Five facts about buy-to-let explained in Bank of England’s blog

Bank Underground – the Bank of England’s blog – is not what you’d call a ‘hot’ read. It is though a source of quality information.

In it’s latest blog post it presents Five facts about buy-to-let from its on-going research into what its says is an increasingly relevant role in the UK housing market. This is the opening paragraph of the blog post, and a neat summary of their research into the sector.

Buy-to-Let (BTL) investors are taking on an increasingly relevant role in the UK housing market. In this post, I present some initial findings from my ongoing research on BTL. I use data from the England and Wales Land Registry and the Zoopla web portal to find properties that are advertised for rent shortly after being bought. I show that: 1) BTL investors prefer (a) London and (b) flats; 2) BTL investors are more likely to pay cash; 3) BTL transactions are faster; 4) BTL investors buy at a discount; and 5) BTL discounts are larger for (a) Northern regions and (b) big properties.

Wow, the Old Lady of Threadneedle Street blogs under scarily titled Bank Underground

The Old Lady of Threadneedle Street, a.k.a The Bank of England, has today entered the blogosphere with a blog entitled Bank Underground.

The blog says it’ll,

Different posts will employ different styles and tools- techy statistical analysis, dipping into the Bank’s archives, wonkish theoretical pieces, imagining future challenges, model simulations, big data and anything else we can think of. But whatever we write about, we aim to do it in a readable, engaging and accessible way.

It’s interesting to me that the bank has chosen the Pilcrow theme on WordPress. It’s a plain and simple theme, with the benefit of being one of the free themes provided and supported by WordPress

Of the two blogs posted today, one is on the impact that driverless cars on accident rates – much lower in theory, and therefore it’s effect on the insurance industry. The other is definitely way outside my orbit, on How does the scope for policy loosening affect the risk of deflation?

The blog isn’t being added to my blogroll, yet.

Praising Britain: 2-Foreign Exchange centre of the world

Lets get get straight to it, and praise the City for being the leader in global trade in Foreign Exchange and Over-the counter Interest Rate Derivatives.

The Bank for International Settlements released their “Triennial Central Bank Survey of foreign exchange and derivatives market activity in April 2013“.

The Bank of England’s comment on the UK predominant global position is,

“Foreign exchange market turnover in the United Kingdom increased by 47 per cent from April 2010 to April 2013. While over the same period, turnover in OTC interest rate derivatives increased by 9 per cent. The United Kingdom remains the single largest centre of foreign exchange activity with 41 per cent of global turnover in April 2013, increasing from 37 per cent in 2010. The United Kingdom also remains the largest centre for OTC interest rate derivatives activity with 49 per cent of global turnover, up from 47 per cent in 2010.”

The UK is responsible for 41 per cent of global foreign exchange turnover. The nearest competitors are 19 per cent for the US and 5.7 per cent for Singapore. For OTC interest rate derivatives the UK has 49 per cent of global turnover.

Here’s the table for Foreign Exchange:

BIS FX report 2013

Hattip: FT Alphaville blog

Allister Heath’s economic arguments are well-expressed

I like well expressed economic arguments. Particularly ones that are succinct and easily understood by the general public.

I’ve no hesitation in directing you to editor of City A.M. Allister Heath’s article Why governor’s monetary revolution will eventually backfire.  It’s a critical assessment of the bank of England’s new monetary policy.

One part of Allister Heath’s critique is the use of unemployment rate as the new target for setting interest rates, being “a decent, easy to measure proxy for spare capacity”. It’s his description of the spare capacity in the economy where I fully agree,  when he says,

“I don’t think there is much spare capacity that would be put to use even if demand were to be buoyant, especially in our open economy. Much capital – human and physical – isn’t lying idle but has been destroyed. There is a mismatch between people and jobs. The lost output and potential growth is gone forever.”

Where I disagree is not so much in terms of economics, but in in the power human nature, when optimism and confidence take hold.

While I agree that the spare capacity in the economy is gone. I disagree that the majority of supply-side growth will come from imports. Sure, our addiction to imported goods will continue.  There’s reasonable evidence that there’s some rebuilding of capacity occurring in the UK. John Lewis repatriating textile manufacture back to the UK, being one such example.

The aim of the ‘forward direction’ on interest rates is aimed at boosting confidence in all aspects of the economy. Optimism and confidence are the vital underpinnings to rebuild the lost capacity in the economy. The shape of our economy has changed forever, we’re in a post industrial phase of development. It’s the services sector, including media and high tech parts that will provide the balancing export wealth to pay for the imports.

I agree that the new policies of the Bank of England contain risks. But the twin focus on employment rate, and interest rate should be given a chance to work.

Being fooled by randomness

There’s much discussion about the failure of economic and financial models in predicting real-world outcomes.

The Bank of England’s Andrew Haldane, Executive Director, Financial Stability and Benjamin Nelson, Economist, Financial Stability have written a recent paper, Tails of the unexpected, that suggests that economics and finance is being fooled by randomness.

Let me say here and now, this paper discusses a topic beyond my full comprehension. Although the concept is one that’s understandable. At the beginning of the paper the authors use a brilliant real life example to make their case, and I thought it’s worth sharing with you.

“In 2005, Takashi Hashiyama faced a dilemma. As CEO of Japanese electronics corporation Maspro Denkoh, he was selling the company’s collection of Impressionist paintings, including pieces by Cézanne and van Gogh. But he was undecided between the two leading houses vying to host the auction, Christie’s and Sotheby’s. He left the decision to chance: the two houses would engage in a winner-takes-all game of paper/scissors/stone.

Recognising it as a game of chance, Sotheby’s randomly played “paper”. Christie’s took a different tack. They employed two strategic game-theorists – the 11-year old twin daughters of their international director Nicholas Maclean. The girls played “scissors”. This was no random choice. Knowing “stone” was the most obvious move, the girls expected their opponents to play “paper”. “Scissors” earned Christie’s millions of dollars in commission.

As the girls recognised, paper/scissors/stone is no game of chance. Played repeatedly, its outcomes are far from normal. That is why many hundreds of complex algorithms have been developed by nerds (who like to show off) over the past twenty years. They aim to capture regularities in strategic decision-making, just like the twins. It is why, since 2002, there has been an annual international world championship organised by the World Rock-Paper-Scissors Society.”

It’s up to you if you want to read the paper, but knowledge of statistics would be a big advantage, which sadly is not my strongest subject.

Banking Commission notes 1: Gordon Brown’s mistakes

The Independent Commission on Banking produced its interim report on 11th April. Solving the problems with the banking system remains one of the most important issues facing our nation. Rather than providing an over-long blog post on the report, I’ve decided to break my thoughts into smaller blog posts.

But, before I do that, it’s worth reminding ourselves of one of the architects of the banking crisis – one Gordon Brown. Last Saturday Gordon was speaking at an event organised by the Institute for New Economic Thinking in Bretton Woods, New Hampshire – you can watch his speech HERE. I don’t recommend it, as it will bring about a shoe throwing at your computer.

In his talk Gordon admitted, finally, mistakes in regulating the banks, neatly forgetting that it was he who removed banking regulation from the Bank of England, and handed it to a bunch of inexperienced regulators in the Financial Services Agency. See earlier comments HERE. Here’s the Press Association report on what Gordon said,

Mr Brown said that in the 1990s and the years up to 2007, when he was chancellor, he was under “relentless pressure” from the City not to over-regulate.

“We know in retrospect what we missed. We set up the Financial Services Authority believing that the problem would come from the failure of an individual institution,” he said.

Mr Brown said the economic problem had been seen in terms of inflation rather than financial stability. He went on: “So we created a monitoring system which was looking at individual institutions. That was the big mistake.

“We didn’t understand how risk was spread across the system, we didn’t understand the entanglements of different institutions with the other and we didn’t understand even though we talked about it just how global things were, including a shadow banking system as well as a banking system.

“That was our mistake but I’m afraid it was a mistake made by just about everybody who was in the regulatory business.”

Yeah, right Gordon. We remember when you said that the UK, and specifically you, led the world in solving the financial crisis. But now everyone else is to blame.

Britain’s Banks: Too Big to Save?

Yep, I cautiously looked forward to Robert Peston’s BBC TV programme last night – Britain’s Banks: Too Big to Save?

The caution is because I find generally Robert Peston’s description of our financial plight overly doom-laden, which his halting delivery and persona doesn’t lighten. Anyway, the programme was a review of the situation national economies face when they have huge global banks to oversee.

Peston succeeded in gaining interviews with some of the most influential people and commentators on international banking.

For me, the most impressive individual interview by Peston was with Paul Tucker, the deputy governor of the Bank of England. My, Tucker exhibited intellectual prowess, and studious calm at the same time. Why, oh why, that mind-numbingly awful Gordon Brown ever removed banking oversight from the Bank of England escapes me. We might not be in this mess now if he hadn’t rushed through that change. Remember that ‘Steady’ Eddie George, the previous governor, was thinking of resigning over the matter, but declined to do so for fear of destabilising and incoming government, and one that had won a overwhelmimg victory. Hell, that’s history now.

But, I hope you’ll see from the comments below that Paul Tucker made to Robert Peston what I mean.

“If we have a system where banks take the upside but the taxpayer takes the downside something has gone wrong with capitalism, with the very heart of capitalism, and we need to repair this”.

“Capitalism can’t work unless these financial firms at the centre of the heart of capitalism can be subject to orderly failure. The rules of capitalism need to apply to them just as they do to non-financial companies.”

Oh, and Peston managed to extract an equally powerful comment from Sir Philip Hampton, chairman of the Royal Bank of Scotland, on why mediocre investment bankers get paid so much. So, now the reason is known, it should be possible get the renumerations down to more acceptable levels.

“The star quality, as it were, seems to filter down to people who don’t seem so star quality. There is, if I can use the expression, a sort of gangmaster cultural phenomenon in this, that you recruit top people who really do make a difference, who really do move markets and get business and are really high achievers.
“But they do tend to associate themselves with people who aren’t such stars, but they want them around and they trust them, sometimes they move with them and there is a team associated with it. And the disparities between the top stars in the team and some of the journeymen players, if you like, is probably not as marked as it should be.”

It’s the likes of Paul Tucker and Sir Philip Hampton that should encourage us that change to investment bankers pay, and the removal of the ‘moral hazard’ element of global banking are both fixable.

What banking regulators must consider

First an admission. I like Gillian Tett assistant editor of the Financial Times. Her economic analysis is especially good when the news is gloomy. Shame that much of her work sits behind the FT’s paywall. But, I guess that’s what you pay for. Occasionally, snippets are available in the FT’s Alphaville blog, which has prompted this post.

It’s my contention that the economic problems of 2007 to today stem from, to a larger extent than is discussed, regulatory failure. That’s the failure of legislators of banking and financial services to recognise the incipient causes of our economic woes.

Here in the UK, Gordon Brown’s policies were the primary cause of regulatory failure. Which both he an Ed Balls have now acknowledged [See in Iain Dale’s quote of the day by Gordon Brown, and here in the Guardian.

Gordon Brown’s much vaunted decision, by him at least, of changing banking regulation in 1997, by moving it from the Bank of England to the Financial Services Agency was one of the main causes of the banking problems we now face. It allowed control of the burgeoning complexity of banking to pass from expert to inexpert hands.

A wonderful, if complex, staff report by the New York Federal Reserve Bank’s on Shadow Banking, says of the 2007-9 banking crisis,

“Ultimately, the underestimation of correlation by regulators, credit rating agencies, risk managers, and investors permitted financial institutions to hold too little capital against the credit and liquidity puts that underpinned the stability of the shadow banking system, which made these puts unduly cheap to sell.”

Dense language I know. But their conclusion about the banking crisis is that of a failure of regulation. There’s a fantastic chart in this report, on the Shadow Banking System which is too big to show here. They recommend it is printed at 36″ x 48″. Heck, that’s 3 feet by 4 feet. Enormous.

Anyway, the point to note about this chart is that the ‘traditional banking system’ is one line across the top of the chart. The rest is a maze of interconnections of between a myriad of parties, other than banks, to the world of credit formation, and the bewildering number’s of credit instruments.

Sure, it’s arcane and often impenetrable. But, it’s worth a delve into as it presents a picture of the financial world that the authors say came briefly out into the open in 2007, and is now hidden again. This is what we want regulators to understand, and to control.

We can and should lead on banking reform

Banking reform, not the most exciting topic, and yet is one of the most important facing the UK.

Last week Mervyn King, the governor of the Bank of England, spoke in explicit terms of the need to change our banking regulation. He did so, to remind government of the need to avoid the taxpayer of ever being again the saviour of a major failure in investment banking, as happened in 2008. Here are a few quotations,

“For all the clever innovation in the financial system, its Achilles heel was, and remains, simply the extraordinary – indeed absurd – levels of leverage represented by a heavy reliance on short-term debt.”

“Of all the many ways of organising banking the worst is the one we have today.”

Mervyn King worries that banking leverage* has got out of control, and that banks have resorted to ‘financial alchemy’ to underpin this leverage. King said that leverage was about 6 to 1 in the 1870’s and reached 50 to 1 in some banks in recent times. Comparisons are illustrative. None more so than the Bank Of Canada’s approach to banking that hasn’t left their economy needing to bail out their banks.

* Leverage is the ratio of total assets to equity that a firm has on its balance sheets

Even more worrying is that UK banks assets are about 5 times our GNP. That’s frighteningly high. Just think back to the situation with Iceland.

My view, which has so often accorded with my favourite economist, Liam Halligan, is that splitting the High Street banking operations from investment banking would seem the best way to restore order to banking, with the re-introduction of an equivalent to USA’s old the Glass-Steagal Act.

The banking sector worries about regulation, and suggests they’ll decamp to another jurisdiction. If we set high standards for banking regulation, the world will flock to our door as a true financial capital of the world, not one based on alchemy as Meryvn King suggests. It’s another opportunity for our mercantile innovation. We mustn’t let it pass.

PS. There’s a Wolves dimension to all this. Not only did Mervyn King go to Wolverhampton Grammar School, but he’s a Wolves supporter.

What Bank of England’s Agent said at our breakfast

I promised to provide a summary of what Chris Piper, Bank of England agent for central southern England, said at this week’s Surrey Heath Business Breakfast.

Chris showed us seven slides. My notes below are the summary points at the top of each of his slides.

  1. Overview: Pace of global recovery easing. UK exports recovering, but little sign yet of impact of weak pound.
  2. Prospects for business spending: Investments fell very sharply in recession, has stabilised and intentions improving gradually. Credit availability improving though at a reduced rate, particularly for small and medium-sized enterprises.
  3. Consumer Spending: Saving rose sharply in recession. Consumer confidence recovered but has deteriorated recently.
  4. Outlook for Growth: Recovery likely to be maintained, but “choppy” … and output likely to be below its pre-crisis trend for some time.
  5. Capacity pressures: Impact of recession very uncertain, spare capacity starting to close. Pay growth muted and rise in unemployment surprisingly modest.
  6. Inflation: CPI inflation to stay elevated through 2011 [VAT rise] — then eases back as temporary effects subside.
  7. Summary: Considerable uncertainty remains.

So, there you have it. I guess it’s what you knew already, smart people that you are.