Slowing the pace of the blogs ...

This was supposed to be a way to help me organise my thinking about what was going on, but it started getting a bit too big and lengthy. And also distracting. So I'm still going to write stuff, but not every day.

The illusion of control, shattered

Since Western central banks of problematically high inflation countries, beginning with the Fed and the BoE, wrang the inflation which had built up over the 1970s from their systems in the early 1980s, there has been a belief that they were somehow in control of our economic destiny. There were a certain set of plausible economic scenarios which "would never be allowed to happen." 

After the 1987 stock market crash there were widespread fears of a return to the 1930s style depression. Greenspan slashed interest rates and injected liquidity into the system. It worked like a dream. Not only was the anticipated economic collapse averted, the market closed the year in positive territory. The tone for the next twenty years had been set. 

By the time of the Asian crisis culminating in the collapse of LTCM in 1998, the tried and tested remedy to any economic problem had become simple - slash rates. Again, it worked like a dream as stock markets and economies not only recovered, they bubbled. When those bubbles burst widespread interest rate cuts becan in 2001 cushioned the fallout. The world marvelled at how shallow the recession had been in the face of significant post-tech-bubble headwinds, and birth was give to the housing bubble. 

But this bubble was different. It was the bubble of last resort and the fallout has been larger than anyone foresaw. And now we've had bank bailouts, insurance bail outs, mortgage nationalisations, TARP relief programs ...  even coordinated rate cuts. Yet the desired effect has been missing. Market falls have turned into market freefalls since the coordinated central bank action because it feels that despite having used up our ammo the monster is still stalking us.

A few days ago I wrote:

"It feels that the only thing preventing all out collapse at the moment is the prospect of some sort rate cut. Soon even that prospect will be exhausted and one feels there will then be nothing holding up the market."

Maybe the 1987 crash wouldn't have led to an economic collapse afterall. The stock market rose because it was going to rise not because Greenspan cut rates. And in 1998, when LTCM bust, the economy did OK because the economy was OK, not because Greenspan cut rates. But it didn't matter. The perception was that central banks and policy makers more generally were in control. Risk assets were peceived to be butressed by different versions of the "Greenspan put" and perception is reality. 

But whereas the inflation scare caused by sharp recent rises in food and energy prices hinted at the underlying truth, the finanancial implosion of the last few weeks has made it obvious. The perception has now been terrifyingly altered. Central banks aren't in control afterall.

How to thaw the mkts ... Ben signals rate cuts .... Fed tries to unblock the CP market ... who will finance the deficit? ... OPEC to cut

During his speech last night, Ben Bernanke was cystal clear - the Fed are ready to cut rates. The stock market rallied all of thirty seconds before beginning its decline on the way to a 5% down move. Asian stock markets are down a similar magnitude, and I suspect Europe will be down more still. The dollar is flat while commodities are mixed. Energy is lower, metals (especially gold up 1%)  and grains are slightly higher ...

... Bernanke might be criticised for yielding one of his most potent weapons against the market - the element of surprise. But this would be very harsh indeed. The market is going to go where it's going to go. It feels that the only thing preventing all out collapse at the moment is the prospect of some sort rate cut. Soon even that prospect will be exhausted and one feels there will then be nothing holding up the market. 

Every policy responce has so far been sold heavily. Yesterday the Fed announced measures to unblock the CP markets by setting up an SPV with Treasury money to buy 3-month unsecured and asset backed CP directly from issuers.  The Treasury will make a special deposit at the Fed to support the facility, and the Fed will lend to SPV at the Fed Funds rate making it neutral to monetary policy. 

This is a crucial intervention as non-financial and blue chip issuers (like AT&T, Boeing and Deere) and even states like California and Massechusetts had recently been locked out of anything beyond overnight liquidity. After LEH went down and ... forget its name - money market fund ... broke the buck, there has been a collapse in demand for any short term money which isn't issued by the government by the money market funds. These states and companies rely on this liquidity to make payroll and pay suppliers. Moreover, the freeze is hurting financial institutions, not only because financials are the biggest issuers, but because the companies are now drawing on credit lines in the absence of any alternative. These had often been agreed years ago when spreads were in single digit bps and used as a loss leader to get advisory business ... seems  like a long time ago now ... anyway, the effect in the credit markets looked good. GE CP spreads came in around 100bps on the announcement. Yet the stock market, after a sharp 3% move higher, soon fell back and began its long descent lower throughout the day. 

Its kinda funny though ... some commentators, mostly those with a more libertarian leaning have suggested that rate cuts are the last thing develped market economies need right now, as though it's  "like giving a junkie another shot of heroin". Since low interest rates caused the mess we're in why are we looking to low interest rates to get us out of it? I wonder what those people will say now that the Treasury has got the Fed to run a SIV to buy commercial paper?! 

Will it work? Once again, it is a step in the right direction. But what's going to happen if the credit markets are still frozen when longer maturity debt falls due, impairing the ability of the companies to fund themselves at economic rates? 

This is how to unfreeze the credit markets - create a centralised exchange for interbank lending. It looks as though we're moving in that direction in the CDS derivatives market already - why not do the same for interbank lending? If I buy an SPX future on the CME or a copper future on the LME, I don't care who took the other side of my trade. The only counterparty risk I have is with the exchange which effectively insures me against counterparty default by charging me a fee which I pay for with membership of the exchange. There should be a similar mechanism in place initially provided for by the governments, for interbank loans. Effectively, the fear of counterparty default would be removed and banks would once again be in a position to lend to one another. 

On March 6th, 1933 facing the prospect of a run on the banking system and on the country's gold reserves, Roosevelt declared a bank holiday to commence four days. In those days Congress hurriedly passed the Emergency Banking Act (By March 9th Henry B. Steagall, Chairman of the Committee on Banking and Currency, apparently had the only copy of the bill in the House. Waving the copy over his head, he entered the House chamber reportedly shouting, “Here’s the bill. Let’s pass it!" They did so in 40mins and a few hours later the House approved it.) Among other things, the Act allowed the RTC to take equity stakes in private sector banks and set up the FDIC deposit insurance scheme. I say we do the same thing right now - we all get a week to recover, the policy makers get a week to set up a centralised clearing exchange for interbank lending and recapitalise our banks.    

Central banks should also be cutting rates though and at long last it now looks as though they're finally about to. So far, the unconventional measures don't appear to have meaningfully narrowed any risk spreads. Rate cuts won't either but at least they'd lower the ultimate cost of capital for those able to get finance. All this delay has felt like we've been watching the house burn down but are scared to turn the hose because we're worried about the water bill ... better late than never I guess, but there isn't much of a house left ... 

But here's another problem - who the hell is going to finance the US current account deficit? The cash-rich surplus economies currently doing the financing aren't looking to clever at the moment and any sudden withdrawal of capital by them could introduce another black swan in a sky filled with them.

For example, illustration of the confusion over the seriousness of the situation in the Chinese real estate markt was provided by Morgan Stanley. One of their economists - Mr. Wang - predicted that "A substantial improvement in the inflation outlook should help ease the lingering concerns about the inflationary consequences of an expansionary macroeconomic policy,'' and that he " ... expects a decisive policy shift toward boosting growth in the coming weeks and months." All sounds sensible enough. Except that the main risk to his forecast was a "meltdown'' in the property sector across the country which "would lead to a massive collapse in real-estate investment". Wang said the consequences of this could be so serious as too offset any pro-growth policies the authorities might attempt, but put such a probability at a comforting 25%. 

Last month, Jerry Lou, one of their strategist said the likelihood of a meltdown was high. Annecdotally, white elephants can be found all over China - empty hotels, shopping malls and sports facilities. And those white elephants are collateral on banks balance sheets somewhere. Also, its nearly always wrong to trust an economist's view, especially if he's a good one. So I'm even more worried that Mr Jerry Lou might be right. If he is, the Chinese will join the Koreans who are already repatriating their dollar holdings to shore up domestic liquidity shortages  ... 

Meanwhile, Russian President Dmitry Medvedev pledged $36 billion of loans to the country's banks for five years to help unfreeze credit markets. That takes the total Russian lending to banks and companies via loans, cash auctions and tax cuts to $190bn in an effort to maintain a decade-long economic boom.  And just in case a quick glance at the stock market didn't tell you how bad things were (down 65% since late May) Russia's big four oil companies have asked the government for loans to refinance debt. Gazprom, Lukoil, Rosneft and TNK-BP are all struggling to raise liquidity at economic rates and so are tapping government reserves ... 

... and in the UAE, the central bank also injected $16bn dollars into their banking system to relieve liquidity shortages there. Nevertheless, Dubai plans to build a 350 billion dirham ($95 billion) development, Jumeirah Gardens, that will be home to up to 60,000 people. It will include offices, retail, residential buildings, two hotels as well as a high-end shopping area andis expected to be complete by the fourth quarter of 2013. Apparently, they think the real estate boom has nothing to do with the recently high but now falling oil price, even though the UAE were shut out of credit markets in 1999 ... if it wasn't so tragic it'd be funny ... 

Speaking of oil ... have the Saudis already pulled back in the 500k bpd they they sold into the mkt after oil hit $147? OPEC members pumped an average 32.19 million barrels a day last month, down 425,000 barrels a day from August, according to the survey of oil companies, producers and analysts. As Goldmans back away from their uber bullish forecast, now saying a rise to $120 was unlikely any time soon, Libya called for OPEC production cuts. The president of OPEC Chakib Khelil said the group would take "appropriate measures" to stabilise markets ... bring back the evil speculators maybe?  

RBA cuts rates by 1% ... events are moving too quickly ... we're watching a policy mistake

A stabilisation of sorts this morning. Asia is still largely softer although there are pockets of green - Korea, Taiwan and Australia are all higher by a percent or so after the RBA surprised the market with a surprise one percent cut, from 7% to 6%. 

There has been the hope of a coordinated cut in recent days ... rate cuts are now the only conventional weapon left in central banks armoury and a globally coordinated move would likely give more bang than individual stand-alones. Who knows if such a move would stave of economic collapse, and God help us if it doesn't - but now is surely the time to try. 

Nevertheless, the BoJ this morning opted to keep rates on hold saying only that economic growth was "sluggish" and likely to persist "for some time given the slowdown in overseas economies is becoming clearer ..." 

You can't help feeling that the world economy is changing more rapidly than its participants can fathom. With his company's stock down 18% yesterday after indicating it stood ready to cut steel production by 15% if needed, Lakshmi Mittal said:

"I believe this situation is short-lived, all of us hope it is short-lived. When this situation is behind us, things will improve.'' 

Only a few months ago the same Lakshmi Mittal said: 

“I can say with considerable certainty that the volatile years of boom and bust are now relegated to the past."  

More serious is that policy makers haven't quite woken up to the problem and the mistakes are compounded an already dire ennvironment as they have every financial crisis in history. In 1930s America it was protectionism, overly tight monetary policy and higher taxes. In Japan in the 1990s it was overly tight monetary policy, bungling financial reform and eventually, higher taxes. 

Today, we have a situation where market interest rates are tightening significantly. Monetary conditions are considerably more restrictive than this time last year, or than this time last quarter, or even at this time last week and the economy is deteriorating lockstep. Yet yesterday, Mr Evans at the Federal Reserve said:

" ... the inflation outlook remains a risk ... energy and commodity prices are notoriously volatile, and could rise again. More importantly, there is the risk that persistently high rates of overall inflation will boost the long-run inflation expectations of businesses and households, and thus become embedded in their actual price and wage setting behavior."

I'm going to put my neck out here, but I think Mr. Evans just might be wrong. The world is already unrecognisable to that which existed two months ago. It is a credit desert and like it or not, economies require the free flowing of credit to function properly. The complete siezure of credit will completly halt economic activity and it is no longer sensationalist to point to the increasingly real risk of depression, especially with central bank attitudes like this. By allowing monetary conditions to tighten so extremely without even trying to lower policy rates we are seeing a policy mistake and history clearly shows policy mistakes make bad situations worse.

Speaking as someone who is structurally bullish of energy, it's difficult to see a doubling of prices while we're looking at a potential debt deflation. This already savage and distressed world-wide financial deleveraging is accelerating and spreading from the US to the rest of the world. Unchecked, the end game is a broken international trading system, an increasingly traumatised world labour force and a radically altered political climate in which international relations will be more strained than they have been since the end of the Cold War. This is the future. Yet policy makers are still looking backwards. 

There is a chance of oil prices doubling in the next twelve months, as there is a chance that a piano falls through the roof of my house, through the office ceiling and lands on my head. There is a much higher chance that this time next year there will be street demonstrations demanding jobs and an increasingly vocal xenophobic nationalism growing in developed and emerging economies alike. Politicians rarely cover themselves in glory in such times.

But few things are as dangerous as a bad idea which is popular. From the Great Deprssion in the 1930s to the lost decade in Japan's 1990s, policy mistakes have been absolutely key ingredients in making bad situations worse. The current obsession with moral hazard and second round price effects echo's, albeit less extremely, the prevailing attitude in the 1930s when Treasury Secretary Andrew Mellon confidently advised Herbert Hoover in 1931:  

"Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down... enterprising people will pick up the wrecks from less competent people."

BRICs need credit too, but less so than the US ... Europeans balk at collective action ... Hypo rescued

As the Latin Americans discovered in the 1980s and the Asians in the late 1990s, being dependent on foreign funding of a deficit position has never been a comfortable place to be. In 1914 the Euroean countries which had invested heavily in the then emerging market of the United States repatriated their investments to pay for what would soon become the First World War. Faced with such an outflow of capital, and of gold which backed the international currency regime of the day, such a panic gripped the stock market that Washington simply closed it for four months. 

A few decades later the roles were reversed. In 1929, it was America which was the distressed debtor nation pulling its money from foreign markets to shore up the liquidity crisis at home caused by the Great Crash. One of the countries most destabilised by this was Weimar Germany whose economic desperation was so utterly complete they voted in Hitler. So as things stand today, we should be rooting for the financers of the US deficit. 

But this morning the Korean Finance Minister Kang Man Soo urged banks to sell overseas assets so that they can use the money to boost domestic lending. The government will provide won-dollar swaps and will use foreign currency reserves to support lenders if necessary. Meanwhile, the Kuwait Investment Authority, that countries sovereign Investment Authority, is considering in vesting $5.6bn into the Kuwait Stock Exchange. And in Brazil, the Treasury is having to inject funds into BNDES - a government sponsored development bank - which has seen applications for loans spike in the absence of market liquidity. The most recent firm to recieve funding from this route was Petrobras ... 

In Europe, the summit of leaders in Paris failed to produce any committment to coordinated action. Merkel said "Each country must take its responsibilities at a national level." The politicians still managed to use the crisis to grandstand to their own voters though. Sarkozy said he wanted a new workd to come out of this, "We want to set up the basis for a capitalism of entrepreneurs, not speculators." 

But what exactly are speculators? Risk-takers? What the difference - entrepreneurs are risk-takers and therefore speculators too, surely. Wasn't it entrepreneurs who ran HBOS, Northern Rock and AIG? I think Sarkozy just doesn't want bad entrepeneurs ...  

No wonder though.  There are as many bad entrepreneurs in Europe as the US, it seems. The bailout of Germany's second biggest property lender Hypo Real estate collapsed over the weekend because it turned out, in an echo of Lehmans, the estimated EUR 35bn Hypo had initially said they needed was wide of the mark. The bailout is now back on with a EUR 50bn rescue. The German has govenment moved to fully gurantee personal savings accounts, while in France BNP (entrepreneurs, not speculators) are taking over the Belgian units of Dexia after a govt rescue failed ... 

... Fingers crossed for everyone in Iceland too, where their own lender of last resort just doesn't seem big enough. According to the Telegraph at the weekend, the Icelandic central bank is trying to cut a deal with other Nordic central banks to help them stave of a complete collapse of their financial system.

What was wrong with the Paulson plan ... companies starved of credit, Fed governors see lost of stimulus ... grains should be higher ... S&P value tra

The S&P closed down 4% last night now and now trades close to where it did when the bail out plan was first rejected by the House of Reps ... deflation is the new inflation. Orders data yesterday was weak, as was the weekly employment data and commodity prices took a bath across the board. They are currently heading for their biggest weekly decline in 50 years. Dollar is stronger while Asian equity markets are softer by a couple of percent overnight, although one market notable for its relative strenth this week is Shanghai, which is up by nearly 3% ...  

The House of Reps are due to vote on TARP again today. It looks as though the plan will be passed this time too, after lengthy and tiring discussions seem to have got to the bottom of what was wrong with the first proposal. Some of the new provisions include the "extension and modification of duty suspension on wool products; wool research fund; wool duty refunds", a "7 year cost recovery period for motor sports racing track facility" and "exemption from excise tax for certain wooden arrows designed for use by children." 

So while the bill in its ealier form was a bail out of Wall St, socialism for the rich and an immoral bequest to the country's grandchildren, its now good for America. And there was me thinking the US wouldn't ever be in a position to pass the bank recapitalisation bill it will ultimately require because it was ideologically constrained ... actually its all about wool and wooden arrows. Why didn't anyone tell Paulson and Bernanke? Whoever drafts the next bail out bill should take note and save us all a lot of trouble ... to think that these people are in charge ... of course, the bill hasn't been passed yet ... I dread to think what will happen if it isn't. 

Asian interbank markets are siezing up too now. Bloomberg reports this morning that Hong Kong's interbank rate jumped 41bps to 3.81 even though the HKMA has since Monday been accepting more securities as collateral in its repo transactions. Last week there was a run on Bank of East Asia, this week Hang Seng Bank said it had "exposure" to debt issued by WaMu .... the Fed data meanwhile showed that the CP market had collapsed, the bond market is effectively closed and financial institutions are now using the Fed for nearly all their liquidity needs. Yesterday they borrowed $348.2bn. Needless to say, non financial institutions just have to do without. Caterpillar and GE are struggling to sell commercial paper at economically viable rates, while the state of Massachusetts pulled a sale ... likewise for Fortescue metals yesterday put a mine expansion on hold because it wouldn't be able to raise the funds. 

Not to worry though. St Louis Fed president Bulllard and Kansas City Fed counterpart Hoenig both said yesterday that "there was very strong stimulus in the economy" and that lowering interest rates would be the wrong response because of an "inflation problem" ... to think that these people are in charge ...

The effect of the recession on the commodity markets is intuitively what you'd expect with the commodity shares currently taking the brunt of the pessimism. But there are some anomolies beginning to develop. Yesterday, for example, gold fell by nearly 5% even though there appears to be a widespread shortage of bullion at the retail level. Agricultural commodities too were down by around 5% yesterday. But will a recession cause people to stop eating? I know there's a biofuel link via sugar and corn but does this justify a near 50% correction? 

Yesterday Mosaic fell by an eyewatering 42% (!!) on an earnings miss and a cut in posphate production, the company cited growing posphate inventories and weaker pricing. Monsanto actually raised its guidance but noone seems to have noticed, and all agricultural stocks in all markets fell heavily. Annecdotally, farmers are scaling back on fertilisers because they can't get the credit for the upfront payments required to purchase. Arable land remains uncultivated for the same reason - banks can't lend the necessary upfront capital. All of these factors suggest farmers are spending less on bringing new supply to the market and while that should explain why agricultural companies might struggle, the same logic should also argue for higher grain prices ... 

There is clear value emerging in large parts of the market as evidenced by Buffet's large and high profile recent investments (although the sage is still manageing to buy at levels of cheapness ordinary people won't be able to buy at). Meanwhile, credit spreads are trading at a 12.2% spread over treasuries, the widest since Merrills started calculating the index and the VIX is trading at levels last seen in the aftermath of 9/11. 

It S&P actually trades on 20x the last 12m earnings which sounds rather rich given the sickness of the credit-desert economy we face. Yet high multiples are normal in recessions. In December 2001, for example, the 12 trailing PE ratio rose to 60x as eaernings collapsed according to Bloomberg so there is plenty of scope to go higher.  Nevertheless, for the losers amongst us, forced into playing the timing game, it is worth bearing in mind that as the US economy entered into recession in 2001, the S&P's PE ratio rose to the high 20s just as it is doing now. Then, the S&P was at around 1300. A year and half later it was trading below 800. 

Why anyone follows the collective wisdom of a group of analysts with no investment experience and little apparent understanding of basic financial analysis I'll never know. As if another example of mass incompetence was needed, the consensus earnings estimate for the S&P500 has earnings rising from the current $52.6 in 2008 to $84 in 2009 - a 60% increase, which would be a fair old performance given the credit desert we now live in.  Who was it that said about analysts that in a bull market you don't need them, in a bear market you don't want them? ... to think that these people are in charge  ...  hang on, they're not - hooray!

We're witnessing a huge policy mistake ...

Last night the Senate sent the amended TARP proposal to the House of Reps who are expected to vote on Friday. It now contains provisions for a temporary increase in the amount of bank deposists insured by the FDIC, a temporary extention of tax breaks and concessions on mark-to-market accounting, which is being blamed for the current mess. 

Mark to market accounting is preferable to any alternative. The Japanese credit crisis lasted for over a decade because they didn't have to value bad loans at realistic prices and so were under less pressure to come clean on the lowered value of the collateral held, or on the solvency of their organisation. So they told everyone that everything was fine because there was no pressure to own up to a failure they could simply deny. The same managers who made the mistakes remained at the helm of the same institutions who were horribly clogging up banking system. And they really did clog up the banking system. Actions spoke far louder than words in revealing how distressed Japanese financial institutions were. They refused to lend any of the liquidity created by the BoJ to anyone other than the government in the form of massive JGB purchases. This cycle led to zero interest rates and, at one point following the tech bust (a staggering 12 years after the banking crisis), 40bp 10y yields! The credit mechanism remained blocked, the velocity of money circulation collapsed as monetary policy became ineffective and the economy slumped into what became known as the lost decade. 

To an extent, therefore, the prolonguation of the Japanese crunch was caused by the absence of the discipline imposed by mark to market accounting. It does help though, if there is a functioning market to mark to which is why the TARP will be a huge step in the direction of ultimate stabilisation and unambiguously, therefore, a good thing. 

But will it provde the banks with adequate capital? In last week's FT Martin Wolf wrote this: 

"The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007 (see charts). The balance sheets of the financial sector exploded, as did the sector’s notional profitability. But leverage, alas, works both ways.

Since US net international debt was 39 per cent of GDP at the end of 2007, virtually all of this debt is an asset of another domestic entity ... when the gross debt stock is huge and economic conditions difficult, the chances that many entities are bankrupt is high. When people fear mass insolvency, lenders stop lending and the indebted stop spending. "

So probably not. Banks will likely remain undercapitalised. It is possible that the Asian sovereign wealth funds will be able participate in this recapitalisation. But is it likely? They are already heavily underwater with stakes taken too early in the crisis and indeed, in many cases (China) may yet find themselves with domesitic concerns where that capital could be deployed with higher priority before this crisis has run its course. An undercapitalised US banking system will be a vulnerable one, and one which is incapable of lending at anything like the rate the current generations of Americans have been used to. 

And this will be democracy in action. As banking crises have shown in the past, when the problem becomes so great that private-sector recapitalisation is impossible, only the government is left. This is the direction in which Europe is headed. The decisiveness of European govenrments is in stark contrast to the cack-handed and reactive handling of crisis by the US authorities. But Europe has no ideological constraint on state intervention in such matters and can therefore act preemptoraly. As the current mess in Congress is showing the world, America's ideological constraint is very real and very binding. Americans will only sanction the steps the Europeans are now being forced into after they've seen the economic consequences of a disfunctional credit mechanism. The outlook for the US is bleak indeed even with the passing of TARP. Failure by the House of Reps tomorrow will all but guarantee a depression ... 

... the central banking policy mistake we're currently witnessing won't help either. One of the lessons from the Great Depression, and from Japan's experience with its real estate bust is that monetary policy has to be adjusted quickly and decisively lower. Instead we've had the opposite. The BoE and the ECB have been unimaginative at best in recognising the deflationary effects of this crisis and history will show they kept interest rates too high for too long because they were concerned by late cycle inflation. 

But central banks always make this mistake. The larger error has been in allowing monetary conditions to tighten so dramatically. The world is deleveraging. In the US the mortgage market is now largely nationalised. In the UK, where there were ten mortgage lenders last year, there are now seven (and mortgage approvals have fallen 95% YoY). The rest of Europe is catching up and loan books everywhere are being wound down. Reduced credit supply means a higher cost of credit so mortgage rates are significantly higher than last year, as are interest rate costs for business are higher than last year. Central bank cuts would have kept the monetary stance unchanged. Instead, it has been allowed to tighten. This is a policy mistake which will exacerbate the deflationary effects of this crisis.