Archive for February, 2009

Symmetrical Monetary Policy anyone?

February 27, 2009

Axel Weber, Chief of Bundesbank (Germany’s Central Bank) says:

The influence of monetary policy on the behaviour of financial market participants might be especially strong in the event that the central bank follows an asymmetric monetary policy that is lowering rates aggressively in the face of macroeconomic downturns but increasing rates only gradually when downside risks have vanished. Contrary to this approach, there is the idea of a symmetrical monetary policy, which would not consider the boom-bust phases in the financial markets as isolated events, but would try to look through the financial cycle and stabilise monetary policy.

Moreover, a symmetrical monetary policy would consider a higher key interest rate in the event of an increase in risk in the financial markets, even in the absence of inflationary risk or macroeconomic risks within the usual time horizon for monetary policy. This does not mean that the central bank would abandon its primary goal of price stability in favour of other intentions. The central bank would rather take a longerterm perspective and include the future consequences of unfavourable trends in the financial markets in its analysis.

This is interesting as it is coming from a Central Banker as they have resisted this all along. He is quite powerful as well and it will be interesting to see other central bankers also saying something similar. If there was no ECB, Bundesbank would have been the next powerful after Fed. Moreover, ECB has been largely on style of Bundesbank.

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Central Bankers should have a degree in economics

February 27, 2009

I came across this interesting resignation letter from David Oddson, Chairman of Board of Governors, Central Bank of Iceland. Before explaining the letter, here is the organisation structure of Central Bank:

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Assorted Links

February 27, 2009

1. Krugman says Obama is trying to do everything right, why not something useful on banks?

2. WSJ Blog points to Volcker testimony

3. Buiter on how to set up a good bank

4. Mankiw points to a new cartoon on moral hazard. He also has an excellent post on accounting differences over classification of TARP money on govt budget

5. Rodrik has a superb post on global fiscal stimulus plans

6.Fin Prof pointsGM lost USD 85 mn every day in Q4 2008

7. TTR points to RBS excesses. What can one say reading all this?

8. Urbanomics on dangers of estimating the bottom

9. Indicus Blog has a good post on forecasting by Indian companies

Could this be a global lost decade just like Japan’s lost decade of 1990-2000?

February 26, 2009

Masaaki Shirakawa, Governor of Bank of Japan has given an insightful speech comparing the US situation with Japan’s in 1990s. He points there is a remarkable similarity between the two.

He says:

While the economy of this period is often called as ‘Japan’s lost decade,’ in my view, such a categorization might not be perfectly capturing the nature of the problem and challenges of policy measures taken to cope with a financial crisis.

What were the factors that led to a slump in Japan?

First, there was a delay in recognizing the severity of the impact of massive nonperforming assets on the economy. It was a few years after the burst of the bubble when we recognized how seriously the decline in real estate prices affected financial institutions.

Second, there were imperfections in accounting and disclosure standards. At present, vigorous discussions are going on about how to cover the expected losses over the credit cycle in terms of accounting. At the time, there was a lag in showing the incurred losses of financial institutions on the accounting and disclosure front.

Third, partly as a result of the aforementioned two points, the authorities could not resolve troubled financial institutions in a timely manner, because of the delayed progress in establishing a framework of resolution to cope with troubled and failed large financial institutions. Arguably, the legal framework of resolution, operational procedure, and, above all, public funds to cover a capital shortage are vital in ensuring the smooth resolution of troubled and failed financial institutions. And it was in early 1998 after we experienced a series of failures of large financial institutions that the full-fledged safety net framework was put in place.

He then points similar problems are resurfaced now. So, despite the lessons US (and others) are repeating the same. Why? policymaking comes with a lot of ifs and buts. So, terming it Japan’s lost decade ignores the fact that there was just too much uncertainty. Same is the case now.

He says removing uncertainty is the main problem. It was never a liquidity problem but a solvency problem. Until we solve this, there will be little forward movement. He also adds there are lots of dilemmas for policymakers to solve:

A ‘mirage’ phenomenon is taking place in that, despite public capital injection, concern over additional losses on the assets mounts over time and such concern in turn will heighten concern for a capital shortage of financial institutions.

Under those circumstances, it is of vital importance to remove uncertainty. There are two options to remove uncertainty stemming from financial institutions’ nonperforming assets; the government purchases those assets or provides a loss guarantee to those assets. Nevertheless, even in both cases, uncertainty might not be removed for the assets not covered by the purchases or the guarantees, and investors thus would continue to ask the institutions for high risk premiums.

What Japan faced in the past and what the U.S. is facing now is arguably those difficulties. However, even with such difficulties, it is an indispensable process to promptly identify the amount of losses and to carry out recapitalization to secure financial system stability, if necessary.

All this does not look good at all. It is also not just particular to US but many economies are facing the same  problem. The problem currently looks deeper than Japan’s as despite some aggressive policy responses(though it could still be a lot quicker), nothing has really happened. Things have only gone worse. True, similar mistakes have been made like that of Japan but policy action did not wait as long as seen in Japan.

What is also interesting (and depressing) is that there are many dilemmas to solve. There is no easy way. You infuse capital, it could signal more losses ahead; you try and buy toxic assets, the pricing is an issue etc etc. It does not look good at all and the way things look, it could take a lot longer for economies to recover.  It looks like a long long dark tunnel with light sometime away.

Economic Forecasters – Hedgehogs or foxes?

February 26, 2009

Philip Tetlock, Professor at the Haas Business School at the University of California-Berkeley, gives an excellent interview in CNN on forecasting (HT: Niranjan’s Blog). Though, I had mentioned about it in assorted links, it deserves a separate post.

What makes some forecasters better than others?

The most important factor was not how much education or experience the experts had but how they thought. You know the famous line that [philosopher] Isaiah Berlin borrowed from a Greek poet, “The fox knows many things, but the hedgehog knows one big thing”? The better forecasters were like Berlin’s foxes: self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.

Excellent. This is so true. Media loves the hedgehogs. It is also important for foxes to remain as one. What usually happens is foxes also become hedgehogs seeing the instant fame.

This actually made me think. Before crisis many experts said we are in era of great moderation and as a result everything will be stable and rising. Quite a few turned hedgehog and stretched the idea to the hilt. And the crisis hit. Now we have a large number of experts saying things are going to be very bad and have stretched this idea as well. We come across new theories nearly every week to justify why the crisis will be worse. Could this be a hedgehog as well and economies will recover sooner than expected.

The entire interview is worth a read.

Did Sweden in its 1990 crisis nationalise the banks?

February 26, 2009

Media is rife with comparisons of today’s crisis with Sweden’s crisis. (However, I think entire Nordic crisis of 1990 is a better parallel). There is a consensus that like Sweden US should also nationalise its banks.

Anders Aslund of IIE turns this Sweden crisis parallel on its head. He says Sweden did not nationalise the banking system as we believe (Norway did). So, we are looking at the wrong country for a solution. Sweden example serves well for buying bad assets but not for nationalisation of banks. Even then, bad banks were set by private banks and not any govt authority.

I also checked a comprehensive paper (see Chapter 3 in paper or page 94 of the entire report) prepared on Nordic Crisis by Norges Bank. It says only 2 banks were nationalised in Sweden – Gota Bank (which Aslund also mentions) and Nordbanken (which was majorly owned by Govt anyways). Norway nationalised three and Finland two.

So it is Norway and not really Sweden we should be looking at. Even in Norway only 3 were nationalised and in US case we are looking at possibly 1000s as President Obama himself noted.

I came across another excellent short note from St Louis Fed on resolving the crisis via Nordic way. It says three lessons:

First, build a bipartisan political consensus to support the actions needed to maintain confidence in the banking system. This includes establishing a new crisis resolution agency to handle both communication with the public and bank restructuring. If successful, such an agency can reduce conflicts of interest or “turf fights” among existing agencies while providing capital and liquidity to banks, even if another agency (such as the central bank) provides funding.

Second, seek private solutions, including mergers and acquisitions; avoid liquidations when possible.

Third, be very transparent regarding support actions. In the Nordic case, public confidence was sustained and bank runs avoided (absent government  deposit insurance) through a highly visible public government guarantee for the obligations of banks, including both deposits and borrowings.

US (and others) have only tried to follow the second lesson. First and Third have been ignored and there is absolutely no clarity with any policy response. I had pointed earlier as well that biggest lesson from Sweden’s crisis was its transparency and communications. Even now, there is much confusion despite both Treasury and Fed trying their best to be transparent. For instance, Treasury has set a website for all its financial stability programs and Fed for its various Programs. They hardly serve any purpose with former having just links to various programs and latter too much information for anyone to digest. What is needed is short primers to tell the public of its intentions.

Anyways, another idea on its head. Hunt for solutions from Norway now.

The focus now moves to pensions

February 26, 2009

BBC reported this shocker:

Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland, is already drawing a pension of £650,000 a year, despite only being 50. The BBC has learned that the pot that generates his pension is worth £16m.

Sir Fred’s strategy and decision to buy ABN Amro is widely seen as making the bank more vulnerable to the credit crunch and having to be bailed out. RBS, which is 70% owned by taxpayers, is expected to announce the UK’s biggest corporate loss on Thursday.

This is simply crazy. Taxpayers now seem to be paying pensions to a guy who is just 50 yrs old!! This has angered the MPs as well:

Michael Fallon, a Conservative MP on the Treasury Committee, said the government should not have allowed the payments to go ahead in the first place.  “Ministers must have known this when they took over the bank back in October,” he said. They must have known what his pension arrangements were. They have had since October to get this sorted out. That pension should have been stopped.

However, Sir Fred is unperturbed:

When giving evidence to the Treasury Committee on 10 February, Sir Fred said: “My pension is the same as everyone else in the bank who is in a defined benefit pension scheme. It is determined in the same way as anyone else.”

Can you believe this!!

Robert Peston of BBC in his blog clarifies that this isn’t just a rumor:

Perhaps unsurprisingly, when I informed the Treasury we were about to run this striking story, I was told that ministers were very unhappy about the generous terms of Sir Fred’s early retirement package.

So UK Financial Investments – the offshoot of the Treasury which manages taxpayers’ stakes in our big banks – is investigating, with RBS’s board, whether there is any way of clawing back some of the pension entitlement (see below for a full copy of a statement given to me by the Treasury).

Peston also points ex- RBS chief fixed this pension arrangement way back:

Now before you pull your hair out, I should mention that Sir Fred didn’t take any money by way of compensation from RBS when he left the bank.  And his entitlement to a pension at 50, in the event that he was asked to leave RBS, was an arrangement put in place some years ago and applied to other directors too. Even so, the disclosure that he’s set up very nicely for life will spark some controversy.

Very smart indeed. Did he understand the risks he had put the bank in and so made a pension plan well in advance?

The authorities would now also have to look at pension accounts as well. How bad can it get?

PS. The latest news tells me RBS has incurred a loss of GBP 34.2 bn in 2008 and is participating in whatever govt plans possible.

Assorted Links

February 26, 2009

1. Krugman points US has not learnt any lessons from Japanese experience. He also says the new measure to stress test banks will not cause much stress :-)

2. WSJ Blog points Geither says nationalisation is a wrong strategy

3. ASB points BPO path to international finance. Despite all this mess, we still seem to believe in international finance!

4. Nudges has an excellent post on India’s New Penson System scheme

5. Mankiw pointsto an interesting graph on Ricardian equivalence

6. Finprof points index funds wins again

7. TTR points to Taleb article on bank bonuses

8. ACB has a superb post comparing forecasters to hedgehogs and foxes.

9. Urbanomics has a useful post on the benefits of early childhood education

India’s capital account liberalization – What is the real issue?

February 25, 2009

Eswar Prasad of Cornell University has written a new paper (free version here) on India’s capital account liberalisation. The abstract says:

In this paper, I analyze India’s approach to capital account liberalization through the lens of the new literature on financial globalization. India’s authorities have taken a cautious and calibrated path to capital account opening, which has served the economy well in terms of reducing its vulnerability to crises. By now, the capital account has become quite open and reversing this is not a viable option. Moreover, the remaining capital controls are rapidly becoming ineffective, making the debate about capital controls rather moot. Managing de facto financial integration into international capital markets and aligning domestic macroeconomic policies in a manner that maximizes the indirect benefits and reduces the risks is the key challenge now facing India’s policymakers on this front.

On reading the abstract casually, I thought the paper would be a typical one – criticising India’s approach towards capital account liberalisation and ask policymakers to open it further.

However on reading the paper carefully, I get an opposite message. The paper actually says India has liberalised its capital account and is quite open. (One could also see this paper which measures financial globalisation by comparing spreads between offshore and onshore markets. India does not fare very badly either.)

One area where India has not opened up is opening its debt market to foreigners. As a result when we look at comprehensive measure of capital account liberalisation, India is ranked low compared to its peers. However, when we disaggregate see only equity markets (FII and FDI), India ranks with the peers. The author points that the ideal way to liberalise capital account with beginning with equity markets and debt markets coming later.

He also praises RBI:

The outcome of the RBI’s calibrated approach to capital account opening appears to have resulted in a preponderance of FDI and portfolio liabilities in India’s stock of gross external liabilities. All elements of the literature point to this as being a favorable outcome in terms of improving the benefit-risk tradeoff of financial openness.

What is also interesting is that author reviews literature on whether capital flows matter. He looks at three ways:

  • On growth: no evidence whether capital flows matter (this is well known as pointed by Obstfeld and Rogoffin different studies). He also points to his own study which says non-industrial economies that rely less on capital flows have betterlong run growth. He says capital flows seem to have more indirect effects than direct ones. However, proving this empirically is very difficult.
  • On risk sharing: Ideally more integrated economies should be better off as their risks are diversified across other economies. However, only developed econs have been able to manage their risks (this has also been thrashed in this crisis). Integrated emerging econs have only seen risks rise in a crisis (see figure 2 in the paper). The author then points to research which says risk sharing works better in case of equity markets and not in debt markets. Which is what India has done exactly.
  • Productivity: Again the same result…equity market integration shows higher productivity, debt does not. If we add indirect benefits of capital flows, impact on productivity is more.
  • Hence, research points what is more important is composition of foreign capital inflows and not overall benefits.

And despite all this knowhow, author says:

Given the cushion provided by India’s high level of reserves, there is now an opportunity to push forward more aggressively with capital account opening in order to gain some of the indirect benefits of financial integration. For instance, a specific recommendation of Rajan Committee (2008) is that allowing foreign investors to invest in government bonds could improve the liquidity and depth of this market. This would have numerous ancillary benefits.

A deep and well-functioning government bond market is a prerequisite for serving as a benchmark for pricing corporate bonds, which could allow that market to develop. By providing an additional source of debt financing, it would create some room for the government to reduce the financing burden it currently imposes on banks through the statutory liquidity ratio—the requirement that banks hold a certain portion of their deposits in government bonds. And it might even have the beneficial effect of imposing some discipline on fiscal policy since foreign investors could pull out and raise the cost of debt financing if the government budget deficit were to start rising again.

I mean why would you recommend this? The benefits of a deep bond market are well known but costs could be much higher especially in times of this crisis (it will be interesting to do a cost benefit analysis). With record high government deficit the least Indian government would want is a foreign investor pull out. It would be a disaster of all sorts.

I don’t think sequence of events should be open govt debt markets and then use it as a signal to impose lower fiscal deficit. It is ideal but never works. A better sequence is to lower fiscal deficit (actual fiscal deficit including off-balance sheet liabilities) and let govt show commitment towards the lower deficit. Only then liberalise govt bond markets.

Anyways an interesting paper. Highly readable.

UK’s new banking act gives BoE more powers

February 25, 2009

UK has passed a new banking act:

The Banking Act provides a permanent and appropriate regime for the resolution of failing banks. It is a major step forward in the Government’s ongoing programme to strengthen stability and confidence in the UK banking system, in the wake of the global instability experienced by financial markets in the last eighteen months. I am particularly grateful to the contribution of the expert liaison group of industry participants in developing these proposals.”

The documents related to the Act are here.

Interestingly, they have also placed a report which analyses cost-benefit analysis of the new bill.

Costs of the Bill: GBP 2.2 mn – 4.5 mn
Benefits: GBP 3.6 mn – 5.1 mn

I am still going through the document. The media helps explain the act. BBCIHT. Telegraph has a neat explanation by outgoing BoE Deputy Governor John Gieve:

On Saturday the first provisions of the new Banking Act brought into force a new and permanent Special Resolution Regime (SRR) under which the Bank of England has been given a central role. The Act also gives the Bank of England for the first time a statutory objective to promote financial stability, working in cooperation with the FSA and the Treasury.

The SRR is a last resort. It will be triggered only if the FSA decides that a bank is failing or is likely to fail its threshold conditions and has no reasonable prospect of remedying that position. At that point, the Bank of England will choose between a range of options including the transfer of the whole or part of the business to a commercial purchaser directly or through a bridge bank, which would be a subsidiary of the Bank of England.

Assorted Links

February 25, 2009

1. Krugman on bank aid plans

2. IDB points to small change education can make

3. WSJ Blog points to Bernanke’s new speech, Econbrowser points as well

4. Mankiw on confused messages from US policymakers

5. FCB points to finance formula that killed wall street

6. Roth points market design is coming of age

7. CTB points Taleb goes short on markets each time he sees Bernanke speaking on TV.

8. ICLB compares bank nationalisations in India with US

A solution to limit risks via incentives

February 24, 2009

Yale Law School has roundtable discussions on current topics. On Feb 13, 2009 it had a discussion on future of financial regulation. It was divided across 4 sessions with top economists presenting papers and debates.

Session 1:  Crisis Origins and Historical Comparisons
Session 2:  Causes of the Crisis: Conflicts, Compensation and Reputation
Session 3:  Reforming Financial Institution Regulation
Session 4:  Reforming Subprime Mortgages

I came across this paperfrom Sanjali Bhagat and Roberta Romano. They propose a way to limit risks via the incentive route. In this crisis, it has been seen how incentives lead to gains for the employee and adds risks to the organisation.

We suggest that executive incentive compensation plans should consist only of  restricted stock and restricted stock options , restricted in the sense that the shares cannot be sold or the option cannot be exercised for a period of at least two to four years after the executive’s resignation or last day in office. This will provide superior incentives for executives to manage corporations in investors’ longer-term interest, and diminish their incentives to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation.

 This looks like a pretty simple idea. Why wasn’t it implemented?

The authors point that instead of applying restrictions on incentives (like Obama did) it is better to design incentives in a manner that limits risks to the organisation. They point that executive compensation has always been a source of public outcry but regulations to limit them have not been effective. People always know a way out to redesign their compensation so that they do not violate the law but also get more compensation!

Good overview on compensation issues in US financial sector.

Infact, all papers presented in the round-table look quite good.

Hernando De Soto’s view on this crisis

February 24, 2009

There is tons of research, speeches on why this crisis happened. However, there is always space for more :-) I came across this interesting interview of Hernando De Soto. De Soto has revolutionised the thinking that property rights leads to economic development.

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Assorted Links

February 24, 2009

1. Krugman on nationalisation fears

2. WSJ Blog on lessons from Sweden’s Bank Nationalisation.

3. NB points defaults might not be good always

4. Mankiw points to scary stuff on US fiscal deficit

5. FCB on dollar cost averaging

6. Lusardi points lessons from her new paper on individual savings

7. ACB on balance sheet recessions

8. Urbanomics has a superb post on Randomisation

9. Urbanomics has more ideas on making India new pension system better. It also points to a nice snapshot on corporate greed. Also check the humor relating Oscar awards to crisis.

10. Econbrowser points deflation risks have declined somewhat

Stress Tests and all that jazz

February 20, 2009

There is a increased focus and hope on stress tests announced in recent US Financial Stability plan. The Stress tests will help seperate good banks from bad banks.

Andrew Haldane of Bank of England has written a fantastic paper on risk management and stress tests.  Paper has good doses of humor with plenty of insight and history .

History of Stress Management:

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Iceland authorities knew things are wrong but were helpless

February 20, 2009

Ingimundur Fridriksson, Governor, Central Bank of Iceland has prepared a paper about the banking crisis in Iceland in 2008.

He says Iceland authorities were aware of the problems as issues over banks came to limelight first in 2005. He says authorities had taken some measures which led banks to be in better shape than they would have been.

The banks attracted international attention late in 2005 and early in 2006. The market became more wary of them, their CDS spreads began rising toward the end of 2005, and they received more probing and critical coverage by the media and others than they were accustomed to. The criticism was wide ranging, targeting the banks’ growth pace, risk appetite, low deposit ratios and high dependence on borrowed funds, as well as cross ownership, lack of transparency, and so on. Until that time, the banks had increasingly been active in the global bond market, with ever larger debt issues.

In February 2006, Iceland’s Prime Ministry, Ministry of Finance, Ministry of Business Affairs, Financial Supervisory Authority, and Central Bank concluded a collaboration agreement centring on financial stability and contingency measures. The government then established an advisory group on the basis of this agreement.

The Icelandic banks sought to respond in various ways to the criticism levelled at them. They greatly enhanced their information disclosure to the global marketplace, thus improving transparency in their operations. They sought  to reduce cross-ownership, improve their liquidity position and capital ratios, and took the first steps toward increasing the share of deposits on the liabilities side of their balance sheets.

Because they took this action, the Icelandic banks were perhaps better prepared than they would otherwise have been for the sudden changes that took place in the global financial markets in mid-2007.

Interesting. I am wondering how bad things could have been if the efforts not taken. Could they been any worse?

Like many others now, he says Bank of Iceland raised concerns but no one listened.

In this context, I wish to cite the Central Bank’s 2007  Financial Stability report, which appeared in April that year. It contained the following statement: “The Central Bank underlines that global market conditions can take a sudden turn for the worse and it is important to be on the alert and prepared for such a contingency.” 

The report goes on to say: “The current episode of ample liquidity and lower interest rates which has been ideal for risk-seeking investors may change unexpectedly. Short-term interest rates have been rising in most markets recently and capital costs are no longer so favourable.” With this warning, the Central Bank was merely stating what should have been obvious, at least to those engaged in banking.

He adds despite best efforts, the crisis became deeper post Lehman and as a result all things fell flat. It kicked a set of events which became difficult to reverse and Iceland had to ask for IMF help.

Interesting defence by the governor. However, Buiter would not agree. Mishkin’s report too missed Iceland trouble.

Assorted Links

February 20, 2009

1. Urbanomics has an excellent post on balance sheet deflation. It also summarises the new US homeowner plan

2. IDB on random experiments

3. Indicus Blog on India consumption story

4. Macroblo explains ARRA in pictures

5. Finprof points to an initiative by WSJ that aism to bring leaders and thinkers in finance on one forum

6. Stephanomics has a discussion on UK’s cost of taking over banks

7. CTB points to research which analyses whether we can learn anything from past financial crisis?

Fed directing a mystery movie.. a la Hitchcock

February 19, 2009

Fed Chairman, Bernanke in his recent speech says:

the expansion of the Federal Reserve’s balance sheet has raised some concerns–and led to some misconceptions–about the credit risk being taken by the Fed. I will address the issue of credit risk today.

Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve will ultimately stoke inflation…..However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. To reduce policy accommodation, the Fed will have to unwind some of its credit-easing programs and allow its balance sheet to shrink. To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities.

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BoE to try quantitative easing

February 19, 2009

In its latest Monetary Policy Committee Minutes:

To the extent that further cuts in Bank Rate could not inject sufficient stimulus, the Committee would need to use alternative policy instruments. The MPC’s ability to influence the value of nominal spending and inflation in the economy ultimately came from the Bank of England’s role as the monopoly supplier of sterling central bank money: banknotes and reserves held by the banking system at the Bank. The MPC had up until now influenced the economy by changing the interest rate –currently Bank Rate – at which those reserves were remunerated. The Bank had supplied the amount of central bank money demanded at that level of Bank Rate, mostly by purchasing and selling government securities.

But the MPC could also influence the economy by controlling the quantity of that central bank  money directly. Increasing the supply of central bank money in the economy through additional purchases of government securities should raise private sector spending, both directly (through the increase in money holdings of private sector asset sellers) and indirectly (through an expansion by banks of the supply of credit).

UK economy is under dire straits. Recently BoE started Asset Purchase Facility (under UK’s TARP) :

In the present environment, where particular credit markets were not functioning normally, it was appropriate to consider increasing the supply of central bank money by more unconventional types of asset purchases. 

The Bank, rather than the MPC, had already been given the authority by the Chancellor to conduct such purchases, via the Asset Purchase Facility (APF), although in this case financed by the issuance of Treasury Bills. The APF was a specially created fund, indemnified by the Treasury. Those purchases were aimed at improving conditions in the specific credit markets rather than achieving the inflation target. Nevertheless, these measures might help to change banks’ behaviour and boost the broad supply of money, which could provide a material stimulus to nominal spending.

APF is being financed by  UK Treasury and does not lead to pumping reserves in the economy. Infact money stays constant in the economy and just changes hands. UK Treasury raises monies by issuing T-Bills; Monies are transferred to BoE to buy securities under APF.

The difference between APF and what Minutes mean is  – BoE would try and buy govt bonds and other securities on its own account and not on Treasury’s account. This is Japan did in its 1990s crisis and it will be interesting to see how BoE fares.

BBC points BoE is looking  to seek permission from government for the same. Also read Stephanomics for more details

India’s Poverty needs urgent attention

February 19, 2009

Though, talking about poverty is a complete no-no these days, here is my paper on India’s poverty. The paper looks at poverty numbers in India which are extremely worrisome. There are large number of people living just above poverty line and a small upward change in the poverty line leads to large number of people below poverty.


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