The financial development of London in the 17th century revisited

Fascinating research by Nathan Sussman of Graduate Institute of Geneva.

The history of London as a Financial centre is always an interesting area of research:

Most research on the development of English financial markets begins with the Glorious Revolution of 1688. 

An overlooked episode of financial development in England during the 17th century, when financial development was still in its infancy,¹ leads me to argue that significant financial development and growth occurred before the Glorious Revolution (Sussman 2019). 

The Corporation of London was a chartered corporation that governed the City of London. It originated in the 12th century, and its governance structure included the Lord Mayor, the Court of Aldermen (executive branch), and the Court of Common Council (a deliberative institution). I have been able to extract individual debt contracts from the accounts of the Corporation of London, and so construct a continuous time series of interest rates paid by the Corporation to its lenders from 1638 to 1683. 

He shows how the Corporation benefited from lower interest rates in the period.

These contracts show that significant financial development occurred in the 17th century, in particular after the Restoration in 1660. Figure 1 shows that, from the 1630s to the 1680s, interest rates in London co-moved with those in Amsterdam, the most developed financial centre at that time. The correlation coefficient between the two financial centres is 0.8. Less than a decade before the Glorious Revolution, the spread between them had declined to zero when London borrowing rates reached 4% in 1680.

Figure 1 Borrowing cost of the Corporation of London and Province of Holland, 1638-1683

Hmmm..

Protection of the euro against counterfeiting and on the authentication of euro coins in Luxembourg

Interesting bit of commentary on ECB’s website.

Luxembourg is placing a new law to deter counterfeiting of Euros in the country. ECB sends its views on the new law. This is a bit more interesting as ECB is a suprnational central bank not accountable to any one government. But Euro circulates in the respective countries and needs counterfeit laws:

The draft law amends five national laws in order to introduce criminal law sanctions for relevant institutions, as well as their managers and responsible staff, who fail to comply with their obligations as set out in Article 6 of Council Regulation (EC) No 1338/20016. Under that Article, relevant institutions are obliged to: (i) ensure that euro banknotes and coins which they have received and which they intend to put back into circulation are checked for authenticity and that counterfeits are detected; (ii) withdraw from circulation all euro banknotes and coins received by them which they know or have sufficient reason to believe to be counterfeit; and (iii) immediately hand over such euro banknotes and coins to the competent authorities. The relevant institutions are the addressees of Article 6(1) of Regulation (EC) No 1338/2001, which are further specified under the draft law as: (i) merchants engaged in the processing and distribution to the public of money via automated bank machines or automated dispensers; (ii) casinos and similar institutions engaged in the processing and distribution to the public of money via automated teller machines or (cash dispensers); (iii) credit institutions, and, within the limits of their payment activity, other professionals of the financial sector; (iv) companies performing private security and surveillance activities; and (v) payment institutions, within the limits of their payment activity. The foreseen criminal law sanctions consist of fines between EUR 1,250 and EUR 125,000.

1.3 The draft law also complements the BCL’s tasks in respect of euro banknotes and coins, in addition to those laid down in the Law of 23 December 1998 on the monetary status and the Banque centrale du Luxembourg (hereinafter the ‘Law on the BCL’). Firstly, the draft law formally designates the BCL as the competent authority for ensuring compliance with Council Regulation.

ECB supports most of these measures…

Sabine Lautenschläger, Germany’s representative on the European Central Bank’s executive board resigns!

Missed this development:

Today, Sabine Lautenschläger, Member of the Executive Board and Governing Council of the European Central Bank (ECB), informed President Mario Draghi that she will resign from her position on 31 October 2019, prior to the end of her term of office. Ms Lautenschläger has been a Member of the Executive Board and Governing Council since 27 January 2014 as well as serving a full term in office as the Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM).

President Mario Draghi thanked her for her instrumental role in helping set up and steer Europe-wide banking supervision, a key pillar of banking union, as well as her unwavering commitment to Europe.

She was unhappy with the ECB decision to restart the bond buying program. This means there is no German on ECB Board, a central bank designed on the lines of Bundesbank.

I had blogged how German presss see Draghi as a devil.

Bundesbank chief Weidmann in this interview says ECB has gone too far:

New bond purchases and even higher penalty interest rates for banks. Is that what’s needed in your opinion, too?
Economic activity has cooled down, mainly in Germany but also elsewhere in the euro area. So inflation is expected to be somewhat lower. The ECB Governing Council has now adopted a very comprehensive package that will provide even more monetary policy accommodation. But I think it has gone too far with this decision. You see, the economic situation is not all that bad, wages are growing strongly, and the spectre of deflation – that is, of persistently contracting prices and wages – is nowhere to be seen.

….

You’re a longstanding critic of the ECB’s monetary policy – but are your views falling on deaf ears at the ECB? Doesn’t Draghi care what you say or do?
I’ve always singled out government bond purchases for criticism because there is a danger they might blur the boundary between monetary and fiscal policy. That is why we established clear constraints for these purchases on the Governing Council, not least because I pushed for them. So my concerns were taken on board. These new purchases, however, will call these constraints into question in the foreseeable future. And incidentally, I’m not alone with my critical stance. Mario Draghi, remember, indicated that opinion is divided on the Governing Council.

Are zero interest rates destroying our savings culture and eroding confidence in our economic system?
You’re right to say that monetary policy is currently placing a strain on savers. But it’s always a good idea to put some money away for later and to provide for old age, even if interest rates are low. And it’s not as if people have stopped saving altogether. But I do agree with your point that when a public sector institution like the central bank chooses which instruments to use, it needs to make sure that its actions do not deeply unsettle people. That also means that people can count on their money retaining its value, that is to say, that the central bank will pursue its objective of price stability.

A big development!

Loan mela comeback: Missed history lessons

My new piece in Business Standard. It reviews history of loan mela.

 

The constitution won’t save American democracy, only its people can..

Daron Acemoglu and James Robinson write a timely piece. Fair bit of world leaders are justifying their actions saying they are doing things as per Constitution. Any Constitution for all you know is a human creation and has many gaps. It requires the leadership to understand the gaps and not exploit them, but we are hardly seeing this.

A & R write:

The ideas and influence of Martin Feldstein, 1939-2019

James Poterba and Lawrence H. Summers pay a tribute to Marty Feldstein who passed away this year:

Martin Feldstein, who passed away in June 2019, was one of the most important applied economists of the last half-century. This column, by two of his students and close colleagues, celebrates his intellectual legacy, outlining his seminal contributions on a wide range of topics in public economics and beyond, his pioneering use of large data sets, and his influential voice in US public policy over many decades. As president of the National Bureau of Economic Research for nearly 30 years, Feldstein advanced the conduct and dissemination of economic research, and helped to create the modern economics profession.

……

There is no ‘Feldstein theorem’, ‘Feldstein estimator’, or ‘Feldstein model.’ Inevitably, with the passage of time, the accumulation of new data, and the development of new empirical techniques, Feldstein’s empirical papers are no longer viewed as the state-of-the-art estimates of key effects. Many of the questions he explored, such as the magnitude of the distortions induced by capital income taxation, have been considered in more sophisticated frameworks than those that he employed. Feldstein’s papers are no longer the reading list staples that they were a generation ago.

But in other, perhaps more profound ways, Martin Feldstein leaves behind a deep scholarly legacy. His approach to research has shaped not just our own, but that of many other scholars. We learned from him to “be about the economy, not the economics literature”.

Feldstein conveyed to his students and the profession the idea that “no single parameter estimate will change anybody’s mind about anything. To be convincing, an empirical conclusion has to emerge from multiple approaches and multiple data sets.”

Closely related was his emphasis on the importance of new information in gaining new insights. Most of his research papers involved the construction of new variables, the use of previously unexploited data, or the measurement of previously unmeasured effects. 

Feldstein was a key figure in the change in the way economists viewed the economy that took place during the 1970s, and which found its political expression in the Reagan and Thatcher revolutions of the 1980s.

When Feldstein entered the economics profession, economists generally believed that government programmes had large income effects and small incentive effects, that stabilisation of business cycles was the principal macroeconomic task of government, that efficiency losses from tax distortions were small, and that accepting higher inflation in order to reduce unemployment was prudent in many circumstances.

Many factors – including, importantly, Feldstein’s research and advocacy – contributed to moving that post-war Keynesian belief system out of fashion. The counter-revolutions of today – calling for expanded benefits, larger deficits, and higher taxes – are a testimony to the enduring influence of Feldstein’s work. 

Hmm..

In medieval England magic was a service industry used by rich and poor alike

Interesting article by Tabitha Stanmore of Univ of Bristol.

Magic is a universal phenomenon. Every society in every age has carried some system of belief and in every society there have been those who claim the ability to harness or manipulate the supernatural powers behind it. Even today, magic subtly pervades our lives – some of us have charms we wear to exams or interviews and others nod at lone magpies to ward off bad luck. Iceland has a government-recognised elf-whisperer, who claims the ability to see, speak to, and negotiate with the supernatural creatures still believed to live in Iceland’s landscape.

While today we might write this off as an overactive imagination or the stuff of fantasy, in the medieval period magic was widely accepted to be very real. A spell or charm could change a person’s life: sometimes for the worse, as with curses – but equally, if not more often, for the better.

Magic was understood to be capable of doing a range of things, from the marvellous to the surprisingly mundane. At the mundane end, magic spells were in many ways little more than a tool. They were used to find lost objects, inspire love, predict the future, heal illnesses and discover buried treasure. In this way, magic provided solutions to everyday problems, especially problems that could not be solved through other means.

…

This all may sound far-fetched: magic was against the law – and surely most people would neither tolerate nor believe in it? The answer is no on both counts. Magic did not become a secular crime until the Act against Witchcraft and Conjurations in 1542. Before then it was only counted as a moral misdemeanour and was policed by the church. And, unless magic was used to cause harm – for example, attempted murder (see below) – the church was not especially concerned. Often it was simply treated as a form of superstition. As the church did not have the authority to mete out corporal punishments, magic was normally punished by fines or, in extreme cases, public penance and a stint in the pillory.

Changing nature of services industry..:-)

Financial conditions and purchasing managers’ indices: exploring the links

Purchasing Managers’ Indices (PMI) is becoming increasingly popular with analysts.

In the BIS quarterly review (Sep-19), Burcu Erik, Marco Jacopo Lombardi, Dubravko Mihaljek and Hyun Song Shin explore links between PMI and Financial conditions:

Purchasing managers’ indices (PMIs) have found a place in global conjunctural analysis and quarterly GDP nowcasting, serving as reliable concurrent indicators of real economic activity. They also closely mirror changes in equity prices and corporate bond spreads. More surprisingly, PMIs react to changes in the dollar index, and do so in a way that runs counter to a trade competitiveness explanation. We show that the financial variables help predict PMIs and explain a significant proportion of their variation. The two seem to be linked through shifts in macroeconomic sentiment and global financing conditions.

 

A fifty-year history of Facebook’s Libra

JP Koning in this superb blogpost (as  always) points idea of Libra is hardly new. There have been several attempts in the past both private and public to create a similar currency unit:

When central bankers use Montesquieu’s quote of “sweet ties of commerce”….you know we are living in tough times

We are living in tough times for sure. It is not very often when you see a central banker say that it is “sweet ties of commerce” which are keeping us away from military conflict! Charles Louis de Secondat, Baron de Montesquieu, a 18th century thinker, was a votary of using commerce for progress and peace.

Who better than François Villeroy De Galhau, Governor of Banque de France to say these words in this speech. After all France has been central to all such conflicts. He says world faces three conflicts:

It gives me great pleasure to speak before you today. I follow in the footsteps of several Ministers of Foreign Affairs, including Jean-Yves Le Drian and Nathalie Loiseau. Caro Enrico, thank you for your invitation, knowing this makes me feel all the more grateful and honoured! The decision to switch from diplomats to a central banker such as myself perhaps sends out three signals.

First, rarely have geopolitics and economics been so closely intertwined. Faced with the rise in protectionist tensions and the verbal volleys, which unfortunately intensified again this summer, some even say that economic interdependence – the “sweet ties of commerce” praised by Montesquieu – is the only thing still shielding us from military conflict. Conversely, rarely has a global economic slowdown been so clearly attributable to political causes: nearly everywhere, public policy instability and uncertainty are on the rise and are damaging private sector confidence; I shall come back to this.

Second signal: rarely have central banks been called upon to do so much.  I’m not going to bore you with a lesson on the technical delights and subtleties of monetary policy. Let’s just say that we have a central mandate – price stability – and a main instrument for achieving this – the short-term interest rate. But for the past ten years, since the great financial crisis, we have been using new instruments: quantitative easing (QE), forward guidance[i] and even negative rates. These non-standard policies have been effective; but they can also create the – mistaken – illusion that monetary policy is omnipotent.

Third signal: rarely has Europe appeared so necessary and at the same time so divided. I am a French and European official, I was in Maastricht 28 years ago to launch the euro; every two weeks I take part in meetings of the ECB Governing Council which manages the currency. I stand by this conviction in Europe and in the belief that the joint work carried out by France and Germany is an indispensable driver, even if it is not enough. Nearly 30 years ago, the fall of the Berlin Wall injected new impetus into the construction of Europe.

Today, Europe is turning in on itself, is on the defensive. Yet it is vital that it make itself heard in the face of the threats that it is facing, and that it do so with one voice if it doesn’t want to be inaudible. But beyond the threats, and at the risk of sounding paradoxical and even a little provocative, I would like to present you with an opportunity: in the current crisis of globalisation, Europe doesn’t need to keep its head down; it should assert and propose a model – its own social, environmental and mutilateral model.

I propose that we do this in the spirit of Stefan Zweig, who as early as 1934, admirably described the state of mind of the great European Erasmus of Rotterdam: “Instead of listening to the vainglorious claims of petty princelings, of fantastical sectarians and of national egoists, the mission of the European is on the contrary to emphasise that which unites the peoples.

Hmm..

Why are economists letting down the world on climate change?

Andrew Oswald and Nicholas Stern in this voxeu piece argue that climate/environment barely feature in economics:

Action on climate change is arguably the greatest challenge for public policy of our times. But despite economic forces being the major driver of the carbon dioxide problem, this column argues that economists have so far been too silent on the subject. For example, the Quarterly Journal of Economics, the most-cited journal in economics, has never published an article on climate change. Good economics can and should play a fundamental role in guiding the policy framework that will influence investment decisions in the coming years, so it is important that the profession dramatically increases its work now.

…..

We suspect that modern economics is stuck in a kind of Nash equilibrium.  Academic economists are obsessed with publishing per se and with pleasing potential referees.  The reason there are few economists who write climate change articles, we think, is because other economists do not write climate change articles. 

Attack on econs from all possible fronts..

What can India’s banking system learn from the shampoo sachet revolution?

Viral Acharya in this FT piece says Indian banks should learn from the FMCG companies who introduced sachets to sell shampoos to consumers based on their cash flows. BS has a shorter piece summarising the key idea.

Dvara Research Blog Competition 2019

Dvara Research has put up the inaugural Dvara Research Blog Competition 2019. The competition is for students currently pursuing Bachelor’s and Master’s degrees in India. The last date for submission is 20-Oct-2019. It is giving great prizes with the first winner getting a cash award of Rs 35,000.

We are delighted to host the inaugural Dvara Research Blog Competition 2019 for students currently pursuing Bachelor’s and Master’s degrees in India. The competition is on the theme of “Suitable Finance for Agricultural Households“ and is aimed towards encouraging students to conduct analyses on the Agricultural sector in India, and how suitable finance can serve as a lever for lower-income agrarian households to improve their social as well as financial capital.

Through this competition, we hope to encourage and invite thinking on ways of applying suitable finance to the issues faced by agricultural households. Students are encouraged to submit their original analysis/insights as part of this competition which would be reviewed by an eminent jury and the top three entries will be featured on our blog and will also be monetarily rewarded. The resources section at the bottom has links that may help you get a rounded view of the theme, and we will keep updating this page with additional information during the course of this competition. In case of any queries or if you seek further clarity, please feel free to reach out to us at blog.research@dvara.com.

The theme:

Theme: Suitable Finance for Agricultural Households

The ill-effects of unsuitable finance tend to be felt more by workers in the unorganised sector, amongst which are those engaged in agriculture. Agricultural workers are unique among other unorganised workers in their livelihoods are dependant on circumstances that are highly unpredictable. This, as well as the cropping cycle usually means that they do not have a regular source of income. As a result, regular finance, with its calculations made based on monthly averages, falls short of being able to address the issues faced by agricultural households.

At Dvara Research, the Household Finance Research Initiative aims to rigorously understand the financial choices and decisions of low-income or excluded individuals and households, and their relation to achieving households’ objectives. We realise that one cannot look at the financial well-being of households without ensuring that they are protected from being prescribed unsuitable methods by which to achieve it. We believe that financial service providers must ensure that the customers’ interests are adequately and effectively protected as a matter of business process.

Pass on the word!

Case of Valeria Gonareva former Governor of Ukraine: From death threats to home arson..

Valeria Gonareva, Former Governor of Central Bank of Ukraine, has been under trouble for a while. She was pivotal to nationalisation of PrivatBank, a bank owned by the billionaire Ihor Kolomoisky.

She received death threats during her tenure with people putting coffin at her home.

She had moved to LSE but was recently hit in London. Her friends think it was not an accident but an attempt to hit her.

As if this was not enough, her home in Ukraine has been torched by protesters!

Draghi Says ECB should examine new ideas like MMT.. (Draghi shown as devil in German newspapers!)

Mario Draghi, President of ECB appeared before Committee on Economic and Monetary Affairs of the European Parliament to discuss economic developments and ECB policy.

In one of the questions, he said ECB should be open to new ideas like MMT. He said MMT and helicopter money are more to do with distribution and this is something which becomes a fiscal task.

MMT supporters would be surprised and tell Draghi: “Told ya!”.

Bill Mitchell in this post reflects on the recent ECB monetary policy decision on 12 Sep 2019:

Impact of Foreign Trade Agreements on India’s trade (some history too)

Rekha Misra and Sonam Choudhry of RBI in this paper (in RBI’s Sep-2019 Bulletin) research India’s foreign trade agreements.

The impact of trade agreements (TA) is more on imports than exports:

RBI’s First Balance Sheet as on 31 Dec 1935…

Given the interest in RBI Balance sheet recently, it is interesting to see RBI’s First Annual Report/balance sheet. The first balance sheet was for a 9 month period (1-April-1935 to 31-Dec-1935).

The RBI took over the currency function from Paper Currency Department of Government and management of Public Debt and government account from Imperial Bank. Further:

It was, however, not till the 4th of July 1935 that the Bank assumed one of its most important function as a Central Bank by announcing the first official Bank Rate of the country. The next step was to establish contact officially with the scheduled banks. This was accomplished on the 5th of July 1935, the date on which the scheduled banks lodged their statutory deposits with the Bank in accordance with the provisions of Section 42 of the Reserve Bank of India Act.

We take all this for granted now!

RBI was a shareholder bank. Of the Rs 5 crore subscribed capital (which remains until today), Rs 2.2 lakh was held by the Government. The process of share subscription required lot of planning given the restrictions over who could be shareholders:

The persistent low interest rates might lead governments to become pension provider of last resort…

As governments push their central banks to lower policy rates (Trump succeeds as well), they should know most economics decisions imply trade-offs. The luring prospect of trying to remain in power by all means could lead to disastrous consequences.

Lars Rhode, Governor of Denmark central bank in this speech points to some of the risks. It is interesting to note that the entire yield curve in Denmark is negative! He says the big impact of low/negative interest rates are pension markets:

When banks use economic nationalism to drive up customers: Case from NZ

With Nationalism being the flavour of the day, how can economic nationalism remain behind? Infact both have coexisted for as long as one can imagine.

Recently Kiwibank, a NZ based bank issued an ad hitting out at competitors.

Michael Reddell, who writes a terrific blog on NZ economy disapproves the tactic:

Are Trump’s tweets undermining Federal Reserve’s independence?

Reinhart and Reinhart in a Proj Syndicate Piece wrote how Federal Reserve’s easy monetary policy will basically lead to Trump reelection:

Probably to Powell’s deep and never-to-be-expressed frustration, the Fed is setting monetary policy in a way that increases the likelihood that Trump will be reelected next year. That instruction is not contained in the Federal Reserve Act, of course, but the Fed is supposed to deliver maximum employment and stable prices. Its mandate of sustainable economic growth thus requires Powell to attempt to offset the effects of policy uncertainty under Trump.

Fed officials are not thinking of intentionally letting the economy stumble between now and the 2020 election. Thus, if Powell succeeds, Trump will not bear the cost of his words and actions. This will invite more of the same.

There is a reason that Powell often has a haunted look, and not just at Jackson Hole.

In a new NBER paper, authors actually show how Trump’s tweetstorm (hatestorm?) leads to lower Federal Funds rate:

This paper presents market-based evidence that President Trump influences expectations about monetary policy. The main estimates use tick-by-tick fed funds futures data and a large collection of Trump tweets criticizing the conduct of monetary policy. These collected tweets consistently advocate that the Fed lowers interest rates.

Identification in our high-frequency event study exploits a small time window around the precise time stamp for each tweet.

The average effect of these tweets on the expected fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps. Therefore, we provide evidence that market participants believe that the Fed will succumb to the political pressure from the President, which poses a significant threat to central bank independence.

Interesting times!