough to comment. I'm just enjoying the debate.

Nick

aSteve said...

Nick... my boldest statement to date:

I think that securitisation explains the UK housing bubble. I think it will define the future for house prices and our national wealth. I *strongly* urge you to read the europeansecuritisation document I posted further up... and decide if you agree that securitisation has been the root of much of the problems introduced over the past decade.

Portfolio investment in UK debt (as found here by Alice) is almost identical - a measurement from a closely connected econometric.

Anonymous said...

asteve,

Let's see if I can get straight on the first principles here:

BEFORE
- Prior to securitisation, UK was a mostly self-contained market, meaning UK banks loaned to UK borrower who bought UK houses
- Therefore total loan value available to buy UK housing stock was restrained by the capital of UK banks and their capital adequacy ratios
- Debt service ability is limited by UK salaries

BUBBLE
- Securitisation allows loans secured on UK houses to be sold easily
- Foreign buyers represented much of the market for these MBS
- Therefore new capital from outside the UK entered into the system
- More new capital and therefore larger loan amounts were chasing a fairly fixed amount of housing stock
- House price bubble
- Debt service is still limited to UK salaries, which didn't go up

NOW
- Debt service limits breached, leading to default or at least default expectations
- Therefore mark to market losses
- Shut down of MBS market
- Foreign buyers no longer buy MBS so no net inflows into UK housing
- Total loan value able to chase houses trends back to how it used to be, with adjustments to clear out excesses of the bubble

Is that essentially what you're getting at? That securisation allowed new money to enter the UK to bid up houses, and now the process has stopped and/or reversed?

Nick

aSteve said...

That's close to what I'm suggesting... nothing wrong with what you've said, but there are some extra ideas... you might have missed them out for simplicity, but I think they're kind-of important.

BEFORE (Exactly;Sort-of;Always has been)

The total loans value available to buy UK housing stock (and anything else you wanted a loan to do) was bounded above by deposits (bank, or – more frequently – building society). This meant that for every pound that was owed, there was another pound someone else could spend immediately if they chose... arbitrary – but a balance between money supply and debt to be serviced. This is important because, in this context it makes perfect sense to target RPIX inflation – so, if people start to spend their money to quickly, the cost of borrowing goes up – so there is less of it to add fuel to the out-of-control fire.

BUBBLE (Yes;Yes;Yes;Yes;Yes;Always has been)

N.B. There will have been some interesting stuff going on with respect to foreign exchange and, possibly GDP at this stage. I'm saying little more as I've not got to the bottom of it... I suspect it has something to do with the IMF; Bretton Woods and some remarkably archaic and aristocratic ideas about wealth. I'm still trying to research this aspect.

NOW (Not really; Separate; Yes – but not for those reasons; Yes;Not really)

It isn't so much that debt service has become impossible – if debt expansion continued, debts could continue to be serviced... but this is like working out that in order to pay all your bills in successive time-periods you need exponentially more credit... 20% more, say, while income is rising by less than 5%. It has become obvious that, eventually, there will be insufficient funds to lend – and that when that happens... defaults will be inevitable. It's a bit like kiteing credit card debt – but on a national scale. Everything is fine – but, eventually, one of the credit cards will refuse to increase your card limit – and then the whole system is stuffed... independent of any individual. US Subprime (where there started to be defaults that the models used to sell MBS suggested were impossible) alerted investors to the risk of MBS... and now they're not happy about being taken for a ride and don't trust any securitisations.

Mark to market losses is not directly related – other than being a crude risk assessment metric that is better than no risk assessment metric at all. This is all about banks needing to trust each other if they are to lend money so as to make efficient use of it. A firm market-offer for an asset is assumed to define a value. It doesn't of course, for the same reason that ponzi schemes fail... but it is better than blindly believing the fantasy predictions of an arbitrary abstract model constructed by a vested interest.

It is more dramatic than loan value available to chase houses trending back to long-term average... for two reasons. First, mortgage originators (banks) tended to issue mortgages first and securitise second... for this reason, they filled their balance sheets with shoddy loans (expecting to be able to sell them) before the MBS market slammed closed... which means – effectively – that a precious resource (capital adequacy) has been squandered by poor planning... this means that banks are dramatically more constrained in all new lending than they would have been if there had been no securitisation. The next and, in my opinion, far more relevant issue is that while mortgages were taken on with a 20 to 30 year term, the financing tended to have 2, 3 or 5 year terms. This is why mortgage lenders were pushing 2, 3 and 5 year fixes so very hard in the past few years. The advantage to the mortgage originator was that they could cream a commission for paperwork ever 2, 3 or 5 years – while customers thought they were benefiting from “competitive” financing... Of course, they weren't... the fixes were cheaper because, in a functioning credit market, the yeild curve dictates that borrowing short term minimises risk – both of default and inflation... and “borrow short term to lend long term” is only profit making during a boom... but, during the boom, it gave the likes of Northern Rock the competitive edge to aggressively grab market share.

What happens when the 2,3 and 5 year fixes expire? Until late 2007, there was no problem – there was a queue of investors looking to compete to take the business. CRUNCH. No investors remain – at any interest rate... and foreign investors sit there saying “my money please” - “I don't care that the mortgage still has 20 years still to run... that's not my problem.” The investors are confident that they'll get their money on the due date – because customer defaults haven't yet happened... If banks defaulted under these conditions (because they'd lent long while borrowing short – with no contingency – after regulatory failure making our FSA look the corrupt incompetents that they are) there would be a systemic failure of Sterling and Britain would cease to trade in the international arena. The foreign investors were bailed-out because they had a right to trust the British banks would honour their obligations – in the same way we, as depositors, have a right to expect out good-faith deposits returned intact.

So, this explains the “extraordinary” measures adopted by central banks... there needs to be a way to finance the existing securitisations when they expire over the coming months/years. The banks are in a major bind – it isn't clear that they can finance the mortgages they've already issued... let alone any new ones. Add into the mix problems like Northern Rock effectively being wound-up by slow-motion administrators; capital flight to the Euro (to preserve purchasing power) – and the likely drop off in economic activity as the housing market grinds to a halt... then it looks like we've witnessed a good prelude. I estimate that the shortfall in finance for UK mortgages will be of the order of half a trillion... even if you only consider the interest rate skims for investment bankers on the leveraged deals... this can only have a dramatic effect on the UK economy... to say nothing of the impact of an effective end to cheap mortgage money that has financed so much of discretionary spending.

Anonymous said...

asteve,

As ever thanks for the detailed comments. I've been thinking about these pier loans for a while, about how banks got caught cold with a ton of warehoused loans that they suddenly couldn't shift, and thus have tied up capital.

At the same time they have been pulling SIVs back onto balance sheet which ties up even more capital.

So really I agree that we've had a sudden freeze and that the BoE trying to swap out alot of these assets is the right idea (given their real constituents) but doomed to failure due to the magnitude of the problem.

I too have been wondering what happens when you come to refinance a loan and you have no bidders. It seems every generation learns that borrow-short/lend-long condemns you to bankruptcy the moment liquidity flees. What I hadn't really thought through was that all the banks would be in this position and thus unable to issue new loans.

Nick

aSteve said...

Trying to take assets without any form of finance out of the equation is about the only thing the BoE can do... but this is not without massive risk... if it accepts one bad piece of paper, banks will be trying it on all the time... essentially allowing banks to "print money" for themselves at everyone else's expense. This is why the AAA 'good as cash' stuff has had massive haircuts... and is only a temporary swap.

Usually, if you take out fixed-term finance, and at the end of that term you need more finance but no-one will give it to you... you are insolvent... what happens is bankruptcy and a fire-sale of assets to repay creditors pence on the pound. With Northern Rock that stood to be a big problem... If the best bid for the £100bn assets had been two tubs of sauerkraut and a Camembert... you can probably imagine some rather angry retail depositors who've been short-changed by £20bn - and even more angry other banks who would likely become insolvent in a chain reaction. This is another reason for central bank intervention... to unpick the knitting - so that insolvent businesses can write off their losses without threatening the entire system.

Anonymous said...

You'll disgree with me on this one, but that's precisely why we need a gold standard and an end to fractional reserve lending.

Gold convertibility gives the depositor an "out" at any moment by giving them the right to convert a sterling deposit into a hard liquid asset on demand

Elminating FRL (or at least cutting the ration from 9:1 down to 3:1) seriously reduces the ability and incentive for banks to overstretch.

Both together would hurt the profitability of banking but I don't see that as such a bad thing. They'd find a new equilibrium and if that means charging customers for accounts, well at least that's better than charging the whole nation via inflation.

Nick

andyrich29 said...

Morning All,

I know very little about economics, but even I know that securitisation has been the root cause of the current problems?

Or more specific, grading of these securities?

Just thought I'd input my laymans view.

Andy

simon said...

The euro now costs more than 80p,

I'm wondering how low sterling will go before we beg to be let in.

aSteve said...

Nick, you're right that I completely reject a gold standard... but the other issues are a non sequitur.

I believe gold to be an utterly arbitrary commodity metal, and that there is no reason whatsoever to value it above its (very limited, chav-like) decorative and electrical properties. To waste mankind's effort mining it when tonnes of the stuff sit unused and hoarded in a big cupboard that costs a fortune to defend is utter madness... if you think about it... are we leprechauns?

I do, however, agree that there is an extraordinarily sound ethical basis for eliminating fractional reserve lending - especially the fractional reserve lending involving investment banks. Curiously, this (odd ideas, to a westerner, about beer and bacon aside) is fundamental to Islamic Banking under *strict* Sharia law.

I am very interested in the idea that a form of virtual gold could be established by international treaty and openly verified by cryptographic means. I admit that this sounds science-fiction to those who like to live in the physical world... but I believe that it could be achieved... and it would be far better than having third-world inhabitants frantically mining for every last speck of a hoarded metal so that it can be locked in a cupboard in payment for food aid and weapons sold to their leaders.

I'm less convinced that improving the reserve ratio alone is sufficient... and if you think the limit is 9:1 today, you need to read about Basel-2 which allows for varying fractional reserve limits.

The case against FRB is not that banks might over-stretch themselves, though they might, but rather a fundamental question of control. In a democracy, or even a plutocracy (which more accurately defines the West) money defines control... however, where the sum of all money in individual hands is challenged (and, in practice, overwhelmed) by money available as credit... a supposedly free, fair and equal society becomes a tyranny.

I'll also pick up on an implicit error of judgement... Fractional reserve banking does not, over the medium/long term, result in inflation. You might think that a mad claim - but it is true. FRB may be used as a weapon by which to perpetuate impoverishment of the poor by the wealthy, the prudent by the reckless - allowing others to bid assets out of your reach... which may well be hugely damaging to civilisation... but it is not inflationary overall - the debt is real. Old-hand economists will tell you flat: "government overspend" causes inflation. In a modern sense, we also need to include fraud within the financial system where the losses require government bale-outs. By this, I don't mean central banks lowering interest rates (that merely stretches time for debtors to make good on their debts... though, I admit, justice delayed is justice denied) or by injecting liquidity (which gives debtors more rope by which they might hang themselves) - but it does mean, for example, the sum the treasury will eventually owe once the debacle at Northern Rock has been untangled. I consider this loss to have been an overspend by government misconduct with respect to its obligation for financial regulation. This puts it squarely in the court of government over-spend. The extent to which £10bn is more than Cross-rail is worth to the public is also inflationary - though many people seem to over-look that comparable sum.

Andy - I realise that the word securitisation is in the mainstream... but I'm going several steps further. The media say that it is US subprime securitisation that is a problem... that it is the creditors in trouble as a result of defaults... and that it is almost over - because most immediate losses have been written down - and the debts are now treated as being as risky as they really are. That's all well and good, but doesn't address mal-investment in debt (leading to mal-investment in assets) which remains to be repaid even though the assets which had their price set by that debt are no-longer retain those debt-set prices.

My point about securitisation is that the extent of foreign portfolio investment in domestic real-estate debt defines the extent to which property market has been over-priced in recent history. Securitisation appears to be the mechanism by which foreign investors can and do cause real-estate to be bid beyond a safe and fair price in the domestic economy. Rising house prices gives a false expectation of long-term (wage) inflation - and, hence, causes reckless optimism to become endemic. There is obviously a tipping point - at which responsible credible debtors leave the market entirely... and this spells default and economic disaster. I think we've reached the point where all the investors know that the tipping point is near. The challenge for the authorities is to hold people accountable for their debt when individuals stop believing that it is making them more wealthy and has become a millstone on an epic scale - when a middle-class £50K/year professional with a £300k mortgage realises that - in the context of suppressed wages; high taxes; a high cost of living and a house that can't be sold... that he needs to work every waking hour just to service his debt for 20 or more years... he will be far better off if he just walks away. If debtors default en-mass, no-one will trust Sterling and no-one will want to finance anything in Britain... so, literally, everything is at stake.

Oh, and before some optimist suggests "wage inflation" - that can't work. Wage inflation => higher yields are demanded by international investors to finance our foreign debt. Default would leave us isolated on an island where we can't feed ourselves and aren't anywhere near self-sufficient in terms of energy - and can't even mass manufacture our own goods like clothing; electricals; cars etc.

In my view, the only way out is to massively devalue British assets such as real-estate - while desperately attempting to repay debt as soon as possible - even at the cost of a significant drop in the standard of living. Of course, I don't want to be the politician who tells the public. I'd far rather focus on "economic growth" and gloss-over (ignore) the fact that for every £1 of increased economic activity, there's £5 of increased debt to foreign investors.

Chav said...

The thing about gold is the fact it is immutable.

CWS said...

...meaning?

aSteve said...

Immutable means "unchangeable" - or, in this context, in fixed supply... and - as such - the easiest commodity to monopolise. This is why the earliest currencies were gold... gold requires no communication to establish its rarity... it is a function of physics... though people at the time it was used as money had no reason to be sure about this.

In a modern world, communication is not a limiting factor. There is absolutely nothing to stop any number of immutable systems being established without the cost of mining. The only reason to advocate gold as a currency is that you like the politics of those who happen to hold gold. The gold standard did not preclude fractional reserve banking - though it did limit government deficit funding - especially for wars etc.

Other properties of gold that I consider relevant are:
heavy; untraceable; easily stolen; subject to wear. None of these represent positives as a monetary standard, as far as I am concerned.

I recently posted a fair bit about this in response to Nick on a topic that has just dropped off the front page.

http://ukhousebubble.blogspot.com/2008/05/running-for-cover.html

Anonymous said...

"where the sum of all money in individual hands is challenged (and, in practice, overwhelmed) by money available as credit"

I agree and this has bothered me for a long time. I find FRL extremely undemocratic. I actually think democracy is a bad idea, but that's a different story.

FRL allows the government to spend money it doesn't have and for banks to charge interest on money they don't have. Because it helps both parties, it continues. The process, in broad strokes, goes like this:

- Government approves a hare-brained scheme to spend a ton of money it doesn't have, to buy votes. Let's call it a £1.5bn program;
- Let's say they've got tax revenue of £0.5bn. They don't want to raise taxes or cut other spending so they go to the treasury;
- Treasury issues £0.5bn in public debt, better called "deferred taxes". Let's say the market wouldn't support a full £1bn;
- So next the government goes to the BoE. They print the remaining £0.5bn.

At the moment the government spends the £1.5bn it gets full monetary value as it's the first time £1bn of it enters the economy. But once that extra £1bn get's deposited in bank accounts by the recipients, FRL turns it into £10bn and we get inflation.

Overly simple, but it's the basic process.
Nick

aSteve said...

On democracy, there's a great quote... it goes: "What do you think about democracy?" ... "I think it would be a great idea." (The implication being that things claimed to be a democracy seldom are.)

On a few technical points, fractional reserve lending does not allow the government to spend money it doesn't have. Government overspend is done by bond issuance (which is independent of fractional reserve banking) and is easiest with fiat currencies... but can be done independently of any commercial banking legislation. Similarly, commercial banks aren't able to charge interest on money they don't have - it is just that you have a different idea of what money should be than what money is defined as being in a fractional reserve system.

In your hyphen-breakdown, I'm with you right-up until you claim that the BoE "print the remaining £..." - because they do not. The treasury and the treasury alone is responsible for its deficit spending.

You're right that for every £1 of M0 expansion, commercial leverage yields ~£10 to £20 in M4 expansion... assuming current levels of support of and demand for bank loans. Things, of course, get interesting when the expanded M4 is subject to taxation... ;)

Anonymous said...

Does this chart explain why my holiday to Spain was so expensive?

aSteve said...

Anonymous... Er... No.

This one might, however:

http://www.exchange-rates.org/history/EUR/GBP/G

Anonymous said...

Well, strictly speaking FRL and money printing are two analytically separate things, but in practice they occur together.

The BoE credits the goverment a/c with the newly created £0.5bn, which it then spends (via a transfer from the govmt BoE a/c into the commercial banks' a/c of the recipient) which is then multiplied through FRL. The printing is inflationary but then the FRL multiplies it again. Importantly, the govt spends the money before the economy has adjusted to the inflation hitting the system.

I do mean the govt spends money it doesn't have because the money it spends is created out of thin air as a tax on all existing pounds.

Nick

aSteve said...

Nick, I almost agree with all of the above... though I hope you can see why I objected to the idea that the banks are "printing"... additional leverage from banks does not introduce more money into the "real economy" without exactly equal debt. I think this is *crucially* important with respect to the relative growth of M0 and M4. Where M4 has grown faster than M0, the burden of debt has grown within the system - and fractional reserves have dwindled. This puts the banking sector at risk... and, as defaults grow forces banks to do rights issues... which, again, increase (only slightly) the ratio of debt to debt-free money in the non-financial economy.

This is key to the argument that we are likely to see slowed expansion of M4 over the medium term. In the short term, M4 will expand, because - when depreciated financial assets are sold, even at a big discount, the new owner will still use leverage... and it will take time before debts are repaid... as those with credit take one-last punt on a bull market - perhaps with commodities; perhaps utilities... perhaps something I've not yet thought about.

As a simplified model, there are a few factors that affect future asset prices:

1. (Inflationary) The amount of government debt (i.e. 100% kosher reliable money - M0) which has been expanding fairly slowly - say at 5% or 6% - roaming free in the economy. [N.B. Curiously, this is harder to estimate post-2006... maybe this is coincidence... Alice, have you some good ideas for information sources?]

2. (Inflationary) The amount of Fractional reserve lending (M4-M0) which has been expanding rather more rapidly - say at 12 to 18%. This expansion reflects the additional private sector debt risk... which has, over the past few years, been mitigated by an exponential expansion in CDS issuance. Looking forward, the effects of the SLS and “pumped liquidity” will increase M4 in the short term... but this only permits trading at a price... banks can't directly profit from this new liquidity. Falling interest rates help here, but LIBOR is not falling with the base rates... and LIBOR is the elephant to the mouse of the BoE rate in terms of scale... since the penalty for borrowing from the BoE, rather than commercially, is significant.

3. (Deflationary) The level of taxes required to keep government debt expansion on target – both for net and gross amounts. N.B. Net matters most for the UK... it is most likely to change in the short term. Missing targets for national debt would push up the cost of government borrowing and impoverish British people. It is important to note that the targets for national debt are as a proportion of GDP. In a slowing world economy, this will seriously constrain M0 growth... and, remember, most borrowing will have been done with the expectation of continued rapid M4 growth.

4. (Deflationary) The will of banks to unilaterally reduce their ratio of credit risk to fractional reserve... a situation prompted/exacerbated by write-downs. There are three options:

a) Retain profits (small bonuses; small dividends) – not likely (not in the interest of the board of directors) and would only make a small dent in the problem over the next few years.
b) Sell off acquired assets to new independent owners... who will (almost certainly) need to buy them on credit... (Whoops, clang, risk aversion to big loans... plus... the assets anyone would want to sell are always the over-valued ones.) It might work – but it would drive down asset prices – and, hence, increase the system-wide problem.
c) Make a rights issue... Not a bad plan... embarrassing for the board of directors... biggest hurdle is plummeting share prices – which limit the maximum size of rights issue that can be achieved.

All of these appear to be in full-swing. M0 expansion doesn't explain property prices – and M4 expansion looks extremely risky... unless entirely new groups of affluent debtors emerge... which, frankly, seems unlikely.

aSteve said...

P.S. In this context, "affluent debtors" would be synonymous with foreign portfolio investors - i.e. those with foreign assets who need to borrow against their Euros; Dollars etc. to invest in Sterling assets.

It would be great to have a breakdown of this foreign investment by originating currency. That way we might infer the rate of contraction in gross outstanding portfolio investment from exchange rates. ;)

aSteve said...

More data - direct from the ONS...

http://www.statistics.gov.uk/STATBASE/tsdataset.asp?More=Y&vlnk=1550

I think we need some graphs to help appraise what is going on.

I'm specifically interested in HBWI, HLXY, HLXW & HBQC.

It would be very interesting to correlate these figures for the issuance of asset backed securities as recorded by European Securitisation.

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