The real questions US Senate should have asked FOMC Chair Janet Yellen..

Brendan Brown of Mises Institute has a nice piece.

He calls the recent meeting a missed opportunity to grill Fed chair and hold the central bank of the mega mess:

Ukraine has the highest inflation in the world today..

Prof. Steve Hanke, the hyperinflation tracker  writes on this.

He says going by recent estimates, Ukraine is the 57th hyperinflation episode in history:

Central Banks and the King Midas touch…

One big lesson from the recent crisis should have been to ignore whatever econs and their inspired central banks have been telling us for some years now. Their role should have been marginalised. But the dependence on them and their wisdom has only risen.

We were told by celebrated econs that how central banks could have avoided great depression only if they eased their policy for an extended period of time. This became a wisdom of sorts and accepted at a wide scale. We could have only known the utility if this wisdom if there was another such crisis and had to wait for nearly eighty years for such an event to occur. And as the event struck, the ideas were implemented in frenzy. This was to ensure if Lords of Finance part II is written, it has just the opposite results. Alas we now know the limitations of this frenziness. It is all over the place.

In this spirit, it is interesting to read this speech by Kirsten Forbes of BoE. She invokes the lessons from King of Midas and how central banks behaved like one:

When the legendary King Midas initially received the power to turn everything he touched into gold, he deemed it highly successful; the benefits of being able to create immense wealth with simply the touch of his finger far outweighed any costs. During the financial crisis, many central banks used less glamorous tools to create base money – sharp reductions in interest rates and quantitative easing. These measures played a critically important role in helping economies stabilize and recover.

King Midas soon realized, however, that this power of wealth creation came with unexpected side effects – from making his food inedible to turning his daughter into a lifeless statue. As these costs accumulated, King Midas eventually wished to give up his “golden touch” and return to normality. Similarly, is the current UK policy of near-zero interest rates beginning to generate substantial costs? Is there a point where any costs accumulate such that they outweigh the benefits? Could near-zero interest rates become less “golden”?

And then we have a similar kind of story. What were cited as the benefits of low rates have become limitations as well.

But the Ms. Forbes story is incomplete. It is actually the case that central bankers behave like King Midas most of the time. They wash their hands but then quickly forget the lessons and become the king again. Whether rates are low or high, they try and behave like King Midas. The whole idea is to show that there is some magic to their actions and things will indeed turn into gold. They have a huge audience in the name of market players and media which keeps wishing for the magic. The monetary policies have become a huge magic show of kinds in the process.

In reality central banks are like those tailors which designed clothes for the king with economy being the king.  Only to realise the king had no clothes really. If the illusion works, they are called as magicians and all kinds of awards are honored.  As reality sicks in, the yesteryear heroes are discarded and new ones created. The game of illusion goes on.

As academicians, they keep warning us over the monetary illusion but there is a huge demand for being an illusionist. The aura and power of being the king is too tempting for anyone to ignore.

So the game shall continue…

Bank of England’s multiple challenges..

Bank of England is fighting many a battle and is trying hard to keep itself in the game. UK economy’s dependence on financial sector is like putting all eggs in one basket. As most eggs are wither broke or cracked, BoE and Govt are trying to play a rescue act.

It just issued these guidelines which will punish top bankers if they are found messing around:

The Prudential Regulation Authority (PRA) has today set out how it will hold senior managers in banks, building societies and designated investment firms to account if they do not take reasonable steps to prevent or stop breaches of regulatory requirements in their areas of responsibility.

In June 2013, the Parliamentary Commission for Banking Standards (PCBS) published its report “Changing Banking for Good” setting out recommendations for legislative and other action to improve professional standards and culture in the UK banking industry. This was followed by legislation in the Banking Reform Act 2013.

The Banking Reform Act introduced new powers which allow the PRA and Financial Conduct Authority (FCA) to impose regulatory sanctions on individual senior managers when a bank breaches a regulatory requirement if the senior manager responsible for the area where the breach occurred cannot demonstrate that they took reasonable steps to avoid or stop it.

The PRA has today published guidance for banks clarifying how it will exercise this new power; including examples of the kind of actions which may constitute reasonable preventive steps and how firms and individuals may evidence them.

The Banking Reform Act also creates a separate offence which could result in individual senior managers being held criminally liable for reckless decisions leading to the failure of a bank. This new criminal offence will, however, be subject to the usual standard of proof in criminal cases (‘beyond reasonable doubt’).

Before the crisis, such things done by central banks and that too in UK were just such a taboo. I mean how could you ask bankers to behave? Markets shall take care..

In another initiative, it has launched a fancy program – One Bank research. So was it a multiple bank agenda earlier?:

The Bank of England today launched its new One Bank Research Agenda – an ambitious and wide-ranging framework to transform the way research is done at the Bank. 

The Agenda aims to improve the coordination and openness of our research across all policy areas, to ensure the Bank makes the best use of our data, and to cultivate an extensive research community that spans the Bank and beyond.

After in-depth consultation with researchers across the Bank and the wider academic community, the Bank has developed five core themes to guide its research: Policy frameworks and interactions; Evaluating regulation, resolution and market structures; Policy operationalisation and implementation; New data, methodologies and approaches; and Response to fundamental change.

They are sharing a lot of historical data under this and should be good for researchers.

the Bank published a supporting discussion paper as well as a high level summary of the five research themes, and released a number of new Bank datasets for use by external researchers. 

Finally, to catalyse interest in the One Bank Research Agenda, the Governor today announced two new competitions sponsored by the Bank – a data visualisation competition using the newly released Bank datasets, and a One Bank research paper competition.

The Governor summarised today’s launch of the One Bank Research Agenda, saying: “Economies are complex, dynamic and constantly evolving systems that are underpinned by social interactions and behavioural change, shaped by fundamental forces like technology and globalisation and supported – or at times disrupted – by finance.

Policymakers need research to help understand these phenomena and to craft our responses to them. And research can make some of its most effective contributions by speaking to the priorities of policy.

Research can help us to discover insights and build them into our policymaking processes.

By focussing on a clear set of research priorities, by opening up our datasets, and by creating tighter links between policymakers and researchers, both within the Bank and across the broader research community, we can advance our mission – promoting the good of the people of the United Kingdom.”

Becoming more and more multiple indicator targeting central bank. The new research themes are also on similar lines.

China’s GIFT city model..

Finance is hot again. Despite the west having  serious troubles over regulating their finance sector, the eastern world remains excited.

Indian FinMin recently released a paper on Finance SEZs  where the special zone will have complete freedom in finance. Just like in trade, SEZs are allowed near complete freedom same thing can be applied to Finance SEZs as well. This is of course keeping GIFT city in mind, Indian PM’s pet project when he was the CM of Gujarat.

Interestingly, China has already done something on those lines (how come they are always ahead when we make most of the noise and hype??). Prof. John Whalley has a piece on this:

The calamity behind formation of Fed — an Austrian school perspective..

As audit the Fed movement picks up heat, we need to again go back to historical reasons for setting up the central bank. Those who agree with the idea argue Fed has become way too powerful and has created enormous damage with its mon pol. So if we cant end the fed let us audit it. Those who are against the move, say just leave the Fed.

The Austrian school a long critic of central banking and Fed, are surely enjoying this. Long ignored by economists, their arguments are coming to fore pretty naturally given the errors central banks have made across the world.

Greece policymakers and game theory..

Nice piece by Anatole Kaltesky of Gavecal Dragonomics.

Using game theory he says the policymakers are playing to loose:

1st hundred years of the Bank of Finland..

Mr Seppo Honkapohja of Bank of Finland has a nice speech on the history bit.

It is the 4th oldest central bank in the World:

The Austrian School: The History, The Principles, and How It Got Its Name

This is as good as it gets. A really useful audio interview of Mark Thornton on the school which remains ignored in economic teaching.

Right at the beginning Dr. Thornton points how the school teachings were missed in all his economic courses. Then there is a great discussion on how Fischer remains relevant to policymakers but not Mises. He calls central banks as legal counterfeiters of currency which is an interesting oxymoron of sorts.

In this informative interview, Mark Thornton details how Carl Menger started the Austrian school of economics, and the possible Greek and Roman philosophical roots the school observes. Dr. Thornton and host Frank Conway also discuss the important limitations to Austrian economic thinking, how von Mises’ papers got in the hands of Nazi Germany and then the Soviets, and the different economic perspectives and predictions of Ludwig von Mises and Irving Fischer.

Should central banks worry about bottom line?

Barry Eichengreen and Beatrice Weder Di Mauro write on the topic.

They say bottom line is the last thing central banks should be worried about. Unlike traditional banks, CBs can remain functional with losses:

Around the world, central banks’ balance sheets are becoming an increasingly serious concern – most notably for monetary policymakers themselves. When the Swiss National Bank (SNB) abandoned its exchange-rate peg last month, causing the franc to soar by a nosebleed-inducing 20%, it seemed to be acting out of fear that it would suffer balance-sheet losses if it kept purchasing euros and other foreign currencies.

Similarly, critics of the decision to embark on quantitative easing in the eurozone worry that the European Central Bank is dangerously exposed to losses on the southern eurozone members’ government bonds. This prompted the ECB Council to leave 80% of those bond purchases on the balance sheets of national central banks, where they will be the responsibility of national governments.

In the United States, meanwhile, the “Audit the Fed” movement is back. Motivated by growth in the Federal Reserve’s assets and liabilities, Republicans are introducing bills in both chambers of Congress to require the Fed to reveal more information about its monetary and financial operations.

But should central banks really worry so much about balance-sheet profits and losses? The answer, to put it bluntly, is no.
To be sure, central bankers, like other bankers, do not like losses. But central banks are not like other banks. They are not profit-oriented businesses. Rather, they are agencies for pursuing the public good. Their first responsibility is hitting their inflation target. Their second responsibility is to help close the output gap. Their third responsibility is to ensure financial stability. Balance-sheet considerations rank, at best, a distant fourth on the list of worthy monetary-policy goals.

Equally important, central banks have limited tools with which to pursue these objectives. It follows that a consideration that ranks only fourth in terms of priorities should not be allowed to dictate policy.

Not sure whether previous examples will work this time. Earlier CBs could work with losses as no one really cared who they were. Now CBs are all over the place and anyone reporting or expected to report losses is going to face huge political ramifications. CBs after fighting for so called independence for many years have just lost it. By trying to be a replacement to Finance Ministry, they have exposed themselves to all kinds of pressures. It will actually be interesting to see how markets react to any major CB reporting losses.

The bottom line is not really in terms of balance sheet. It simply is CBs have become way too big and powerful for anyone’s comfort. Efforts should be made to make them as anonymous as they once were..

NZ to release its first ever coin..

NZ is about to release its first ever coin that circulated on its shores 100 years ago. The coin is called Anzac and was then minted by Canada:

The Anzac coin honours the spirit of Anzac that was formed 100 years ago, and continues to live on today. The Anzac coin was launched in February 2015, by His Excellency Lieutenant General The Right Honourable Sir Jerry Mateparae, GNZM, QSO, Governor-General of New Zealand.

Further details are available in this media release and these questions and answers.

It is the first time in New Zealand’s history that a coloured circulating coin has been produced. The coin will be in circulation as legal tender and available for collectors.

The Anzac coin design features a New Zealand and Australian soldier standing back to back with their heads bowed in remembrance. The mangopare (hammerhead shark) pattern symbolises strength and determination, and the silver fern reflects New Zealand’s national identity.

One million Anzac coins have been minted and will be released to coincide with the 100th anniversary of Gallipoli. This number represents the size of the New Zealand population in 1914, of which 10 percent served in the First World War.

New Zealand Post is coordinating the release and distribution of the Anzac coin. The coin will be available in New Zealand Post/Kiwibank stores from 23 March, 2015 and will be sold at ‘face value’ – 50 cents.

Great way to honor history.

The illusion of independent mon pol under flexible exchange rates

All wisdom gained during last 20-30 years of macro/monetary policy is being questioned. One such idea is working through the impossible trinity – where countries can choose two of the three things – independent mon pol, fixed exchange rates and open capital accounts. The best way for economies is to choose open capital accounts and independent mon policy and abandon fixed exchange rates (or choose flexible rates).

This was working for a while and seen as the new god standard.  Sebastian Edwards of UCLA says the standard is more of an illusion now:

The conventional ‘trilemma’ view is that countries that allow free capital flows can still pursue independent monetary policies as long as they allow flexible exchange rates. This column examines the pass-through of Federal Reserve interest rates to policy rates in Chile, Colombia, and Mexico. The author concludes that, to the extent that central banks take into account other central banks’ policies, there will be ‘policy contagion’ and that, even under flexible rates, monetary policy will not be fully independent.

……The most salient findings may be summarised as follows:

• The coefficient of the Federal Funds rate (FF-Policy) is always significantly positive, indicating that during the period under study there was, indeed, ‘policy contagion’ from the US policy rates into central banks’ policy interest rates in the three Latin American countries in the sample.
• The extent of long-term policy contagion is rather large. The point estimates for the long run ‘pass-through’ coefficient range from 0.32 for Mexico to 0.74 for Colombia; for Chile it is between 0.45 and 0.74. However, in none of the three cases is the pass-through one-to-one.
• These results also indicate that inflationary pressures – both domestic and global – result in higher policy rates. The same is true for expected devaluation and higher country risk premia.

This has ramifications as Fed raises rates:

t the time of this writing – early 2015 – it is expected that the Federal Reserve will raise interest rates before the end of the year. It will be the first Federal Funds hike since 2006. How is this tightening going to affect emerging markets? In Edwards (2015) I provide a (partial) answer to this question by investigating the extent to which Fed policy actions have, in the past, been passed into monetary policy interest rates in three Latin American nations with flexible exchange rates – Chile, Colombia, and Mexico.

The basic estimates suggest that Federal Reserve interest rate changes are imported, on average, by 74% in Colombia, more than 50% in Chile, and 33% in Mexico. That is, if the Federal Reserve were to hike rates by a cumulative total of 325 basis points – bringing the Fed Funds rate to 3.5% – we could expect that (with other things given) Colombia would hike policy rates by 250 basis points, Chile by almost 175 basis points, and Mexico by more than 100 basis points.

A possible explanation for the results reported in this paper is ‘fear of floating’, or the concern that sharp changes in currency values may generate major dislocations in domestic economies. One way of reducing the risk of exchange rate fluctuations is for local central banks to maintain interest rates within certain ranges.⁵

The results reported in this column call into question the idea that under flexible exchange rates there is monetary policy independence. Whether there is policy contagion in other countries, besides the ones included in this study, is an open question whose answer will require additional empirical research.

Macro is all over the place at the moment…

Why are there deflation fears across the world when we were warned of inflation?

After Eurozone, the “d” fears are hitting the Australian shores as well. Moreover, most are also worried about asset price bubbles as well. The warnings by various econs that we will only see inflation in future (barring the Krugman camp) have been proved wrong for sure.

We were told that central banks can create inflation at will but even this wisdom is under pressure for sure..

Persistent overoptimism about economic growth….

Kevin Lansing and Benjamin Pyle look at this perennial issue of being overoptimistic on economic growth.

They question the dominant rational expectations theory:

From Greenspan /Bernanke put to Central Bank put and some game theory..

Vineet Bhansali of PIMCO on the topic.

He says how central banks are responding to PIMCO’s outlook. Calls them credible irresponsible institutions:

Central Bank talking…from too much to too little?

Economists continue to remain silent about the many theories/ideas they had created in the 1990s and won a lot of admiration/tenures in the process. Most of these ideas are being questioned now but the hype over what econs can do continues. One such idea was importance of central bank talking which was euphemistically called central bank communications. The  notion was that central banks should communicated as much as possible to markets, communications are a potent tool as open mouth operations as important as open market ones and so on. Be more and more transparent. These talks were to guide market expectations, anchor inflation expectations and what not. From a non-entity, central bankers became a highly followed figure with each word being tracked and analysed.

Cometh the crisis and things like forward guidance were seen as a highly important tool. Central bank after central bank came with new ways to guide markets. Some indicated a date, some indicated amounts and some both.  We are all seeing these ideas failing badly now. Central banks have become victims of their own perceived success. All these things like communications and transparency have just made markets highly reliant on central banks. This has created huge uncertainty as we have seen in the last 4-5 years.

Satyajit Das has a piece on the same:

What if Utah breaks from American Monetary Union and introduces its own currency?

The Swiss shock has again led free banking scholars to come out and attack the hallowed world of central banking. The free banking scholars prefer to abandon central banks and let banks introduce their own currencspeaks oaies.

Ryan Mcmacen has this interesting column on the topic. He mentions Utah which did introduce its own currency albeit in a limited way in 2011:

How the SNB rollback has a historical precedent which ended dangerously..

Nice article by Markus Brunnermeier and Harold James.

They say sudden Swiss rollback of peg was due to political pressures. And this was nothing new. Similar pressures piled on Germany in 1971 too leading to breakdown of BW:

The Swiss shock…

There seems to be something brewing given two central banks made policy changes outside of their policy days. The disillusionment over growing powers of central banks is rising with every passing day. With governments in equal shambles, one does not know what really is the way out.

Swiss National Bank which had pegged its currency against expectations decided to remove the peg in a knee-jerk reaction. It also pushed the interst rates to a negative zone of -1.25% to -0,25%:

How about having a necktie mommemorating end of Fed stimulus

Superb post and some innovation by asset management firm Van Eck:

Janet Yellen was off the Christmas list at Van Eck Global this year.

The asset manager Van Eck helped the Federal Reserve chairwoman to her caricature debut on the their central bank-themed holiday ties—riding a white dove, no less. This year, the $30 billion firm cast off in a rather more literal direction.

This year’s ties (and matching tote bags) show a boat called the “QE III” sailing into the sunset. The boat appears to be empty, though there are queasy waves ahead.

As we reported last year, Van Eck’s ties have earned somewhat of a cult following. Prior iterations have featured “Helicopter Ben Bernanke” and a “Super Mario” version ofMario Draghi, the president of the European Central Bank. This one, of course, is referring to the end to the third round of the Fed’s stimulus measures, called quantitative easing. The massive bond buying program ended earlier this year.

Memorable holiday gifts are a way to get noticed in the financial world, and the Van Eck ties–va neckties, if you will–aren’t the only game in town. Among the competitors:Berkshire Hathaway Inc. Chairman Warren Buffett sends out a goofy picture with a box of chocolates from Berkshire-owned See’s Candies. And the effort that Kingsford Capital Management, a small Northern California-based hedge fund, puts into its oddball gifts earned it a front-page story in the Wall Street Journal in 2013.

Van Eck sends out thousands of its custom-made ties to its clients every holiday season. As always, the ties are made by Vineyard Vines, a preppy favorite in the Northeastern financial world.

Click on the post to see the previous design and the current one as well..