The recent Financial Times article Sweden’s central bank chief says negative rates ‘undramatic’ is worth a quick read. In it, Riksbank head honcho Stefan Ingves roles out a message similar to what we’ve heard from other central bankers all around the world.
To summarise, Ingves is saying:
- Negative interest rates – currently minus 0.5% – have been ‘undramatic’. It hasn’t impacted banks or citizens unduly.
- The Swedish economy is booming.
- Bad loans aren’t a problem.
- Some other idiots appear to be causing a housing bubble. Sweden’s property market is out of control.
Let’s move briefly past the flaws in point 2 (so why do you need negative interest rates?) and 3 (it’s hard to go bust when the cost of borrowing is so low and availability of credit so high) and onto ludicrous point 4.
I’m astounded by the inability of central bankers to see how crucial their own actions are in the formation of asset price bubbles and subsequent busts. I shouldn’t be, they’ve been at it for a few decades now. By now it must surely be feigned ignorance rather than complete stupidity?
I’ve read derivatives of this article dozens of times as each bust is met with a flood of liquidity to carry markets well into the next unsustainable boom. It brings to mind an awful song by Jamaican-American reggae-rapper Shaggy, It wasn’t me. Here are the reworded lyrics:
♬ But the US housing bubble?
It wasn’t me!
All them European troubles?
It wasn’t me!
Triple digit oil?
It wasn’t me!
Overpriced agricultural soil?
It wasn’t me!
Skyrocketing private debt levels?
It wasn’t me!
The S&P damn near trebles?
It wasn’t me!
Aussie house prices booming?
It wasn’t me!
And the economy is zooming ♬
[Record scratch] Yeah, yeah, that was us.
13 thoughts on “Central Bankers: It Wasn’t Me”
I’m pleased to see Shaggy’s greatest song getting a run.
Short-termism focused central bankers who inherently should be managing core economic fundamentals to provide a platform for sustainable growth and inflation are the new quarterly market listed company return update. Knee jerk reactions to day to day volatility.
The downside risks of this type of monetary policy significantly outweighs the benefits.
Central banks should be accountable not just for the outcomes they are getting now, but the risks they are exposing us to to achieve it.
Everyone’s happy for their fund manager to squeeze an extra 2% in returns, but just don’t tell them that meant they had to move from exposure to to short-medium term volatility, to being exposed to a permanent loss of 50% of capital.
One thing that I struggle to understand is how every single central banker in the world seems to be blind to the obvious (to me at least) benefits of monetary contrarianism.
With almost every central bank in the world setting remarkably low rates, you’d think that at least one central bank out there would be shrewd enough to ramp up rates. It would reward domestic savers, encourage borrowing from offshore at artificially low rates (so that when the loans go bad, it isn’t domestic institutions that are on the hook), and it would inflate the domestic currency so much that a much larger portion of the economy could run on imports.
Sure, employment and business activity would slump, but when the rest of the world is in giveaway mode, then what is the point of working?
In a functional global economy, if one participant misprices something (whether a dollar bill, a tyre or a hot dog), then his counterparty will be the beneficiary. But what happens when every single market participant misprices the time value of money?
We are going to learn the answer to that question very soon, and I have a feeling that it will make Mr Ingves look very foolish in posterity.
Central bankers looking foolish in posterity? They have decades of that, but somehow it just never sticks. Central Bankers have teflon shoulders, and, it would appear, no shame.
Even if we assumed that Ingves’s premises were correct (they aren’t), his logic is also completely faulty, and it demonstrates a complete ignorance of convexity effects.
In essence he is saying that ZIRP/NIRP hasn’t had any adverse effects thus far, therefore, there is no grounds for believing that it will cause undue problems in the future. This sounds a lot like the argument for buying a stock because it is going up.
Next week’s article – Central Bankers: Killing in the name of!
I was fortunate enough to visit Stockholm a month ago and the property bubble there is truly staggering. Friends of ours recently bought a 1 bedroom unremarkable apartment 6 from the centre for the equivalent of 600k and they confided to us that they had borrowed the deposit from her parents and had been able to borrow more than usual from the bank because she works there. They are great friends and I was sinking inside but they considered themselves lucky just to be “in the market” and for the usual reasons “it’s only going to keep going up”. Isn’t it a sign common to all bubbles that the vast number of participants don’t consider valuations too bad? I’ve also, coincidentally, just moved to auckland so it seems like housing bubbles everywhere I look
That’s cheap – relative to their GDP per capital and loan interest rates (which is negative) to Sydney!
Older style and unrenovated 1 bd apartments are selling for $600K in many parts of inner city Sydney (note that our cost of borrowing is approx 4.5%pa for investors). I recently saw an add for a brand new 1 bd apartment at Bondi Junction starting from $1M (up to $1.3M).
Last week, a 6 yr old inner-west 2bd apartment with 2 bath & 1 garage sold for approx’ $1.050M (add another $45K for stamp duty and legal costs) in Sydney. Imagine what prices will be if loans were 0% to 1%?
IMO, rent money is dead money. An average 3bd home in the inner city of Sydney costs approx $1,000 pw (after tax) to rent. It’s unlikely that rents will be much cheaper in 30-50 yrs time. So, owning your own home – albeit very expensive right now – may be a good hedge against long term rising rent and rising costs of living.
And why housing in Sydney and Sweden shouldn’t be expensive? Investors can get more yield from an investment property vs term deposit. That said, many parts of our big cities are overdeveloped and very expensive that I wouldn’t touch with a ten-foot pole. But similar to the stock market, it’s all down to skill in stock picking.
This area was no bondi junction and you could certainly pay much more if you wanted to. You are choosing to value housing relatively but your “cheap” prices will be very hard to justify in an economic downturn or a higher rate environment. If it takes comparing something to Australian property, which is amongst the highest levels of dwelling prices to gap in global history, to make you feel good about valuation, good luck with that
The borrowing cost is central to any valuation. Sweds only pay 0-1% pa and receive a net yield of 2.5-3% pa (https://www.numbeo.com/cost-of-living/in/Stockholm.) Do you really think this is expensive? What do you think is fair… 5-7% net yield on a property in Stockholm?
In inner-city Sydney, it is impossible to find a positively geared property. The thought of buying a property that generates DOUBLE the cost of borrowing, in my view, would be “cheap”. If you find one, please let me know.
How much a person can borrow to spend on housing is determined pretty much solely on the ability to service the loan. It sure was when I have gone for mortgages.
When you must be able to pay (lets say) $1000 / month to service the loan, then when interest rates are low you can borrow a much larger sum.
This is very basic maths, and it has driven all the worlds housing bubbles since the GFC. Nobody should be surprised by any of this, it’s a perfectly rational response to cheap money.
If money stays cheap, then actually you don’t have a housing bubble (these things are all relative, after all).
But money WON’T stay cheap. We just don’t know how long it will take before interest rates rise. When they eventually do the reaction of those who borrowed will also be rational, and right now is perfectly predictable. Oh and property prices will also fall.
hmm, Im not sure i agree. Central Bankers are far from ignorant and stupid. Its not a question of lack of intellegence but lack of integrity. I doubt they really believe all the spin and BS they come out with – any idiot with a remote understanding of economics knows this system is cooked. Spineless CBs just choose to perpetuate it til the end of their tenor – Knowing full well it will crash, just “not on my watch”