Archive for the ‘Financial Markets/ Finance’ Category

The role of capital controls in Great Depression…

August 22, 2014

Kris James Mitchener and Kirsten Wandschneider  look at the role of cap controls in crises. There have been suggestions that to dampen fin cycle one could also use capital controls.

The authors see how authorities used these controls in Great Depression. The find that these controls were just used for trade purposes:

Capital controls appear not to have been successfully used as tools for rescuing banking systems, stimulating domestic output, or for raising prices. Rather they appear to have been maintained as a means for restricting trade (working alongside or in lieu of restrictions on imports) and repayment of foreign debts. While our analysis suggests capital controls provided little macroeconomic benefit relative to other policies that were implemented in the 1930s, it would be difficult to conclude that they would have no ameliorative effects in other crises if employed with that purpose in mind. On the other hand, the experience of the 1930s suggests capital controls are often implemented with very short-run objectives in mind – to prevent capital flight. If kept in place, however, macroeconomic objectives can end up sharing the stage with other goals of policymakers.

Research on depression and related events continues to be engrossing…

You can’t run an economy using spreadsheets…

August 22, 2014

Well, one thought this is how economy is run really. And why just using spreadsheets..it is run on using softwares like Stata, R, SAS etc. All that is needed is data which you keep feeding in which tells you about economies. One can be an expert just like this.

Nicolás Cachanosky of Metropolitan State University of Denver reacts to recent remarks from an Argentina minister. Latter said one can run economies these days using spreadsheets:

(more…)

How money is made?

August 21, 2014

Not money as in earnings but money as in money supply.

 and Richard A. Werner say it is mainly created by banks. We usually think it is central banks who create money but that is a fraction of the overall money supply.

Last month, the BRICS countries (Brazil, Russia, India, China, and South Africa) announced the establishment of their own development bank, which would reduce their dependence on the Western-dominated, dollar-focused World Bank and International Monetary Fund. These economies will benefit from increased monetary-policy agency and flexibility. But they should not discount the valuable lessons offered by advanced-country central banks’ recent monetary-policy innovation.

In June, the European Central Bank, following the example set by the Bank of England in 2012, identified “bank credit for the real economy” as a new policy goal. A couple of weeks later, the Bank of England announced the introduction of a form of credit guidance to limit the amount of credit being used for property-asset transactions.

Before the financial crisis hit in 2008, all of these policies would have been disparaged as unwarranted interventions in financial markets. Indeed, in 2005, when one of us (Werner) recommended such policies to prevent “recurring banking crises,” he faced vehement criticism.

This March, however, the Bank of England acknowledged the observation that he and others had made – that, by extending credit, banks actually create 97% of the money supply. Given that a dollar in new bank loans increases the money supply by a dollar, banks are not financial intermediaries; they are money creators.

They should have looked at India’s monetary policy. We always had credit playing an important role in mon pol.

Further, govt should stop issuing bonds and instead borrow from banks:

In general, economic growth depends on an increasing number of transactions and an increasing amount of money to finance them. Banks provide that finance by extending more credit, the impact of which depends on who receives it. Bank credit for GDP transactions affects nominal GDP, while bank credit for investment in the production of goods and services delivers non-inflationary growth.

The problem lies in bank credit-for-asset transactions, which often generate boom-bust cycles. By extending too much of this type of credit, banks pump up asset prices to unsustainable levels. When credit inevitably slows, prices collapse. As the late-coming speculators go bankrupt, the share of non-performing loans on banks’ balance sheets rises, forcing banks to reduce credit further. It takes only a 10% decline in banks’ asset values to bankrupt the banking system.

With an understanding of this process, policymakers can take steps to avert future banking crises and resolve post-crisis recessions more effectively. For starters, they should restrict bank credit for transactions that do not contribute to GDP.

Moreover, in the event of a crisis, central banks should purchase non-performing assets from banks at face value, completely restoring banks’ balance sheets, in exchange for an obligation to submit to credit monitoring. Given that no new money would be injected into the rest of the economy, this process – which the US Federal Reserve undertook in 2008 – would not generate inflation.

In order to stimulate productive bank credit – and boost the effectiveness of fiscal policy – governments should stop issuing bonds, and instead borrow from banks through loan contracts, often available at lower rates than bond yields. This would bolster bank credit and stimulate demand, employment, GDP, and tax revenues.

Some lessons from history:

During the Great Depression of the 1930s, Michael Unterguggenberger, the mayor of the Tyrolean town of Wörgl, performed an experiment. In order to reduce unemployment and complete much-needed public-works projects, he hired workers and paid them with “work receipts” that could be used to pay local taxes. With the local authority effectively issuing money for work performed, the local economy boomed.

The central bank, however, was not pleased, and decided to assert its monopoly over currency issuance, forcing Unterguggenberger to scrap the local public money and causing Wörgl to fall back into depression. Some 80 years later, the English city of Hull has begun to implement a similar scheme, using a digital crypto-currency that is, so far, not prohibited by law.

The unfettered creation of money by large private banks has generated overwhelming instability, undermining the fundamental principle that money creation should serve the public good. This does not have to be the case. By implementing safeguards that ensure that credit serves productive and public purposes, policymakers can achieve debt-free, stable, and sustainable economic growth.

Broadly the idea is the same. Throw the money at the economy. Just that agency throwing it can differ. It can be govt., central banks or in this case as authors suggest banks can do the job better..

Has Creative Destruction Become More Destructive?

August 20, 2014

John Komlos of Ludwig-Maximilians University reviews Schumpeter’s idea of creative destruction.

He says we take creative destruction for granted without really looking at overall value creation by the innovation. This is crucial as today’s innovations do not create as much value. They just replace the existing products and are not a fundamental game changer:

(more…)

Is Real Business Cycle Theory really a theory of business cycle?

August 19, 2014

Gradually, skeletons are falling off the economists cupboard. if this continues we shall be able to soon say that the economist emperor is indeed naked. That is a different story that the emperor will continue to charm the people as there is no alternative really.

Noah Smith explains RBC in this piece and is interesting (scary actually) to read all this:

(more…)

Casino crashes casino banking or casino banking crashes casinos.

August 13, 2014

An interesting news piece reported byMark Gimein of Bloomberg.

Apparently, the biggest casino in Atlantic City which opened in 2012 has filed for bankruptcy already. It filed for bankruptcy in 2013 itself but somehow managed to chug along. Now it seems it will close down in Sep-2014. What is so interesting here? Well, Morgan Stanley backing the venture despite its initial losses. The idea was to keep pumping money hoping it will recover.

(more…)

Global Economy’s Groundhog Day..

August 8, 2014

Ashoka Mody takes a stab at current economic thinking and asking why IMF keeps getting its economic forecasts wrong.

(more…)

Did Bernanke create the Ukraine crisis?

August 8, 2014

Things keep getting crazier. Central banks which were kind of unknown entities till even 25 years ago, are being embroiled in all kinds of things.

Benn Steil of CFR who wrote a book which is like events post Great Depression (or Lords of Finance part II). There is this interview where he says in a way Bernanke created the Ukraine crisis:

(more…)

ECB’s dilemma over communications..

August 6, 2014

An interesting speech from ECB chief Mario Draghi on central bank communications and challenges for ECB.

First why do central banks communicate so much these days? Just to keep giving cheap dope to financial markets:

(more…)

Can 21st century economic problems be solved with 20th century modes of analysis?

July 31, 2014

There is a lot of commentary on state of economics education but nothing happening other than words.

TCA Srinivasa Raghavan joins the debate asking can 21st century economic problems be solved with 20th century modes of analysis?

(more…)

Why killing cash is MasterCard’s main strategy…

July 31, 2014

Ajay Banga. chief of Mastercard gives a nice interview of MasterCard’s strategy.

He says usage of cash is bad economics:

(more…)

Understanding Argentina’s Debt Default..

July 31, 2014

Argentina’s affairs with crisis continues. It is like a perennial story. The talks have failed and yet another default is looming. Wondering which courts will act on this

 of Metropolitan State University of Denver explains what led to this crisis and way ahead. His main idea is the crisis has its origins in Arg’s history. They have always resorted to debt financing and never really learnt the lessons.

(more…)

Thinking about multilateral DFIs…just too many and all doing similar things..

July 24, 2014

Prof. Robert Wihtol of Asian Institute of Management writes this very useful and timely paper on state of Multilateral Development Finance Institutions. The title of the paper is Whither Multilateral Development Finance? which resonates with Whither Multilateral Trade. All things multilateral seems to be on their way down

Wihtol gives a good overview of the several MDFIs we have and then looks at the latest one BRICS Bank:

Multilateral development finance is at a critical juncture. In the past 70 years, it has developed through four distinct stages. The Bretton Woods conference established the World Bank and the International Monetary Fund in 1944 to finance post-war reconstruction and stabilize the global economy. The second stage saw the establishment of regional development banks in the 1950s and 1960s. This was followed by the emergence of subregional banks.

In the fourth stage, from the mid-1970s to the 2000s, specialized vertical funds were established to address global issues, and private development finance expanded. The multilateral financial architecture now has a multitude of development banks and funds. As the architecture enters the next stage, the development agenda is changing rapidly. Financially constrained traditional donors are unwilling to recapitalize the existing banks, while emerging donors want to reduce the role of traditional donors and increase their own funding. Emerging-economy bilateral programs are expanding. At the same time, new multilateral initiatives are advancing fast.

The BRICS countries’ New Development Bank and related contingent reserve and the PRC’s Asian Infrastructure Investment Bank initiative have added to the pressure for reform, and to the risk of fragmentation. An alternative financial architecture may take shape led by emerging economies, playing down coordination and well-established development, safeguard, and governance criteria. However, there is also an opportunity for genuine reform to ensure a new and innovative multilateral architecture.

Nice stuff and bit of history of all these MDFIs. I liked this one on ADB:

The Asian Development Bank (ADB) was established in 1966 and benefitted from the experience gained in establishing the other regional banks (Watanabe 1977: 1–14). ADB had the strong support of two key donors, the US and Japan. In the negotiations on establishing ADB, it was agreed that the president would come from Japan and the headquarters would be located in the Philippines, a strategic ally and former colony of the US. Given ADB’s modest resource base compared with the World Bank, it was initially agreed that India, whose vast financial needs would have overwhelmed ADB, would continue to borrow only from the World Bank. India and the PRC, which joined ADB only in 1986, started to borrow only in the late 1980s.

Interesting to note this trivia..

I think there are just toomany of these institutions and there is a need for a merger of sorts. China is building another infra bank alongwith the BRIC Bank whose focus is also going to be on infra just like BRIC Bank. How many do we need?

These multiple multilateral instis have created their own kind of elite bureaucracy and it is really ironical when they ask developing countries to reform their bureaucracy. We get a lot of commentary from these institutions over this and that reform in their member econs. High time they introspect on their side of the reform story too. ..

How do we reform the Fed (and other central banks)?

July 24, 2014

Troubles don’t end for adv eco central banks. The trouble is acute for fed ion particular where politicians have taken special interest in the already huge and growing power of Fed.

The House financial services committee recently heard experts on what is the way ahead for Fed. The proposed rulebook suggests Fed to follow Taylor rule and stick to it. This has led to obvious reactions from Fed which believes this will undermine its independence (nearly sick of this word).  The committee also had John  Taylor of the Taylor rule speaking. So what to expect.

But what is this deal about independence? What is central bank independent of? Martin Feldstein provides some clarity:

(more…)

Bernanke vs Friedman…Did Bernanke get Friedman’s theory wrong?

July 17, 2014

Prof. Jeffrey Rogers Hummel of San Jose State University writes this superb paper on the topic (HT: Marginal Revolution).

In the process, he dubs Fed as as the U.S. Economy’s Central Planner. Well all central banks are central planners. There is nothing more ironical than a central banker talking about free markets. Which regulator really interferes in its domain as much as central banks do? And these days they do not even need to interfere. Mere talk and face signs are enough.

Anyways, in this paper Prof Hummel suggests Bernanke got Friedman’s lessons wrong. Friedman simply suggested to flush the economy with liquidity in case of a crisis hitting agggregate demand. However, Bernanke intervened and supported some financial firms in early part of the crisis.  And surprise surprise, Prof Hummel says Greenspan did a better job in resolving crisis as Fed chair. The once maestro just flushed markets with liquidity unlike Bernanke who targeted support.

(more…)

Irrational exuberance one more time?

July 16, 2014

Prof. Shiller in his recent piece sees signs of irrtaional exuberance across asset markets yet again. He calls the article “Booming till it hurts”.

(more…)

What is good (financial/banking) regulation?

July 15, 2014

The speech title just says What is “good regulation”? but is on financial/banking regulation. Hence used brackets.

The talk is by Andreas Dombret of Bundesbank. He was a banker once upon a time. So understands both the sides – the regulator and regulated:

(more…)

Rise of the digital bank…

July 15, 2014

An interesting article  by Tunde Olanrewaju of Mckinsey.  The author argues that despite Europeans increasingly moving to digital world, banks have not really moved on.

So the author chalks out a strategy for European banks to bite the digital world:

(more…)

Cricket’s corridor of uncertainty and monetary policymaking…case of interesting similarities..

July 14, 2014

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…

 

India’s National Pension System : Review till now and way ahead..

July 9, 2014

Renuka Sane and Susan Thomas of IGIDR have done a nice review of India’s National Pension System.

They say despite the progress, there are still several issues that need to be addressed:

(more…)


Follow

Get every new post delivered to your Inbox.

Join 1,195 other followers