Prof. Shiller in his recent piece sees signs of irrtaional exuberance across asset markets yet again. He calls the article “Booming till it hurts”.
Archive for the ‘Financial Markets/ Finance’ Category
A fascinating speech by Andy Haldance of BoE.
He connects cricket with monetary policymaking. The predicament facing today’s policymakers is similar to the batsman in cricket who face balls in corridor of uncertainty:
It is wonderful to be back in Scarborough. I say back because many of my earliest and fondest childhood memories were of summer holidays spent here. Being a cricket fan, the Scarborough Festival – the cricketing jamboree held at the end of August each year since 1876 – has always held a place in my imagination. Alas I have never been, but am hoping one day to break my duck.
I want to discuss the economy and the role of monetary policy in supporting it. And with apologies to the non-cricketers in the audience, to do so I will borrow a cricketing metaphor – the “corridor of uncertainty”. The corridor of uncertainty is every bowler’s dream and every batter’s nightmare. It refers to a ball which pitches in such a position – the corridor – that the batter does not know whether to be playing off the back foot or the front foot.
This, I will argue, is similar to the dilemma facing monetary policymakers on the Bank’s Monetary Policy Committee (MPC) today. Should monetary policy hold back until key sources of uncertainty about the economy have been resolved? Or instead push forward to prevent leaving it too late?
He reviews the econ situation across globe and UK. For both an econ and cricket follower one can easily connect the two.
He says depending on how the batter/policymaker reacts, one dubs him/her a dove or hawk:
Faced with these uncertainties, what would be a prudent course for monetary policy in the period ahead? The first thing to say is that there is consensus across the MPC on three key elements of our monetary strategy: that any rate rise need not be immediate, that when rate rises come they are intended to be gradual and that interest rates in the medium-term are likely to be somewhat lower than their historical average.
This message appears to have largely been understood by financial markets. Despite the upwards revision to growth, financial markets’ best guess of how rapidly the first percentage point of tightening will take place is essentially unchanged over the past year – around 20 basis points per quarter. So too is their best guess of where interest rates may settle in the medium run – around 2-3%. Views may in time differ across the MPC on the preferred lift-off date for interest rates, as you would expect at a difficult-to-predict turning point in the cycle. These will reflect individual members’ different reading of the runes, not their individual preferences. That is a real benefit of the MPC’s committee-based structure, with individual member accountability.
It is not difficult to see why this choice over timing is a difficult one. The policymaker in this situation faces the self-same dilemma as the batsmen facing a ball pitching in the corridor of uncertainty. In that situation, the coaching manual no longer offers a clear guide. Two strategies are equally justifiable.
The first is to stay on the back foot and play late. This has the advantage of giving the batsmen more time to get a read on the trajectory of the ball as it swings and darts around. It avoids the risk of lurching forward and then needing hurriedly to reverse course if the first movement is misjudged. This is the way, Joe Root, the Yorkshire and England batsmen, plays his cricket. If he were on the MPC, he’d be called a dove.
But this strategy is not riskless. Playing late relies on having an uncannily good eye and strong nerve. It runs the risk of having to react fast and furiously to avoid missing the ball entirely. An earlier front foot movement would avoid that risk, allowing a more gradual movement forward. This is the way Ian Bell, the Warwickshire and England batsman, plays his cricket. If he were on the MPC, he’d be called a hawk.
What about owls? Night watchmen?
Which is better? Hawk or Dove?
So which is the better strategy? Benjamin Disraeli told us there are lies, damned lies and statistics. Here my analogy between cricket and the economy breaks down. Economic statistics, as we know, do sometimes lie. Cricket statistics, typically, do not. They tell us that Joe Root averages 43 in test matches to Ian Bell’s 45. In other words, it is a close run thing with the odds at present slightly favouring the front foot. But a good run of scores from either player could easily tilt the balance. That, in a nutshell, is where the MPC finds itself today
A superb analogy.
Though, Haldane misses the other side of the cricket pitch – the bowlers. In this case the bowlers are financial markets/players. They keep putting the batters into difficulty with their persistent attack on the batters. In the swinging UK conditions, they pose even more difficulty to the batters.
And then all this happens cyclically. During tough times, the central bankers become the batters and are made to face tough batting conditions. And when the times turn good, the markets become the batters and thrash the bowlers all around…
In the BW article he said the monetary order was framed under a lot of pressure and countries just wanted to finish it. So, the crisis led to certain responses. In this piece too, he says the 1907 panic led to US and Germany building their system to war off UK hegemony. But this then played a large role in build up to WW-I. So in BW the crisis led to peace and in 1907 panic led to further crisis in form of war. Crisis is really crucial point.
And then in both these events we have parallels for today:
Terrific piece by Harold James and Domenico Lombardi.
They shows how BW was originally going to shape like UN with five permanent and major members. However, because of global political and security issues, countries just managed to have a more participative and global system. The negotiations were led by US and UK who were in a hurry as domestic issues were as pressing.
However, this time around the global economy is centered around US and China. Can we have BW-II now? Well, as per authors crisis situation does not seem to be as bad as it was in 1944. Despite the several issues, the world is “simply not dangerous enough”.
There is also a very interesting book review of 2 recent books on history of BW. Amazing econ history..
The crisis literature keeps churning out new papers with different perspective. You think there is nothing more to learn but somehow there is.
Selin Sayek and Fatma Taskin (of Bilkent Univ) use an interesting technique to compare European crisis with crisis in other countries in the past. They find Greece being closer to Indonesia and Portugal to Malaysia. As crisis differ, policy responses should as well:
He cites evidence from France when monetary policy did not use interest rates. It actually used certain quantity controls to dampen output and inflation. This has implications for macropru policy which also is expected to used quant controls:
Do see the not in the phrase.
Antonella Tutino and Carlos E.J.M. Zarazaga of Dallas Fed undo the famous Friedman quote in this short note. They say both the recent US experience and German experience in 1920s refute the Friedman quote somewhat. In US case, despite surge in money supply, there is no inflation. And in Germany, inflation was much higher than money supply:
The elitists central bankers are getting the fury doze which is usually reserved for politicians. And rightly so, given how important central bankers have become over the years without the kind of accountability faced by politicians.
It was really interesting to read this interview of Benoît Cœuré of ECB conducted by 2 members of protest group in Europe. It was published inc Süddeutsche Zeitung (SZ), so SZ is also asking the questions.
SZ: Mr Cœuré, have you ever taken part in a demonstration?
Cœuré: Since I’ve been working at the ECB, no. I have taken to the streets in the 1990s, including to campaign against the French government’s anti-immigration laws. But that was long ago.
SZ: For you, Mr Rätz, demonstrations are part of your job description. What is your mission?
Rätz: Mission is something of an exaggeration, but standing up for your views in public is part of democratic and civic action. Demonstrating is an important tool in this respect, and it should be used.
SZ: Mr Aschmoneit, you define the right to demonstrate very broadly and propagate civil disobedience. What justifies this right in your view?
Aschmoneit: I came to this interview by train. On the way, a respectably dressed man in his early seventies came over and I moved over so that he could sit down. But he didn’t want to. He said that he wanted the deposit bottle that was in the bin in front of me. A poor, old man who has to collect bottles to get by. This reminded me once again that what we are doing is legitimate, moving from protest to resistance. We will interfere with and obstruct the opening of the ECB’s new premises because what happens at the ECB is immoral. We want it to stop.
These protesters blame the ECB for the evils surrounding European economy. Some tough talks this:
SZ: Mr Rätz, what irritates you the most about the ECB?
Rätz: For us, it is the role that the ECB is playing within the Troika. Together with the International Monetary Fund (IMF) and the European Commission, the ECB pursued a policy that had dramatic – in some cases fatal – consequences in the crisis countries. In Spain, 400,000 people have been driven out of their homes; in Greece, almost one-third of the population no longer has access to the healthcare system and 40% of its people are poor. All of this is clearly linked to the Troika’s policy. It is therefore a bit ripe to say that the ECB only wants the best. I believe you, Mr Cœuré, as a person, but the ECB is contributing to division in Europe, and not to cohesion.
Aschmoneit: The IMF, which is not known for its left-wing extremism, says that saving is wrong. There is far too little investment. The International Labour Organization (ILO) says that the unemployment rate in the euro area has shot up and that one-quarter of the population is seriously threatened by poverty. The ECB is creating winners and losers from the crisis. Last year, the wealth of the rich in western Europe rose by 5.2%. The US investor Warren Buffett has said that there is class warfare and that it is his class, the rich class, that is winning. Your policy, Mr Cœuré, is geared towards reducing large portions of the population to poverty and safeguarding the profits of a few.
Rätz: It’s not all about the citizens of Europe for the ECB – they’re not even being asked. Let’s take Greece, for example. Since 2010, its economy has shrunk by 25%. This year, it is expected to grow by 0.7%, which is extremely little. We’re not going to live to see Greece recover. The people of Greece are not being asked about the Troika’s recommendations, even though the measures have a profound impact on society: salaries and pensions have been reduced, unemployment benefits have been cut and hospital care has deteriorated. That is not a policy for the people, it is a policy for the banks.
In the middle ECB member defends ECB saying usual things…so have skipped them,,
Usually such criticism is meant for the politician. We see politicians take on questions from protesters. I have never read a formal interview of a central bank by civil society protesters criticising the central bank. It seems as if central bankers have become the neo-politicians for the amount of media space they generate. Who really cared what central banks did around 15-20 years ago?People are now taking note on who is trying to call the shots in their economies.
Also interesting to see Coeure agreeing to be a part of the interview.
A superb speech by Benoît Cœuré of ECB. It is really important that economic policymakers also reflect on the state of the profession barring a few academicians who are often ignored. With people like Coeure talking, hopefully more it reaches more ears.
He says policymakers do not have the luxury if academicians..
An interesting debate going on in la-la land. The topic is whether US govt should close its Exim Bank?
EH.net keeps one abreast of some really interesting books on econ history. Its book review section is really top stuff.
In the latest book review, it points to this book which looks at history of bankruptcy in early modern Europe. It is reviewed by Bradley A. Hansen of University of Mary Washington.
I mean why study of bankruptcy is important? Well, it gives us tremendous insights:
Robert Skidelsky joins the debate over reforming economics pedagogy. This is followed by interesting comments from Brad Delong. With so many joining the chorus for change, not sure when it will change? And this is not just about the anglo-saxon world. It is also about other parts of the world where what is taught in the west is blindly copied. Atleast in the west, some people understand the limitations of current economics teaching, in the other places this is not even understood. There is just competition on most places to keep pace with the west..
Skileddesky says economics teaching should be more pluralistic:
It is always interesting to read such stuff.
The Univs which teach and preach the virtues of finance to the world struggle when it comes to performing in their own backyards. Just a few months ago there was news on how U of Chicago has messes up its finances. And now Harvard’s money managers have been dismissed for showing sub-par returns:
After years of subpar results at Harvard Management Co., three high-level managers have exited the $32.7 billion endowment and the university is searching for new leadership.
Apoorva K. Koticha, 48, among the highest-paid traders at Harvard Management in 2011, has left, according to two people familiar with the matter. News of his departure comes a week after Jane Mendillo, chief executive officer of the university’s investment company since July 2008, said she will resign at the end of the year. Mark McKenna, 43, a money manager at the endowment, moved to BlackRock Inc. (BLK) this month to start an event-driven hedge fund. Since April 2013, Harvard Management has also parted ways with two heads of its private-equity unit.
“When the team posts mediocre records too many years in a row, the coach goes,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “And, not far behind her, the assistant coaches.”
One does not know in finance which way the tide will turn..