Banks face a huge hike in financing costs as $2,000,000,000,000 of funding comes dues in the next three years.  From the FT:

Moody’s estimates that a lender wanting to refinance a short-term government-guaranteed bond with 10-year paper could see costs rise nearly 7 percentage points.

This surely of huge concern.  The end of QE may be a really fraught experience.  Or – central banks see this coming, and don’t have the nerve to end it.  On the subject (loosely), how might it be helping London property prices?

The most dramatic improvement has come in London, where 95 per cent of surveyors are reporting rising prices, a level unseen since 1996, including during the whole of the last housing boom. Some properties in London were now back above the 2007 peak prices, according to Simon Rubinsohn, economist at Rics, helped by hopes of big financial sector bonuses.and an influx of foreign investors taking advantage of the weak pound.

So, great for the London market. Great if you got on the train in time.  What about if you can’t afford houses?  Um . . .  affordable home starts drop by a third. Oh dear.  No wins for QE on the social justice side.   It may be blowing bubbles.  Mishkin is not worried.   Some are more concerned about the Chinese one.

Not sure it’s been good for the rest.  As Tracey Corrigan says, banks make hay, the rest of us pay. It’s becoming the conventional wisdom. Perhaps more fiscal policy would have worked. Of course, Krugman would agree, but here is some major empirical evidence to back him up.  “Initial fiscal multipliers of 2 or more, although they shrink over time. Yes, fiscal expansion is expansionary.”  As he wisely points out, you have to ask not whether fiscal stimulus has worked in ordinary conditions (think Tony Benn, and go ‘no’), but what about during a liquidity trap?

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4 thoughts on “Important news buried in dull headlines, part 1

  1. Price Fishback, Univ of Arizona, gets much lower muliples for US depression era spending. He finds a multiple of 1 +/- .3, that is, spend a dollar, get a dollar. There are also good reasons to think that the figures are lower today (more open economies, for example). It is worth reading his stuff.

  2. Tim

    The impression I get from empirical work on past fiscal multipliers., from Barro downwards, is ever more muddy. Do we have any better guide for policy now than the a priori assumption that with private savings racing upwards in the old deficit countries, government spending is helping to sustain demand to some uncertain degree?

    Giles

    Moodys always have trouble grasping the point when the key question is what will the authorities do. The authorities game plan seems to be to roll over the finance until leveraging begins to reach some more normal levels (quite a debate must be going on about what will be roughly normal), at which point progressive refinancing will be used to raise interest rates to more normal levels (another problem in the identification of normalcy). Even writing that gives me a pain because it makes me type with my fingers crossed; but Moody’s opinion on the point is about as relevant as a 2007 Moody’s AAA rating on a mortgage backed security.

    Excuse me now. I have to go to London and sell a house.

  3. There seems to be a problem that the number of multiplier studies easily matches the number of people wanting a conclusion on them, enabling some choice. And then current circumstances are always different. Finally, our HMG has done very little actual Keynesian spending, except by default/omission: all it has really done is refrain from closing the budget deficit, rather than actively go out handing out shovels. This is seldom pointed out. The ‘surge’ in spending is a fiction created by people looking at ratios rather than nominal amounts: and the economy runs on nominal amounts. So we will never know about 2008-9, although I am fairly sure that trying to close the gap would have been extraordinary lunacy.

    I am getting those begging letters from estate agents again, saying “we like your house someone will want to buy it”. London is doing very well. Russians everywhere . . . .

  4. Estate agents write those letters even when the market is tanking. It is cheap talk.

    More seriously, the old editions of the Samuelson textbook used to talk of multipliers of the order of 2 or 3. I think we are pretty clear that that is too high. The E&O’R estimates are towards the top end of estimates for the 1930s, as I understand it. So yes, I think we have ruled some values out.

    Of course, the multiplier for a fiscal boost in one country will be different to a fiscal boost in all countries simultaneously.

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