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:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • robot tradersA Fully Automated Stock Market Blow-Off?
      Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.  The bots keep buying... Illustration via...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
  • Juncker, Keqiang, Tusk 2EU Sends Obsolete Industries Mission to China
      “Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”)  and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
  • Purchasing Power of the BuckThe Real Reason the “Rich Get Richer”
      Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs.   Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...
  • chart-4-silver-basis and cobasisGold is not Going to $10,000
      One Cannot Trade Based on the Endgame The prices of the  metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322!   All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...

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