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John Plender

John Plender on my blog

Gertjan Vlieghe of the Bank of England Monetary Policy Committee put a cogent case that the Phillips curve,
which charts the relationship between unemployment and wage inflation, is far from dead.
John Plender FT 4 April 2018

Money, Banking and the Future of the Global Economy, by Mervyn King.
Review by John Plender

How Japan resists the populist tide
John Plender, FT 1 January 2017

Bond valuations are the Achilles heel of markets
Investors seem to have concluded that this is the beginning of the end of unconventional central bank monetary policy.
Investors can, of course, change their minds.
John Plender, 1 November 2016

Global bear market moves closer after Brexit
It could be that the tipping point for markets will come
when the great mass of investors concludes that the wizards of central banking are emperors with no clothes
and that anaemic global growth provides inadequate support for current equity valuations.
John Plender, FT 28 June 2016

Money, Banking and the Future of the Global Economy, by Mervyn King.
Review by John Plender, FT 3 March 2016

The real, less respectable reason why companies engage in buybacks,
namely to boost earnings per share by shrinking the equity.
John Plender, FT 1 March 2016

A malign external outcome of China’s unsustainable growth model is that returns in many industries have been depressed
because of the Chinese contribution to global excess capacity.
That is an undermentioned factor in the low levels of investment by industry in the US and much of Europe since the financial crisis.
John Plender, FT 23 December 2015

Throughout this extraordinary monetary experiment managers of listed companies have been reluctant to invest in fixed assets
despite enjoying the lowest borrowing costs in history.
By contrast financial institutions have been fearless in propelling markets ever higher.
John Plender, FT 6 august 2015

John Plender on Bubbles
For unreconstructed efficient market theorists, bubbles do not exist.
John Plender, FT 21 July 2015

Policy makers remain wilfully blind to the reality that the debt problem is unresolved,
and that the eurozone’s outstanding public sector borrowings will never be repaid in full.
The West German economic miracle was launched from a clean balance sheet while the Allies remained heavily indebted.
John Plender, FT December 29, 2014

"not only too big to fail, but too big to rescue"
There is a time-honoured way of protecting taxpayers from picking up the bill for the failure of a systemically important financial institution.
It involves central banks and finance ministries pressing a better capitalised bank to absorb the ailing business through an arranged merger.
Yet it is becoming clear that this tool of crisis management can no longer be put to use,
raising questions about the authorities’ ability to stabilise the financial system in a crisis.
John Plender, FT, September 1, 2014

Conventional wisdom has it natural interest rates have fallen
With debt in the developed world standing at higher levels than before the financial crisis,
one of the more disturbing threats to financial stability is an unexpectedly sharp rise in global interest rates.
John Plender, Financial Times June 24, 2014

Déjà vu: echoes of pre-crisis world mount
But missing credit bubble indicates next crash is not imminent
John Plender, Financial Times June 10, 2014

Many are convinced that the US is a victim of secular economic stagnation and that its power and influence are waning inexorably as a result.
It is politically dysfunctional, its political class has been bought by Wall Street bankers with an efficiency and cynicism not seen since Cosimo de Medici bought up the 15th century papacy.
But... One of the important consequences of the financial crisis has been that it reinforced the role of the dollar as the world’s most sought after store of value in a storm.
John Plender, Financial Times 7 January 2014

For at least a decade and a half, cash has progressively increased its share of the American corporate balance sheet
According to research by the Federal Reserve Bank of St Louis,
their cash hoard had reached almost $5tn by the end of 2011.
John Plender, FT December 29, 2013

Full text

About a third of the world’s biggest non-financial companies are sitting on most of a $2.8tn gross cash pile,
according to a study by advisory firm Deloitte

Rolf Englund blog 5 december 2009:
- Jag tycker det är skriande uppenbart att räntan världen över är för låg och att en större del av stimulanserna borde ske via finanspolitiken. Men väljarna och därmed deras medlöpande politiker är rädda för budgetunderskott och vill hellre att villaägarna skall låna än att staten skall göra det.
Strategin synes vara att det gäller att stabilisera, helst höja, villapriserna så att konsumenterna främst i USA skall återgå till att konsumera med lånta pengar, dvs just det som ledde fram till katastrofen.
Detta kan inte vara klokt.

Is the global economy confronting another rash of housing bubbles?
In the aftermath of the most recent housing crash in the US,
to forecast a repeat performance in short order would imply a collective memory loss in banking of quite colossal dimensions.
John Plender, Financial Times 3 December 2013

Treasuries have turned anything but risk-free
The global financial system is hostage to a big rise in borrowing costs
when the retreat from QE puts an end to the current era of extraordinarily low interest rates.
John Plender, FT 22 October 2013

UK and much of the eurozone appear determined to repeat the mistakes that inflicted stagnation on Japan
Basel III’s backstop leverage figure is just 3 per cent by 2019.
For a banking system to operate on the basis that a fall of a mere 3 per cent in the value of bank assets
will wipe out the banks is simply absurd
John Plender, Financial Times, June 21, 2013

It’s hard to write a happy ending to ‘QE’ story
Have we finally witnessed the end of the great 32-year bull market in bonds?
John Plender, Financial Times, June 18, 2013

The post-election deadlock in Italy is an uncomfortable reminder that
the developed world’s sovereign debt problem ultimately boils down
not just to bad economics but to a failure of democracy.
John Plender, Finncial Times 26 February 2013

In the fixed interest sector something irrational is undoubtedly going on
Despite the oft-heard central bankers’ refrain that bubbles are impossible to identify until after they have been pricked,
historical comparisons leave little doubt that this is a bubble
John Plender, FT January 29, 2013

Yields in the index linked market remain largely negative at present, which feels distinctly bubble-like
Yet they have been driven down by the perfectly rational fear that extreme monetary measures could lead to inflation
and that inflation could be part of the solution to the developed world’s overhang of public sector debt.
Perhaps this should not really be called a bubble because the protection offered by index linked is invaluable if you fear the worst, even if the security offers a negative real return.
John Plender, FT, January 29, 2013

To what extent was the economics profession to blame for the financial crisis?
Misunderstanding Financial Crises: Why We Don’t See Them Coming, by Gary B. Gorton, Oxford University Press
Review by John Plender, FT January 13, 2013

Basel
Bank of England’s latest financial stability report call for the banks to bolster their capital base in order to boost their capacity for lending to industry and commerce.
Yet there is a chicken-and-egg problem here that relates to investors’ readiness to stump up. For as the Financial Policy Committee itself points out, the banks sell at a discount of around a third to net asset value because of
uncertainty about the value of assets that are difficult to price and a well justified conviction that the assets are overvalued.
John Plender, Financial Times 4 December 2012

The greatest ever monetary experiment
Throughout history monetary experiments have shown a nasty tendency to blow up.
I repeat: this experiment is vast.
John Plender, Financial Times 25 September 2012

No country defaults on its domestic bonds if it retains the right to set the printing presses in motion.
US Treasuries were never risk free in the common sense understanding of the term.
John Plender, Financial Times, August 16 2011

Om man har en sedelpress går man inte i konkurs
Rolf Englund blog 4 november 2011

History lessons for a world out of balance
The prevailing rhetoric about currency wars smacks of the 1930s
John Plender, FT November 11 2010

Investors must be wary of government bond 'bubble'
But is it possible to have a bubble in the most boring form of IOU?
John Plender, Financial Times, January 7 2009

Capitalism in convulsion:
Toxic assets head towards the public balance sheet
John Plender, September 19 2008

There are signs that the mix of policies and economic circumstances that gave a protracted laisser-passer to the rich and to business is coming to an end
Income inequality in the US is at its highest since that most doom-laden of years: 1929.
Throughout the main English-speaking economies, earnings disparities have reached extremes not seen since the age of The Great Gatsby.
John Plender, FT 7/4 2008

Greatest danger lies in consumer recession
John Plender January 22 2008

Everywhere leverage is being unwound
– especially in the shadow banking system,
John Plender FT December 18 2007

It was the 1988 Basel Accord that first created the opportunity for regulatory arbitrage
whereby banks could shunt loans off the balance sheet.
John Plender, FT November 6 2007

The waning dollar and a not-so-brave new world
As the prospect of the pound costing $2 edges closer, it is worth looking back to the early 1980s when we last explored such remote exchange rate territory.
John Plender, FT 4/12 2006

Bank of Japan estimating that there are up to Y15,000bn (£67bn) of outstanding yen carry trades worldwide
If volatility in both equity and currency markets is indeed set to turn up, the biggest potential upheaval will be in carry trading,
there will be painful adjustments as the yen, the Swiss franc and other carry trading currencies appreciate sharply and liquidity is withdrawn from markets.
John Plender, FT, November 13 2006

Watershed in global markets
The decision by China to abandon the renminbi-dollar peg in favour of a managed float marks the beginning of the end of the dollar recycling process whereby a large US current account deficit is substantially financed by Asian official reserves.
John Plender, Financial Times, July 25 2005

LTCM's troubles surely demonstrated that accountability to investors was both weak and insufficient to prevent a hitherto obscure institution from posing a serious threat to the whole global banking system.
Black clouds over hedge funds
This unloved and under-regulated corner of the financial community, which controls more than $1,000bn of assets
John Plender FT May 13 2005
Full text

Resistance to systemic risk may be eroded
Has a newly resilient international banking system acquired near-immunity to crises?
Or could a financial bolt from the blue still expose global finance to a devastating systemic shock?
John Plender FT 15/2 2005

Stand by for a pensions bail-out
A re-run of the S & L disaster
John Plender Financial Times 13/9 2004

Falling from grace
The American model of unfettered capitalism is under strain,
but John Plender still believes it is better than the alternatives
Financial Times, March 27, 2001

So you think this bear market is rough?
It is positively limp-wristed when compared with the depths of the mid-1970s.
John Plender Financial Times; Jul 15, 2002

Land of the rising yen
John Plender, FT, September 21, 1999

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Resistance to systemic risk may be eroded
Has a newly resilient international banking system acquired near-immunity to crises?
Or could a financial bolt from the blue still expose global finance to a devastating systemic shock?
John Plender FT 15/2 2005

Since manias and panics are endemic in financial markets, the eternal financial verities surely still apply. That said, the conventional wisdom among establishment bankers is that the vulnerabilities are all some way into the future.

In its most recent Global Financial Stability Report, the International Monetary Fund said: "Short of a major and devastating geopolitical incident or a terrorist attack undermining, in a significant and lasting way, consumer confidence, and hence financial asset valuation, it is hard to see where systemic threats could come from in the short term." Last December the Bank of England's Financial Stability Review referred to a contrast between "low near-term risks and heightened longer-term volatilities".

The case for playing down the near-term worries is, first, that the global economy is stable and growing... Yet banking is a cyclical business, in which the seeds of future trouble are sown precisely at times such as this.

A useful starting point is to consider the causes of financial crises. According to Timothy Geithner, president and chief executive officer of the Federal Reserve Bank of New York, in a recent speech:

"Most financial crises involve a shock whose origins lie in the realm of macroeconomic policy error, often magnified by the toxic combination of poorly designed financial deregulation and an overly generous financial safety net. Probably the most important contribution policymakers can make to financial stability is to avoid large monetary policy mistakes or sustained fiscal and external imbalances that increase the risk of large macroeconomic shocks."

Measure the US, which holds the key to global financial stability, against that template and warning lights immediately flash. The US economy does indeed suffer from big imbalances, in part because monetary policy under Alan Greenspan, the Fed chairman, has delivered freakishly low interest rates to stave off economic stagnation after the bursting of the extraordinary equity market bubble in 2000

The huge US fiscal and current account deficits...

Meanwhile, interest rates that are still very low by historic standards are doing strange things to a financial system that is highly deregulated.

An overly generous financial safety net has potentially been extended by default as a result of the growing concentration of financial assets and liabilities.

The top five bank holding companies in the US own 45 per cent of all banking assets - nearly twice their share 20 years ago. The markets assume the Fed would come to the rescue, acting as lender of last resort, if any of the five hit trouble. Also seen as too big to fail are Fannie Mae and Freddie Mac, the home loan institutions. Their balance sheets have been bloated by the Fed's low post-bubble interest rates, which have fuelled housing booms across the nation. Such concentration means that the impact of any failure would be far greater than in the past.

Outstanding US household sector debt of just under $10,000bn in the third quarter of 2004 was at an all-time peak both in absolute terms and relative to gross domestic product. This is no great threat in the short run because of the remarkable structure of the mortgage market, which allowed borrowers to lock in low rates at the bottom of the cycle. More than 80 per cent of the mortgage debt stock is reckoned to be at fixed rates and around 60 per cent of mortgage debt was financed or refinanced in the 18 months before the Fed started raising interest rates in June last year. The problem comes when there is a recession and rising unemployment hampers debt servicing.

As Charles Goodhart, Boris Hofmann and Miguel Segoviano have shown*, the authorities’ attempt since the 1980s to regulate banks through capital adequacy requirements is pro-cyclical, amplifying rather than damping fluctuations in the business cycle. The better the value and riskiness of banks is measured, the greater the pro-cyclicality of the capital regime, the academics find.
Bank Regulation and Macroeconomic Fluctuations, Oxford Review of Economic Policy, Winter 2004

Full text

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Bubbles, crashes and power shifts
One of the fascinating things about the extended media commentary on the 75th anniversary of the Wall Street Crash is that no one has a definitive answer as to the cause.
John Plender Financial Times November 1 2004

Modern finance theory denies the existence of bubbles on the ground that markets are efficient. Interesting, then, to read a new book* by Richard Dale of Southampton University on the South Sea Bubble that turns up new evidence showing there were established valuation techniques at the time and that aberrant investors genuinely lost touch with fundamentals. I found him pretty convincing.

The First Crash: Lessons From The South Sea Bubble, Princeton University Press

Full text

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Resistance to systemic risk may be eroded
Has a newly resilient international banking system acquired near-immunity to crises?
Or could a financial bolt from the blue still expose global finance to a devastating systemic shock?
John Plender FT 15/2 2005

Since manias and panics are endemic in financial markets, the eternal financial verities surely still apply. That said, the conventional wisdom among establishment bankers is that the vulnerabilities are all some way into the future.

In its most recent Global Financial Stability Report, the International Monetary Fund said: "Short of a major and devastating geopolitical incident or a terrorist attack undermining, in a significant and lasting way, consumer confidence, and hence financial asset valuation, it is hard to see where systemic threats could come from in the short term." Last December the Bank of England's Financial Stability Review referred to a contrast between "low near-term risks and heightened longer-term volatilities".

The case for playing down the near-term worries is, first, that the global economy is stable and growing... Yet banking is a cyclical business, in which the seeds of future trouble are sown precisely at times such as this.

A useful starting point is to consider the causes of financial crises. According to Timothy Geithner, president and chief executive officer of the Federal Reserve Bank of New York, in a recent speech:

"Most financial crises involve a shock whose origins lie in the realm of macroeconomic policy error, often magnified by the toxic combination of poorly designed financial deregulation and an overly generous financial safety net. Probably the most important contribution policymakers can make to financial stability is to avoid large monetary policy mistakes or sustained fiscal and external imbalances that increase the risk of large macroeconomic shocks."

Measure the US, which holds the key to global financial stability, against that template and warning lights immediately flash. The US economy does indeed suffer from big imbalances, in part because monetary policy under Alan Greenspan, the Fed chairman, has delivered freakishly low interest rates to stave off economic stagnation after the bursting of the extraordinary equity market bubble in 2000

The huge US fiscal and current account deficits...

Meanwhile, interest rates that are still very low by historic standards are doing strange things to a financial system that is highly deregulated.

An overly generous financial safety net has potentially been extended by default as a result of the growing concentration of financial assets and liabilities.

The top five bank holding companies in the US own 45 per cent of all banking assets - nearly twice their share 20 years ago. The markets assume the Fed would come to the rescue, acting as lender of last resort, if any of the five hit trouble. Also seen as too big to fail are Fannie Mae and Freddie Mac, the home loan institutions. Their balance sheets have been bloated by the Fed's low post-bubble interest rates, which have fuelled housing booms across the nation. Such concentration means that the impact of any failure would be far greater than in the past.

Outstanding US household sector debt of just under $10,000bn in the third quarter of 2004 was at an all-time peak both in absolute terms and relative to gross domestic product. This is no great threat in the short run because of the remarkable structure of the mortgage market, which allowed borrowers to lock in low rates at the bottom of the cycle. More than 80 per cent of the mortgage debt stock is reckoned to be at fixed rates and around 60 per cent of mortgage debt was financed or refinanced in the 18 months before the Fed started raising interest rates in June last year. The problem comes when there is a recession and rising unemployment hampers debt servicing.

As Charles Goodhart, Boris Hofmann and Miguel Segoviano have shown*, the authorities’ attempt since the 1980s to regulate banks through capital adequacy requirements is pro-cyclical, amplifying rather than damping fluctuations in the business cycle. The better the value and riskiness of banks is measured, the greater the pro-cyclicality of the capital regime, the academics find.
Bank Regulation and Macroeconomic Fluctuations, Oxford Review of Economic Policy, Winter 2004

Full text

More about Chrash

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