Wednesday, 21 October 2015

QE card - That'll do nicely

QE - Nice idea but the whole process was like trickling water down a pile of sand, most of it got lost on the way down the slope due to seepage. QE was a great way to get the banks back in shape as they collateralised their debt but did the man on the street actually see much of the benefit other than by secondary effects from those who were able to hand over a bond for cash?

One thing I find peculiar is that a bank or central bank, will buy a bond made up of an aggregation of debt no matter how small the face value, but won't buy the same size debt from one of the entities that is a component of that aggregation. All debt is, at some point in the food chain, claimable upon a company or a person. Although a company is the sum of a group of people, I list it separately to a person because a company can declare bankruptcy thus protecting the people who make up the company from personal responsibility. In this respect you are less likely to have ultimate recourse over a company than you would do over an individual. Of course a person can declare bankruptcy too, but that is a lot more personally unpleasant than walking away from a company. Ask Donald Trump, he seems to worth a bob or two after spectacular bankruptcies.

So my point is, if you are going to look at the risk of lending then lending to people should be, in aggregate, less risky than lending to companies as people own all assets anyway but are less likely to walk away as a company would. A bailiff at the door is more worrying than losing your share holdings.  The argument against this is that in lending to an individual you don’t benefit from the portfolio effect of averaging default risk. Which is why anyone lending to individuals tries to garner as big a portfolio as possible to average out that risk. This is exactly how the credit card industry works.

Here I am surmising, so please excuse any unchecked facts, but my first surmise is that there is a feedback loop in setting the interest rate at which you lend on your credit card. Though you want to lend at as high a rate as possible, as you raise the rate so you introduce a bias in your client set. The higher the rate goes the more desperate a borrower must be to borrow through you rather than through a cheaper facility, so the more likely they are to have lower credit ratings.

So I am also surmising that the reverse is true. Lower your borrowing rate and the default risk of your client base will improve. So what if you lower your credit card rate to say 2% p/a? Wow, wouldn’t you love one of those puppies? The credit profile of the portfolio would increase dramatically as funding switched to it from otherwise credit worthy borrowers. We’ll all have one of those and at that rate we can afford to run our debt, not worry about paying it off and go and spend the proceeds.

But which credit card company could possibly want or be able to do that? They’d have to have a potentially massive balance sheet and be able to borrow short term at exceedingly low rates themselves. There is one bank that satisfies these conditions - the central bank.

In issuing a credit card at very low rates the central bank will have effectively QE’d the populations debt directly, putting the spending power where it was meant to be, with the population, rather than being usurped by replenishing corporate and bank balance sheets. This is direct democratic QE with individuals borrowing from the sum of all individuals, individuals deciding how to spend it and individuals responsible for repayment.  If you can’t lend your money to yourself then who can you lend it to?

So the pay day loan co's and loan sharks are bypassed, banks are let of the obligatory hook to lend more whilst trying to reduce balance sheets, squeezed corporate debt gets priced realistically rather than via QE comparables and Joe Public gets lent to. What is more, do enough of it and they can even move base rates off Zirp or negative levels and restore a bit of normality.

An impossibility in many minds, but it's always fun to try to bypass normal procedure as failure is the mother of innovation.


Anonymous said...

The main problem with direct cash payments as stimulus is that in a recession they may often go into savings instead of consumption. The QE credit card would help because at least the direct payments from the card could be limited to consumption. Also, since this borrowing not a permanent transfer it could be wound down over time. Some may still chose to save other income to offset the card, or not use the card at all, but your idea is better than cash stimulus payments or tax rebates from the state that just add to state debt. The interest rate on balances could be tied to inflation, encouraging repayment as the economy heats up.

Dave Chapman said...

Ah, no. Lots of studies have show that giving direct cash to ordinary people results in something like 50-60% of it being spend within a week.

While it is true that something like 40% of the cash distributed goes to pay down credit cards or into savings accounts, follow-up studies show that, within 6 months or so, the balance on these credit cards is back up where it was previously. (i.e. While the person may have intended to save the money, there was merely a small delay in the consumption.)

The technical term for this is "propensity to consume", and both common sense and academic studies agree on the central point: People who make less than $100,000 per year have a high propensity to consume.

This is precisely why helicopter money stimulates the economy and giving zero-interest loans to people who are already rich does nothing.

Polemic said...

Thats why I m saying give zero rate loans to the poor.