FacebookTwitterGoogle+RedditEmail

The Bank of England Misses the Point

by PETER MORICI

The Bank of England (BoE) announcement of a 50 billion pound (US$99 billion) lending facility for British banks and building societies (mortgage providers) will do little to open up lending and help the United Kingdom to avoid a recession.

The facility will permit British banks and building societies to borrow against mortgage-backed and other securities for terms of up to one year, and renewable by the BoE for up to three years.

The market for mortgage-backed securities and other collateralized debt obligations (CDOs) has essentially closed, making the extension of new mortgages and credit by banks to worthy homebuyers and businesses in the United States and Britain very difficult.

Unfortunately, the BoE action will, like similar special lending facilities created by the US Federal Reserve in recent months, have limited impact on the present banking crisis.

Over the past two decades, banks have moved from a “deposits into loans model” to a “loans into bonds model”. The shift is a good thing because it eliminates the kind of risks banks bear when they borrow short and lend long, which mightily contributed to the US Savings and Loan Crisis of the 1980s and 1990s. Properly done, the loans to bonds model permits banks to greatly expand their lending capacity.

However, in recent years, banks have created increasingly complex and difficult to understand securities. Banks sold, bought and resold securities, and engaged in credit-default swaps that did not lay off risk in the manner advertised. Insurance companies, pension funds and fixed income investors, having been stuck with risky securities, are no longer willing to finance bank loans in this manner. Banks can no longer sell CDOs to these investors.

These practices did permit banks to earn outsized profits on transactions fees and pay executives much better than in comparable non-financial firms. However, it is simply impossible to borrow at 5% and lend at 7%, the essence of traditional banking, and skim off the kinds of profits and executive bonuses bankers now expect and still provide for loan servicing, insurance and the other costs involved in lending and securitization.

Unfortunately, bankers are not much interested in returning to traditional lending practices and are looking to other lines of business within their larger financial services firms for opportunities that may permit continued outsized incomes.

Central banks, by taking mortgage-backed securities and other CDOs off the books of banks, may temporarily relieve liquidity pressures, but such measures do not resolve fundamental structural problems within contemporary financial conglomerates.

The Bank of England and Federal Reserve would do better to bring banks and fixed income investors together to define the kinds of simple mortgage- and other loan-backed securities that insurance companies, pension funds and the like would accept, and condition access to the discount window on banks making and securitizing loans in such a rebuilt market for collateralized debt obligations.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the US International Trade Commission.

 

 

 

 

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

More articles by:
May 26, 2016
Paul Craig Roberts
The Looting Stage of Capitalism: Germany’s Assault on the IMF
Pepe Escobar
Hillary Clinton: A Major Gold-Digging Liability
Sam Pizzigati
America’s Cosmic Tax Gap
Ramzy Baroud
Time to End the ‘Hasbara’: Palestinian Media and the Search for a Common Story
José L. Flores
Wall Street’s New Man in Brazil: The Forces Behind Dilma Rousseff’s Impeachment
Patrick Cockburn
The Battle of Fallujah: ISIS Unleashes Its Death Squads
John Feffer
The Coming Drone Blowback
Alex Ray
The Death Toll in Syria: What Do the Numbers Really Say?
Richard Pithouse
We Shall be the Prey and the Vulture
Binoy Kampmark
Trump and the Polls of Loathing
Manuel E. Yepe
A Cruise Ship Without Tourists Arrives in Havana
Jack Rasmus
Greek Debt Negotiations: Will the IMF Exit the Troika?
Ajamu Nangwaya
Pan-Africanism, Feminism and Finding Missing Pan-Africanist Women
Howard Lisnoff
Israel, a Palestinian State and Anti-Semitism
May 25, 2016
Eric Draitser
Obama in Hiroshima: A Case Study in Hypocrisy
Ryan Mallett-Outtrim
Does Venezuela’s Crisis Prove Socialism Doesn’t Work?
Dan Arel
The Socialist Revolution Beyond Sanders and the Democratic Party
Marc Estrin
Cocky-Doody Politics and World Affairs
Sam Husseini
Layers of Islamophobia: Do Liberals Care That Hillary Returned “Muslim Money”?
Susan Babbitt
Invisible in Life, Invisible in Death: How Information Becomes Useless
Mel Gurtov
Hillary’s Cowgirl Diplomacy?
Kathy Kelly
Hammering for Peace
Dick Reavis
The Impeachment of Donald Trump
Wahid Azal
Behind the Politics of a Current Brouhaha in Iran: an Ex-President Ayatollah’s Daughter and the Baha’is
Jesse Jackson
Obama Must Recommit to Eliminating Nuclear Arms
Colin Todhunter
From the Green Revolution to GMOs: Living in the Shadow of Global Agribusiness
Binoy Kampmark
Turkey as Terror: the Role of Ankara in the Brexit Referendum
Dave Lindorff
72-Year-Old Fringe Left Candidate Wins Presidency in Austrian Run-Off Election
May 24, 2016
Sharmini Peries - Michael Hudson
The Financial Invasion of Greece
Jonathan Cook
Religious Zealots Ready for Takeover of Israeli Army
Ted Rall
Why I Am #NeverHillary
Mari Jo Buhle – Paul Buhle
Television Meets History
Robert Hunziker
Troika Heat-Seeking Missile Destroys Greece
Judy Gumbo
May Day Road Trip: 1968 – 2016
Colin Todhunter
Cheerleader for US Aggression, Pushing the World to the Nuclear Brink
Jeremy Brecher
This is What Insurgency Looks Like
Jonathan Latham
Unsafe at Any Dose: Chemical Safety Failures from DDT to Glyphosate to BPA
Binoy Kampmark
Suing Russia: Litigating over MH17
Dave Lindorff
Europe, the US and the Politics of Pissing and Being Pissed
Matt Peppe
Cashing In at the Race Track While Facing Charges of “Abusive” Lending Practices
Gilbert Mercier
If Bernie Sanders Is Real, He Will Run as an Independent
Peter Bohmer
A Year Later! The Struggle for Justice Continues!
Dave Welsh
Police Chief Fired in Victory for the Frisco 500
May 23, 2016
Conn Hallinan
European Union: a House Divided
Paul Buhle
Labor’s Sell-Out and the Sanders Campaign
FacebookTwitterGoogle+RedditEmail