Archive for July 26th, 2019

Would macroprudential policies have saved Japanese from their financial crisis of 1990s?

July 26, 2019

What if Japanese had implemented macroprudential policies earlier? Would it have saves them from 1990s financial crisis?

Eric Rosengren, head of Boston Fed in this speech says it would have alleviated fallout of the crisis:

  1. Takeaway: The Japanese financial crisis of the late 1990s had significant implications for both the Japanese and global economies.

    Excerpt: “…Japan’s domestic economy was severely impacted, with lasting effects. In addition, because of the global reach of the largest Japanese banks, the problems were essentially exported, as Japanese banks pulled back on foreign lending in order to bring assets better in line with their shrunken capital. Essentially, Japanese banks reduced their global footprint.”

  2. Takeaway: Effective use of macroprudential tools – that is, banking regulations aimed at mitigating financial-system risk – could have lessened the crisis in Japan. Unfortunately, it wasn’t until the financial crisis of 2008 that countries began to work on improving macroprudential policies.

    Excerpt: “…my own view is that with effective implementation of macroprudential policies, many of the issues would have been substantially mitigated.”

  3. Takeaway: Bank stress tests and the use of a countercyclical capital buffer (or CCyB) are two macroprudential tools that emerged from the financial crisis which could have reduced the severity of the banking crisis in Japan.

    Excerpt: “Rigorous stress tests would have revealed emerging problems, required retention of more bank capital, and discouraged aggressive lending. A CCyB would similarly have brought about a larger capital cushion to absorb shocks, which would have reduced the need for such dramatic shrinkage of lending when asset prices declined.”

  4. Takeaway: The Japanese banking system is again being affected by adverse economic conditions. Like the U.S., Japan might benefit from considering an expanded set of macroprudential tools.

    Excerpt: “Despite the passage of time and adoption of better policies, one could argue that the Japanese banking system is now, once again, being threatened by adverse economic conditions. A shrinking population, aging demographics, and very low interest rates provide very little room for Japanese banks to operate profitably. This of course provides an incentive to reach for yield, potentially implying additional risk-taking. …All this raises questions about how resilient the banking system is, or could be, in the face of some future global downturn.”

Hmm..

I dont know but have a feeling that next source of crisis could be macropru policies. Each time policymakers become gungho about some policy/measure, it creates problems later…

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Central bank of Turkey cuts policy rate by 425 bps!

July 26, 2019

After firing the Central Bank Governor, President Erdogan seems to be getting his way with the central bank under new Governor.

In the monetary policy meeting held yday (25-Jul-2019), the central bank cut rates by 425 bps in one go!:

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Creation of Washington, D.C.: How war debts, states’ rights, and a dinner table bargain created the capital

July 26, 2019

Superb piece by Jessie Romero:

By the summer of 1783, soldiers in the Continental Army were fed up. The British army had surrendered at Yorktown, Va., two years earlier, effectively ending the Revolutionary War, but soldiers remained on duty while treaty negotiations dragged on in Paris. They hadn’t been paid in full for their service in years, and when the Continental Congress passed legislation furloughing them, they suspected they never would be. On June 21, around 400 angry members of the Pennsylvania militia surrounded the building in Philadelphia where the Congress met, scaring off so many delegates that legislators failed to achieve a quorum. Alexander Hamilton and other congressional leaders urged Pennsylvania’s government to send in friendlier troops for protection, but the state refused. The next day, the Congress announced it was abandoning Philadelphia in favor of Princeton, N.J.

Over the next few years, legislators would meet in Annapolis, Md., Trenton, N.J., and New York City. In 1788, the Constitution gave Congress the power to establish a permanent home for the federal government, but there was considerable disagreement among the states’ delegates about where that home should be. Eventually, the debate would become entangled with arguments about the nation’s finances, reflecting deep philosophical divides between the country’s founders. The compromise that was eventually reached in 1790, which created a new district on the banks of the Potomac River, had long-lasting political and economic repercussions for the region and for the country.

How Washington, Jefferson and Hamilton navigated through the political economy of those times..

Inflation targeting in era of low inflation: Australia edition

July 26, 2019

Philip Lowe, Governor of RBA in this speech looks at two qs: Why is inflation low in world economy and Australia? Is inflation targeting appropriate for this low inflation era?

First why is inflation low?

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