Here is a rough transcription of the presentation for people who are hard of hearing. Apologies for the lack of grammar, I am working to improve the automated transcriptions -
hello new week and I’m going back to the old East CD dock that I quoted last week and for this we go to dig out some Europe information so OECD monetary transmission is not working in many countries now monetary transition and the fact that it’s not working is the excuse that Mario dried the boss of the ECB is using directly to justify the new arm idea of buying other countries bonds which is or was otherwise in the legal thing to do but he part of the ECB’s arms things that it must do is ensure that monetary transition works alright and the OECD have probably put this in on purpose was all part of the excuse the druggie to go on buying out that forget it’s not just on buying just when he thinks about when it when he thinks it’s a good idea the country should it be Spain or Italy have got to go to Brussels and sign up for this sort of thing then got to sign up for oversight from the European Central people are and probably the IMF another troika to come in and look at their books and tell them what to do such not an absolute giveaway by the ECB but as long as they sign up and it looks like they’re going to agree to whatever there’d been told to do the central bank then will buy their bonds and try and break drive their interest rates down but will in fact driver interest rates down because and a central bank with unlimited money with the minutes said that they will do unlimited buying will drive interest rates down because they have the power they have the power anyway that and then it runs into a lot of confusions about which bonds they can to buy but where will we yet to see any of this put into motion right so what we got monetary transmission is not working so this was the excuse go the top is Portugal and we got euro area cost of borrowing interest rates in percent on what would we would think would be kind of normal is that different countries are having different interest rates when their lending to their peoples in those countries I Portugal if you happen to be in Portugal you have to pay an interest rate of about 7% France 2 1/2% and the others stretched out in between now we think because they’re different European countries that this is a perfectly normal and natural but it’s being used as an excuse that monetary transmission is not working and the ECB can come in and save the day okay this move onto another OECD one bank deposits are contracting in some euro area countries now this would be more of a panic for a central bank Central bank loan lender of last resort our lender of last resort is to lend to banks whether the bank run for my mind this time the real thing of the lender of last resort is to buy government bonds is not lender of last resort that the new made up mean anyway but you can imagine that there are bank runs in purple green red and the top blew their so Italy is not too bad but Spain Portugal Ireland and Greece since 2011 money has been coming out of bank accounts there are bank runs in those countries and you can imagine that that is what gets the central bank very agitated and that will be behind their real thinking for why they’re going to come in and buy bonds it’s not so much the monetary transmission from the first slide that kind of we expect different interest rates in different countries although there are in the Eurozone okay another thing slide three where the central bank will be very worried is more capital is required across European banking system are indicative estimates of additional capital required over mid-2012 levels to bring core tier 1 capital up to benchmark of only 5% when it got to eventually be brought up to 8% and people are like me think it should is no reason it shouldn’t be 25% anyway be consider really big chunky ones at the that the that the right there France am Holland and Germany have to bring their tier 1 capital what looks like up 10% to bring it to 5% I would say that with making intent than technically insolvent but I’m obviously not quite understanding this but it’s an sufficient to show us that that and know the reason that the central bank wants to come in and calm everything down because not only are bank runs happening on the entire bank are systems of entire countries that there are other countries actually strangely where a lot of the accounts are running to France and Germany and Holland where their capital is nowhere near what it needs to be for the Basel 345 or whatever it might be or at least what the central bank would want it to be a want them to have more capital and of course it will be rising with the deposits but when you get a deposit you also get the liability so you can imagine that’s behind why the central bank is moving is because the banks are still in dreadful trouble in Europe right at finish with this one from Bloomberg off arms fed information this is kind of how we got here for Europe monetary policy needs in euro area is diverging headed now are will start at the top of purple line pallets go fully the timeline with got it goes back to the start of the Euro gap when the euro was introduced arm 01 2001 so that’s the amount of time that we got and when the purple line and concede dies down across the other colours that’s the start of the great recession all when the credit crunch started when they realised it was something dreadfully wrong link to the purple line is the Taylor rule prescribed Spanish rate come and explain the it’s the red line is the Taylor Ruud rule prescribed euro area rate that euro area as a whole rate the green line is for Germany Taylor rule prescribed and the blue line is what the central bank actually did so can’t explain Taylor all sure you’ll heard of it I think it’s explained at the top there over the purple line where the interest rate that is proscribed prescribed said by the central bank should be one plus one and half times core inflation -1 times employment unemployment gap I don’t know who I think it’s even slot is a lot more complicated than that but there are basically two or three are for GDP was in their two or three amp factors to be taken into account by a central bank says John Taylor who invented the role John Taylor who might actually be made Fed chairman if Romney gets elected and then if that happens it abandon hope everybody anyway he invented this thing 25 years ago or maybe longer or I be less whether these small these things to be taken into account inflation are unemployment and I for GDP was in there but there are obvious because it sees an economist it’s got lots of stuff I don’t understand it’s simple enough and if the central bank said that this is what there were going by the entire market would know exactly what the arm interest rate would be at any particular time all they would have to know where the factors involved and project out what the FAQ how the factors were going to change which would be an inflation the unemployment gap in GDP as long as you got those projections you could work out what the central banks interest rate would be now most people said this is a good idea and if you look at the US Taylor rule basically it goes a lot below where it should have been it was lower than it should have been at the end of Britain Greenspan’s time through that to that the to thousands it was lower than if you take it back and back and back the kind of runs where people say yes that’s a good idea at about where it should be an Greenspan had it to low during the two thousandths so everyone agrees that it’s too simplistic that as a simplistic rule of thumb it’s a very good way to judge what inch central bank should set as the interest rate forgetting that should central banks even set interest rates okay so that understood now that started the bottom arm green that Taylor rule prescribed German rate going back to the start of the euro was and was very it was a lot lower than where it was set it was set as the blue number the Germans would have always wanted that interest rate lower it should have been there wouldn’t want lower the should of been lower for Germany it was always slightly to Haifa Germany and that was slowing down the German economy because the interest was rate was too high for it it should have been actually lower for Germany so if you would follow the red line in the blue line they kind of run together the red line is for the euro area as a whole so we can say that the central bank the European Central bank did follow the Taylor rule for the euro area as a whole can look it does track it goes up and down as it goes with the euro area police always downwards its always on the side of Germany it’s always kind of its following the euro area average where it should be put -1 or a half a percent to wear Germany would like it before the credit crunch started in wait for that time during the two thousandths so it was when it should have been for the average of the euro but with a tendency towards Germany but then we look at Spain and for Spain the Taylor rule says it should have been wildly higher order for awful lot higher now if it was arm attended the wreck above the red line a tendency towards Spain it still would have been an awful lot to low for Spain and basically what happened is interest rates in Spain and other peripheral countries for up to the credit crunch had interest rates which were Taylor rule far far too low and they just got tempted and is succumbed and just borrowed and spent and borrowed and spent for all that time from 2001 to 2008 eight borrowed and spent and borrowed and spent and cranked up everything and that’s what caused the great splitting apart now of the euro that was kind of explained in other things are said and the other charts but that’s what happened because the ECB kind of follow the Taylor rule book with a tendency to bend it towards Germany if anything and there were other countries that were outliers on the average where the interest rate should’ve been an awful lot higher and they just got horrendously out of control as in the United States they did where Greenspan and the 90 The interest rate low what the Taylor rule said it should have been and everyone gets excited and borrows too much and then it blows up and that’s what with got around the world interest rates have been to gather their although and people have been people and have succumbed to the temptation of it all at it by
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