Stopping Bubbles via 'Regulation'

Sweden's Riksbank was one of the first central banks to impose negative interest rates on deposits with the central bank. Not surprisingly, a credit and asset bubble has been set into motion that has now become so large that Sweden's authorities are getting cold feet. However, instead of simply coming to the conclusion that it may be a good time to abolish the central bank and instead institute free banking based on traditional legal principles, it has been decided to fight the bubble with additional regulations. After all, according to a speech delivered by Ben Bernanke in early 2010 (who as an eminent economist should know about such things), everybody has been made aware of the fact that asset prices, especially those of houses, have absolutely nothing to do with the central bank's interest rate policy. Instead, mortgage credit and housing bubbles are supposed to be the result of 'not enough regulation'. In 2012, Bernanke reiterated that interest rates and home prices have nothing to do with each other

 

Apparently economic theory is rewriting itself in the new millennium. After all, there is allegedly 'evidence' (according to Bernanke) that suggests so! It is not quite clear just yet why the housing bubble decided not to migrate to even less regulated sectors of the economy, as we are still waiting for the wizard to reveal that particular mystery to us.

Anyway, they apparently heard him in Sweden, as the credit and asset bubble there is going to be subjected to regulatory brakes:


“Sweden’s financial regulator says it’s ready to tighten restrictions on mortgage lending to stop banks feeding household debt loads after a cap imposed during the crisis failed to stem credit growth.

“Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,” Martin Andersson, the director general of the Financial Supervisory Authority, said in an interview in Stockholm. “If that would happen, we can utilize the two tools we do have again, or look at other alternatives.”

The FSA is ready to enforce a cap limiting home loans relative to property values to less than the 85 percent allowed today, Andersson said. Banks may also be told to raise risk weights on mortgage assets higher than the regulator’s most recent proposal, he said. The watchdog has other measures up its sleeve should these two prove inadequate, he said.

As most of the rest of Europe grapples with austerity and recession, the region’s richer nations, including Sweden, Norway and Switzerland, have been battling credit-fueled housing booms. And with southern Europe sinking into a state of deeper economic decline, the prospect of monetary tightening remains remote. That’s adding to pressure on Swiss and Scandinavian regulators to counter the effect of low interest rates on their markets.”

[…]

Sweden has already pushed through stricter lending rules as policy makers try to avoid a repeat of the nation’s 1990s real estate and banking crises. The FSA in October 2010 introduced its 85 percent loan-to-value limit, a move that helped slow borrowing growth from more than 10 percent between 2004 and 2008, to 4.5 percent in December. That’s still too fast a pace, according to Finance Minister Anders Borg, who argues credit growth shouldn’t exceed 3 percent to 4 percent.

The regulator last year also proposed tripling the risk weights banks apply to mortgage assets to 15 percent. While the pace of credit growth has eased, household debt still reached a record 173 percent of disposable incomes last year, the central bank estimates.

That far exceeds the 135 percent peak reached at the height of Sweden’s banking crisis two decades ago. Back then, the state nationalized two of the country’s biggest banks after bad loans wiped out their equity. Nordea Bank AB is the product of a series of state-engineered mergers born of that crisis.

 

(emphasis added)

We have no doubt that tightening the loan-to-value limit from an astonishingly lax 85% to something more conservative will have an effect on mortgage credit growth. However, it is way too late to “avoid a repeat of the nation’s 1990s real estate and banking crises.” With household debt today at 173% of disposable income compared to 135% in 1990, that horse has long ago left the barn.

Why was and is monetary tightening out of the question for Sweden just because the euro area periphery is in recession? Sweden is not even a member of the euro area, so it could have decided to tighten monetary policy regardless of what the ECB was doing. The authorities very likely feared a strengthening of the Swedish Krona, as if the country would suffer if its currency were actually able to buy more rather than fewer goods and services. However, this is the neo-mercantilistic creed followed everywhere today: one's currency must not strengthen under any circumstances (if investors had any sense, they would trip over each other right now to buy more gold).

In any case, Sweden's housing bubble has begun to wobble of late and it may be destined to follow the path the bubbles in Denmark and the Netherlands have taken. The government of the Netherlands has recently bailed out a bank, although it appears that in this particular case, the bank was felled by its exposure to Spain's housing bubble collapse. However, it goes to show that if/when house prices fall further in the Netherlands, trouble will likely strike other banks as well.

 


 

Sweden housing bubble

Sweden's house price index – the bubble is beginning to look wobbly lately.

 


 

Sweden housing bubble-rate-of-change

At the annualized rate of change  of Sweden's nominal and 'real' prices house prices (real prices are calculated according to government's 'inflation' statistics and must therefore be taken with a grain of salt). As can be seen, this indicator has now turned negative.

 


 

It is of course better to try to stop a bubble late rather than never. Since the damage can no longer be avoided, it is surely best to keep it as small as possible. However, we still predict that this will turn into a case of 'be careful what you wish for' from the perspective of Sweden's authorities.

This is easy to foresee, as there will be a lot of wailing and gnashing of teeth once house prices begin to fall more precipitously. With households and banks exposed to debt like never before, a crisis is already assured, even if its precise timing remains uncertain (however, it appears that the point of crisis is no longer very far away).

There will be a considerable political backlash when that happens. With the Riskbank's repo rate already at a mere 1%, the central bank will find it difficult to 'reflate' the bubble once it bursts in earnest. Sweden can probably look forward to 'interesting times', in the Chinese curse sense.

 

 

 

Charts by: globalpropertyguide.com


 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • French labour union workers and students attend a demonstration against the French labour law proposal in Marseille, France, as part of a nationwide labor reform protests and strikes, March 31, 2016. REUTERS/Jean-Paul Pelissier/File PhotoHow the Welfare State Dies
      Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico).  Gee, we wonder why?   They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
  • offendFree Speech Under Attack
      Offending People Left and Right Bill Bonner, whose Diaries we republish here, is well-known for being an equal opportunity offender  - meaning that political affiliation, gender, age, or any other defining characteristics won't save worthy targets from getting offended. As far as we are concerned, we generally try not to be unnecessarily rude to people, but occasionally giving offense is not exactly beneath us either.   The motto of the equal opportunity...
  • The-answer-is-yesToward Freedom: Will The UK Write History?
      Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call.   The battle lines are...
  • water houseA Market Ready to Blow and the Flag of the Conquerors
      Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast.   St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6   Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
  • nails-in-a-bed-of-nails-new-yorker-cartoonGoing... Going... Gone! The EU Begins to Splinter
      Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
  • queen_gold-840x501Rule Britannia
      A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.   Waving good-bye to...
  • MACAU, CHINA - JANUARY 28: Buildings of Macau Casino on January 28, 2013, Gambling tourism is Macau's biggest source of revenue, making up about fifty percent of the economy.What Could Possibly Go Wrong?
      A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China.  This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong.   Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool   I took the hydrofoil to Macau one afternoon and the same service back early the next morning.  On the morning trip, I am sure that I saw many of the...
  • junkThe Problem with Corporate Debt
      Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour.   Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell   As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:   “Businesses racked up debt in the...
  • saupload_loves-me-loves-me-notA Darwin Award for Capital Allocation
      Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.   The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne   Quite frankly, keeping tabs on it all is beyond human capacity.  This also goes for the federal government.  Even with all their data gatherers and...
  • rate_hike_cartoon_10.15.2015_largeJanet Yellen’s $200-Trillion Debt Problem
      Blame “Brexit” BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap.   “Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened...
  • Brexit supporterGold and Brexit
      Going Up for the Wrong Reason Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use.   August gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears - click to enlarge.   Moreover, insuring against Brexit might ironically be equivalent...
  • deflated-souffleThe Fed’s  Doomsday Device
      Bezzle BALTIMORE –  Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh?   Only two? There were four last time!   Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower. But Brexit is a side show. As our contacts in London...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com