The winter months traditionally see lower house sales and prices tend to remain steady or fall. However, house prices had continued to increase over Christmas, as the stamp duty holiday came to an end. In a bid to boost the housing market, the stamp duty threshold had been pushed up from £125,000 to £175,000 for just over a year. This seemed to work, as the housing market did rally throughout 2009 and in particular, in the final months of 2009. Mortgage approvals increased, as first-time buyers in particular tried to complete before stamp duty fell back to £125,000.
However, the end of this ‘holiday’, combined with the icy conditions experienced throughout the UK were contributing factors in the first decline in house prices in about 9 months. According to Halifax, house prices in February fell by 1.5%. House prices are still higher that they were 9 months ago, but the upward momentum they did have, has now taken a dive. Mortgage lending was also down in January by about 32%.
Another factor that has contributed to this downturn is the increased number of properties on the market. Throughout 2009, the number of properties for sale was relatively low and as such, ‘Sale agreed’ notices were appearing on properties within days of them being for sale. This imbalance between demand and supply is now beginning to even out. Is this downward trend merely a blip or does it spell further trouble for the UK economy?
Articles
Snow and end of stamp duty holiday leads to first property price decrease in the UK for nine months PropertyWire (1/3/10)
UK house prices see first fall since June, says Halifax BBC News (4/3/10)
Mortage lending slump prediction comes true as stamp duty returns Daily Mail Online (23/2/10)
House price ‘lose momentum’, says Nationwide BBC News (26/2/10)
Snow and tax send house prices down 1.5% (including video) Times Online, Francesca Steele (4/3/10)
UK house prices fall, snapping rally Telegraph (4/3/10)
House prices fall in February Guardian, Hilary Osborne (4/3/10)
Data
For the Halifax data, see
Halifax house Price Index, February 2010
See also Lloyds Banking Group Housing Research home page and in particular the Historical House price Data link
Questions
- What is stamp duty and how did an increase in the threshold aim to stimulate the housing market? Can this be illustrated diagramatically?
- Illustrate how house prices are determined using a demand and supply diagram.
- One factor that had caused house prices to rise was a lack of supply. Show this on your diagram. Are there any factors that make price fluctuations even more severe, following changes in the demand and supply of houses?
- Illustrate how the imbalance of demand and supply has begun to even out.
- Why is the state of the housing market such an important factor in determining the strength of the economy?
- How do interest rates affect the housing market? Think about the impact on mortgages. Why have mortgage approvals fallen?
- To what extent has the weather contributed to falling house prices?
In several of the posts in recent months we’ve considered the possible use of a Tobin tax as a means of reducing speculation in financial markets and possibly raising substantial amounts in tax revenue. See, for example: Tobin or not Tobin: the tax proposal that keeps reappearing and A Tobin tax – to be or not to be?. Although James Tobin’s original proposals referred to a tax on foreign exchange transactions, recent proposals have been to impose such a tax on a whole range of financial transactions.
Added impetus has been given to the move to adopt Tobin taxes by the publication of a video from an organisation known as the Robin Hood Tax Campaign. To quote the site “The Robin Hood Tax is a tiny tax on bankers that would raise billions to tackle poverty and climate change, at home and abroad. By taking an average of 0.05% from speculative banking transactions, hundreds of billions of pounds would be raised every year. That’s easily enough to stop cuts in crucial public services in the UK, and to help fight global poverty and climate change.”
So would this version of a Tobin tax work? The following videos and articles examine the proposal.
Actor Nighy backs Robin Hood banking tax campaign BBC Breakfast News (10/2/10)
Robin Hood banking tax ‘would raise billions’ (includes article) BBC Breakfast News (10/2/10)
Robin Hood tax on banks ‘would raise billions’ BBC News, Richard Westcott (10/2/10)
Celebrities launch ‘Robin Hood’ tax campaign BBC News, Hugh Pym (10/2/10)
Richard Curtis and Bill Nighy team up in new film urging Tobin tax on bankers (includes article) Guardian, Nick Mathiason (9/2/10)
Articles
Robin Hood tax offers a way to deal with our pressing problems Guardian letters (10/2/10)
Call for ‘Robin Hood tax’ on banking transactions Independent, James Thompson (10/2/10)
Joseph Stiglitz calls for Tobin tax on all financial trading transactions Telegraph, Edmund Conway (5/10/09)
I’m happy to play my part in the great Robin Hood Tax Telegraph, Bill Nighy (9/2/10)
The world’s greatest bank job! Ethiopian Review, Ian Sullivan (10/2/10)
Robin Hood tax could shrink currency markets by 14% ShareCast (10/2/10)
Don’t leave Greece to face the speculators alone Guardian, Larry Elliott (9/2/10)
Global support for a tax on banks is growing, says Gordon Brown Guardian, Helen Pidd (11/2/10)
Global bank tax near, says Brown Financial TImes, George Parker and Lionel Barber (10/2/10)
Get behind Robin Hood Guardian, Austen Ivereigh (19/2/10)
Questions
- Explain how a ‘Robin Hood tax’ would work.
- How would such a tax differ from Tobin’s original proposals?
- What would determine its effectiveness in stabilising financial markets?
- Would it be effective in raising tax revenue?
- Compare this tax with other methods of stabilising financial markets.
- What considerations would need to be taken into account in setting the rate for a Tobin tax on financial transactions?
Since March 2009, the Bank of England has engaged in a process of quantitative easing (QE). Over the period to January 2010 the Bank of England injected £200 billion of new money into the economy by purchasing assets from the private sector, mainly government bonds. The assets were purchased with new money, which enters the economy as credits to the accounts of those selling the assets to the Bank of England. This increase in narrow money (the monetary base) is then able to form the basis of credit creation, allowing broad money (M4) to increase by a multiple of the increased monetary base. In other words, injecting £200 billion allows M4 to increase by considerably more.
But just how much more will M4 rise? How big is the money multiplier? This depends on the demand for loans from banks, which in turn depends on the confidence of business and households. With the recovery only just beginning, demand is still very dampened. Credit creation also depends on the willingess of banks to lend. But this too has been dampened by banks’ desire to increase liquidity and expand their capital base in the wake of the credit crunch.
Not surprisingly, the growth in M4 has been sluggish. Between March and Decmber 2009, narrow money (notes, coin and banks’ reserve balances in the Bank of England) grew from £91bn to £203bn (an increase of 123%). M4, however, grew from £2011bn to £2048bn: an increase of only 1.8%. In fact, in December it fell back from £2069bn in November.
Despite the continued sluggishness of the economy, at its February meeting the Bank of England announced an end to further quantitiative easing – at least for the time being. Although Bank Rate would be kept on hold at 0.5%, there would be no further injections of money. Part of the reason for this is that there is still considerable scope for a growth in broad money on the basis of the narrow money already created. If QE were to continue, there could be excessive broad money in a few months’ time and that could push inflation well above target. As it is, rising costs have already pushed inflation above the 2% target (see Too much of a push from costs but no pull from demand).
So will this be an end to quantitative easing? The following articles explore the question.
Bank of England halts quantitative easing Guardian, Ashley Seager (4/2/10)
Bank calls time on quantitative easing (including video) Telegraph, Edmund Conway (5/2/10)
Bank of England’s time-out for quantitative easing plan BBC News (4/2/10)
Shifting goalposts keep final score in question Financial Times, Chris Giles and Jessica Winch (5/2/10)
Bank halts QE at £200bn despite ‘sluggish’ recovery Independent, Sean O’Grady (5/2/10)
Easy does it: No further QE BBC News blogs, Stephanomics, Stephanie Flanders (4/2/10)
Leading article: Easing off – but only for now Independent (5/2/10)
Not easy Times Online (5/2/10)
Quantitative easing: What the economists say Guardian (4/2/10)
Questions
- Explain how quantitative easing works?
- What determines the rate of growth of M4?
- Why has the Bank of England decided to call a halt to quantiative easing – at least for the time being?
- What is the transmission mechanism whereby an increase in the monetary base affects real GDP?
- What role does the exchange rate play in the transmission mechanism?
- Why is it difficult to predict the effect of an increase in the monetary base on real GDP?
- What will determine whether or not the Bank of England will raise interest rates in a few months’ time?
It’s not just the roads in the UK that were frozen, as the Bank of England unsurprisingly decided to keep interest rates frozen at 0.5%. Furthermore, many economists do not expect to see interest rates increase for some time. Roger Bootle has predicted that rates could stay low for up to 5 years and this will contribute to a continuing weak pound and spell further trouble for importers and their customers.
The Bank of England also left its money-creation programme of ‘quantitative easing’ unchanged, but next month it will have to decide whether to extend quantitative easing beyond the limits of £200 billion that it set back in November.
Whilst we are supposedly beginning our economic recovery – with 2009 quarter 4 figures showing the first rise in output since the first quarter of 2008 – its strength remains questionable. Indeed, the rise in output in the last three months of 2009 was a mere 0.1%. So how important are interest rates in helping to sustain the recovery? Can they really pull us out of the recession by remaining at just 0.5%? Read the articles below which look at freezing interest rates and quantitative easing.
FTSE unaffected by interest rate decision In the News (7/1/10)
Freeze on UK interest rates BBC News (7/1/10)
Bank of England may raise interest rates as soon as March, leading economist predicts Telegraph (7/1/10)
Interest rates and quantitative easing on hold Guardian, Larry Elliott (7/1/10)
Bank of England extends quantitative easing by £25bn – but is it enough? Guardian, Larry Elliott (5/11/10)
Questions for QE BBC News blogs, Stephanomics, Stephanie Flanders (7/1/10)
Interest rates could stay low for 5 years, says Bootle BBC News (7/1/10)
Questions
- How do low interest rates contribute to a weak pound? How does this affect exporters and importers?
- What is quantitative easing? Should the QE programme be extended? What are the arguments for and against this in terms of economic recovery and public debt?
- How much of an impact do you think the recession will have on government policy over the next few months?
- Explain the transmission mechanisms by which changes in interest rates affect the goods market.
- If the Bank of England were not independent, what do you think would be happening to interest rates?
President Obama has proposed a major reform of the US banking system. This follows on from the proposed levy to be imposed on banks’ assets announced a few days ago (see “We want our money back and we’re going to get it”).
There are two elements to the new proposals. The first is to limit the size of banks’ market share. Currently, banks’ deposits are not permitted to exceed 10% of total retail deposits in the USA. This 10% limit would be extended to cover wholesale deposits and other liabilities. The idea is to reduce concentration and increase competition. At present the largest four banks hold over half the total assets of banks in the USA.
The second element involves separating casino banking from retail banking. This would be achieved by barring retail banks from owning or investing in private equity or hedge funds or from engaging in ‘proprietary trading operations’. As the second BBC article below states:
Proprietary trading involves a firm making bets on financial markets with its own money, rather just than carrying out a trade for a client in which only the client’s money is at risk.
This comes close to restoring the Glass-Steagall Act, which was repealed in 1999. The Act, which was passed in 1933 in the wake of the 1929 Wall Street cash and the subsequent Great Depression, separated commercial banking and investment banking. It was designed to prevent customers’ deposits being exposed to the riskier activities of investment banking.
What have been the reactions to President Obama’s announcement? Are these reactions justified? Will the proposals prevent another banking crisis and credit crunch? The following articles explore these questions.
Obama hammers the banks Financial Times, Tom Braithwaite and Francesco Guerrera (22/1/10)
Obama pushes new bank regulation (including video) BBC News (21/1/10)
Q&A: Obama’s bank curbs BBC News, Martin Webber (21/1/10)
Obama announces dramatic crackdown on Wall Street banks (including video) Guardian, Jill Treanor (21/1/10)
Barack Obama bank reforms: Trying to fix a broker society Telegraph, Louise Armitstead and Helia Ebrahimi (23/1/10)
Glass-Steagall lite The Economist (22/1/10)
Obama’s Plan Finally Attacks “Too Big to Fail” The Huffington Post, Neil K. Shenai (21/1/10)
Obama Sizes Handcuffs For Banks Forbes, Liz Moyer (21/1/10)
Obama’s Showdown With Wall Street Forbes, Richard Murphy (22/1/10)
President Obama shows the way Independent (23/1/10)
Wall Street’s $26m lobbyists gear up to fight Obama banks reform The Observer, Andrew Clark (24/1/10)
Obama’s drawn first blood – now it’s the UK’s turn The Observer, Ruth Sunderland (24/1/10)
Gordon Brown to push for ‘Tobin tax’ after Wall Street crackdown Guardian, Larry Elliott and Jill Treanor (22/1/10)
Myners: UK does not need to copy Obama banking reforms Guardian, Andrew Clark, Jill Treanor, Paul Owen (22/1/10)
Debate on London’s banking system The Observer, Will Hutton and Boris Johnson (24/1/10)
What Obama’s bank reforms really mean BBC News blogs, Peston’s Picks, Robert Peston (22/1/10)
Davos 2010: Central bankers seethe behind closed doors BBC News, Tim Weber (29/1/10)
Questions
- What are the arguments for and against separating retail banking from the more risky elements of investment banking?
- Should banks be allowed to fail? Explain your answer and whether it is necessary to distinguish different types of banks.
- Would putting a limit on the market share of banks prevent them from achieving full economies of scale?
- Why did banking shares fall after President Obama’s announcement? Was this a ‘good sign’ or a ‘bad sign’?
- What is meant by the ‘broker-dealer’ function of banks? Explain each of the specific types of broker-dealer function.
- Compare recent UK measures to control banks with those in the USA.