Did the EU cental bank help cause the recession ?

jimmmy

When I got reminded today about how as recent as last summer the EU central bank put up interest rates ( instead of taking them down ....when the dogs in the street knew what was coming ) ....it reminded me of the criminally low interest rates we had during the boom years. eg in 2004 many people had mortgages at less than 3%, way below inflation. No wonder people borrowed to put in to property. In 97, 98, 00, 02, 03 etc people who had left money in the bank saw it eaten away by inflation. In an effort to preserve their savings, and encouraged in this country by tax incentives like section 27, many jumped on to the property bandwagon. Would the property bubble have got as bad if interest rates had been higher then ? That was the realistic thing to do, all across Europe. But no, in 2004, the Germans wanted interest rates left low, because they felt their economy was in recession. If interest rates were say 6% then, I am sure people would not have borrowed so much, the banks would not have lent as much, property would not have gone up as much so quick...and we would not be in the mess we are in.

Another thing which helped cause the recession I feel was the oil spike ....I remember Bush a year or so ago warning the OPEC that if oil prices kept rising so much there was a real threat of a world recession...

mike65

To a degree, a policy of cheap money has been what has allowed the current crap to come about, no worries about a 400,000 starter home when mortage rates are so low etc. That doesn't excuse failings elsewhere of course.

The ECB was clearly not reading the runes as it was only looking at inflation (which is its raison d'etre after all) and saw potential upward pressure on that with the leap in comodities.

Amberman

I'd put the split of blame at....ill fitting interest rates....70%.

Local factors like tax breaks....30%.

So yeah...pretty much IMO...it was their fault a lot, but we cant really blame them. The reality of the EU came home to roost. Its more concerned with Germany it is with Ireland...which makes perfect economic sense from the point of view of Brussels. Gotta look after the big economies...right?

A perfectly sensible strategy.

Pity for us though.

Lefournier

With hindsight it may be that the ECB should have lowered interest rates faster, but what level of interest rate do you think we in Ireland would face now if we were not part of the Eurozone?

Amberman

I agree....I think they're artificially low too.

And thats how we got here.

K-9

jimmmy wrote: »

When I got reminded today about how as recent as last summer the EU central bank put up interest rates ( instead of taking them down ....when the dogs in the street knew what was coming ) ....it reminded me of the criminally low interest rates we had during the boom years. eg in 2004 many people had mortgages at less than 3%, way below inflation. No wonder people borrowed to put in to property.

The rises of 2006 didn't help. Cowen substantially increased Mortgage Interest Relief in December 06 against most advice. He was correct to leave Stamp Duty alone, despite McDowells promises. Giving Interest relief of up to €20,000 a year (€1,667 a month) to First Time Buyers is ridiculous, a sign of our property bubble.

We had a property bubble from at least 04. That bubble was going to bust, interest rate rises or not.

In 2007, First Time buyer affordability increased.
http://www.ebs.ie/site/all/EBS,%20DKM%20and%20Irish%20property%20buyer%20publish%20the%20first%20affordability%20index%20of%202008?opendocument

The problem was the first signs of the sub prime crisis showed during 2007. Despite more affordability, banks became reluctant to lend. McDowells Stamp Duty debacle didn't help either during 06.

In summary, yes the Interest Rate rises didn't help, but as shown by Cowens increases in Interest Relief and McDowells Stamp Duty suggestions, we had the power to offset those rises.

jimmmy wrote:

In 97, 98, 00, 02, 03 etc people who had left money in the bank saw it eaten away by inflation. In an effort to preserve their savings, and encouraged in this country by tax incentives like section 27, many jumped on to the property bandwagon. Would the property bubble have got as bad if interest rates had been higher then ? That was the realistic thing to do, all across Europe.

Probably not. Then again banks probably would have just increased lending and affordability limits and introduced 100% mortgages anyway, as they did with very little regulation. The other thing is some economies chose to concentrate on construction like Ireland and Spain. Germany and France didn't. Having at least 15/20% of your economy dependent on construction isn't good. Getting 20/25% of your Tax Revenues from Capital and Property taxes isn't good planning either. All this was our own fault, not the ECB's.

jimmmy

K-9 wrote: »

We had a property bubble from at least 04.

Sure , but my point is that if interest rates were set at a level where people were encouraged to save instead of borrow, the bubble would not have got as big. I know govt inteference in section 23/ 27 etc, and the way they continually extended deadlines , did'nt help. I do remember in 01, 02, 03, 04 etc people who had money in the bank seeing it almost wiped out by inflation, and everyone who had a few bob at all was encouraged to put it in to property.....seeing as it was going up at 20% and you could borrow money at less than 3% why not ?

Scofflaw

jimmmy wrote: »

Sure , but my point is that if interest rates were set at a level where people were encouraged to save instead of borrow, the bubble would not have got as big. I know govt inteference in section 23/ 27 etc, and the way they continually extended deadlines , did'nt help. I do remember in 01, 02, 03, 04 etc people who had money in the bank seeing it almost wiped out by inflation, and everyone who had a few bob at all was encouraged to put it in to property.....seeing as it was going up at 20% and you could borrow money at less than 3% why not ?

There's certainly research that suggests as much. On the other hand, interest rates are still low, but house prices - and the economy - have collapsed, so presumably there's a bit more to it than that.

cordially,
Scofflaw

K-9

jimmmy wrote: »

Sure , but my point is that if interest rates were set at a level where people were encouraged to save instead of borrow, the bubble would not have got as big. I know govt inteference in section 23/ 27 etc, and the way they continually extended deadlines , did'nt help. I do remember in 01, 02, 03, 04 etc people who had money in the bank seeing it almost wiped out by inflation, and everyone who had a few bob at all was encouraged to put it in to property.....seeing as it was going up at 20% and you could borrow money at less than 3% why not ?

The Irish property obsession doesn't help either.

The money could have been used for start ups etc. but it wasn't!

K4t

Does this prove a significant failure of the EMU? That it doesn't take into account the economic situations in seperate countries????

K-9

K4t wrote: »

Does this prove a significant failure of the EMU? That it doesn't take into account the economic situations in seperate countries????

A disadvantage I'd say.

Failure to me would be a country like Iceland.

Économiste Monétaire

K4t wrote: »

Does this prove a significant failure of the EMU? That it doesn't take into account the economic situations in seperate countries????

That's why you consider such things as optimal currency area theory before expanding the monetary union. The ECB does factor heterogeneity between states into decisions, that's why we use multi-country models in conjunction with area wide models. It doesn't 'prove' anything, except that banks failed to allocate credit, collectively, in an efficient manner.

jimmmy

Scofflaw wrote: »

There's certainly research that suggests as much. On the other hand, interest rates are still low, but house prices - and the economy - have collapsed, so presumably there's a bit more to it than that.

cordially,
Scofflaw

House prices have collapsed because they were allowed to grow like a bubble......had interest rates encouraged peoople to save instead of borrow for property, then they would not have grown as much. Those who saved - and saw their little savings getting little or no interest, even before dirt tax, and certainly failing to keep up with inflation in '03, '04 etc - were laughed at. Of course the govt encouragement to buy property did not help ( section 23 / 27 tax incentives, telling us we were one of the richest countries...and to go off + commit suicide if we disagreed, as the Taoiseach said in Letterkenny ) either.
The banks are in trouble because of the property collapse. Because the banks are in trouble the taxpayer had to stump up. ...taxes go up...jobs go....plus of course confidence is gone. Our economy which was built on the receipts from the construction boom ( stamp duty etc ) has, as you correctly say, collapsed. Most of the stuff sold in our shops comes from China. Nearly all of our exports are from foreign owned firms. Why would our economy not be in trouble ? Thats just how I see it, maybe I am wrong.

K-9

jimmmy wrote: »

House prices have collapsed because they were allowed to grow like a bubble......had interest rates encouraged peoople to save instead of borrow for property, then they would not have grown as much. Those who saved - and saw their little savings getting little or no interest, even before dirt tax, and certainly failing to keep up with inflation in '03, '04 etc - were laughed at. Of course the govt encouragement to buy property did not help ( section 23 / 27 tax incentives, telling us we were one of the richest countries...and to go off + commit suicide if we disagreed, as the Taoiseach said in Letterkenny ) either.
The banks are in trouble because of the property collapse. Because the banks are in trouble the taxpayer had to stump up. ...taxes go up...jobs go....plus of course confidence is gone. Our economy which was built on the receipts from the construction boom ( stamp duty etc ) has, as you correctly say, collapsed. Most of the stuff sold in our shops comes from China. Nearly all of our exports are from foreign owned firms. Why would our economy not be in trouble ? Thats just how I see it, maybe I am wrong.

That is all caused by ourselves.

France and Germany haven't got property crashes etc. etc.

Carlow52

http://ec.europa.eu/internal_market/finances/committees/index_en.htm


leads to the following page
Financial Markets supervision

The European Commission is launching a consultation on the improvement of supervision for the financial services sector. Following the report of the high-level group on financial supervision in the EU chaired by Jacques de Larosière, published on 25 February 2009, the Commission has announced in its Communication of 4 March 2009 "Driving European Recovery" that it intends to come forward by the end of May 2009 with a Communication setting out its proposals on the future of the EU supervisory architecture followed by specific legislative measures in autumn 2009 . Before doing so, it wishes to take into account the views of all interested parties. The deadline for submissions is 10 April 2009.

Press release (10.03.2009)
Consultation
Report of the de Larosière group

The first part of the report highlighted above is well worth reading for an analysis of where it all went wrong.

It highlights the political failure which, certainly here in Eire, is being buried by a concerted attack on the banks.

Some good ammo for the local elections when OC and his roundheads come looking for ur vote:)

Amberman

K-9 wrote: »

That is all caused by ourselves.

France and Germany haven't got property crashes etc. etc.

You're either drinking from the koolaid fountain...or clueless. Im not sure which.

Start with tenancy agreements and attitudes to debt along side historical norms in Germany and France...then get back to me.

Amberman

Scofflaw wrote: »

There's certainly research that suggests as much. On the other hand, interest rates are still low, but house prices - and the economy - have collapsed, so presumably there's a bit more to it than that.

cordially,
Scofflaw

Yes. Yes there is.

Well done you!

Amberman

Économiste Monétaire wrote: »

That's why you consider such things as optimal currency area theory before expanding the monetary union. The ECB does factor heterogeneity between states into decisions, that's why we use multi-country models in conjunction with area wide models. It doesn't 'prove' anything, except that banks failed to allocate credit, collectively, in an efficient manner.

Banks were dumb?

Wheres my journal?

K-9

Amberman wrote: »

You're either drinking from the koolaid fountain...or clueless. Im not sure which.

Start with tenancy agreements and attitudes to debt along side historical norms in Germany and France...then get back to me.

LOL, Did you read my quote, differentiating Ireland from Germany.

Still, how much do German banks have loaned to Estern European countries?

PS. Do you actually know why the French are resistant to owning property?

K-9

K-9 wrote: »

LOL, Did you read my quote, differentiating Ireland from Germany.

Still, how much do German banks have loaned to Estern European countries?

PS. Do you actually know why the French are resistant to owning property?

I am actually curious.Why are the French resistant?

K-9

Deleted User wrote: »

I am actually curious.Why are the French resistant?

One of the original property crashes was in France, about 400 years ago.

Amberman

Deleted User wrote: »

I am actually curious.Why are the French resistant?

They have unreal long term tenancy agreements...that mainly why. There are other reasons...but the law is that main one.

K-9

Amberman wrote: »

They have unreal long term tenancy agreements...that mainly why. There are other reasons...but the law is that main one.

All stems from their property crash.

We never had that, instead we had an obsession with property since Famine days.

We aren't any different in that respect, plenty of international crashes since the French one!

Amberman

K-9 wrote: »

LOL, Did you read my quote, differentiating Ireland from Germany.

Still, how much do German banks have loaned to Estern European countries?

PS. Do you actually know why the French are resistant to owning property?

Which quote? I cant see it.

As for regulations stopping bubbles...LOL

How about companies go out of business when they feck up.

Isnt that a better disencitive to stupidity/better means to allocate capital?

Krugman et al ahve come out against bailouts. They havent worked. they arent working. They wont work. Show me wher bailouts have worked and i'll back down.

Wake up!

Amberman

K-9 wrote: »

One of the original property crashes was in France, about 400 years ago.

Jez...they must not plant tulips any more either by that logic.

Amberman

K-9 wrote: »

All stems from their property crash.

We never had that, instead we had an obsession with property since Famine days.

We aren't any different in that respect, plenty of international crashes since the French one!

Is it April fools day already?

K-9

Amberman wrote: »

Which quote? I cant see it.

The very one you quoted. LOL.

I'm lost at this stage.

What's your point exactly?

PS. Can you answer my points about investor incentives and €20,000 mortgage interest relief.

Is €20,000 interest relief not a major boon to FTB'S! So big, it artrificially pumps the market.

We are chatting €2,000 a month or more mortgages, which our Govt. incentivised!

Scofflaw

Amberman wrote: »

You're either drinking from the koolaid fountain...or clueless. Im not sure which.

Start with tenancy agreements and attitudes to debt along side historical norms in Germany and France...then get back to me.

Speaking with my moderator's hat on, if you continue to refer to other posters insultingly, you'll find that he has a week to get back to you, during which you will be unable to post.

warningly,
Scofflaw

Amberman

Scofflaw wrote: »

Speaking with my moderators hat on, if you continue to refer to other posters insultingly, you'll find that he has a week to get back to you, during which you will be unable to post.

warningly,
Scofflaw

fair enough..though Im genuinely unsure...will look for more acceptable phrases in future.

Amberman

K-9 wrote: »

The very one you quoted. LOL.

I'm lost at this stage.

What's your point exactly?

PS. Can you answer my points about investor incentives and €20,000 mortgage interest relief.

Is €20,000 interest relief not a major boon to FTB'S! So big, it artrificially pumps the market.

We are chatting €2,000 a month or more mortgages, which our Govt. incentivised!

My point is that interest rates V house prices aren't a driver in Europe. Its a UK/US issue mainly....pretty much since we have such crappy tenancy laws.

Does that make sense to you now?

Ps - Like the hat

PPS - Dont really, but scoff made me say it...you would suit a peaked cap much better.

PPPS - Am I banned?

K-9

Amberman wrote: »

Jez...they must not plant tulips any more either by that logic.

Amberman wrote: »

Is it April fools day already?

Amberman wrote: »

My point is that interest rates V house prices aren't a driver in Europe. Its a UK/US issue mainly....pretty much since we have such crappy tenancy laws.

Does that make sense to you now?

Ps - Like the hat

PPS - Dont really, but scoff made me say it...you would suit a peaked cap much better.

PPPS - Am I banned?

Don't think so!

I think I see what you are getting at!

Whatever reasons, the French do not have the property obsession we have, actually, ours is probably more a land obsession, with a good bit of greed thrown in.

I've a notion even if stronger tenancy laws was there, the boom still would have happened.