Wednesday, August 17, 2016

Central Bank Follies 
"Quantitative Easing (QE) keeps banks liquid, but does little else for the broad economy. If anything, it incentivises banks to buy government bonds (and soon to be high grade corporates) rather than focus on core lending activity. Sub-normal and now negative interest rates distort asset prices. Investors are crowded out of low-risk assets and crowded in to higher risk assets, all the while reducing their reward / risk ratio. Faced with compressed interest rate spreads banks resort to broad based fees. This is a regressive tax on people and businesses who can least afford it and have little or no alternative. Continual rounds of QE and interest rate cuts undermine the economy by transmitting negativity and pessimism. If people and businesses are continually afraid of the next looming financial crises they are more likely to reduce spending and reduce investment. Increased drive on the part of central banks to raise banking capital adequacy ratios reduces the overall capital available for banks to lend & encourages banks to lend to an increasingly narrow segment of businesses and consumers, ironically, those who need credit least .. The paradox is that the more central bankers lower rates, the more they transmit pessimism and distorted asset prices into the economy. Central bankers – if you are listening – here is the message:
1. Business want to borrow and often pay in excess of 10% even when base rates are zero!
2. The lower rates go, the more pessimism there is in the economy, the more frightened business become, the more risk averse banks become.
3. Low interest rates compress bank earnings and force them to charge higher fees, which is a regressive tax on consumers and businesses.
4. The small extra savings consumers and businesses make when rates go down doesn’t get pumped back into spending and investment, especially when the savings occur amid bearish economy outlook and the negative signal of a rate cut.
5. The appetite of consumers and businesses to spend and invest at any given moment or any given short interval in time is finite. It is, in fact, a step function driven by the lifespan of the acquired asset and purchasing power. The interest cost, if any, attached to the purchase is marginal."
- Michael Sonenshine is CEO of Symfonie Capital
LINK HERE to the report

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