Archive for January 19th, 2009


January 19, 2009

UK Treasury has announced series of measures to rescue its financial system. The media was full of reports this morning (see Bloomberg; BBC1, BBC2) that a scheme was on the anvil and UK Government has obliged.

There are 3 press releases from UK Treasury:

  1. Summarising all the old and new schemes 
  2. A seperate statement on UK’s new initiative – Government’s Asset protection scheme.
  3. A statement on RBS – In this government has swapped the previously infused preference share capital with ordinary share capital so that dividend payout does not happen; no extra capital to be infused.

Under the new schemes, there are quite a few. UK could also follow the US route and use acronyms for its various schemes. Reading through them is a sure shot way to get a headache. Here is a broad summary:

  • Credit guarantee scheme (CGS): This guarantees debt of financial institutions. It was announced earlier but CGS was to shutdown on 9 April 2009. This has been extended to 31 Dec 2009.
  • Guarantee scheme for asset backed securities  (GSABS): A new facility which will provide guarantees to AAA rated (do they matter now??) asset backed securities. This would include ABS backing mortgages, corporate and consumer debt. Subject to approval and would start on April 2009. Why the delay? Is it just a signal?
  • Bank of England liquidity facilities (BoELF): A 30 day liquidity facility to close down on 30 Jan 2009. To be replaced by 364 day facility.
  • Bank of England asset purchase facility (BoEAPF): Treasury will issue T-Bills and give the monies to BoE. BoE will then use the money to buy toxic assets from the banking system. This is to be a 50 GBP scheme and begins on 2nd Feb. Which assets??The Bank will be authorised by the Treasury to purchase high quality private sector assets, including paper issued under the CGS, corporate bonds, commercial paper, syndicated loans and a limited range of asset backed securities created in viable securitisation structures.Guarantee scheme for asset backed securities  and starts in April 2009 and here UK Treasury is allowing BoE to purchase ABS in Feb 2009. So purchases come first and guarantees later! It should be other way round. This is absurd at its best!! And look at all this investment banking US Treasury-Fed style. Why can’t they follow simple structures?? A similar thing was seen in Swiss version of TARP.


  • Government’s Asset protection scheme (GAPS): This is the insurance fund which the above pointed media releases pointed.

Under the Scheme, in return for a fee, the Treasury will provide to each participating institution protection against future credit losses on one or more portfolios of defined assets to the extent that credit losses exceed a “first loss” amount to be borne by the institution.  It is intended that the Scheme will target those asset classes most affected by current economic conditions.

The Treasury protection will cover the major part but not all of the credit losses which exceed this “first loss” amount.  Each participating institution will be required to retain a further residual exposure, which is expected to be in the region of 10 per cent. of the credit losses which exceed the “first loss” amount.  This residual exposure will provide an appropriate incentive for participating institutions to endeavour to keep losses to a minimum.

So, the purpose is you lend and in case of losses above the first loss amount, the Government will bail you out by providing for the losses. The eligible assets under the scheme are (they could be in any currency):

    • Portfolios of commercial and residential property loans most affected by current economic conditions;
    • structured credit assets, including certain asset-backed securities;
    • certain other corporate and leveraged loans;
    • and any closely related hedges, in each case, held by the participating institution or an affiliate as at 31st December 2008. 

This is a huge plan and if done wrongly could lead to huge moral hazards. I mean how do you calculate first loss amounts when the entire markets have frozen? And with guarantees for ABS coming later, this market will not take-off any soon.  The statement says further details of the scheme to be out by last week of Feb. So looks like another signalling device to support free- falling of bank share prices in UK.

  • The statement also has a note on Northern Rock . It says NR is not planning to cut its mortgage books. This is to provide a boost to mortgage markets. But how else would NR deleverage?
  • There is also a statement on Capital regulation which says capital ratios of banks are not being increased as of now.

This was the summary of the various UK measures. One can even understand these schemes from the functional perspective:

  1. Extending the Duration of Loans – BoELF
  2. Increasing Acceptable Collateral –  (BoE has extended the list of acceptable program under BoELF)
  3. Extending the Reach of Lending Facilities – GSABS, BoEAPF, GAPS, CGS

Overall, there is a huge US overhang here. It is I-banking at its best. I don’t know whether UK Govt and regulators are increasing their employment numbers. If they are not then I dont know who would run these schemes. If they are, then it looks as if the schemes are being created to employ the laid-off people from the UK’s financial world (which looks like the case for US as well).

Has Monetary Policy become more efficient?

January 19, 2009

I came across this paper by Stephen G. Cecchetti, Alfonso Flores-Lagunes and Stefan Krausewhich says  – “Yes, monetary policy has become more efficient compared to 1990s with 1980s.  The idea is:

Over the past twenty years, macroeconomic performance has improved in industrialized and developing countries alike. In a broad cross-section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly. This increased stability can be attributed to either: 1) more efficient policy-making by the monetary authority, 2) a reduction in the variability of the aggregate supply shocks, or 3) changes in the structure of the economy.  this paper we develop a method for measuring changes in performance, and allocate the source of performance changes to these two factors. 

The findings:

We apply our technique to a cross-section of 24 industrialized and developing countries in order to compare their macroeconomic performance in the 1980s with that in the 1990s. We are able to determine that in 21 of the 24 countries that we study, monetary policy became more efficient in the 1990s.

In 20 of the 21 countries that experienced more stable macroeconomic outcomes, better policy accounted for over 80% of the measured gain. While policy efficiency improved in Finland, it was unable to completely o.set the increased variability of shocks hitting the economy. Only in Austria and Germany did both policy deteriorate and the variability of supply shocks increase.

Finally, we consider some factors that may help in explaining the cross-country differences in macroeconomic and policy outcomes. Our findings, both in the present paper and in previous research, suggest that elements such as central bank credibility and transparency, together with the nature of the financial system, can account for at least  some portion of the observed improvements.

In summary, our results suggest that more efficient policy has been the driving force behind improved macroeconomic performance. At the same time it has also contributed,at least in part, to offsetting an increased variability of supply shocks in some countries.  Overall, lower variability of the aggregate supply shocks has usually played a minor role.

The paper is highly technical (atleast for me) and could not understand much of it. Anyways, I thought it would be useful for people who wonder whether monetary policy has improved with time and how do we quantify the same? This paper helps build a model to answer this question.

A better way to sumarise Fed policies

January 19, 2009

Fed has launched plethora of schemes to get the financial markets working. Despite number of people explaining the crisis (see this for an overview, Also this new research from Minneapolis Fed) these schemes are extremely difficult to remember.

I came across this excellent way via St Louis Fed economist Craig Aubuchon. He classifies the schemes based on functions. There are three broad schemes according to this classification:

  1. The Initial Expansion: Extending the Duration of Loans – Under this we have TAF
  2. The Second Expansion:Increasing Acceptable Collateral- Under this we have PDCF, TSLF and TALF
  3. The Third Expansion: Extending the Reach of Lending Facilities – AMLF, CPFF, MMIFF 


Even if we don’t remember the fancy scheme names, it is useful to understand (and hopefully remember) from this perspective.


Understanding the works of Ken Rogoff

January 19, 2009

Minneapolis Fed  has a very useful publication called – Region. It is a quarterly publication. The one thing to look forward in this publication is interview of a leading economist. This interview is not like the usual interviews of economic views but is like a literature survey of the covered economists’ main works. 

I have not come across a better source where we get to know the main ideas of all prominent economists minus all the maths models etc. I had pointed to Christina Romer and David Romer’s interview. Here is a list of all the previous interviews. You can subscribe the magazine here

The recent edition has an interview of Ken Rogoff, one of the best macroeconomists we have. Rogoff offers plenty of insights on his research and issues to be resolved after this crisis. Rogoff has done path-breaking research in virtually everything under the sun.Each insight is worth seperate posts.


Assorted Links

January 19, 2009

1. There is a big buzz in blogosphere over this Sheila Blair Interview where she mentions setting up an aggregator bank that will buy the distressed assets from banks. This was original TARP plan and am not sure why we keep coming out with new names for the same ideas.  Krugman says this idea is plain hanky-panky as valuation is difficult.

2. WSJ Blog points deflation threat is getting real

3. Mankiw points to the recent Economic Report to President. It is a very important economics policy document

4. Fama answers complaints over his view of no fiscal stimulus

5. I discovered a useful blog from Robert Peston of BBC. Get some good analysis of UK economy and policies

6. EAPB points to more bad news from China

7. CTB on trade policies in the crisis

8. Krugman says it looks more and more like Japan style trap. He also points as per Taylor rule the rates should go to minus 6%

9. Krugman on appeasing the financial gods 🙂

10. MR points to some Swede lessons for the US

11. ACB points to a plan to fix finance

12. Urbanomics points to the debate between monetary and fiscal policy. It also points to lessons from UBS. Also the postsummarising the TED, VIX and TIPS indicators

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