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On Europe's Broken Transmission Channels

Tyler Durden's picture




 

There are many channels through which changes in the monetary policy stance are transmitted to the real economy. Recent statements by Draghi and Noyer (and a dropped word by Nowotny) suggest that the ECB is concerned about the uneven transmission of its July interest rate cut to bank lending rates across the Euro area. Goldman finds this empirically true noting that the influence of official ECB rates on retail interest rates in Italy and Spain has diminished, while it has increased in Germany and France and in fact there is a ‘reversal of policy transmission’ in Spain and Italy, whereby ECB rate cuts are now associated with an increase, rather than a fall, in retail rates (as the rapid deterioration in peripheral banking systems has more than offset any impact of lower rates). This 'failure' of standard monetary policy to ease conditions has led to the non-standard measures being discussed now. We see three points from this: rate cuts are less likely than the market believes; while SMP is now being priced in, it doesn't specifically address the transmission-mechanism; and just as Draghi hinted at in his last conference, we suspect he will reiterate his reduced collateral standards and increased eligibility to private-sector loans directly (an LTRO 2.5) - which, however, will necessarily encumber bank balance sheets even more (if Zee Germans will even agree to it).

 

 

Goldman Sachs: Broken transmission and non-standard ECB policy

Recent statements by ECB President Draghi and Banque de France Governor Noyer suggest that the ECB is concerned about the uneven transmission of its July interest rate cut to bank lending rates across the Euro area. Consistent with this view, this week we demonstrate how sovereign tensions have segmented financial markets in the Euro area, thereby increasing the divergence of bank lending rates across countries, and hindering the uniformity and transmission of monetary policy.

We highlight two main empirical facts. First, during the financial crisis the influence of official ECB rates on retail interest rates in Italy and Spain has diminished, while it has increased in Germany and France. Second, we observe a ‘reversal of policy transmission’ in Spain and Italy, whereby ECB rate cuts are now associated with an increase, rather than a fall, in retail rates. This observed reversal should not be read as implying that monetary policy now has perverse effects on demand in the periphery. Rather, it suggests that the tightening effect of a sharp deterioration in the state of the peripheral banking system and financial markets has more than offset the impact of lower official rates.

As a result of these considerations, we conclude that the ECB’s July rate cut has failed to loosen financing conditions in the periphery, where stimulus is most needed. A blocked interest rate channel of monetary transmission makes it less likely that the ECB will implement further rate cuts. In line with Mr. Draghi’s recent comments (see European Views, July 26), re-establishing transmission through non-standard monetary policy measures to restore market functioning appears a more appropriate line of policy action.

 

Broken link between official, market and retail interest rates

There are many channels through which changes in the monetary policy stance are transmitted to the real economy. Here we focus on what has traditionally been seen as the main channel: from changes in central bank official interest rates to changes in market rates (in money and sovereign markets), and on to the final (or retail) interest rates that banks charge on loans to their customers.

In normal times—when financial markets are unified and functioning properly—ECB rate decisions exercise close control over banks’ refinancing costs in the money markets throughout the Euro area. And, albeit with lags of varying length, refinancing costs are passed on by banks to their borrowers: in the end, interest rates on loans and mortgages follow the policy rate in a uniform way across countries.

But, in the context of the ongoing crisis, financial markets have become dysfunctional. This has led to an impairment of monetary policy transmission in general, and of the traditional interest rate channel (described above) in particular. Reflecting this, in a recent speech Banque de France Governor Noyer noted that July’s ECB rate cut had been passed through to borrowers unevenly across Euro area countries: sovereign tensions had segmented the money market, leading to different financing conditions in different jurisdictions.

Here we explore how the relationship between policy rates, money market rates and sovereign yields has evolved over the crisis period and the implications this has had for the variation in financing conditions across Euro area countries. Before the crisis, it was widely assumed in the economics literature that the evolution of longer-term market rates (notably government bond yields) did not exert much influence over the way banks set the interest rates they charge to their customers. Rather, monetary policy decisions have generally been considered to be the predominant driver of retail rates. This assumption mostly derived from the stability of sovereign yields themselves and the spreads between them, which introduced little volatility into retail rates. It was also believed that bank funding costs were only modestly affected by sovereign yields. The latter therefore had little impact on retail rates.

We start here from the assumption that the rate-setting behaviour of Euro area banks—and thus the transmission mechanism of monetary policy—has changed with the onset of the financial crisis, possibly in very fundamental ways. There are a number of inter-related potential drivers of this change, among which:

  • The banking system itself has become dysfunctional in the peripheral countries.
  • The dislocation in government bond markets has affected bank funding costs through several channels, for example:
    • Because of the interconnectedness of bank and sovereign balance sheets, developments in sovereign bond markets (widening and volatile spreads, liquidity strains) also affect wholesale refinancing costs (as can be seen from the persistently elevated CDS for European senior financials).
    • The dislocation of government bond markets erodes bank capital: for holders of government debt, capital losses are incurred as yields rise. In a context where bank capital requirements have risen under the Basel III standards, this erosion of bank capital constrains credit expansion.

 

Changes in the behavior of retail interest rates

 

Up to the crisis, retail bank interest rates moved in lockstep (albeit with a spread, and after a lag) with changes in the ECB policy rates. The financial crisis has altered this picture. We now observe:

  • A new—and significant—heterogeneity across bank interest rates across countries. Spanish and Italian retail rates are much higher than French and German ones, as illustrated in Chart 1.
  • A decoupling of some retail interest rates from monetary policy rates (see Chart 2). Since the crisis, changes in ECB policy rates—and in particular the most recent sequence of interest rate cuts—have failed to be reflected in retail interest rates in the periphery, notwithstanding the non-standard policy measure implemented to unfreeze money markets and ease bank refinancing costs.1 As a result, while Italian and Spanish households and non-financial corporations are facing sharp increases in the rates they are charged by their banks, their German counterparts have been borrowing at rates that are declining in line with official rates.
  • A higher correlation between sovereign spreads and retail interest rates, as sovereign tensions have played an increasing role in shaping bank funding costs by country.

 

 

Exploring the ‘official-market-retail’ interest rate link

We now look in greater detail at the interactions of bank lending rates, official rates and sovereign yields. To do this, we have estimated a model relating retail bank interest rates to the level of ECB official rates and national government bond yields, controlling for short-term adjustments due to changes in official rates and sovereign yields.

We examine the evolution of interest rates on loans to the household and corporate sectors across maturities (between 1 and 10 years), and compare two sub-periods: before and after the start of the sovereign crisis, which we take to be May 2010 (the introduction of first Greek program). We confine our analysis to the ‘Big-4’ countries (Germany, France, Spain and Italy).

The results are summarized in Table 1. The long-term impact of market rates on each retail rate are shown in the first four columns (sub-columns (1) correspond to the period 2003-2010, while sub-columns (2) correspond to the crisis). We find that:

  • Most importantly, not only the size but also the sign of monetary policy transmission has changed in Spain and Italy. This can be seen intuitively from the divergence between retail interest rates and the ECB rate in Spain, shown in Chart 2. It is confirmed by the signs of the long-term coefficients on ECB rates: these turn negative for longer-term loans in Italy and Spain, even when controlling for the impact of sovereign yields (second column in Table 1). This evidence of a ‘transmission reversal’ should not be read literally. But it does point to structural problems in the banking sector. Over the crisis period, the deterioration in the state of the banking system—which is not captured in our model—had an impact on retail rates that more than offset that of lower official rates. For this reason, the ECB’s July policy decision failed to loosen financing conditions in the places where loosening is most needed.
  • The reaction of retail bank rates to national sovereign yields is not unique to the crisis. It existed before the crisis, but was not so obvious because sovereign yields were so stable and spreads so tight (see third and fourth columns of Table 1). (This relationship may help to explain the well-documented sluggishness in the response of retail bank rates to changes in the monetary policy stance.)
  • With the crisis, official ECB rates have lost their influence on retail rates in Italy and Spain, while they have gained influence in Germany and France. This can be seen from the fact that most long-run coefficients on official rates ceased to be statistically significant in Spain and Italy during the crisis.3 By contrast, the importance of the ECB policy rate has increased substantially (and has remained significant) in Germany and France.

Borrowers in the periphery feel the pain more quickly than before

Euro area retail bank rates have always proved sticky in the short term. This contrasts with the US experience, where retail interest rates are more generally indexed to market conditions and therefore move quasi-automatically with them (and thus with policy rates). Our analysis here suggests that retail bank rates have overall become less sticky since the onset of the crisis. This can be seen in the estimated adjustment coefficient shown in the last two columns of Table 1 (i.e., the parameter in the cointegration relationship, which captures the speed at which retail rates revert to their long-term equilibrium level over time).

ECB is likely to be more reluctant to use rate cuts

Our results suggest that the way Euro area banks set interest rates on their loans to households and non-financial corporations exacerbates the macroeconomic strains that are afflicting the periphery. Borrowing rates amplify and entrench the divergence of financial conditions across Euro area countries. Since the Euro area economy is still predominantly bank-financed, this retail divergence in financial conditions adds to that seen in wholesale markets, strengthening the centrifugal forces within the Euro area.

If the transmission of standard monetary policy measures were to deteriorate further and add to the forces promoting divergence of macroeconomic performance across Euro area countries, other things equal the ECB would be less likely to implement further interest rate cuts in coming months. Mr Draghi’s comments in London on Thursday 26 July (“within our mandate, the ECB is ready to do whatever it takes to preserve the euro.; and believe me, it will be enough.” cf. European Views, July 26) support our view that further non-standard monetary policy measures may be implemented in the near future, so as to improve the functioning of financial markets and improve monetary policy transmission.

A key open question is whether such measures will focus on attempts to revive the sovereign markets or rather set out to bypass them by offering more direct support to the private sector.

In the past, the former approach has embodied outright purchases of government debt by the ECB through its Securities Markets Program (SMP). But the resurrection of the SMP threatens to break the current internal compromise on the ECB’s decision-making bodies. And its effectiveness is open to question, given market participants’ concerns about subordination in the aftermath of the treatment of ECB holdings in the Greek debt restructuring.

The ECB may therefore look to support private-sector financing more directly, by further easing of collateral eligibility, increased liquidity support to the banking sector and outright purchases of private-sector assets originating in both the bank and corporate sectors.

 

Source: Goldman Sachs

 

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Thu, 07/26/2012 - 22:02 | 2655343 AldoHux_IV
AldoHux_IV's picture

In the end, switching out worthless paper for less worthless paper until it becomes even more worthless paper-- asset purchases don't work, and sooner or later will be counterproductive regardless of market jubilation. The only real thing they can do is destroy the debt, reform (though this is where they will repeat the same mistakes with the same people with self-serving needs come and re-design the system), and break up the euro in order for individual countries to actually survive and trade with each other rather then have a consumer financed union which the euro currenty is.

Edit: So will the ECB buying be backed by the full faith and credit of trust-me Draghi-- Dragos?

Thu, 07/26/2012 - 23:09 | 2655472 Skateboarder
Skateboarder's picture

I think one way for the current lineup of bankers and politicians to stay in power and keep pulling the strings and looting everything is to have massive mergers of bank and market and write off most or all of the debt. Merger of state will induce revolt but bank and market will not (because Joe Average has no clue about either).

Writing off the debt will keep the people pacified and will keep revolt at bay so that they can buy time until all civil assets and wealth are eventually seized.

But anyhoo... this was an informative article. Thank you Tylers.

Fri, 07/27/2012 - 04:10 | 2655669 zhandax
zhandax's picture

If the current lineup wants to stay in power, and the expected results of their model are diametrically opposed to observed results, they had better get someone's ass working on a new model.  Since this is lot won't think of that until they are going down for the third time, STFR.

Fri, 07/27/2012 - 06:19 | 2655719 negative rates
negative rates's picture

Big daddy just bought a new pair o shoes.

Fri, 07/27/2012 - 04:16 | 2655670 Nussi34
Nussi34's picture

Why should the PIIGS retail rates should be lower?? The crisis has exposed the tendency of the South towaste money, lend as much as possible and then refuse or be unable to pay back. I would not them any money for 30%

Fri, 07/27/2012 - 04:28 | 2655676 slaughterer
slaughterer's picture

The ECB may therefore look to support private-sector financing more directly, by further easing of collateral eligibility, increased liquidity support to the banking sector and outright purchases of private-sector assets originating in both the bank and corporate sectors.

Could Goldman think of a better scenario for them than that?  

Fri, 07/27/2012 - 05:47 | 2655708 1000pips
1000pips's picture

We will be using fiat currency for the rest of our lives...Euro is here to stay.  Save this post-don't say u were never told.

Fri, 07/27/2012 - 07:17 | 2655801 Griffin
Griffin's picture

The problem is that people always prefer dreams and illusion over logic and reality, they will fight to keep this alive untill the bitter end. The reason could be fear of change, or the Stockholm syndrome, who knows.

My ananlysis of the situation is that there is a big Wolf roaming around in Europe, he has already eaten 3 little piggies.

2 went down rather smootly, one is still fighting and may cause some indigestion. The Wolf is now huffing and puffing at the doors of the fat and jucy piggies, and when he is done with them he is going to poop.

When its over and the sheeple crawl out of the shit, the Wolf will introduce the sheeple to a brand new reality where all nonsense like rights for humans or democracy will be put in the bin.

 

 

 

 

 

Thu, 07/26/2012 - 21:43 | 2655344 Bohm Squad
Bohm Squad's picture

Risk premium?

Thu, 07/26/2012 - 21:49 | 2655352 eurusdog
eurusdog's picture

I think it is becoming clear that Greece is going to be allowed to default all of it's debt and still stay in the EU. Only problem is that the other periphery countries will want to do the same and then those that paid for the previous rescue will truly be left with an empty bag. This will be German cue to simply walk away as a break between what the ECB is willing to do, and what the Germans are willing to pay for diverges drastically.

Thu, 07/26/2012 - 22:59 | 2655461 Sandmann
Sandmann's picture

and still stay in the EU

 

There is no way to leave.....it is as hard as seceding from the USA or USSR

Fri, 07/27/2012 - 00:30 | 2655549 zuuuueri
zuuuueri's picture

yes, i've been saying, they won't _kick_ greece out, hell, they won't _let_ greece out!

of the EU that is.. the euro, might be a bit different..

don't forget that while holding people in the debt trap is a mechanism available mostly to the banks for devouring real wealth, this mechanism fundamentally depends on the state to enforce its demands, and is also weakened by inflationary policies which allow anyone close to the fountain of fiat to transfer wealth to himself regardless of debt pressures... When the party is going well there might be more inclination for various elites to cooperate in feasting on the rest of us. When things get a bit rough they turn on each other just like any other population will under stress. The states still hold the ace card of armed force and the 'law' (as twisted as that has gotten in most countries) and now that its already clear that various big players are willing to throw one another under the bus to save their own asses, don't expect the bankers to really be secure for much longer in their strategy. The politicians will turn on them the moment it's expedient. The cleverl politicians will even ride a wave of popular sentiment against bankers to do it!

So it is quite likely to see currency conversions (and attendant controls and lots of printing) in some of these countries even as they are locked even tighter into the EU. The EU as a mechanism of transferring power and wealth will still work for a while longer until again in the next round, politicians turn on each other again struggling for pieces of a still shrinking pie, and invoke more nationalistic rhetoric in defecting. i'd expect the bankers to get eaten before they set into eating each other in brussels though. nationalistic rhetoric might be getting drummed up as part of the move to throw bankers on the fire but it will be hot air as long as they see brussels as a mechanism that still gives them some advantage. until they begin to turn on one another (and initially do so even using mechanisms of the EU monster) none will dream of leaving or being allowed to leave the EU.

 

Fri, 07/27/2012 - 04:07 | 2655668 TPTB_r_TBTF
TPTB_r_TBTF's picture

under "various elites" you mention states, bankers and politicians.  Where do you see the oligarchs fitting in?  These elite families which may(?) have held control for centuries, or even milleniums?

I would put these families of oligarchs above the states and banks and well above the politicians (excepting family members holding a political position, of course).   The banks and politicians are buffers for these oligarchs; a buffer between themselves and us peasants.

The oligarchs would certainly turn on each other in times of stress (a modern feudal system); however, I wonder if they play by gentleman's rules.  Gentleman's rules are something like: the army of one gentleman against the army of another, for example.  Whereby, they donT necessarily attack, they just maneuver. They donT use their militaries to fight out their differences in the first world; they take their disagreements into the third world.  Disagreements in the first world can be fought with lawyers and bribes (not to mention assassinations- both fatal and character).

One oligarch might mention to another, "my armies are bigger than your armies, so back down."  Kinda like two alpha animals jockeying for position in the animal kingdom, whereby strength is respected and the weaker animal eventually backs down "voluntarily".

In other words, we are pawns (although you yourself might be a bishop or maybe a knight), the kings and queens (and presidents) are also just game pieces and beyond that are "the real players".

And if we accept this premise, then Greece is just a square on the board.

Thu, 07/26/2012 - 23:15 | 2655481 Spitzer
Spitzer's picture

Doesnt sound inflationary to me... So why would Germany want to leave then ?

Thu, 07/26/2012 - 21:55 | 2655364 steveo77
steveo77's picture

You no build that! Tribute to the Socialist in Chief SIC 
 
http://oahutrading.blogspot.com/2012/07/you-no-build-that-you-didnt- build-that.html

Thu, 07/26/2012 - 21:56 | 2655368 JR
JR's picture

“The crisis is by no means limited to the periphery of Europe.  Germany, France and other northern European countries are confronted with a decline in industrial production, which will lead to further unemployment and wage cuts,” according to Record Unemployment in Euro Zone by Christoph Dreier on Global Research July 3, 2010.

According to Dreier:

·         The most recent manufacturing data show overall stagnation and an outright decline in Germany, the strongest economy in Europe and the continent’s biggest exporter…

·         A number of German companies have announced mass layoffs in recent months, including the insolvent Schlecker drugstore chain, which has laid off nearly 30,000 employees….

·         [At the end of June] the head of the Munich-based Ifo Institute, Hans-Werner Sinn, forecast that the German economy would stagnate at least until the autumn. The Institute for Macroeconomic Policy Institute (IMK) predicts zero growth for the German economy for the next two years…

·         To comply with the fiscal pact, the German government will need to cut around 25 billion euros in its next budget.

·         In France on Monday  (July 2) the official accountancy agency advised President Francois Hollande that he must make cuts in the current budget of 6-10 billion euros in order to compensate for plummeting tax revenues resulting from weaker economic growth. The agency said that an additional 33 billion euros will have to be cut from next year’s budget.

http://www.globalresearch.ca/index.php?context=va&aid=31740

Fri, 07/27/2012 - 07:41 | 2655833 JackT
JackT's picture

I logged in just to say, "Daaaaannnnng" and "thanks"

Thu, 07/26/2012 - 21:56 | 2655369 steveo77
steveo77's picture

You no build that! Tribute to the Socialist in Chief SIC 
 
http://oahutrading.blogspot.com/2012/07/you-no-build-that-you-didnt- build-that.html

Thu, 07/26/2012 - 21:57 | 2655372 disabledvet
disabledvet's picture

i must say for Goldman Sachs this is pretty good. Having said that "i smell a rat" seems to be missing. The Fed is going to have a meeting...is it next week? I think ZH is spot on in sniffing out a "coordinated action" of some sort. I don't think what the head of the Austrian Central Bank said yesterday vis a vis taking one of these programs and "making it into a bank" was clearly a "test drive." equities rallied on this rather ridiculous news...which played perfectly into the "Mario moment" today. You wouldn't think this stuff would work to begin with given the absolutely ROCK BOTTOM interest rates and anemic growth. Goes to show just how inventive these Central Banker folks can really be. And there i was giving up on them and focusing in on the election, the fiscal cliff and Syria. Guess i gave up too soon. Again "Senator Schumer was the tell."

Thu, 07/26/2012 - 23:46 | 2655516 Spitzer
Spitzer's picture

ROCK BOTTOM rates ? Where ?

Europe has real bond markets based on fundamentals, not bubbles.

Thu, 07/26/2012 - 22:00 | 2655381 THE DORK OF CORK
THE DORK OF CORK's picture

The problem with Europe these past 200 years and the countries withen it is that they simply can't spend money into existence.....the banks must get a cut off everything ....including basic utilties.

A credit line of 1.25 Billion.....................

"This operation, heavily oversubscribed, brought together thirteen leading financial institutions who are renewing their confidence in Réseau Ferré de France for the next five years. This syndication strategy has to RFF to expand its pool and structure of relationship banks. Barclays Bank PLC, Credit Agricole Corporate and Investment Bank, Credit Suisse, Natixis and Société Générale Corporate & Investment Banking acted as Mandated qu'Arrangeurs and main content of Books, Banco Santander, BNP Paribas, Deutsche Bank AG, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley and Royal Bank of Canada as Principal Commissioned qu'Arrangeurs. A brand of renewed confidence for the signature of RFF

Réseau Ferré de France, with its own resources and funding programs annually on international capital markets of around 4 billion euros, driver and finance the renovation, modernization and development of rail infrastructure.

 With total assets of 30 000 km industrial lines, RFF is the second largest investor French public. It has 1,500 employees and a turnover of 5 billion euros in 2011."

Only Greenbacks can kill the beast.......mountains of it.

Cut the bastards off from the spigot.....they serve no purpose other then extraction.

Thu, 07/26/2012 - 23:05 | 2655468 Meremortal
Meremortal's picture

"Cut the bastards off from the spigot.....they serve no purpose other then extraction"

You bet. We'll get right on it.

 

Thu, 07/26/2012 - 22:05 | 2655390 caimen garou
caimen garou's picture

so what they are saying in a nut shell is that the centeral banks and planners dont have a CLUE as to what they are doing or how to fix what they screwed up, who would of guessed?

Fri, 07/27/2012 - 05:55 | 2655713 TPTB_r_TBTF
TPTB_r_TBTF's picture

... unless ... breaking the financial system is part of The Plan, so that TPTB can rebuild, as in to build a "new-and-improved" system (from their perspective)?

If you break something, then you get to fix it.  When you fix it, you can make it "better" than it was before...

Some politicians call this "Change".

Thu, 07/26/2012 - 22:15 | 2655401 macduggie
macduggie's picture

OK, so there's market failure. Whereabouts?

At its core, it's the housing market.

The two private sector models are rental and mortgage.

In one the occupier has a 0% rate of investment in equity, in the other 100%.

That's too sticky a market to function without boom/bust.

Fill the middle market and this is over.

Thu, 07/26/2012 - 22:20 | 2655408 JohnKozac
JohnKozac's picture

mac, funny you should mention 'house prices'...

 

London House Prices Plunge as Supply Rise Adds to Lull: Economy

 

London home sellers cut prices by a record for the month of July as an increase in supply added to pressure on the property market during the traditional summer lull, Rightmove Plc (RMV) said....“The housing market remains heavily depressed,” Victoria Clarke, an economist at Investec Securities in London, said in a telephone interview.

 

http://www.businessweek.com/news/2012-07-15/london-house-prices-plunge-a...

Thu, 07/26/2012 - 22:45 | 2655441 macduggie
macduggie's picture

A market prone to fits of manic depression is a sub-optimal way to run an economy.

Letting householders choose to only part repay their mortgages, so part own the equity tied up in their property would mean there's no great risk of mass defaults and banks subsequently going insolvent as a glut of repossessed property comes onto market at the one time.

On the downside, it's not going to be as exciting a watch.

 

Thu, 07/26/2012 - 23:47 | 2655513 JohnKozac
JohnKozac's picture

Letting houseowners pay zero down is part of the craziness that got us into this mess...and it's still widespread since the original lenders continue to pass the risk onto taxpayers via the FHA and VA. This is why we see more evidence of "Suburbs to Slums" articles poppin gup all over the nation.

here:

http://gawker.com/5853251/the-suburban-slum-era-has-arrived

 

and here, for example:

http://realestate.msn.com/article.aspx?cp-documentid=21179977

 

Dr Housing Bubble documents the gradual dropping of RE prices in the ritzy Cali areas due to carefully controlled leakage of the massive shadow inventory into the market. I guess as long as banks get 'free money' from the Fed window they will continue the game and as long as they suppress interest rates to zero.  The Inland Empire of Cali has already imploded...now the correction is slowly eroding the primo neighborhoods......Grab your popcorn......it's going to be a real show!    Sadly, due to the manipulations and gyrations of the Fed and Wall Street we are no where near the housing bottom. Many areas are just in the first inning.

Thu, 07/26/2012 - 22:55 | 2655457 GMadScientist
GMadScientist's picture

Wow...where to start...

 

a) housing is a manifestation, not a root cause

b) the history of rent to own arrangements is actually quite long

c) don't you think that government-sponsored credit whoring did enough "filling" for three generations already?

d) your "stickiness" argument would argue against bubbles forming

e) the "middle market" is called condominiums and commuting from the cheaper burbs

Thu, 07/26/2012 - 23:32 | 2655499 macduggie
macduggie's picture

a) Debt's the key to growth cycles- see Steve Keen's macro at debtdeflation blog. Housing's the biggest private sector debt by a long way. Afaik, the toxic debt held by banks is very largely in the housing sector.

b) Are you saying breadline householders on mortgages is statistisically insignificant in comparison to rent to buy? Would come as a surprise if true.

c) Don't know, frankly. Were the government subsidies designed to reduce the rate of borrowing, but maintain the need to payback the entirety of the loan? If so we still have a 100% non-discretionary equity investment by the occupier (albeit at lower rates).

d) Not so much. Either the mood is a speculative mania (borrowing to speculate) or expected collapse. The stickiness certainly makes collapse likelier. If there's flexibility in whether mortgage payments are made or not, you don't get mass defaults. At all.

e) Moving home is sticky. Changing repayments isn't. Moving down so as not to fall below the breadline is painful when a bubble bursts. Check the real world.

Thu, 07/26/2012 - 22:28 | 2655421 zorba THE GREEK
zorba THE GREEK's picture

Maybe the Fed will match this move and directly buy Facebook stock.

Thu, 07/26/2012 - 22:34 | 2655426 Gloppie
Gloppie's picture

Check out this load of drivel;

 

"Is there some point at which the integrity of the region is sufficiently undermined that we pass the point of no return?" asked David Mackie, an economist with J.P Morgan in London.    "I don't see that happening in a technical sense, because anything happening in the capital markets at the moment can easily be reversed," Mackie added. "The break-up of the monetary union is not something that can ever be forced by financial markets."    That is because the European Central Bank, like any other central bank, could if necessary expand its balance sheet, or "print money",without limit to contain capital flight or buy up the debt of besieged member states.  - -
except for a little piece of paper called a treaty...yeah they could print.   Full article here: http://www.athensnews.gr/portal/8/57259

 

This is getting more sickening by the minute.

Gloppie

Thu, 07/26/2012 - 22:45 | 2655442 Caviar Emptor
Caviar Emptor's picture

The net result of their Ponzi machinations ahs been, is and always will be biflation. 

Thu, 07/26/2012 - 22:51 | 2655450 luckylogger
luckylogger's picture

IMHO the russell must drop 100 points for the pipe dream to happen. Good luck longs..............................

Thu, 07/26/2012 - 23:00 | 2655462 q99x2
q99x2's picture

Say whatever you like but you'll not get a penny from me.

GS f'n vampire squid M'fers.

Thu, 07/26/2012 - 23:06 | 2655470 butchee
Thu, 07/26/2012 - 23:43 | 2655510 Cabreado
Cabreado's picture

It is to be declared "broken" when nobody understands, yet those in control continue to pretend.

In such an arrangement, there is a very short half-life.

Thu, 07/26/2012 - 23:42 | 2655512 lolmao500
lolmao500's picture

Treason we can believe in...

http://thehill.com/video/senate/240657-cybersecurity-bill-includes-gun-c...

Cyber bill has gun control amendment

The amendment was sponsored by Democratic Sens. Frank Lautenberg (N.J.), Barbara Boxer (Calif.), Jack Reed (R.I.), Bob Menendez (N.J.), Kirsten Gillibrand (N.Y.), Schumer and Dianne Feinstein (Calif.). S.A. 2575 would make it illegal to transfer or possess large capacity feeding devices such as gun magazines, belts, feed stripes and drums of more than 10 rounds of ammunition with the exception of .22 caliber rim fire ammunition.

Pass that and millions become felons automatically...

Fri, 07/27/2012 - 00:31 | 2655564 Dr. Engali
Dr. Engali's picture

It's always the same criminal names sponsoring these bills too. They can't leave the senate too quick for my liking. Unfortunately we are stuck with them for a long time.

Fri, 07/27/2012 - 00:20 | 2655557 hedgehog9999
hedgehog9999's picture

Sounds to me when he says "believe me" all he really can do is PRINT, while that may bolster the market temporarily. it will light up or lit the ass of the weekly candles for GOLD, OIL and generally all commodities; given the what now appears to be a worldwide drought, food prices are going to skyrocket around the planet, incomes are not!!! as economies will take time to adjust to the new print environment (just ask Faceplant , Starbucks, Apple and everyone else), these means people will go literally hungry across the planet , even in the good ol USSA and old Europe.....

When that happens, watch out!!!, they will come after the Draghis of the world with pitchforks and rocks and their bare hands, just look at the mid east countries as a model......even Bashar is going into hiding... western society can be just as deadly,as the last 100 years have proven for Europe.......

Fri, 07/27/2012 - 02:41 | 2655643 doc_in_the_house
doc_in_the_house's picture

futures are up +0.4% = beautiful

gimme spx 1370 = me ADD my FIRST LAYER of shorts tomorrow! let's see what does QEorganizer want $100 oil or the casino to crash?? they either BOTH go up or both go down!

oil @ $90 now...@ $91, and EUR @ 1.23+ and spx @ 1370 = me short !!

i feel so lucky i covered my spx 1370 avg short price from last week, this Tu @ 1332 (bottom was 1329)..today's close = 1360 !! ROFLMAO !! I made sure that I SQUEEZED MY PROFITS..LOL !!

Fri, 07/27/2012 - 03:02 | 2655653 doc_in_the_house
doc_in_the_house's picture

for those of u in the E. Coast,

yes its 3AM EST..its 12AM here in CA....going to sleep now...and NO! i will not get up tomorrow @ 0600 PST = 0900 EST... just patiently waiting for spx 1380+ to short..IF NOT tomorrow, then Monday...i can smell the TOP...smells so good !!!

Fri, 07/27/2012 - 04:40 | 2655679 Laretes
Laretes's picture

DAX going down. That's how long Draghi's lies last these days.

Fri, 07/27/2012 - 06:21 | 2655721 localpacific
localpacific's picture

great charts on the europe from zh good thing we are in the US :P Markets Surge After ECB Inflation Pledge 

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