Reading the mixed messages of the week from the US Fed and markets
I have been backing off on comments about the banking system, because that’s not really what my blog is about. But once in a while I just can’t resist.
There just has to be more going on with regard to the disconnect between the markets and the Central Bankers.
Basically it goes like this:
Central Bankers: The economy of our country and of the world has not returned to normal employment, growth and inflation therefore QE must continue.
Markets: There is no way “printing money” can continue because there is no ‘soft landing” to be had. Therefore QE must stop now because the longer we wait the worse will be the hard landing in terms of market volatility and inflation.
We saw the Fed Chairman follow the lead of BofE Chairman Carney speak about talk of tapering QE being far too soon relative to economic growth, unemployment and inflation. Then two days after Bernanke summarised the Fed meeting, Fed member Bullard basically contradicted Bernanke saying tapering will probably happen next month. What are markets supposed to think.
However the deeper test might be that no matter which alternative between the market reaction and the Central Bank view is picked that the economy(s) are screwed.
This alternative and unspoken narrative says that the problem of the banking and economic crisis that gripped the world in September 2008 is really a systemic issue of excessive consumer debt that is potentially unaffordable. This narrative goes on to say that the Central Bankers are being driven by politics and keeping votes versus the market street guys who worry about reality.
This quote in the FT from Lord Turner who recently headed up the Banking Commission.
Until this situation changes it is delusional to think that anyone has really “fixed” western finance with post-Lehman reforms, or created truly healthy growth, Lord Turner insists. Put another way – although he did not say so bluntly – one way to interpret this week’s dance around QE is that policy makers are continuing to prop up a financial system that is (at best) peculiar and (at worst) unstable.
The FT piece (Gillian Tett) goes on to talk about the changing role of banks:
A standard economics text book, Lord Turner writes, claims that banks exist to “raise deposits from savers and then make loans to borrowers” … and “primarily lend to firms/entrepreneurs to fund investment projects”. Thus “demand for money is a crucial issue” in terms of growth.
But this depiction is a fiction, he says. The reason? He calculates that today in the UK a mere 15 per cent of total financial flows actually go into “investment projects”; the rest support existing corporate assets, real estate or unsecured personal finance to “facilitate lifecycle consumption smoothing”.
The part that caught my eye is the reference to ‘lifecycle consumption smoothing’. This is a reference to using debt to buy everything today rather than save and buy gradually. This has grown from basically zero before consumer lending in the 50’s to 85% of lending.
Banks are no longer facilitating commerce and saving. They are time shifting ownership (of homes) and consumption in ways that have not been tested or understood before.
I don’t validate the percentage but it seems apparent there is a sea shift in lending purpose and that lies at the centre of the concern.
The bottom line is that we just don’t know what lies at the end of ‘tapering’ but we know a lot of smart people are worried about it.