Archive for the ‘Blogs to Read’ Category

Retired politicians in demand in New Zealand..

February 19, 2018

Michael Reddell posts about the topic. 

He says  we need to restrict appointment of politicians/central bankers to take up other jobs post retirement:

Until just over a year ago, Bill English had been Minister of Finance for eight years.  In that role he had responsibility for the framework of legislation (primary and secondary) governing the prudential regulation of banks,  non-banks, and insurers.  He was minister responsible for the Reserve Bank of New Zealand, the prudential supervisory agency (including for banks).  He appointed the people who appointed the new Governor (and – single decisionmaking – supervisor). His department –  The Treasury –  was a key participant in the trans-Tasman banking council.  Even in his year as Prime Minister, there was no sign that he had lost interest in matters economic and financial.

It would be a dreadful look if a retiring former Minister of Finance went (more or less) straight from politics onto the board of a Bank.   It would be almost as bad as if a retiring Governor of the Reserve Bank made a similar move.   The issue –  especially for the Minister of Finance case –  isn’t about inside information; ministers aren’t usually privy to much individual institution data, and the broad intended sweep of policy (a) usually isn’t that secret, and (b) is somewhat specific to particular governments.    It is about incentives, appearances, and our ability to be reasonably confident that our governors are governing in the public interest and not in their own interests.

Probably few people go into politics initially for the post-politics opportunities.  Nonetheless, people need to feed their families, and fill their days, and even if you eventually get to the very top, even being Prime Minister doesn’t last forever.   Bill English is only 56, and the current Prime Minister –  even if consistently successful –  is likely to be out of Parliament by the time she is 50.   And –  even in New Zealand –  private sector directorships can pay pretty well (it was suggested that John Key might be getting $200,000 per annum for chairing the ANZ –  a big bank to be sure, but an unlisted 100 per cent subsidiary of an Australian parent, pretty substantially controlled by that parent).

Whatever the sector, a Cabinet minister who legislates/regulates in ways which are welcomed by the regulated industry are much more likely to find the post-politics doors open than one who regulates in a way the industry finds costly or inconvenient.  It isn’t just an issue in banking – it could be telecoms, or electricity, or transport, export education or whatever.   I’m no great fan of most business regulation, but it exists –  and the community as a whole has made a decision that such regulation is necessary or desirable.  If so, it is easy to envisage cases of a conflict between the public interest and the private interests of the regulated entities.

I’m not suggesting that Bill English (or John Key) made any decisions during their terms in office for reasons other than some mix of their view of the best thing for the country, and their view of how best to get re-elected.     But the incentives, and risks around them. are things that need managing.  It would set a dreadful example if Bill English shortly turns up on the board of a bank (in John Key’s case, the concern might be more about his membership of the Air New Zealand board –  a majority state-owned company, with ownership sold down by Key’s government, and where Key himself had until quite recently been Minister of Tourism).

Hmm..

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The financialization of everything: How finance is reshaping the ‘rules of the game’?

February 15, 2018

A long post by Servaas Storm. But we know this narrative of how finance controls pretty much everything we do today.

The shift in financial intermediation from banks to financial markets, and the introduction of financial market logic into areas and domains where it was previously absent, have not just led to negative developmental impacts, but also changed the ‘rules of the game’, conduct and outcomes—to the detriment of ‘inclusive’ economic development and in ways that have helped to legitimize—what Palma (2009) has appositely called—a ‘rentiers’ delight’, a financialized mode of social regulation which facilitated rent-seeking practices of a self-serving global financial elite and at the same time enabled a sickening rise in inequality. Establishment (financial) economics has helped to de-politicize and legitimize this financialized mode of social regulation by invoking Hayek’s epistemological claim that (financial) markets are the only legitimate, reliably welfare-enhancing foundation for a stable social order and economic progress.

….

Rather than letting financial markets discipline the rest of the economy and the whole of society, finance itself has to be disciplined by a countervailing social authority which governs it to act in socially desirable directions. One famous account in the Talmud tells about Rabbi Hillel, a great sage, who when he was asked to explain the Torah in the time that he could stand on one foot, replied: “Do not do unto others that which is repugnant to you. Everything else is commentary.” If there is a one-foot summary of the literature reviewed in this introduction, it is this: “Finance is a terrible ‘ephor’, but, if and when domesticated, can be turned into a useful servant. Everything else is commentary.”

I don’t think this was the vision of markets which Hayek gave us. The markets are heavily regulated with numerous conflicts of interest present across the entire chain.

The Anchal Service: The postal services used in Travancore and Cochin

February 5, 2018

Brilliant post by Maddy’s Ramblings blog. This blog is the goto blog on nuances of Kerala’s history which is quite amazing to learn. The blog is an inspiration of sorts of being really meticulous in research and using the blog to share it with people.

In this post, he writes about the postal services used in Travancore and Cochin areas called Anchal Service (Wiki entry):

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Focus Economics: List of Top Economics & Finance Blogs of 2018

February 1, 2018

Focus Economics has updated its 2017 list of top economics and finance blogs.

There are quite a few additions and some others who continue to be included in the list. In all humility, Mostly Economics continues to be in the list. Thanks to the several visitors and well-wishers. Hope the momentum continues this year as well…

 

When bank deregulation is dangerous if not done properly…

January 24, 2018

The usual narrative is that when you deregulate banking, crisis follows as banks take on more risks, lend/invest foolishly and so on.

Prof George Selgin says deregulation is dangerous not for the above reason but if not implemented properly:

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Banking deserts in US are literally in deserts only…

January 17, 2018

Interesting post on NY Fed’s Liberty Street blog.

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How a Bitcoin System is Like and Unlike a Gold Standard

January 16, 2018

Larry White has a post:

In what important respects are the Bitcoin system and a gold standard similar? In what other important respects are they different?

Bitcoin is similar to a gold standard in at least two ways. (1) Both Bitcoin and gold are stateless, so either can provide an international base money that is not the creature of any national central bank or finance ministry. (2) Both provide a base money that is reliably limited in quantity (this is the grounding for Selgin’s characterization), unlike a fiat money that a central bank can create in any quantity it likes, “out of thin air.”

Bitcoin and the gold standard are obviously different in other ways. Gold is a tangible physical commodity; bitcoin is a purely digital asset. This difference is not important for the customer’s experience in paying them out, as ownership of (or a claim to) either asset can be transferred online, or in person by phone app or card. The “front ends” of payments are basically the same nowadays. The “back ends” can be different. Gold payments can go peer to peer without third-party involvement only when a physical coin or bar is handed over. Electronic gold payments require a trusted vault-keeping intermediary. Bitcoin payments operate on a distributed ledger and can go peer-to-peer electronically without the help of a financial institution. In practice, however, many Bitcoin transactions use the services of commercial storage and exchange providers like Coinbase.

The most important difference between Bitcoin and gold lies in their contrasting supply and demand mechanisms, which give them very different degrees of purchasing power stability. The stock of gold above ground is slowly augmented each year by gold mines around the world, at a rate that responds to, and stabilizes, the purchasing power of gold. Commodity (non-monetary) demands also respond to the price of gold and dampen movements in its value. The rate of Bitcoin creation, by contrast, is entirely programmed. It does not respond to its purchasing power, and there are no commodity demands.

Hmm..

Good way to think about the two systems…

Central banks should also be judged by their quality of research/work….(Why central banks do not blog?)

January 15, 2018

Nice article which says we should move beyond just talk of institutions being independent. Rather institutions should be assessed on the quality of their work.

In our contemporary lexicon ‘independence’ – for instance of a government body – is usually a Good Thing.

But if we’re thinking of independence as a good thing for an agency to have – for instance, the Productivity Commission (PC) – it’s not sufficient. It also needs to be used by the agency, and the agency must be worthy of it by virtue of the quality of its work. The odd thing is that so many such agencies have such a strong flavour of bureaucracy about them. There’s the same cultural emphasis on what I call being a sound chap. I’ve come to think that this is a kind of natural product of groups. They are … well … groupish.

They acquire the same kinds of social dynamics you notice at high school when nearly everyone wants to be one of the cool kids. But in government there’s an institutional basis to this also. Even if they have their own act, even if their independence is prized in our public culture, most government statutory agencies are tethered to the career public service. Their officers enjoy the privileges of the Commonwealth public service career structure. So we should not be so surprised that those in such independent agencies think like bureaucrats. And there are few things more important to bureaucrats than appearing to be in control. To be thought of as sound chaps.
The institutions need to move beyond their comfort zone. In this the author differentiates between central banks of Australia and England:

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How bitcoin futures market drives prices in bitcoin spot market?

December 20, 2017

Prof J.R. Varma has a superb post which helps think through the issue.

He says there are more players who are long on bitcoin than those who are short influencing the spot price of bitcoin:

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Money’s 4th function: Generally-accepted medium for short selling..

December 20, 2017

JP Koning says apart from the 3 functions of money -unit of account, medium of exchange and store of value – there is a fourth function as well. Money is accepted as a medium of short-selling.

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Martin Luther King’s 95 theses to protest against catholic church vs. Steve Keen’s 33 thesis to protest against economics

December 19, 2017

Brilliant post by Frances Coppola.

How Prof Steve Keen who has long dissented against current economics teaching has taken a leaf from one one of the buggest dissents/protests in human history:

Five hundred years ago, so legend has it, a dissident priest called Martin Luther nailed a list of 95 “theses” to the door of the Castle Church in Wittenburg. His action launched the Protestant Reformation. 

Last week, the dissident economist Steve Keen “nailed” a list of 33 Theses to the door of the London School of Economics. His aim was to launch a Reformation in economics as significant as the religious Reformation that Luther started. It was a bold gesture.

Wow!

However, Coppola finds the the 33 theses disappointingt:

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Free Riding in Finance: A Primer

December 19, 2017

Nice post on money and banking blog:

“The problem of the ‘stability commons’ is that anybody who could deplete the [financial] system’s resilience needs to be within the broad scope of the regime for stability.” Paul Tucker, October 2015.

Many features of our financial system—institutions like banks and insurance companies, as well as the configuration of securities markets—are a consequence of legal conventions (the rules about property rights and taxes) and the costs associated with obtaining and verifying information. When we teach money and banking, three concepts are key to understanding the structure of finance: adverse selection, moral hazard, and free riding. The first two arise from asymmetric information, either before (adverse selection) or after (moral hazard) making a financial arrangement (see our earlier primers here and here).

This primer is about the third concept: free riding. Free riding is tied to the concept of a public good, so we start there. Then, we offer three examples where free riding plays a key role in the organization of finance: credit ratings; schemes like the Madoff scandal; and efforts to secure financial stability more broadly.

……

Like adverse selection and moral hazard that arise from information asymmetry, free riding poses serious problems both for providers of financial services and for governments wishing to secure financial resilience. Rules and practices—such as the role of independent custodians in asset management—continue to evolve to limit the impact of free riding. In theory, technological progress that lowers information costs helps overcome information asymmetries. However, the distortions arising from free riding likely will persist so long as there are fixed costs to producing financial information, and the resulting information is not excludable.

The tragedy of the financial stability commons poses a particularly important challenge that, in a globally integrated financial system, requires an internationally coordinated response.

Getting to basics of finance…

Discussions on issuing e-New Zealand Dollar…

December 14, 2017

After Sweden, Australia, we now have some bit from New Zealand as well. Though, unlike the Sweden and Australia posts which were based on speeches of their central bank chiefs, the NZ one is from Michael Rendell, former  central banker from NZ.

He reflects on this report from the NZ central bank:

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Hayek on the Creation of Moral Hazard by Central Banks

December 8, 2017

Prof Larry White discovers an older paper by Hayek where Hayek questions role of central banks:

In section 8 of the article (pp. 145-47 in the 1999 translation), Hayek gives a favorable evaluation of free banking as against central banking. Having overlooked this passage, I had previously thought that Hayek first addressed free banking in his 1937 book Monetary Nationalism and International Stability. Hayek does not embrace free banking as an ideal, first-best system, because he thought it prone to over-issue (as I discussed in my 1999 article based on Hayek’s other writings). But he criticizes the Federal Reserve Act for relaxing rather than strengthening the prior system’s constraints against excess credit expansion by American commercial banks.

Hayek begins the passage with a caution that the intended result of creating a central bank, when the intention is to avoid or mitigate financial crises, need not be the actual result:

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Are Bank Holding Company Structures Still Beneficial?

December 6, 2017

Julie Stackhouse, Executive Vice President of St Louis Fed posts about structure of Bank Holding Company. They were popular till Dodd Frank Act was enacted:

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A primer on the rise of populism and a way forward

November 30, 2017

Gulzar posts about why rise of populism is closely linked to inequality and gulf between 1% and 99%.

Why is it happening? But this consensus was accompanied by a less benign bipartisan elite convergence (more of it latter) which effectively ended up capturing the economic and political establishment. 
The rapid and fairly inclusive economic progress achieved in the period helped underpin this consensus and paper over fissures that were developing due to forces like trade liberalisation, globalisation, de-unionisation, and skill-biased technological changes. But once growth started slowing, for a variety of factors, these fissures started to show up.
But mainstream political parties, captives as they had become of elite interests, failed to see the breakdown in social consensus. The liberal elites too became caught up in their rhetoric.    
Nothing has been more emblematic of this isolation of elites from the electorate than the staggering levels of economic inequality, which has been widening at a rapid pace since the millennium. As the graphic below shows, in the US, the share of national income going to the top 1% has nearly doubled from 11% in 1980 to 20% in 2014. 
Fair amount of graphs etc to emphasise his point.
What is the way out? Gulzar quoting Prof. Rodrik says “the most promising solution may be to let the house burn down completely!”…

 

 

 

If central banks cannot provide anonymous payments in digital currency world, they should give up their monopoly

November 28, 2017

Tyler Cowen recently started this debate recently where he said central banks should mint their own cryptocurrency or not. Cowen said central banks should keep away from the cryptocurrency space as they are conservative bureaucracies which shall kill all innovation.

There was a response from David Andolfatto disagreeing with Cowen and says currency is a central bank game and they will have to eventually play it.

And then there is this post by JP Koning who manages to sum up issues on monetary economics really well. In this new post, he says central banks have been focusing all this while on monetary stability which is obvious. But they came into being monpolising currency function and anonymity was central feature of their issued currency. But this was long ago and central banks neither more remember nor care much for this function as they take it for granted.

Now for the first time in many years they have to rethink on this currency function as cryptocurrencies are providing competition:

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Research on cash usage…

November 27, 2017

There are three research pieces looking at cash and other means to make payments.

First is this blogpost by  John Williams (President of San Francisco Fed) and Claire Wang. Second is this paper by ECN economists Henk Esselink and Lola Hernández on cash usage in Euroarea. Third is RBI Memo which looks at how non-cash transactions are rising across the country.

First the San Francisco Fed Blog says cash usage remains high and its death is widely exaggerated:

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Why study and research numismatics?

November 14, 2017

Nice post by Hillery York, Jennifer Gloede, and Emily Pearce Seigerman:

Whenever we tell friends and family where we work, their first response is typically, “What is Numismatics?” Of course, they pronounce it anywhere from “numismatic” to “gnomimatic!” The National Numismatic Collection (NNC) is the Smithsonian’s collection of monetary and transactional objects. It houses approximately 1.6 million objects spanning thousands of years and a great variety of materials. One of the best parts of our jobs is getting to share the collection with the world! Numismatics is a far-reaching field, and we’ve found connections to military history, facial hair, woman suffrage, and even Game of Thrones! We often share things about our favorite objects, but here are a few large, notable collections that you may not know are housed within the NNC. We’re making these available online, and researchers are welcome to contact us regarding their research in these areas.

Greco-Roman Collection

Ancient coins have long been collected because of their beauty, age, history, and sometimes rarity. Even dating back to the Renaissance, aristocrats and royals sought to add ancient coins to their collections. It makes sense then that the NNC would also have an extensive collection of these fascinating coins donated by various collectors over the years. Scholars recently dove into the collection to assess its strengths as compared to other notable museum collections. In doing so, they created a detailed listingof the holdings and discovered the collection contains approximately 26,900 Greek and Roman coins! These coins offer a great opportunity to study economics, art history, ancient coin production, classics, and more.

Numismatics is simply fascinating . It should be part of teaching monetary economics as it tells you so much about the monetary history and even politics around it…

We should move beyond just assembling these coins and put them in a museum. The idea should be to research and figure why certain coins were changed/modified, introduction of new coins and so on. Central banks should sponsor research on numismatics as there is much more to research than the usual “download data and run models”…

How Newton learned about financial gravity the hard way…

November 13, 2017

Interesting post by Jason Zweig (HT. V. A. Nageshwaran).

Zweig picks this paper by Andrew Odlyzko of  University of Minnesota which looks at Newton’s investments and eventual losses in South Sea Bubble :

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