What stimulus is there after a 0% rate?

There are generally two strands to monetary stimulus, firstly there are interest rates, and then there is the actual money supply. We’ll talk about both of them here and what will mean for consumers.

Interest rate drops drive money into an economy in a few different ways, obvious to most is that the cost of borrowing comes down, so if a company has to borrow to hire people they can do so, people need less to service debts which increases their disposable income and that puts more money into circulation. The other thing that happens is that bank deposits look less attractive, interest rates dropping actually cause rate compression, something we discussed here before, and that means money (especially at a 0% interest rate) will not sit on deposit and will instead move to corporate bonds which will thus be a way of extending credit to companies and they can finance projects.

In the past many would ‘fly to quality’ …

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The bailout has arrived, Irish banks in line for Government funds.

The banking bailout has come along, as many of us always thought it would, in the form of a (potential) €10 billion Euro package. An announcement was made yesterday and shares in financial institutions surged on the back of the news. The actual details of the deal are scant at present.

The Minister of Finance remarked on RTE radio that the main thing he hoped to see as a result of this was for lending to return to the market, we can only assume this refers to enterprise lending and not to mortgages as the mortgage market has not frozen to the same degree the business loan/credit area has.

The National Pension Fund Reserve is the area the funds will come from, an obvious issue here is that the fund made losses of c. 33% in the last year and cashing out now will mean those losses are crystallised without hope of return should the markets come back any time soon. …

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How falling interest rates hurt banks during a liquidity crisis

The falling interest rates are heralded by consumers of Irish mortgage companies as a godsend – well, for the clients of the Irish banks who actually pass on the full rate cuts that is! However, at the same time it creates a rate compression which damages the bank and this is what we will consider in this article.

Banks have two sides to the operation roughly speaking, on one side there is the lending function which we are all aware of, mortgages, car loans, personal loans etc. on the other side is the deposit taking function which provides part of the money they lend out. There is of course the interbank market which supplements (and often surpasses) deposit funds for lending, but to keep things simple we will focus on a world where deposits roughly equal lending.

When

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ECB cuts rates to 2.5% – tracker mortgage interest rates benefit.

Tracker mortgages are a mortgage that is tied to some form of base, be it the ECB base rate or the Euribor, in residential lending it tends to be the ECB in commercial it tends to be the Euribor. Today interest rates were reduced by a further 0.75% giving a new base rate of 2.5%, which is the lowest it has been since March of 2006,the Euribor is now at 3.743% and will see the base rate drop filter through in the coming days.

Commercial loans tend to follow the Euribor, specifically the 3 month money which banks actually tend to use to finance most of their operations. The way that banks operate is to sell long term but finance short term. This is where they create their margin and its based on the yield curve, part of the problem in the last 12 months was a yield curve inversion which made lending difficult and was a …

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The end of Commissions?

The FSA (Financial Services Authority) in the UK have said that they are not ruling out a future ban on commissions. In the UK financial advisers work on both fees and commissions, however, there is no mention of how they would hope to balance the competition between broker and direct channels.

Currently there are many consumers who cannot afford fees, in Ireland financial advisers work (in general) without fees, relying on commissions for their incomes.  In Ireland consumers have gotten used to a market where they don’t pay brokers, they enjoy independent advice at no difference in cost to that of going through a direct channel (i.e.: walking into a bank where they cannot give you independent advice).

However, if, in the morning the Financial Regulator followed the lead of the FSA and tried to end commissions it would cause a huge market distortion because peoples attitudes to fees would actually drive them out of …

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ECB Cut Rates by 0.5% bringing the ECB base rate to 3.75%

The ECB rate change has given many of us a pleasant surprise, the ECB has cut rates by 0.5% giving a new base rate of 3.75%. For many of us that means new lower mortgage repayments (if you are on a tracker mortgage) for people on variables you will have to adopt a ‘wait and see’ approach because banks are not obliged to pass on the rate change. The pressure is coming down at least for now.

[Take note: this is not a ‘positive’ rate cut, it can have a positive result but the motivation behind it raises questions about the solvency and losses of major institutions as well as the threat of deflation.]

So, why would a bank opt to not pass on a rate reduction? Simply put, the income from many tracker mortgages does not cover the cost of funds that banks run on and therefore it would not make commercial sense to give people …

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So with lower house prices you make big savings right?….erm…kind of…

There has been much talk in the papers from many respected sources giving people the message that ‘now that prices have dropped its a good time to buy’. I think that the true nature of what purchasing a property boils down to needs to be examined before such a statement can be shown to be true or false.

Firstly you have to look at what you are actually getting and then you have to consider what it will cost you over the long term and do a like for like comparison for the same time last year, I think that not using 2007 as a control is one fundamental flaw that commentators are making because you can’t simply look at something and say that because its cheaper today it makes sense, if you do happen to believe that please call me immediately as I happen to have some cans of dog food that I was selling for €600 last year but you can have them at a steal for €300, but hurry, they’re going like hotcakes!

Anyway, moronic inklings aside, …

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ECB says rates may hold until 2010

Jean Claude Trichet said last Thursday that he would hold interest rates as are and that he could not see inflation coming under control until 2010 meaning that for the foreseeable future we just have to get used to rates not having the prospect of coming down. We felt that there may be a rate cut on the way in early 2009 but always on the back of this was the belief that if inflation didn’t come down sooner that it would be Q3/4 of 2009 before we saw a rate cut (potentially).

The current news is partially sabre rattling by the ECB, laying down the strong message (and rightly so) that inflation must be beaten, anything short of the message given by Trichet might send out the belief that if the market falls and inflation remains that we might get a few ‘market favouring’ decisions, this hasn’t happened so far and with any …

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Peer to peer lending, maybe there is an alternative to banks?

Have you ever lent a friend a tenner? If so you already understand ‘peer to peer‘ lending, this is where one person lends money to another person and there is no bank or other intermediary involved. Traditionally it has been a case of letting a person borrow some money until payday and then they’ll give it back to you, traditionally this was also an interest free proposition, not only because the amount of time the money spent borrowed was generally short term but also for cultural reasons, because lets be frank, if a mate asked for ‘interest’ on a loan for a week or two you’d think of them as an incurable scab.

The current liquidity crisis is hitting banks the hardest, this means that the very stalwarts of the financial world are the ones that don’t have the money to lend out, however, there are many individuals who do and this presents the opportunity for a market niche. The market has responded in the form of enabling technology which connect a borrower …

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Some quick Tips about Irish Mortgages and getting a Mortgage in Ireland.

If you have never bought a house then all the talk you will hear about mortgages might be fairly confusing and even frightening. Back in the olden days when I had a personality (the mortgage industry eventually strips you of that) I was training up as a mortgage advisor and even though it was all I did the whole day through every day of the week it took me a long time to become a Professional Broker, that and examinations such as the Mortgage Diploma. So I can only imagine how it must feel for people who are looking for a mortgage and looking to get straight talking advice. Who do you trust? How can you be sure that you are not being ill advised or ripped off?

In this post I will give you a few quick ‘checks’ you can do to ensure you are dealing with a professional broker. Firstly, you can ask the broker if they are regulated by the Financial Regulator and if you are the suspicious type you can ask to see their certificate of …

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