Archive for October 24th, 2008

Opt-in strategy not working in Germany

October 24, 2008

I had posted how NZ seems to be using lessons from behavioral economics to protect its financial system. Basically NZ had used a opt-in strategy where banks had to choose to be part of the deposit guarantee program. The main reason could be that NZ wanted to provide the signal that its banking and financial system is safe (read nudges blog view as well).

Infact, most of the bailout packages have been structured in that fashion. The firms have to opt for the plan rather than the opt-out plan where all are included and a firm which does not want the plan, has to opt out of the plan .

However, Eurointelligence points (scroll below) that this opt-in strategy is not working in Germany.

There are increasing signs that the German bank rescue plan is not working. Lucas Zeisemakes the point that the money market is still frozen, and that the biggest mistake of the German plan had been the voluntary nature of bank rescues, which has led to the perverse situation that so far only one state-owned bank, BayernLB, has asked for new funds. Zeise says the German government made the mistake to ask the banks to co-draft the rescue plan, rather than forcing banks into recapitalisation, as the British and French have done.

So, what Germans instead needed is an opt-out plan.

Who says behavioral economics does not matter? This selection of what should be the default seems to be quite critical for the bail-out plans. As a policymaker, you need to take a call whether your financial system/banks are safe or not? If things are bad, there is no point having an opt-in strategy (like Germany) and one should simply include all the banks and let the safer ones opt-out of the plan. In case things are fine, opt-in makes sense as it sends the signal that all is well.

Some research to understand the various signals and default strategies is welcome.

Denmark continues to raise interest rates

October 24, 2008

I had posted a while back that Denmark seems to be the only Central Bank to have raised interest rates. I had also said in the same post that may be Denmark would have to undo its decision soon.

However, it continues to raise rates to support its currency (Danish Krone). Basically, Denmark is raising rates to prevent capital outflows and depreciation of its currency. Earlier, the rates in Denmark and Euroarea was at same levels leading to capital outflows and depreciation of the currency. Now ECB has lowered rates and is expected to lower further (same would be the case for BoE, Sweden, Switzerland etc). So the interest rates in Denmark would be much higher compared to other economies going ahead. Let’s see for how long it continues to maintain higher rates.

Interesting times surely for the Central Banker.

RBI Mid-term review of Monetary Policy 2008-09

October 24, 2008

It is a status quo policy.

a)  Bank Rate – unchanged at 6.0 per cent.

(b)  Repo Rate/Reverse Repo Rate – The repo rate under the LAF has been kept unchanged at 8.0 per cent. The reverse repo rate under the LAF has been kept unchanged at 6.0 per cent.

(c)   Cash Reserve Ratio – On a review of the current liquidity situation, it has been decided to keep the CRR unchanged at 6.5 per cent of NDT

Let me read the details and point any new development

Assorted Links

October 24, 2008

1. The event being most discussed is Greenspan testimony to Senate Oversight committee. WSJ Blog points Greenspan ‘Shocked’ to Find Flaw in Ideology

2. Krugman on Greenspan testimony. Fin Prof points as well

3. FIn prof has some bad news on hedge funds

4. TTR points GSachs cutting jobs

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