Archive for March 25th, 2009

For AIG bonuses blame the Connecticut law

March 25, 2009

I had pointed earlier:

House Committee on Financial Services has started a two part hearing. In first part AIG CEO talks and in second Bernanke and Geithner would present their views (25 March 2009). The first part hearings are available on the website

The second part of hearing is here and is being discussed widely in blogs and media.

Geithner says:

On March 10th, I received a full briefing on the details of AIGFP’s pending retention payments, including information on the payments to individual executives.

I found these payments deeply troubling.  After consulting with colleagues at the Fed and exploring our legal options, I called Ed Liddy and asked him to renegotiate these payments.  He explained that the contracts for the retention payments were legally binding and pointed out the risk that, by breaching the contracts, some employees might have a claim under Connecticut law to double payment of the contracted amounts.

Bernanke says:

I asked that the AIG-FP payments be stopped but was informed that they were mandated by contracts agreed to before the government’s intervention. I then asked that suit be filed to prevent the payments. Legal staff counseled against this action, on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail; legal action could thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees.

It seems lots of work has gone in structuring compensation schemes, ensuring the flow continues whatever happens

Comparing Fed, BoJ and ECB

March 25, 2009

I have pointed to number of papers comparing monetary policy between Fed and ECB ( See this, this, this and this).

I came across another paper from the trio Dieter Gerdesmeier, Francesco Paolo Mongelli and Barbara Roffia which compares Fed, ECB and Bank of Japan.

Key Findings:

This paper has analysed the similarities and the differences among the  Eurosystem, the Fed and the BoJ. It finds that, while several of their tasks and their respective legal statuses differ somewhat, there are fewer differences in their institutional structures and monetary frameworks, as well as the use of instruments. Central banking practices around the world have also evolved in the di rection of greater independence, transparency and the adoption of monetary policy committees, among other developments. This has contributed to reducing the differences among the three institutions, a trend that can also be observed among other central banks.

There are, however, some de facto differences in the way monetary policy committees operate.  For example, when taking monetary policy decisions, both the Governing Council of the ECB and the Board of Governors of the Fed officially act by simple majority voting. In practice, both the Governing Council and the FOMC operate as collegial committees. Yet, while the former functions as a genuinely collegial committee practising consensus voting, in the latter the chairman has scope to steer the agenda very tightly. The Policy Board of the BoJ, by contrast, operates in a much more individualistic manner than the other two.

There are also some differences in terms of communication strategie s, although, overall, the  responsiveness of the financial market seems high for both the Eurosystem (concerning monetary policy inclinations) and the Fed (regarding monetary policy inclinations and views on the economic outlook). However, the Fed does not quantify its definition of price stability, whereas the ECB and the BoJ do. Nor does it spell out a fully fledged monetary policy (again in contrast to the ECB and the BoJ). The ECB does not publish the minutes of its Governing Council meetings, unlike the Fed and the BoJ.

As for the economic and financial environment, over the past two decades all three central banks have faced a series of diverse challenges, some of them country-specific (as in the case of Japan), and others more global in nature. Early in the sample period, conditions differed considerably in the three currency areas, with a much higher dispersion among euro area.

A comparison based on a very simplistic policy reaction function framework à-la-Taylor shows no striking differences in the implementation of monetary policy. It can, therefore, be concluded that, in practice, the monetary policies of the Eurosystem, the Fed and the BoJ(if we exclude the more recent challenging period) fundamentally do not differ that much.

Excellent stuff.

Monetary Policy under ZIRP

March 25, 2009

Lars Svensson of Princeton Univ and Deputy Governor Riksbank has done loads of research on Zero Interest Rate Policy (ZIRP).  He has given a nice speech summarising the issues and various research on the subject.

Assorted Links

March 25, 2009

1. WSJ Blog points to Kansas Fed chief  views on Fed operations

2. Mankiw pointsto a pessimistic forecast from Reinhart-Rogoff duo

3. Stephanomics on recent Governor’s remarks


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