Archive for the ‘Central Banks / Monetary Policy’ Category

How the first thing Nazis did after invasion of a country was to rob central banks ..

December 18, 2014

Fascinating history and there is a book on this – Chasing Gold: The Incredible Story of How the Nazis Stole Europe’s Bullion. by George Taber.

This article summarises the main idea behind the book:

To keep Hitler’s war machine going, the Nazis captured bullion from European central banks that today would be worth $19 billion, writes George M. Taber, author of Chasing Gold: The Incredible Story of How the Nazis Stole Europe’s Bullion.

Hjalmar Horace Greeley Schacht was Adolph Hitler’s moneyman, and for six crucial years he formulated the dictator’s economic program. At the time, Schacht was Germany’s most famous and respected financier because he had broken the country’s hyperinflation of 1923, one of history’s worst. At the height of that financial crisis, one American dollar was worth 4,210,500,000,000 marks. Schacht in 1932 threw his immense reputation and economic skills behind Hitler and became both the president of the Nazi central bank and the finance minister.

….The centerpiece of Schacht’s economic policy for Hitler was autarky, or total self-sufficiency. During World War I, the British blockade had starved the German people and eventually defeated them. Nearly a half million Germans died of starvation. That prompted Berlin in 1917 to resume submarine warfare in hopes of defeating the Allies before the Americans got into the war. The strategy failed. That blockade experience left the Germans with the post-war determination never again to depend on other countries for vital imports.

Nature had not blessed Germany with all the vital products needed for the country’s war machine. Without them the Nazi army would be little more than toy soldiers.

There was only one problem. Nature had not blessed Germany with all the vital products needed for the country’s war machine. Without them the Nazi army would be little more than toy soldiers. While Germany had plenty of low-grade iron ore to make weapons, it lacked the high-grade steel used in the manufacture of tanks and bombers. Low-grade iron ore, though, could be turned into a higher quality product with the help of a metal known as tungsten or wolfram. That could be bought from Spain and Portugal.

Germany was also short of oil to fuel tanks and bombers. The Germans began a successful crash program to make synthetic oil, but they could still not produce needed high grade oil. That they bought largely from Romania, which fueled the Nazi tanks that invaded the Soviet Union in June 1941. Chromium was another natural resource needed for warfare that Germany lacked. They bought that from Turkey. Sweden also supplied the Germans with ball bearings, another important material.

These five neutral countries wereok with Gold but not with Marks:

Those five supposedly neutral countries would not accept German Reichsmarks in payment for the war goods, but they would take gold. Part of the world’s bullion resides in private hands, but the vast majority of it is in central banks. Willy Sutton robbed banks because that’s where the money was. The Nazis robbed central banks because that’s where the gold was. Swiss bankers played a crucial role in the transactions by being the financial middlemen.

Austria was the first victim of Nazi aggression in the spring of 1938. Because of his close relations with the Bank for International Settlements, which he had helped start, Schacht knew that the Austrian central bank had about 100 tons of gold. That was almost four times as much as the Germans had at the time. When the Wehrmacht marched into Vienna on Saturday morning March 12, Wilhelm Keppler, a businessman and early Hitler backer, and two armed Nazi commandoes arrived at the Austrian Central Bank and took the Austrian gold to Berlin. The Germans forced the Austrian central bank to transfer an additional 5.7 tons that it had shipped to London for safekeeping.

The Nazis also demanded that Vienna’s large and wealthy Jewish community hand over to Berlin 14.3 tons of their private gold. Schacht immediately departed for Vienna to lead the Nazi takeover of the Austrian central bank. In a festive celebration at its headquarters, he led the staff in a pledge of allegiance to Hitler, asking them to join him in “a triple Sieg Heil to ourFührer.”

The windfall arrived at a crucial time for the Nazis. By mid-1938, Berlin was almost out of foreign currency and gold largely because of its rearmament program and would have been forced to cut back their war buildup. On October 3, 1938, Emil Puhl, who soon became vice-president of the Reichsbank, wrote in a memo, “The rapid implementation of rearmament was only possible because of the use of available gold, foreign exchange from the former Reich, and the immediate recovery of Austrian gold, foreign raw material, and valuable securities reserves.”

When the Germans later invaded other European countries, one of their first stops was always the local central bank. After quickly learning what had happened in Austria, foreign central bankers desperately tried to get the gold out of their countries. Usually the bullion was sent an ocean away to Canada and the United States, where it was stored temporarily at the New York Federal Reserve vaults in lower Manhattan but eventually went to Fort Knox. Even the Vatican secretly sent nearly eight tons of gold to New York.

In the darkest days of the Blitz in May 1940, the Bank of England shipped 2,000 tons across the U-boat infested Atlantic. That included not only Britain’s gold but also large stashes held for other countries. Amazingly, not a single ship was sunk. The British nicknamed the secret cargo margarine. After the Nazis invaded the Soviet Union in June 1941, Stalin’s Politburo voted to send by train their three most valuable properties 900 miles to the Eastern side of the Ural Mountains to keep them out of Hitler’s hands. The three: Lenin’s embalmed body, the art works of Leningrad’s Hermitage Museum, and 2,800 tons of gold.

 In the end they had around $600 mn worth of gold:

The Nazis eventually captured some $600 million worth of gold, which today would be worth $19 billion Twitter . That kept Hitler’s war machine going for five years. At the end of World War II in 1945, the Reichsbank still had nearly 300 tons on hand, which was more than it had at the beginning of the conflict. Without the stolen central bank gold, Adolph Hitler would have been an insignificant player in world history.

Fascinating..

 

Was Milton Freidman a true libertarian?

December 12, 2014

One serious misgiving of ignoring history of economic thought is inability of students to argue against the other side of an econ debate. This lacunae becomes deeper if we try and argue against the mainstream thinking and that too on a topic as suggested by the title of the blogpost.

Murray Rothbard of Austrian school had written this article  in 1971 arguing that Friedman is not the libertarian as idolized by free market believers:

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How the Banking Union has transformed banks’ IT requirements..

December 10, 2014

This is an unusual speech but seeing how banking is shaping up could be the most usual thing to talk about. In things like banking union, one would usually see things like banks’ capital requirements, quality of assets and so on.

Dr Joachim Nagel, of the Bundesbank talks on IT requirements of banks post the banking union:

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Monetary Policy Transmission in India: Pre and Post LAF period

December 9, 2014

A nice research by Nandini Sengupta of KC College Mumbai.

She looks at the impact of monetary policy on things like credit markets, asset markets, interest rate and so (this is standard monetary policy transmission). More importantly, the paper divides the research into two periods- pre LAF (before 2000) and post LAF (post 2000) and sees whether the transmission has changed in the transition. The findings are:

It is found that the bank lending channel remains an important means of transmission of monetary policy in India, but it has weakened in the post-LAF period. The interest rate and asset price channels have become stronger and the exchange rate channel, although weak, shows a mild improvement in the post-LAF period.

Bank lending channel has weakened as now firms have much wider choices to raise capital. Banks are not the only option..

Improving the security and cost-effectiveness of banknotes…

December 8, 2014

Management of currency notes is  one of the least focused tasks of monetary management. The origin of central banks largely came from this activity. There were many banks which issued their own notes convertible into some commodity (mainly gold). Some of these banks over-issued these notes, leading to problems of liability management. The governments then decided to have one bank issue notes which eventually came to be known as central bank. Then gradually, these banks were given additional tasks. Earlier, the banks had both deposits and currency as liabilities. But with central banks coming in picture, the currency became liabilityty of the central bank and deposits of banks.

Mr François Groepe of the South African Reserve Bank has comments  on this currency management business:

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Will Hong Kong become irrelevant as Mainland China opens up?

December 8, 2014

Nice speech by Mr, Norman Chan of HKMA.

He says there is no reason why HK should decline as mainland China opens up. Both have their own strengths. He shows through statistics how things between the two regions have only improved overtime.

By leveraging on each other’s strengths bot can gain:

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The real question is not whether interest rates are high or low but are they correct..

December 4, 2014

 of Mises Institute says interest rates are like prices. Just like prices, we should be more concerned with right or wrong interest rates:

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What is free banking all about?

December 3, 2014

There has been some hot and stirring debate on free banking in the blogosphere.

Ueasymoney blog sums up the debate and provides links on who said what on the topic. For those interested in history of money and banking, studying free banking is a must as this is how it all started. Adam Smith wrote on free banking in his wealth of nations tome. Also read this website where leading free bajmking scholars are writing some really fab and interesting stuff.

There are two schools of free banking — Currency school led by Hume and Banking school led by Smith:

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Gold referendum rejected and SNB gets a breather

December 2, 2014

An old news as the referendum happened on 30th Nov. It was rejected by a vote of 78% against the referendum. That is a huge margin.

SNB breathes a sigh of relief and continues with its policy of targeting exchange rate at 1.2 CHF/EUR.

Bank funding costs: what are they, what determines them and why do they matter?

November 28, 2014

BoE has an interesting article/primer in its latest quarterly article.

It uses colorful scales to show how banks manage their liabilities:

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The Federal Reserve’s Escape from New York..

November 26, 2014

Prof Simon Johnson’s recent piece is on governance at Federal Reserve. In his typical style, he lambasts what has been going on at Fed esp. at NY Fed.

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Is ECB a rabbit in the rabbit/tortoise story? (and Fed/BOJ tortoise??)

November 26, 2014

Harley Bassman of Pimco thinks so.

Aesop relays the tale of a hare who ridicules a slow-moving tortoise, who then challenges the hare to a race. The hare soon leaves the tortoise far behind and, confident of winning, takes a nap midway through the race. When the hare awakes, however, he finds that his competitor, crawling slowly but steadily, has crossed the finish line before him.

Investors may wonder how long the European Central Bank (ECB) will slumber after taking an early lead in the race to expand its balance sheet to facilitate growth across the eurozone – the world’s second-largest economy.

We could call it an economic fable…

It has come to pass that the first- and third-largest economies on the planet – the U.S. and Japan, respectively, and the tortoises of our tale – have engaged in massive quantitative easing (QE) programs as a means to spur monetary velocity (via increased asset velocity – that is, the rate at which assets circulate). Yet some analysts insist the eurozone may not follow suit.

He goes on to suggest that QE may not work in theory but does in practice…

Should Russian Ruble follow Keynes proposal of Currency board?

November 25, 2014

Prof Steve Hanke argues how Russia has just lost its control over Ruble. It makes sense for the country to adopt a currency board first suggested by Keynes (did not know this):

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Why are central banks getting concerned with gold reserves/location of gold reserves?

November 21, 2014

The gold fetters are worrying central banks once again. One keeps hearing some news or the other. Swiss are anyways going to vote on Nov 3o on whether SNB should hold 20% of its reserves as gold and hold all its gold reserves in Switzerland (currently 30% gold reserves held in UK and Canada; see one, two and three on this)

Now, I read this about Dutch Central Bank. It too has adjusted its gold location policy:

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Bank of Finland’s 200 years..

November 18, 2014

Seppo Honkapohja of Bank of Finland has this interesting speech covering history of the central bank. It was established in 1811 making it the 4th oldest central bank.

The journey from being a central bank established by Russians to becoming a EMU member is all captured:

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Evolution of money…from playing cards to e-currency

November 18, 2014

Superb speech from Carolyn Wilkins of Bank of Canada.

In particular she points to this picture placed in one of BoC  halls which shows evolution of money.

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Central Bankers and bahavioral biases

November 17, 2014

Andy Haldane of BoE discusses the issue in this speech.

He first lists the behavioral biases and then suggests what central banks can do to overcome the biases:

Preference biases – where the decision maker might put “personal objectives over societal ones, such as personal power or wealth”   

Myopia biases – “people differ materially in their capacity to defer gratification” and studies suggest that people who show greater patience “outperform their impatient counterparts in everything from school examinations, to salaries, to reported life satisfaction”. 
Hubris biases – over-confident individuals are “more likely to be promoted to positions of influence” but tend to pursue “over ambitious targets” like “undertaking over-complex company takeovers. That way nemesis lies”

Groupthink biases – people tend to adapt their view to confirm to those around them and also have a “tendency to search and synthesize information in ways which confirm their prior beliefs”.     
There is little doubt that central banks have suffered from either all or some of these biases over the period with hubris bias being the biggest.
BoE (and others in their own ways) have tried to get out of these biases:
To tackle preference bias, the Bank’s does not set its own objectives.  It has three policy making committees – for monetary policy (MPC), financial policy (FPC) and prudential regulation (PRA Board). In addition, “to ensure the actions of the Bank’s policy committees are well-aligned with society’s wishes” their targets are “set ex-ante in legislation by Parliament acting on behalf of society”. 
 
To prevent myopia, the Bank of England has been made independent from government when choosing how to set monetary and financial policy to achieve their respective objectives.  These decisions have been given to an institution “whose time horizon stretches beyond the political cycle”.  Andrew suggests that central bank independence has been successful at taming “the inflation tiger” but he warns that “as some countries are finding today, the tiger is capable of biting back” in the form of low and falling inflation expectations. Andrew notes that while inflation expectations in the UK have held up pretty well, this is something he is “watching like a dove.”
 
To guard against Hubris at the Bank, “all policy decisions … are made by Committee rather than an individual” which “provides some natural safeguard against over-confidence bias”.  Andrew notes that external MPC members have contributed importantly to the diversity of opinion on the committee “on average they have been around twice as likely as internals to dissent from monetary policy decisions”. 
 
Finally to ward off groupthink, each member of the policy committees is individually accountable for their vote or view, and this should encourage “a variety of analytical perspectives”. That said Andrew notes that analysis of MPC minutes suggests that they did not devote enough time to discussing banking issues in the run up to the financial crisis, something that in hindsight, “looks like a collective analytical blind-spot”. He argues that despite all the changes to the Bank’s policy responsibilities since the crisis, “it is too soon to tell whether any remaining blind-spots remain”. Also, in his view “improvements to the Bank’s forecasting process have some considerable distance still to travel”.
Have these committees worked? I mean it just has people with very similar backgrounds trained in the same kind of economics. How can views be any different? We make a big deal of dissents. Have these dissents dissuaded the chief of the central bank from taking a different path? All we have is hype around dissents, nothing more nothing less. Groupthink continues despite committees
Much of fight against inflation was brought during highly comfortable global times. We are now seeing serious limitations on what central banks can achieve on inflation as well. Despite so much easing, deflation pressures remain in most adv economies. This is against expectations that we will have high inflation due to these policies by many experts. The  standard ideas have just failed really. But hubris continues..
 
All these biases can only be avoided if alternate schools of thought are encouraged in economics. The subject should be more interdisciplinary and humble. Just by saying we have committees and encourage diversity, it does not happen.  When most students are made to think in one standard way, diversity is just a myth and groupthink a reality..

Volcker does not understand the monetary policy of today…

November 14, 2014

Well, not many do either barring those who seem to be making the policy.

WSJ Blog has these comments by Paul Volcker over the monetary policy at today. He does not really get it:

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The rising complexity of the FOMC statement

November 12, 2014

Rubén Hernández-Murillo and Hannah Shell have this interesting graph which shows how complexity of FOMC statement has been rising.

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Influencing household inflation expectations…(comparing US with Argentina)

November 10, 2014

Alberto Cavallo, Guillermo Crucas and Ricardo Perez-Truglia have this post in voxeu on the topic.

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