Central banks colluded in an endless cycle of credit expansion

It is time they set a lead.

My daughter, who knows a thing or two about the human body, keeps on telling me “Breakfast doesn’t count”, as we sit opposite each other of a morning eating our opposing meals – macerated fruit (me) versus two chocolate croissants (her). The point – her point – is that early on in the day you could chug down a cup of duck fat without consequence because you are going to burn it off anyway as you go about your day. It’s what you eat the rest of the time that makes the difference.

If you were setting up a bank from scratch today (for convenience let’s call it Stewart Cowley Unlimited Mortgage Bank – SCUM Bank for short) you would think pretty much the same way – you could eat as much risk as you wanted at the beginning because within not very long you would burn it off – all you need is rising property values as you go about your day. For instance, if house prices were going up at 5 per cent a year for five years then the loan you made would be only 78 per cent of the value of the house. As a banker your only thought would be – "If the borrower stops paying I could sell the house and get my money back even after all the other fees – happy days. Is that a bonus I see before me?"

Do the same calculation for 7 per cent house appreciation and the value of the loan is now only 70 per cent of the house value. And don’t forget this is with a 100 per cent mortgage; make the borrower put down 20 per cent up front and, after five years, these loan-to-value ratios drop to 62 per cent and 56 per cent respectively. In other words the cushion you have as a banker from making a loss is simply enormous. You understand why it is in just about everybody’s interests, in a functioning capitalist economy, that house prices keep on rising at a more or less steady pace; banks win, homeowners win, regulators win, politicians win.

More to the point, should things go wrong for some borrowers the chances of losing the money of the people you borrowed off in the first place (depositors) is minimal and what’s more, as a bank, you don’t have to put too much money aside for a rainy day to cover any losses that may arise from bad loans.

And so the system gets bigger and bigger – depositors are blissfully unaware of the risks being piled up and banks begin to function on wafer-thin reserves of money. And why shouldn’t they? In the US on rolling five year periods house prices rose by about 5 per cent for 30 years. Here in the UK it was just under 9 per cent with barely a pause for breath. It is a situation with some risks, many virtues and even more vested interests all aligned to keep it going.

You also understand why banks and bankers don’t self-limit; experience tells them that it isn’t necessary. Setting legislation that increases the amount of money bankers put aside for a rainy day, like those being introduced by the US and under the Basel III criteria, is against their instincts and experience. It has even led JP Morgan CEO Jamie Dimon to declare them “Un-American” because the idea of control is anathema to them.

So if you really want to control bankers you have to control the borrowers. Increasing interest rates to penal levels will stop the mathematics working. But we have had a generation of central bankers that colluded with the system and invented excuses not to rail in the excesses of either the lenders or the borrowers; interest rates were kept in single digits whilst house prices were rising by double digits in the run up to the peak in 2007, bolstered by the convenient theory that risks were being smeared around the system so thinly that no one would get hurt.

In fact risk was being concentrated in the hands of a few with disastrous consequences. Alan Greenspan, the Federal Open Market Committee and Sir Mervyn King and the Monetary Policy Committee of the Bank of England are all culpable in that sense of being unwilling to dish out the harsh medicine when it was needed. It’s something that shouldn’t be forgotten as we reignite the credit cycle, especially in the US, and watch as house prices rise, once again, far above the cost of borrowing. We need a new generation of central bankers prepared to lead, not follow.

Source: Bloomberg

 



 

Photograph: Getty Images

Head of Fixed Income and Macro, Old Mutual Global Investors

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Ariana and the Arianators: "We really are like a family"

The pop star provides her fans with a chance to express themselves joyfully - their targeting was grimly predictable.

Ariana Grande’s concert at Manchester Arena on 22 May began like any other. Children and teenagers streamed through the doors wearing pink T-shirts, rubber wristbands and animal ears (one of Grande’s signature looks). They screamed when she came on stage and they sang along with every song. It was only once the music had ended, and the 20,000-strong audience began to leave the venue, that the horror began – with a bomb detonated at the main entrance.

The show was just one date on Grande’s Dangerous Woman tour, which began in Phoenix, Arizona in February, moved across the United States and Europe, and had stops scheduled for South America, Japan, Australia and Hong Kong. (Since the Manchester attack, Grande has suspended the tour indefinitely.)

Since releasing her debut album in 2013, Grande has successfully transitioned from teen idol to fully fledged pop star (all three of her studio albums have sold over a million each) with a combination of baby-faced beauty and Mariah Carey-style, breathy vocals. Her most popular records are bubblegum pop with a Nineties R’n’B influence, a combination also expressed in her fashion choices: Nineties grunge meets pastel pinks.

She entered the limelight at 16 on the children’s TV programme Victorious, which ran on the Nickelodeon channel, pursuing her musical ambitions by performing the show’s soundtracks. Many of the young people who grew up watching her as the red-haired arts student Cat Valentine on Victorious would become fans of her pop career – or, as they call themselves, the Arianators.

As she outgrew her child-star status, Grande’s lyrics became more sexually suggestive. Recent songs such as “Side to Side” and “Everyday” are more explicit than any of her previous hits. She has repeatedly insisted that young women should be able to speak openly about sex and feel empowered, not objectified.

“Expressing sexuality in art is not an invitation for disrespect,” she tweeted in December. “We are not objects or prizes. We are QUEENS.”

Grande also has a reputation as something of a gay icon. She has advertised her records on the gay dating app Grindr, headlined shows at Pride Week in New York, and released a single and a lipstick to raise money for LGBTQ charities.

Cassy, a 19-year-old film student and fan, told me the fanbase is “made mostly of young women from 14-23, but I run into guys and non-binary fans all the time.”

“It’s pretty well known that Ariana has got a LGBTQ+ fan base. She’s so outspoken about it and that’s what draws us to her. Because she’s accepting of everyone, no matter who you are.”

Like many child actresses-turned-pop star, Grande has a fan base skewed towards the young and female: teenage and pre-teen girls are by far the majority of her most dedicated supporters. A writer on the Phoenix New Times described the typical Ariana Grande crowd as “pre-tween, tweens, teens, young gay (and fabulous) men, moms with cat ears, and multiple candidates for father of the year”. The Arianators form tight-knit groups on social media. I spoke to several over Twitter after the attack.

Arena concerts, which often have more relaxed age restrictions than nightlife venues, have long been a safe space for children, young people and teenage girls. They provide a secure place for concert-goers to dress up, experiment, play with burgeoning sexualities, dance, scream and cry: to flirt with an adult life still slightly out of reach. Glitter-streaked tears stream down the unapologetic faces of fans touched by an emotion bigger than themselves. It is appalling, if grimly predictable, to see children, teenage girls and young gay men targeted by agents of regressive ideologies for expressing themselves so joyfully. On 23 May, Isis claimed the attack.

Andréa, a 17-year-old fan from France, told me about her first experience of a Grande concert. “It was incredible,” she said. “Everyone was so kind, excited and happy. We really are like a family.”

The fans are devastated by Monday’s bombing. Thousands of messages appeared on social media to commemorate those who lost their lives. “As an Arianator,” Alexandre, aged 16, told me, “I’m really sad and I’m scared.”

“We’re all taking it really hard,” Cassy said. “We’re a family and we lost 22 members of that family last night.”

Ariana began her gig in Manchester with the song that has opened every night of her current tour: “Be Alright”. In it, she repeatedly reassures the crowd, “We’re gonna be all right.” It’s a phrase that her fans are clinging to after the attack. So, too, are the lyrics of “Better Days”, by Grande and her support act Victoria Monét, which was also performed the night of the explosion. “There’s a war right outside our window,” the words go. “I can hear the sirens . . ./I can hear the children crying . . ./I’m hoping for better days . . .”

“It’s hit us all very hard because we’ve lost some of our own,” said one Arianator who runs a popular Twitter account about the tour. “People we interacted with on a daily basis. People that just wanted to have a night of fun. These are dark times, but we are looking forward to better days.”

Anna Leszkiewicz is a pop culture writer at the New Statesman.

This article first appeared in the 25 May 2017 issue of the New Statesman, Why Islamic State targets Britain

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