Archive for August 4th, 2017

The weak legitimacy of Indian capitalism and is it more East Asian or Latin American?

August 4, 2017

Two articles from the same newspaper and both are related. The first one is by Niranjan who asks whether India is like East Asia or Latin America? The second one is worried over legitimacy of Indian capitalism where corruption is at the centre.

First Niranjan:


A closer look at the Fed’s Balance Sheet accounting (applies to other central banks as well)…

August 4, 2017

There are two subjects apart from economics which are vital to understanding monetary policy: law and accounting. We have seen importance of law in India’s demonetisation and even advent of digital currency which has made us look at terms like legal tender, currency etc that have legal meanings. Knowledge of Accounting is crucial to understanding central bank accounts which tells us how central banks add or subtract reserve money which was also a big puzzle during demonetisation. Also, law has a lot to do with how accounting will be eventually done.

 have a nice post on accounting policies followed at Fed’s balance sheet. This applies to most central banks as well:

When a Reserve Bank purchases a Treasury security, it purchases an asset, typically from a bank or broker-dealer. It credits reserves (a liability of the Fed) to the reserve account of the seller (or the seller’s bank). The bank or broker-dealer may sell its own securities or may act as an agent on behalf of a client. As a holder of a Treasury security, a Reserve Bank has no special rights relative to other Treasury-holding entities. The Treasury security that the Fed has purchased is not “paid in full.” It remains an asset on the Fed’s balance sheet until the security matures or is redeemed by the Treasury in accordance with the terms of issuance. 

As the nation’s central bank, the Fed plays a number of important public policy roles, and monetary policy does indeed have fiscal implications. In trying to understand the effects of the Fed’s actions on public finances and debt, it can be convenient, in some cases, to think about a consolidated public sector balance sheet that sums together the respective assets and liabilities held by the Fed and the federal government. Nevertheless, as noted in an answer to a comment on our earlier post, the Federal Reserve Banks are independent entities, with their own balance sheets, separate from that of the Treasury. There is no authority to consolidate Reserve Bank and Treasury balance sheets. 

One might wonder whether the Fed could coordinate with the Treasury and agree to an accounting offset, so that every time the Fed buys a Treasury security, the security is considered “paid in full.” In fact, neither the Board of Governors nor any Reserve Bank is authorized under the Federal Reserve Act to fund the repayment or retirement of a Treasury security; only the Treasury can do so, and it can do so only under the terms under which it issued the security. 

Even if it could coordinate with the Treasury and agree to an accounting offset every time it buys a Treasury security, the Fed may prefer to hold on to these assets for future use. Indeed, just like any other entity with Treasury holdings, a Reserve Bank may resell or lend Treasury securities—as the New York Fed does—subject to the Section 14 open market limitation and FOMC directions. But again, a Reserve Bank does not have the authority to fund the payment or retirement of Treasury securities, which are obligations of the U.S. government. 


The role of political environments in the formation of Fed policy under Burns, Greenspan, and Bernanke…

August 4, 2017

Interesting paper by  Alexander William Salter of Texas Tech University  and Daniel J. Smith of Troy University.


Lessons from Mr Panagariya’s sudden exit: Need for clear appointment rules…

August 4, 2017

Prof Vivek Moorthy of IIM Bangalore keeps telling me that instead of obsessing over this and that monetary policy rule, we should focus on appointment rules of central bankers. He advocates a Non-renewable non-dismissable (barring serious breaches) contract for a central banker.

The reason behind this is simple. When we keep a term as open ended and renewable, it is natural for policymaker to be more submissive to the government authorities eyeing a second term. Moreover, it keeps the media grapevine buzzing over whether the term would be renewable or not. Whatever the decision, the politics behind eventually follows. Also one should work under the pressure of dismissal provided one has followed the broad code of conduct.

The term of the contract should also be reasonable so that there are no quick fixes on both sides. The short term tenures gives government powers to keep changing positions leading to political interventions more frequently then needed. Also the short term tenures gives those who are interested in short term roles just to get that “served policy position” on their CVs. Currently, RBI gives a 3 year term which is open for renewable leading to all kinds of problems as seen recently.

Interestingly, this does not apply to central bankers alone but policymakers across areas. We are seeing this in case of the recent sudden exit of Mr Panagariya, Vice-chairman of Niti Aayog. If his terms of contract were clear and it was known that he would be available till this date, there would be no scope of rumors.


The oil trader known as ‘God’ is closing down his main hedge fund

August 4, 2017

How often finance industry christens someone as God only to see God being reduced to a mere human soon thereafter.


Story in Bloomberg. 

Andy Hall, the oil trader sometimes known in markets as “God,” is closing down his main hedge fund after big losses in the first half of the year, according to people with knowledge of the matter.

The capitulation of one of the best-known figures in the commodities industry comes after muted oil prices wrong-footed traders from Goldman Sachs Group Inc. to BP Plc’s in-house trading unit. Hall’s flagship Astenbeck Master Commodities Fund II lost almost 30 percent through June, a separate person with knowledge of the matter said, asking not to be identified because the details are private.

“I’m shocked,” said Danilo Onorino, a portfolio manager at Dogma Capital SA in Lugano, Switzerland. “This is the end of an era. He’s one of the top oil traders ever.”

Hall shot to fame during the global financial crisis when Citigroup Inc. revealed that, in a single year, he pocketed $100 million trading oil for the U.S. bank. His career stretches back to the 1970s and includes stints at BP and legendary trading house Phibro Energy Inc., where he was chief executive officer.

He bet for oil prices about to rise soon which never happened leading to decline in the fund.


The underpinnings of RBI monetary policy: Just mimicking models in US?

August 4, 2017

Indira Rajaraman has a nice piece on underpinnings of India’s monetary policy. Right at the beginning, she says the article is not the usual noise ones: how much rate cut, too little too late types. But instead analyses the process.

She says earlier worries were MPC members singing similar tunes (even at time of demon). Now the worry is over the divergent vote patterns as members are divided over inflation trajectory:


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