Archive for June 7th, 2019

Skills of a Risk Manager in finance: C# / .NET full-stack Developer?

June 7, 2019

Interesting job vacancy at BIS:


Saga of Central Bank Independence continues: Lessons from Slovenia

June 7, 2019

In cases of central bank independence, we often look at large economies and their central banks.

However, of late we are getting some intriguing cases from smaller economies. The latest I came across is that of Slovenia whose case is as enthralling as Cyprus which was discussed in earlier post.


How the State uses law to create value from nothing…

June 7, 2019

Katharina Pistor has a fascinating piece on financial history:

If there ever was a magic ingredient for seemingly making something from nothing, it is law. Law can transform a simple commitment into an enforceable claim. And with a few additional legal steroids that grant asset holders priority, durability, convertibility and universality, law can turn a simple asset into a capital asset, as I explain in my new book The Code of Capital. Notes, currencies, bonds, asset-backed securities (ABS), and their derivatives exist only in law; without it markets for these assets would neither exist nor have scaled to multi-trillion-dollar markets that span the globe. The history of credit, or private money, is thus inextricably linked to the willingness of states to throw public power behind private commitments made on an unknown future.

France’s haute cuisine was not created overnight; it evolved over centuries in a process of trial and error, through endless efforts to refine the ingredients, the tools and the cooking processes. And so similarly was the evolution of minting private money from law. First came notes, or IOUs, the most basic form of private money. Then, the notes were placed on legal steroids, which gave us the bill of exchange. In legal parlance, they were made “negotiable”: anyone in possession of the note could now demand payment, not only from the original debtor, but from anyone who had endorsed the bill with a signature on the back. And no one who had endorsed the bill could raise objections that arose of the contract for which they had accepted the obligation. Cloaked in these creditor protection devices, bills became highly fungible, or money-like. Long chains of payment commitments linked producers to markets, creditors to debtors, cities to the country side, and major trading centers to each other in early modern Europe. These webs of bills became our first payment system thanks to legal protections offered by common law courts and to special statutes that trading cities throughout Europe adopted to ensure that they could be enforced in their jurisdiction.

Ever since, private money has proliferated, taking new forms along the way: Corporate bonds, asset backed securities, derivatives and claims stacked on top of one another to create squared and cubed variants followed suit. Dissecting these assets into their legal compounds, we find the basic elements of the code of capital: property, collateral, trust, corporate, bankruptcy, and contract law. These devices shield asset pools from too many creditors; they create priority rights by some claimants over others, and they make it possible to tailor assets to the specific needs of investor – to feed their risk appetite or their need for regulatory arbitrage. Refined and perfected over time, the basic legal ingredients have remained remarkably stable throughout the centuries – even as acronyms and financial jargon suggest new creations.

She points how today’s financial firms and crisis in them are all similar to previous firms and crisis in them:

In the end, all cooking is done with water, even in France where in the nineteenth century the Péreire brothers invented the Crédit Mobilier, the first leveraged banking operation on a large scale. They called their invention “banking without money”. They established a bank (the CM), capitalized it with only partially paid up shares, raised additional funds from bond holders and depositors, and invested in major infrastructure projects and banking ventures across Europe. The bank paid huge dividends to attract new shareholders, which in turn attracted more creditors, so that, for a while, the bank boomed. However, it all ended in tears with a bail-out orchestrated by the Banque de France. And yet, the basic scheme was soon emulated by others: “ponzi finance”, or leveraged investment in need of constant refinancing, as Minsky would much later call it, was born. 

loser scrutiny suggests that Lehman’s structure was remarkably similar to that of the Crédit Mobilier (CM). Unlike CM, it did not invest in infrastructure, but it issued and traded in what seemed to be highly liquid financial assets – just as LTCM had done. Lehman Brothers had over 200 registered subsidiaries as well as many more investment vehicles. The shares of these subsidiaries comprised the major assets of the parent, which guaranteed the debt its subsidiaries and sub-subsidiaries raised. Lehman operated as an integrated global financial intermediary with its profit center in New York. It made use of every legal tool in the kit to carve out assets, shield these assets from a multitude of competing creditors, and raise funds on repo markets, all the while ploughing profits back to the parent company’s shareholders. When the market for these financial assets dried up, liquidity evaporated. The only truly liquid asset available at that point was (and always is) state money – but Lehman was denied access to it. When the Fed determined that Lehman had no adequate collateral to lend against, this meant the end of Lehman.


Modern Monetary Theory’s Reluctant Poster Child: Japan

June 7, 2019

Ben Dooley in this piece writes how MMT pretty much explains Japanese economy yet Japanese policymakers are reluctant to accept it.

Spend big and never mind the deficit. That’s what proponents of modern monetary theory, the unorthodox set of economic ideas that has inspired politicians like Bernie Sanders and Alexandria Ocasio-Cortez, see as the winning formula for American prosperity.

For proof, its admirers point to Japan. Despite the highest debt in the developed world, Japan remains an economic powerhouse with high living standards.

Japanese leaders wish they would point somewhere else.

Shinzo Abe, the Japanese prime minister, has dismissed the theory as “simplistic.” Finance Minister Taro Aso described it as “very dangerous.” And Haruhiko Kuroda, the head of Japan’s central bank, called it “extreme.”

Rather than embrace an idea that could explain or even justify the country’s situation, Japan is furiously debating it. Lawmakers to Mr. Abe’s left are citing the theory — known as M.M.T. — to denounce his plan to raise taxes on the country’s consumers. On the right, members of his own party have tried to link his policies to the theory, accusing him of running up gargantuan debts the country can never repay.


Can MMT explain Israel’s growth story?

June 7, 2019

Tyler Cowen writes on Israel’s growth story:

From about 1973 to 1985, Israel had very high rates of inflation at one point reaching over 400%. That was the result of excessively loose monetary policy. Over time, printing money at such a clip took in successively less government revenue, as Israelis adjusted to the inflation and worked around it by holding less cash and denominating their contracts in foreign currencies. The inflation stopped giving macroeconomic benefits, even for government revenue, and Israel moved toward a regime of lower inflation and fiscal strength, to the benefit of the country’s longer-term growth.

This is a classic episode of MMT — “Modern Monetary Theory” — getting it wrong, as argued by Assaf Razin in his recent study of Israeli macroeconomic history. Under MMT, monetary policy can cover government spending, and fiscal policy can regulate price levels. Israel wisely followed more mainstream approaches.

Assar Razin’s NBER paper is here:

This essay offers an economic-history perspective of the long struggle towards macroeconomic stability. The paper is a broad analytical overview of major exogenous shocks and shifts in macroeconomic policy and institutions in Israel since the 1977-1985 great inflation through the global financial crisis and the effects of those shifts on long term growth, inflation, the business cycle, the Phillips curve and related economic developments.

The paper will discuss three main issues.

The first one on the inflation crisis focuses on the 1985 stabilization and on its impact on subsequent reform of monetary institutions.

The second discusses the impact of globalization on growth, inflation and the Phillips curve.

The third contains a discussion of the reasons for the relatively good performance of Israel during the 2008 global crisis, including foreign exchange market intervention.

Henceforth we highlight: (1) the role of macro-populism in generating hyperinflation; (2) the role of seigniorage revenue in generating the hyperinflation; (3) distributive effects of inflation stabilization, which are political driving forces behind the need for across-the-broad-coalition for a successful stabilization policy; (4) the effects of globalization on the Philips Curve and thereby on domestic inflation– means of transforming an inflation regime to a one with price stability; (5) the role of financial prudence regulatory institutions, which serve to explain the Israeli macroeconomic robustness in the face of the 2008 external depression-deflation global forces; and, (6) Israel’s government-deficit and money-creation experience, which help evaluate recent theory—the Modern Monetary Theory (MMT).

On MMT, Razin says:

Fiscal policy has been recently given greater emphasis in the post-2008 crisis that nominal interest rates appear to be persistently low — and below the annual growth rate of nominal GDP. This recent phenomenon generated renewed debate on the role of “printing money” in financing government deficits. Modern Monetary Theory, or MMT,  argues that a country borrowing in its own currency can finance fiscal stimulus by  printing money.

That is, governments able to issue fiat money can’t go bankrupt,  regardless whether investors are willing to buy their bonds. By extension, MMT would
allow the government to control inflation through tax policy. Instead of asking the Fed  to stabilize prices through monetary policy, the government could raise taxes when  prices get too high and cut taxes when prices get too low.

However basic  macroeconomics wisdom suggests that deficit finance by money issue won’t leave banks  sitting idle on their newly acquired reserves; they’ll convert them into currency, which they lend to individuals. So the government indeed ends up financing itself by printing  money, getting the private sector to accept pieces of paper in return for goods and  services, and this would lead to inflation. Recall that a deficit financed by money issue is
more inflationary than a deficit financed by bond issue.

When the central bank  purchases a government bond in the open market in exchange for commercial bank  reserves, all it does is substitute a very short‐term liability (reserves have zero maturity) for a longer‐term liability. That is, a central bank purchase of government bonds simply  alters the maturity structure of the consolidated government’s liabilities, and thereby  pushing up inflationary pressures.


But then I am not sure whether MMT applies to Israel under high inflation. MMT applies under low inflation with no price constraints. What we saw in Israel was just the opposite where inflation was very high.

RBI, the world’s model central bank? Just maybe

June 7, 2019

How quickly the sentiments change!

Daniel Moss writes in Bloomberg:

India is becoming the gold standard for monetary policy in Asia, if not the world.

While global markets are giddy from hints that the Federal Reserve may cut interest rates, India’s central bank has been easing since February. Just as important, Reserve Bank of India (RBI) has been very consistent in its message: Borrowing costs need to come down to juice growth. Passive inflation and the central bank’s full tank of gas make the case to cut even stronger. After Thursday’s trim, the benchmark rate is 5.75%.

RBI’s approach is correct. There’s no point targeting inflation if growth is waning and the very thing you’re aiming at is dormant. Thursday’s quarter-point reduction in the benchmark rate, the third in as many policy meetings, underscores the theme: “Growth impulses have weakened significantly,” according to the central bank’s statement.

“A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern.’’ RBI made clear that “global economic activity has been losing pace” and declared its stance to be “accommodative”.

Much focus is rightly given to Beijing’s efforts to pull both fiscal and monetary levers; as big as India’s economy is, China’s is much larger. But the People’s Bank of China tends to be opaque and is trying to thread the needle between buttressing the economy and fretting about financial stability.

Japan, meanwhile, gets plenty of attention as a pioneer of unconventional policies—yet its economy remains a parable about how booms can end in tears. And remember back in February, the consensus was that the Fed had just paused before resuming hikes. Few serious observers believe that now.

So give governor Shaktikanta Das his due. RBI’s rate cut in February was risky—few economists anticipated it—but appropriate. The signalling power was immense. Officials followed that up with another reduction in April. The outlook has only deteriorated since then.


Much of this is also plain luck as well. If inflation went up somehow, the same rate cuts would have made RBI as the worst central bank.

I also think too much attention is paid to these policy rate changes which is mostly here and there. WHat is very concrete is banking supervision which is housed in quite a few central banks including RBI. There was fair criticism over RBI’s handling of NBFC crisis in yesterday’s meeting. From banks to NBFCs, the crisis continues yet does not affect sentiments is quite unbelievable..

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