STATS.
on the bank’s books for months or even years. By contrast, the
borrower can write cheques against the deposit, moving the
money into someone else’s deposit. Whereas the loan is only
FIGURE 2: S&P 500 P/E AND REAL MZM GROWTH, 1980 – 2005 one transaction, the extra deposit is money and can result in
endless rounds of transactions.
PE on S&P 500 Annual Real MZM growth (RHS)
Much of the lending was to purchase assets, the prices of
50
42
which rose. Th e seller of the assets received the bank deposit.
45 36
Asset prices rose further when the money was reinvested, and
40 30
so on. Th e result was asset-price infl ation, booming bank
35 24 profi ts and the perception of high levels of bank capital relative
30 18
to assets.
25 12
20 6
BURST BUBBLE
15 0
Buoyant bank lending continued. Th e continuing eff ects of
the money created by the lending compounded. Th e result was
10 -6
a fi nancial bubble, with all the excess behaviour that occurs
5 -12
when a bubble is building up. Th e only thing unusual this
0 -18
19801982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
time was the degree of the excess, for example, the amount of
leverage. Th e result was a house of cards waiting to collapse.
When the bubble burst the whole process went into
reverse. Th e downswing began symmetrically with the
“Money is quite like the hot potato of
upswing. It was again a monetary phenomenon. Matters
became much worse when the value of collateral in general
the children’s game – one individual
fell below the level of the loans being secured. Forced selling
started. Market confi dence was then shattered because the
can pass it to another but the group
law of supply and demand had reversed. Falling prices forced
more people to sell rather than discouraging sellers. Forced
as a whole cannot get rid of it”
selling is also a monetary phenomenon: by defi nition, people
are selling to raise cash.
I agree with much of Anatole Kalestky’s criticism of academic
particular, became too large to ignore and economists. Th e problem is not merely that you cannot teach
the analysis needed to be global, see Th e old dogs new tricks, but more seriously, that young dogs are
Bill from the China Shop, Charles Dumas being taught the wrong tricks. Th e effi cient market hypothesis
and Diana Choyleva.) Th e Stewart Ivory should not however be scrapped. It should be complemented by
course mentioned above has now been the liquidity theory of asset prices.
given 20 times, in Edinburgh, London,
other European cities, New York and
Singapore. Not one delegate has
PROFILE – FACT BOX
challenged the assertion that the LTAP
helps considerably to explain the
Gordon Pepper, CBE, FIA, FSIP
behaviour of fi nancial markets in the past.
Career highlights:
Turning to the present, the recession is
Gordon Pepper is chairman of Lombard Street
a monetary phenomenon. Th e story starts
Research and was a joint founder of the gilt-edged
with an explosion of bank lending. Th e
business of W Greenwell & Co during which time
lending itself was not the key feature –
he introduced Greenwell’s Monetary Bulletin, one
the key feature was the money being
of the most widely read UK monetary economics
publications of the 1970s and 1980s. He was joint
created by the lending. Th e lending is
senior partner and later chairman of Greenwell
one-off , but the money stays in the
Montagu. He is an honorary visiting professor at
system because money is quite like the
CASS Business School, a fellow of the Institute of
hot potato of the children’s game – one
Actuaries and an FSIP. He has been a member of
individual can pass it to another but the the Economic and Social Research Council and is
group as a whole cannot get rid of it. Put the author of several books on monetary
another way, a loan typically stays inert economics in the UK.
22 SUMMER 2009
20-2320-23 EMH.indd 22EMH.indd 22 2/6/092/6/09 14:11:2814:11:28Professional Investor Summer 09.24 24 4/6/09 15:40:52
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