Today’s Capital & Conflict continues the theme of stockmarket crashes. They’ve been banned.
Someone should put up a sign on the corner of Threadneedle Street and Princes Street – “Stockmarket crashes prohibited, by order of the Bank of England”.
Over at the Federal Reserve in New York, the same sign would be put up on Maiden Lane. One of the Fed’s backdoor bailouts in 2008 was named after this back-alley entrance to America’s central bank.
Outside the European Central Bank (ECB), the same sign would be a famous quote from the ECB president instead: “We’ll do whatever it takes!”
Past Capital & Conflicts have discussed how and why central banks prevent the stockmarket from crashing. And then we looked into whether they can keep up the act. I’m undecided on that one.
But today, let’s think about what the world looks like without falling stockmarkets. If central banks judge stock prices and financial markets too important to civilisation to be allowed to crash, where does that leave us?
Unfortunately it’s not as simple as using a ton of margin lending to get rich. There are costs to this sort of economic policy. It’s been tried many times in the past. The bad ending was always inflation. Whether it’s the Roman Empire or the French Revolution, when money printing was used to prop up the economy it always ended in inflation.
But central banks have flooded the world with money to an unprecedented level and they’re barely breaking even on their inflation targets. Not long ago, central bankers would’ve been horrified by the potential inflation that their everyday policies now risk.
So why hasn’t there been any inflation? Well the central banks have walked the tightrope between inflation and deflation. Debt and demographics triggered enormous deflation, while central bank policies offset it. The question is, presuming they don’t fall off either side, where does the tightrope actually lead?
Who is John Galt? And what happened to Walter Bagehot?
“Who is John Galt?” is one good answer to where we’re heading. Our world is growing more and more similar to the world of Ayn Rand’s Atlas Shrugged. Stability and the welfare of all is the justification for a government-controlled financial sector.
The control is creeping. We started with Walter Bagehot’s lender of last resort on good collateral only. Then monetary policy became the fad, first with exchange rates and then interest rates as the policy tool. Government bailouts used to be an implied promise, now it’s pretty much explicit. Suddenly central banks were buying everything, even shares to implement monetary policy through the wealth effect. There is no limit to these government interventions. They’ll keep getting bigger.
All this turns the incentives of capitalism on their head. Instead of serving their customers, businesses become successful by being in partnership with the government. And by being big and systemically important. The more big businesses rely on government help, the more politically pliable they are, and thus the more favoured by politicians. The car industry, agriculture and banks are three obvious examples. These are now electoral tools for politicians. The more they struggle, the better for their political protectors’ careers.
The partnership between business and government is insidious. It means the death of entrepreneurship, creative destruction and productivity growth. The future is bleak if the government guarantees it.
Last minute changes to tax laws
Chancellor Philip Hammond has taken out a bundle of changes to what was going to be the longest finance bill in British history. The leftovers from George Osborne’s Budget and Hammond’s changes combined were going to be longer than the Lord of the Rings trilogy. But not any more.
Some of the changes are important. The tax-free dividend allowance remains at ÂŁ5,000 instead of falling to ÂŁ2,000. Digitisation of tax records and filings will be delayed for small businesses. And changes to dealing with non-doms are to be reviewed.
Most of the changes are pencilled in for after the election though.
Canada’s housing bubble claims its first casualty
Do you remember when American sub-prime mortgages were a small and contained problem? Well there’s another small and contained problem on the same side of the Atlantic. It’s worth keeping an eye on.
The share price of Canada’s largest non-bank mortgage lender crashed over 60% in a day yesterday. And it’s down from $50 to $6 over the last three years.
Home Capital Group announced it needed to use its emergency loan facility thanks to problems with liar loans at one of its subsidiaries. The market took this as a sign of impending doom for the company.
Shortly after, the Canada Mortgage and Housing Corporation, which is in fact the regulator, published its update on the state of the property market. Its risk barometer is at the “strong evidence of overall problematic conditions” level. Particular areas of Canada are very overvalued.
I went to Canada once. A Maserati and a Bentley almost ran me over in a single street crossing. Both were driven by women under the age of 30 who were so polite about letting me cross that it created the confusion which almost dented their bumpers.
Canada is a strange place. It would have very far to fall if things turn ugly in the housing market there. As with the sub-prime mess, the links to Europe are strong enough to cause a problem here too. Then again, as I’ve been explaining, regulators and central banks now know to contain these problems before they become a crisis.
Until next time,
Nick Hubble
Capital & Conflict
Category: Central Banks