Archive for January 28th, 2008

New Zealand Central Bank makes reading on its economy interesting

January 28, 2008

Reserve Bank of New Zealand is an inflation targeting (IT) central bank. It was the first to have adopted the IT framework in 1990. Central banking as a whole has made tremendous progress since then. There is a lot of research on the way Central Banks have come to terms with inflation and have helped in their own way to stabilise growth in respective countries (However, this was all till the subprime came and we really don’t know which way the Central Banking is headed)

However, RBNZ is one central bank which is right at the top when it comes to explanation. The speeches etc from them are really simple and worth a read. It seems they take their role of being accountable to the public pretty seriously. They assume anyone who knows English should be able to read their report.

NZ is a pretty small economy but the way RBNZ explains the developments is excellent stuff. For instance see this on explaining financial system and this on rising food prices.

Now this recent one on the way NZ economy has performed over the years. It is a speech from the Governor – Alan Bollard. It is a nice prototype for all the analysts doing a report on a certain economy.

Indian economy report: Q3 2007-08

January 28, 2008

RBI’s quarterly report on Indian economy and financial markets has been released. It is released a day before the Monetary Policy meeting. The summary of the report is here.

I have not read the report. I will post later if I find anything interesting.


The report is routine stuff with lots of numbers and statistics. However, chapter 3 of the report on Monetary and Liquidity Conditions is really interesting. The new doing the rounds in economy is that rates are too high, banks are not giving loans etc. Here is what RBI has to say:

  • Non-food credit by scheduled commercial banks (SCBs) expanded by 22.2 per cent, y-o-y, as on January 4, 2008 as compared with 28.4 per cent at end-March 2007 and 31.9 per cent a year ago. The deceleration in credit growth coupled with the acceleration in deposit growth led to a decline in the incremental credit-deposit ratio (y-o-y) of SCBs to 63.3 per cent as on January 4, 2008 from 93.7 per cent a year ago.
  • Disaggregated sectoral data available up to November 23, 2007 show that about 43 per cent of incremental non-food credit (y-o-y) was absorbed by industry, as compared with 34 per cent in the corresponding period of the previous year. The expansion of incremental non-food credit to industry during this period was led by infrastructure (power, port and telecommunication), iron and steel, textiles, engineering, food processing, vehicles, petroleum, chemicals and construction industries. The infrastructure sector alone accounted for over 28 per cent of the incremental credit to industry as compared with 18 per cent in the corresponding period of the previous year.
  • Apart from bank credit, the corporate sector continued to meet its funding requirements from non-bank sources such as capital markets, external commercial borrowings and internal generation of funds. Resources raised through domestic equity issuances during the first nine months of 2007-08 (Rs.31,897 crore) were higher by 40 per cent than the corresponding period of the previous year.

So, capital raising is not that much of a problem. However, credit has slowed down but deposits have increased within banking system. Where are these deposits then invested in?

  • Growth in deposits, issuances of fresh capital and internal generation of funds by banks on the one hand, and moderation in credit growth on the other, enabled banks to deploy their funds in Government and other approved securities, which increased by 24.7 per cent, y-o-y, as on January 4, 2008 as compared with 5.9 per cent a year ago. 
  • Investments by SCBs in non-SLR securities (such as shares/bonds/commercial papers) increased substantially during the year. As regards banks’ exposure to the external sector, while banks’ overseas borrowings expanded, their holdings of foreign currency assets declined

So, it is not as much a problem with lower credit on account of lower deposits. The deposits have been growing but instead of deploying the proceeds as credit, they are being invested in G-Sec and other financial assets. Why is that? The reasons that comes to my mind are:

  • There are no really bankable projects- this is scary to think of given the huge infrastructure deficit in the country.
  • The returns on financial assets are higher- the banks could prefer financial assets instead of giving loans for creating real assets. The returns on real assets could be lower or the projects may not really be worthwhile.
  • The interest rates are quite high and the corporates are not looking forward to banks to raise debt capital. But cost of debt is lower than cost of equity and corporates seem to be raising via the equity route. Hence, this high interest rate is not really an important factor.

What else could be the possible reasons?

Central Bankers are neither doves nor hawks, they are owls

January 28, 2008

Reading speeches of Richard Fisher is always entertaining stuff. (See previous posts onetwo). He is usually very forthright in his views and doesn’t mince words either.

Here is another classic from the man. He says:

Those of you who follow my speeches—probably a very small number of you with way too much time on your hands—will recall that I like neither the term “hawk” nor “dove.” I like to think that all FOMC members are best metaphorically described in ornithological terms as “owls”—wise women and men seeking to achieve the right balance in carrying out our dual mandate.


The speech is another reminder on rising inflation and inflation expectations.

Banks, Banking and crises

January 28, 2008

Here is an excellent summary of the various aspects of Banking. It is basically a literature survey of Gary Gorton’s work.

The subprime mortgage credit crisis demonstrates that while financial intermediaries have changed in many ways, at root their problems remain the same. Indeed, the old problem of banking panics can reappear in new guises.

In the subprime mortgage crisis, investors without information about exactly which bonds have declined in value have refused to reinvest in the short-term obligations of structured vehicles, including Structured Investment Vehicles (SIVs) and Asset-Backed Commercial Paper Conduits. And, without financing from capital markets, these intermediary vehicles either must sell assets, causing the prices of a range of assets to fall and resulting in widespread losses, or must receive financing from their sponsor banks, reabsorbing the vehicles onto the balance sheet and resulting in decreased capital for the sponsoring banks. In this report I review my research on banks and banking, and look at bank crises in particular.

Again, the broad learning is nothing is different about the crisis. It also implies no lessons are really being learnt. See this excellent paper from Rogoff and Reinhart also saying nothing is really different this time.

Review of Joseph Stigilitz’s work

January 28, 2008

This paper from Karla Hoff is a nice summary of Joe Stiligiltz’s work.

Citations are an objective, if imperfect, measure of influence. Kim, Morse and Zingales (2006) compiled a list of the 146 articles published in economics journals from 1970 to 2002 that had received by June 2006 more than 500 citations from the ISI Web of Science/Social Science Citation Index. Six of Stiglitz’s papers appear on this list (no other author has more).

Procyclicality of balance sheets is another problem

January 28, 2008

Procylicality of balance sheet mean that leverage of balance sheets increase with rising asset prices  and vice versa. So when times are good leverage increases and then when we have sudden downfall, the entire thing is a mess.

I came across this paper from Adrian and Shin which show how strong this relationship has been over the years. The implication of this behavior is that we have upward sloping demand curves for assets and downward sloping supply curve.

It is a nice read. Really short and crisp. They gave a presentation at BIS which is also worth a look.

Assorted Links

January 28, 2008

1. JRV onIndia’s margin system. TTR also lends his thoughts on the margin system.

2. WSJ Blog points to economists discussion over whether enough is done already. It also pointsto Mark Gertler ‘s views on the crisis. He was Bernanke’s coauthor in few papers.

3. WSJ Blog also revisits financial accelerator, the one broad  idea developed by Bernanke that is behind the problems in US economy and the monetary policy measures.

4. Mankiw’s list of economists against the fiscal stimulus. It is amazing that in such stiff times, the economists in US are still debating what should be and should not be done.

5. Rodrik points to a capital flow analogy.

6. JRV also has a nice take on the Soc Gen fraud.

7. Ajay Shah reminds us of debt management office


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