Gareth Vaughan on the lack of a positive impact from QE on bank lending, everything is going to be repriced, stealing from our kids, the degrowth movement, reported COVID-19 deaths & excess deaths

This Top 5 COVID-19 Alert Level 3 special comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

As I write this we in Auckland have been in COVID-19 Alert Level 3 lockdown for a week. Disappointing as it is to be back in Level 3, it feels like most of us are battling on, familiar with the territory as we are from our experiences earlier in the year. Hopefully those of you in Level 2 are enjoying your greater freedoms and we'll be rejoining you soon.

Accurate pic.twitter.com/080v3xV496

— ian bremmer (@ianbremmer) August 13, 2020

1) 'No evidence of a positive impact of QE through the bank lending channel.'

A working paper from the Bank of England (BOE) asks:

How do banks adjust their balance sheets in response to unconventional monetary policies, and what are the implications for the real economy?

The paper's title is; Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? The case of the UK. The authors are Simone Giansante, Mahmoud Fatouh and Steven Ongena.

The authors note the Bank of England's Monetary Policy Committee (MPC) didn’t expect "strong transmission" of its asset purchase program (APP) through the bank lending channel. Nonetheless given the Reserve Bank of New Zealand (RBNZ) is now pursuing quantitative easing (QE), the report's findings are of interest here. 

We analysed the reaction of the balance sheets of UK banks to the APP of the BOE. The comparison of lending behaviour of treated or QE banks with a control group that is unaffected by the QE treatment helps uncover the mechanisms by which monetary policy operates and its potential real economy implications.

We used a unique confidential dataset of APP that identifies QE treated banks, i.e., those which received reserves injections through APP. The MPC didn’t anticipate strong transmission of APP impact through the bank lending channel. In line with that, our difference-in-differences exercise finds no evidence of a positive impact of QE through the bank lending channel.

Treated banks appear to have reacted to QE reserves injections by reallocating their assets towards those asset categories with low risk weights (government securities), promoting carry trade activity. These results are robust even when controlling for demand-side changes using loan level data and borrower firm fixed effects.

The combination of lower gilts yields, resulting at least partly from QE and risk-based capital requirements might have given capital-constrained banks the incentives to shift their portfolios into high-yielding assets with the low risk weights in an attempt to optimise the use of regulatory capital. Thus, the presence of risk-weighted capital requirements could limit the direct QE impact via the bank lending channel, as they may induce inadequately capitalised banks to substitute away from lending to the real economy.

These requirements may have reinforced the concentration of investment in sovereign debt, contributing to the decline of market values of many EU banks involved in carry trade operations right before the EU sovereign debt crisis (Acharya and Steffen, 2015). As it treats symmetrically, the introduction of a regulatory leverage ratio is likely to reduce banks’ incentives to invest in assets with low-risk weights, such as sovereign bonds.

If the policy objective is to provide an additional boost to the economy through supporting bank lending in a time of stress and uncertainty, it might be valuable consider using alternative credit easing tools. This may include programs such as Funding for Lending Scheme (FLS), Term Funding Scheme (TFS) and Term Funding Scheme with additional incentives for SMEs (TFSME). Other alternatives include guaranteed lending to small businesses, with no access to capital markets, or allow access to central bank balance sheet, maybe through a central bank digital currency.

Our findings also encourage policy makers to pay attention to the type of asset purchased via the QE programs in relation with banks’ exposures (Rodnyansky and Darmouni, 2015). This is key to achieve an effective transmission of QE impact to the real economy via bank lending.

Announcing its large scale asset purchase program, or QE, in March, to be worth up to $30 billion over 12 months, the RBNZ said: "The negative economic implications of the coronavirus outbreak have continued to intensify. The [Monetary Policy] Committee agreed that further monetary stimulus is needed to meet its inflation and employment objectives." Announcing the latest increase in its QE program last week, the RBNZ said it was being increased to up to $100 billion by June 2022 "so as to further lower retail interest rates in order to achieve its [the RBNZ's] remit." (Emphasis mine).

The RBNZ also said: "Monetary policy will continue to provide important economic support in the period ahead. Its effectiveness is evidenced by retail banks’ lower funding costs and lending rates, which are benefiting businesses and households. It remains in the long-term interest of banks to fully pass on the benefits of lower funding costs to their customers." (Emphasis mine).

2) 'Everything is going to be repriced' after 'the greatest demand destruction of our lifetimes.'

We sometimes run articles by John Mauldin of Mauldin Economics. We didn't run this one but it's well worth a read. Mauldin's primarily writing about the US economy. But given it's the world's biggest, what happens there remains of interest and importance to us. And the outlook's not good. 

Here's one thing I think we can all agree on…

This recession/depression is unlike anything we have experienced in the history of the US.

I am at a loss to find anything like it in world history. That is because we have never experienced an economic disaster—and that’s the correct phrase—like we are witnessing today.

As this type of article tends to do, he eventually gets onto what economic recovery may look like.

I frankly think it is misleading to draw a graph and say this is what the economic recovery will look like.

Talk about a V- or U-shaped recovery is simply silly. Every one of the “bodies” I mentioned above will have a significant recovery impact. We don’t know how they will interact.

My guess is that we are going to see several different economies. Heather Long (a fellow Camp Kotok regular) illustrates this for The Washington Post.

This dichotomy is evident in many facets of the economy, especially in employment. Jobs are fully back for the highest wage earners, but fewer than half the jobs lost this spring have returned for those making less than $20 an hour, according to a new labor data analysis by John Friedman, an economics professor at Brown University and co-director of Opportunity Insights.

If we have to choose a letter for the economic recovery, maybe it should be a “K.” Some go up and others go down.

He goes onto argue that this crisis is going to change the way we live. I'm sure he's right about this. But I'm not convinced all the changes we're experiencing will be permanent, not clear on which ones will be temporary, and which changes are yet to emerge. Being adaptable and flexible is now more important than ever.

This is going to change the way we live. We have already seen savings increase, not unlike our parents and grandparents during the Great Depression. It is going to change spending and saving habits. It is going to force businesses and entrepreneurs to adjust in ways that they never dreamed they would need to.

I think it is fair to say that many of us have looked at our lives and decided we don’t need quite as much “stuff” as we did before. We are not going to hunker down in caves, but we may pack them with less paraphernalia.

Each one of those choices represents a buying decision that impacts some entrepreneur who provided that product.

This crisis is simply the greatest demand destruction of our lifetimes. It will come back, but it is not going to come back to what it looked like in 2019. Our future economic buying decisions are going to be different.

Everything, I mean everything, is going to be repriced and thought through. You can’t take anything for granted. Inflation numbers and measures are going to be warped for at least a few years. We are using old tools to measure a new economy. We are going to have to develop new models to appropriately analyze the world we now live in.

How do we value the price of a home or apartment? I don’t think it is unreasonable to expect 10% unemployment, or something close to it, in the middle of 2021. That is going to affect prices up and down the housing value chain.

How do you value retail and office space? If your tenants are gone, do you pay the mortgage? Hotels will come back, eventually, but who is going to own them? The old private-equity owners or the new ones? At what price? We already knew we had too many retail stores. What is the correct number in the future? How will malls and commercial space be repurposed?

Hundreds, if not thousands of planes are sitting on the tarmac. Who is going to own them?

There are thousands of scenarios playing out in thousands of industries all over the world. What they have in common is that…

Everything is going to be repriced.

That makes me very uncomfortable.

Cartoon: Shaun Yeo, Otago Daily Times.

3) What we’ve stolen from our kids.

Writing in The Atlantic Chavi Eve Karkowsky, a doctor and mother of four school-age kids, delves into the impact on them of not going to school for months on end. I recently spoke to a friend in New Jersey whose kids haven't been to school since March. The breaks here obviously hasn't been as long. But as a parent, I hear where Karkowsky's coming from. If we hadn't moved from Level 3 to Level 2 in May I was ready to ask David C for some time off. I felt my eight year-old needed some attention as lockdown dragged on with his parents busy working from home and striving to home school him and his older brother.

But even for children whose needs are less physical, school is often their entire external world. It is a place where their relationships are not dependent on their parents, where they try and fail and then try and succeed. School is where they make friends and mortal enemies and friends again. School is where my children are not my daughter or son; they are themselves, figuring out who that is every day.

I am not a developmental psychologist; I’m just a mom. But it has always seemed to me that headlong, unstoppable forward development is the normal state of a growing child. In the same way that a shark that is alive must swim, a child who is alive needs to be in a constant state of movement and change. When the forward motion stops, something is very wrong.

With no school, much of that progression, that learning, that schoolyard negotiation—in short, much of a kid’s life outside their house—disappears. 

Meanwhile elsewhere in America...

Just heard from a teacher friend prepping for the school year: they've been told they can't leave classroom doors open to promote better air circulation, because that would circumvent the school's automatic locking system that's in place for active shooter situations.

— Gabriel Debenedetti (@gdebenedetti) August 17, 2020

4) The degrowth movement, - is less really more?

Okay, strictly speaking this isn't a COVID-19 related story. But following on from the massive changes we're facing according to John Mauldin, it fits. Bloomberg's Akshat Rathi talks to Jason Hickel, an economic anthropologist at Goldsmiths University of London, about the degrowth movement. Hickel has a book called Less in More: How Degrowth Will Save the World.

Rathi explains what Hickel and other scholars who share his views want.

These scholars first want the world to reconsider the value of gross domestic product as a metric for progress, as GDP may still be rising even as inequality worsens and overall well-being falls. Second, they contend that a sustainable planet must find a way to live within certain limits for things like climate change, ocean acidification, and biodiversity loss, called “planetary boundaries”—and that rich countries are abusing these boundaries by consuming too many resources. And third, they question the wisdom—and even the morality—of most climate models looking to keep temperature increases below 1.5°C, which require the use of negative-emissions technologies that draw down carbon dioxide from the air and are still in early stages of development.

But suggests there are plenty of gaps in the theory.

Some economists have shown that well-being does keep rising along with GDP. Technologists have shown that we are eking out more economic gains from less material use. Others say that the idea of degrowth goes against the deep-seated human desire to have it at least as good as one’s neighbors—an impulse that has geopolitical consequences, as well.

Rathi starts by asking Hickel what people get wrong about degrowth.

When people first encounter the idea, they think this sounds like a recession. In fact, degrowth is the opposite of recession in some key respects. A recession is what happens when a growth-oriented economy stops growing. Everything falls apart. People lose their jobs. It’s a human disaster.

But degrowth is building an economy that does not require growth in the first place, which can deliver high levels of human flourishing without growth. In a recession you see inequality rise, you see joblessness rise. In degrowth, you have a reduction of inequality. You have full employment, which you achieve through a shorter working week and a job guarantee.

A lot of people when they initially encounter the concept of degrowth, they think that sounds bad because we have so much poverty in the world. I have to point out this is just for high income countries that are exceeding planetary boundaries and need to reduce excess material and energy throughput.

5) Reported COVID-19 deaths vs the likely real number.

The Financial Times has a COVID-19 section that's not behind its paywall, with this page particularly useful. Among other things the FT undertakes the grim task of tallying the COVID-19 death toll. The FT says whilst more than 766,000 people are known to have died from the virus globally, the real number is likely much higher.

There are concerns, however, that reported Covid-19 deaths are not capturing the true impact of coronavirus on mortality around the world. The FT has gathered and analysed data on excess mortality — the numbers of deaths over and above the historical average — across the globe, and has found that numbers of deaths in some countries are more than 50 per cent higher than usual. In many countries, these excess deaths exceed reported numbers of Covid-19 deaths by large margins.

The picture is even starker in the hardest-hit cities and regions. In Ecuador’s Guayas province, there have been 10,000 more deaths than normal since the start of March, an increase of more than 300 per cent. London has seen overall deaths more than double, and New York City’s total death numbers since mid-March are more than four times the norm.

There are several different ways of comparing excess deaths figures between countries. In absolute numbers, more people than would usually be expected have died in the in the US than in any of the other countries for which recent all-cause mortality data is available.

6) Mortgage deferral volumes similar in the North and South islands.

On Wednesday I published a story in which figures from credit bureau Centrix put 11.9% of mortgages in Queenstown and 8.9% of mortgages in Rotorua on deferral. Other cities Centrix highlighted were Whangarei with 8.7% of mortgages registered as being on deferral, Taupo with 8.4%, and Tauranga at 7.6%. In the major centres 3.8% of Wellington mortgages are registered as being on deferral, 6.8% in Auckland, and 6.3% in Christchurch.

Now illion, another credit bureau, has provided me with the chart below. It shows a very similar rate of mortgage deferrals in the South Island as the North Island.