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That $70 barrier: Perception vs rationality and the forex rate
published: Friday | September 21, 2007
Wilberne Persaud, Financial Gleaner Columnist
The $70 barrier has been broken. Unlike Concorde's supersonic speed, however, this is nothing to celebrate.
Informed opinion during election campaigning seemed of the view that at season's end things would settle. Perhaps they have.
But a simultaneous development in the United Kingdom gives us pause as we ponder financial markets' behaviour, including our own.
BBC reported that one of the UK's established mortgage lenders, Northern Rock, had "�2 billion withdrawn - which represents about 8.0 per cent of the �24 billion deposits it held (September 1) - actually less than the mortgage lender had feared.
However, it cannot be certain whether much more will be withdrawn in the coming days, especially from holders of Northern Rock's postal accounts, which contain about �10 billion. Mortgage banks and building societies - as well as the bigger banks, have seen much of the money withdrawn from Northern Rock.
Depositors are fleeing Northern Rock to bigger banks and building societies. There is no systemic failure or contagion - not just yet at least.
United Kingdom authorities will do their utmost to avoid it. They will succeed. So this depositor response - panic with-drawals - appears perverse.
The Bank of England has guaranteed funding facilities. U.K. Treasury added its voice supporting Northern Rock, confirming it is not insolvent.
Watchdog
Regulatory watchdog, the "Finan-cial Services Authority, has backed comments from the Treasury, saying Northern Rock is solvent and savers could continue to deposit and withdraw funds", according to the BBC.
What more could depositors want; are they not completely unreasonable, downright irrational?
While some may hold this view, it is the nature of financial markets and responses to perceptions of crisis and potential loss of money.
Northern Rock is solvent with a solidly performing book of mortgage loans which, from reports I have seen, in no way resembles that of some U.S. mortgage lenders. Nevertheless, it is unlikely to survive as a brand.
What accounts for the panic? Psychologists have a view. It is a reaction like the stampede from the cinema as the shout 'fire' is heard. It's classic herd behaviour, a well-known human response.
The facts baldly: Northern Rock booked mortgages funded from savings deposits and borrowings from the U.K. money market.
The money markets ceased lending to Northern Rock as a result of the U.S. sub-prime mortgage market crisis.
In negotiations for purchase, buyers requested a Bank of England guarantee. Bank of England did not relish being perceived as protecting shareholders and bondholders of Northern Rock.
The sale did not materialise.
Bank of England at the end of the day did indeed give the guarantee but by this time Northern Rock is tarnished.
The rock is now hardly a sandstone block.
The Northern Rock brand is unlikely to survive because in peoples' minds - perception - it is tainted.
Historical perception
I now pose the question: To what degree is behaviour in our foreign exchange market driven by historical perception, hence precautionary and speculative behavious, rather than fundamentals of the foreign exchange markets?
I have not done the calculations but such inquiry ought to be rewarding.
Does a large net international reserve (NIR) attenuate the impact of deteriorating balance of payments on current, capital and investment account?
Are ever increasing interest rates necessary to keep wealth holders content with the Jamaican dollar share in their portfolio?
Does perception of a growing NIR as merely added foreign debt, notwithstanding our pristine payment record, offset the intended impact of the NIR itself? Are deficits viewed as the current generation's profligate decision to burden the future with its extravagances?
Surely there is a mix of policies that shall deliver the 'correct' values and 'balance' of these parameters.
But even if, when, they are delivered, public perception must hold the regime to be sound, effective.
I discussed Northern Rock's problems to highlight the difficulty countering perception - even when that counterweight is the Old Lady of Threadneedle Street, the ancient, now modern Bank of England.
Creation of a stable or truly fluctuating (note: the rate moves essentially in only one direction) Jamaican dollar exchange rate must be approached with this historical perception in mind.
If the mindset remains unaltered the constant slide shall, as self-fulfilling prophesy, surely continue.
Caveat: Those calculations of which I spoke, Bank of Jamaica must have done them. They may be shared with the Jamaican public in a way tha the mindset. Former U.S. central bank chairman Alan Greenspan shared classically, correctly without the critical political and philosophical judgements of his published memoir.
PS: I note innovation in Finance - three ministers, one from the private sector - an opening gambit worthy of the likes of chess masters Capablanca, Fischer and Karpov. I hope they cause attention to public perception, and hopefully, too, conflict of interest issues have been resolved.
wilbe65@yahoo.com
published: Friday | September 21, 2007
Wilberne Persaud, Financial Gleaner Columnist
The $70 barrier has been broken. Unlike Concorde's supersonic speed, however, this is nothing to celebrate.
Informed opinion during election campaigning seemed of the view that at season's end things would settle. Perhaps they have.
But a simultaneous development in the United Kingdom gives us pause as we ponder financial markets' behaviour, including our own.
BBC reported that one of the UK's established mortgage lenders, Northern Rock, had "�2 billion withdrawn - which represents about 8.0 per cent of the �24 billion deposits it held (September 1) - actually less than the mortgage lender had feared.
However, it cannot be certain whether much more will be withdrawn in the coming days, especially from holders of Northern Rock's postal accounts, which contain about �10 billion. Mortgage banks and building societies - as well as the bigger banks, have seen much of the money withdrawn from Northern Rock.
Depositors are fleeing Northern Rock to bigger banks and building societies. There is no systemic failure or contagion - not just yet at least.
United Kingdom authorities will do their utmost to avoid it. They will succeed. So this depositor response - panic with-drawals - appears perverse.
The Bank of England has guaranteed funding facilities. U.K. Treasury added its voice supporting Northern Rock, confirming it is not insolvent.
Watchdog
Regulatory watchdog, the "Finan-cial Services Authority, has backed comments from the Treasury, saying Northern Rock is solvent and savers could continue to deposit and withdraw funds", according to the BBC.
What more could depositors want; are they not completely unreasonable, downright irrational?
While some may hold this view, it is the nature of financial markets and responses to perceptions of crisis and potential loss of money.
Northern Rock is solvent with a solidly performing book of mortgage loans which, from reports I have seen, in no way resembles that of some U.S. mortgage lenders. Nevertheless, it is unlikely to survive as a brand.
What accounts for the panic? Psychologists have a view. It is a reaction like the stampede from the cinema as the shout 'fire' is heard. It's classic herd behaviour, a well-known human response.
The facts baldly: Northern Rock booked mortgages funded from savings deposits and borrowings from the U.K. money market.
The money markets ceased lending to Northern Rock as a result of the U.S. sub-prime mortgage market crisis.
In negotiations for purchase, buyers requested a Bank of England guarantee. Bank of England did not relish being perceived as protecting shareholders and bondholders of Northern Rock.
The sale did not materialise.
Bank of England at the end of the day did indeed give the guarantee but by this time Northern Rock is tarnished.
The rock is now hardly a sandstone block.
The Northern Rock brand is unlikely to survive because in peoples' minds - perception - it is tainted.
Historical perception
I now pose the question: To what degree is behaviour in our foreign exchange market driven by historical perception, hence precautionary and speculative behavious, rather than fundamentals of the foreign exchange markets?
I have not done the calculations but such inquiry ought to be rewarding.
Does a large net international reserve (NIR) attenuate the impact of deteriorating balance of payments on current, capital and investment account?
Are ever increasing interest rates necessary to keep wealth holders content with the Jamaican dollar share in their portfolio?
Does perception of a growing NIR as merely added foreign debt, notwithstanding our pristine payment record, offset the intended impact of the NIR itself? Are deficits viewed as the current generation's profligate decision to burden the future with its extravagances?
Surely there is a mix of policies that shall deliver the 'correct' values and 'balance' of these parameters.
But even if, when, they are delivered, public perception must hold the regime to be sound, effective.
I discussed Northern Rock's problems to highlight the difficulty countering perception - even when that counterweight is the Old Lady of Threadneedle Street, the ancient, now modern Bank of England.
Creation of a stable or truly fluctuating (note: the rate moves essentially in only one direction) Jamaican dollar exchange rate must be approached with this historical perception in mind.
If the mindset remains unaltered the constant slide shall, as self-fulfilling prophesy, surely continue.
Caveat: Those calculations of which I spoke, Bank of Jamaica must have done them. They may be shared with the Jamaican public in a way tha the mindset. Former U.S. central bank chairman Alan Greenspan shared classically, correctly without the critical political and philosophical judgements of his published memoir.
PS: I note innovation in Finance - three ministers, one from the private sector - an opening gambit worthy of the likes of chess masters Capablanca, Fischer and Karpov. I hope they cause attention to public perception, and hopefully, too, conflict of interest issues have been resolved.
wilbe65@yahoo.com