Archive for the ‘Central Banks / Monetary Policy’ Category

Building real markets for the good of the people..

June 11, 2015

How times have changed. Earlier any mention of markets automatically meant it is real and good for the people. Not anymore.

Mark Carney of BoE (while releasing the Bank’s Fair and Effective Markets Review Releases Final Report) says we need to build such markets:

 Almost 350 years ago, the Great Fire destroyed the City of London and rendered 100,000 people homeless. It took half a century to rebuild. The legacy of the Great Fire endures, including such Wren masterpieces as St Paul’s and his twenty-five other steeples that survive today within the City’s precincts. But the Fire’s legacy is not limited to how the City looks, it extends to what the City does. 
The blaze led Nicholas Barbon to establish the first insurance company, an innovation to fulfil a social need: the sharing of risk. Public authorities complemented private initiative.   
There was a Royal Proclamation that set standards for wider roads and houses built from brick and stone instead of timber. And Parliament passed the Parish Pump Act to prevent “mischiefs that may happen by fire” by establishing fire brigades and improving water supply. So that spark in Pudding Lane ignited much more besides the Great Fire itself:
  • the provision of liquidity to limit contagion;
  • a recognition that clear, well-understood codes contribute to the greater good; and
  • a belief that financial markets can solve real world problems.  

From the coffee houses that served as meeting places for entrepreneurs and merchants; to the exchanges that supported the trading of financial claims; to a central bank that acted as lender of last resort: a rich infrastructure developed to support markets that served the UK and the world.  As it grew into the world’s leading economic and trading power, the UK also became its centre of financial capitalism.

 By the early 20th century, though no longer the world’s largest economy, the UK was still its hub of international finance.  It held close to a half of the world’s stock of overseas investments and traded one third of all negotiable instruments. 
The City has retained its pre-eminence through market innovation.  From eurobonds to emerging market debt, credit derivatives and centralised clearing; the City has continually created new financial products and markets to serve the real economy. Today the City remains the leading global financial centre.  The UK is the venue for 40% of foreign exchange trading volume, half of all trades in OTC interest rate derivatives, and more than two-thirds of trading in international bonds.  More international banking activity is booked in London than anywhere else, and the UK is host to the world’s third largest insurance sector as well as its second largest asset management industry. UK markets matter for global commerce.  But above all, our markets matter for our prosperity.
How this crisis changed things:
Though markets can be powerful drivers of prosperity, markets can go wrong. Left unattended, they are prone to instability, excess and abuse. Markets without the right standards or infrastructure are like cities without building codes, fire brigades or insurance. Poor infrastructure allowed the spark of the US subprime crisis to light a powder keg under UK markets, triggering the worst recession in our lifetimes.  
Poor ‘soft’ infrastructure such as codes of conduct that too few read and too many ignored.\ Faulty ‘hard’ infrastructure like interest rate and foreign exchange benchmarks that were quite literally fixed; and Weak banks whose light capital and heavy reliance on short-term funding created a tinder box.
Central banks shared in these failings, operating a system of fire insurance whose ambiguity was anything but constructive when global markets were engulfed in flames. The Bank of England’s general approach was consistent with the attitude of FICC markets, which historically relied heavily on informal codes and understandings.  That informality was well suited to an earlier age.  But as markets innovated and grew, it proved wanting. 
Most troubling have been the numerous incidents of misconduct that exploited such informality, undercutting public trust and threatening systemic stability.  This has had direct economic consequences.  Mistrust between market participants has raised borrowing costs and reduced credit availability.  Falling confidence in market resilience has meant companies have held back productive investments.  And uncertainty has meant people have hesitated to move job or home.  These effects are not trivial, and they have reduced the dynamism of our economy in the post-crisis years.Widespread mistrust has also had deeper, indirect costs.  Markets are not ends in themselves, but powerful means for prosperity and security for all.  As such they need to retain the consent of society – a social licence – to be allowed to operate, innovate and grow.  Repeated episodes of misconduct have called that social licence into question. 
We have all been let down by these developments.  And we all share responsibility for fixing them.

It is really surprising to see such reflections. For all you know, BoE and London were seen as the benchmarks for anything in finance.

What are real markets?

I believe everyone in this room would agree: we need real markets for sustainable prosperity. Not markets that collapse when there is a shock from abroad.  Not markets where transactions occur in chat rooms.  Not markets where no one appears accountable for anything.
Real markets are professional and open, not informal and clubby.  Participants in real markets compete on merit rather than collude online. Real markets are resilient, fair and effective.  They maintain their social licence. Real markets don’t just happen; they depend on the quality of market infrastructure.
Robust market infrastructure is a public good, one in constant danger of under-provision because the best markets innovate continually.  This inherent risk can only be managed if all market actors, public and private, recognise their responsibilities for the system as a whole. The City has a special responsibility given London’s pre-eminent position in global markets, which is why it has already brought so many ideas and such energy to advance financial reform.
He then goes onto the various reforms underway to make financial markets real markets. It is ironical to see markets being shaped by govts and central banks of all players.
The key is humility and not let hubris set in. For years we have been told that we have arrived at a perfect real market framework which will continue to deliver prosperity to people. And then it was upto others to inch towards this kind of policy setting. And now we know how much of these ideas were not just plain wrong.

Turkey’s political uncertainty likely boon for central bank??

June 11, 2015

I guess our economic commentary is getting really extreme and dangerous. Now we will actually evaluate election outcomes on what it does to the central bank of all things?

So, it was really ironic to see an article like this. It says recent political uncertainty is a boon for its central bank:


Untaper tantrums for Eurozone and Taper tantrums for the rest

June 11, 2015

ECB didn’t mention the word taper but EZ markets fear it. On the other side of Atlantic, investors in US compare the tapering fears in 2013 with today’s fears of Fed hike. How much economies and markets actually suffer from tantrums thrown by central banks.

First what explains untaper fears in EZ? No clear answers:


Maggi controversy and repo rate cuts

June 10, 2015

Manasi Phadke of manasiecon blog continues with her really witty pieces.

This time she explains why Maggi ban led to cuts in Repo rates this time around. :-)

PS.  A commentator on her blog said may be banning instant food produicts is the leading indicator for rate cuts..:-)

How economists are biased and self-selective about monetary history..

June 9, 2015

An insightful post by Prof George Selgin.

He picks a ppt from a Fed official who taught monetary economics to a school class. Prof Selgin says that the official tried to show how Fed is a superior system compared to the alternatives:

One of the chief goals of Cato’s Center for Monetary and Financial Alternatives is to make people aware of alternatives to conventional monetary systems—that is, systems managed by central bankers wielding considerable, if not unlimited, discretionary authority.  The challenge isn’t just one of informing the general public: even professional monetary economists, with relatively few exceptions, are surprisingly ill-informed about such alternatives.

I recently came across a document that perfectly illustrates this last point: a power point presentation by a senior Federal Reserve Bank research economist, given at a conference aimed at school teachers specializing in economics.

I have no desire to single-out the economist in question, who I will therefore refer to simply as “our economist.”  On the contrary: I offer his presentation as an example of the all-too common tendency for otherwise competent monetary economists (and our economist is in fact very accomplished) to misread the historical record regarding potential alternatives to central banking and to otherwise give such alternatives short shrift.

This unfortunate tendency rests in part on the fact that most economics graduate programs stopped teaching any sort of economic history decades ago (our economist earned his PhD in the early 1990s), while burdening their students with enough mathematics and statistics to all but guarantee that they never so much as crack open a book on the subject.  But the trouble isn’t just that many monetary economists don’t know their monetary history: it’s that they know, and teach, monetary history that ain’t so.  That’s what our economist did when he lectured a roomful of teachers on the merits of central banks and “Alternative Monetary Systems.”

Hmm.. Standard way to show how useful you are to the society.

It is frustrating how none of the real monetary history is taught to students. I mean one may disagree with free banking stuff, but atleast it should be taught.

Why CPI based inflation targeting does not lead to price stability..

June 9, 2015

Axel Weber, former head of Bundebank (who could have become ECB chief if he had not resigned) has this nice piece.

He says why CPI based inflation targeting is too narrow an objective. Above all, it does not even guarantee price stability:

Over the last two decades, inflation targeting has become the predominant monetary-policy framework. It has been essentially (though not explicitly) adopted by major central banks, including the US Federal Reserve, the European Central Bank, and the Swiss National Bank. But the 2008 global economic crisis, from which the world has yet to recover fully, has cast serious doubt on this approach.

The Bank for International Settlements has long argued that pure inflation targeting is not compatible with financial stability. It does not take into account the financial cycle, and thus produces excessively expansionary and asymmetric monetary policy. Moreover, a major argument in favor of inflation targeting – that it has contributed to a decline in inflation since the early 1990s – is questionable, at best. Disinflation actually began in the early 1980s – well before inflation targeting was invented – thanks to the concerted efforts of then-US Federal Reserve Board Chair Paul Volcker. And, from the 1990s on, globalization – in particular, China’s integration into the world economy – has probably been the main reason for the decline in global inflationary pressure.

A more recent indication that inflation targeting has not caused the disinflation seen since the 1990s is the unsuccessful effort by a growing number of central banks to reflate their economies. If central banks are unable to increase inflation, it stands to reason that they may not have been instrumental in reducing it.

The fact is that the original objective of central banks was not consumer-price stability; consumer-price indices did not even exist when most of them were founded. Central banks were established to provide war financing to governments. Later, their mission was expanded to include the role of lender of last resort. It was not until the excessive inflation of the 1970s that central banks discovered – or, in a sense, rediscovered – the desirability of keeping the value of money stable.

But how to measure the value of money? One approach centers on prices, with the consumer price index appearing to be the most obvious indicator. The problem is that the relationship between the money supply (which ultimately determines the value of money) and prices is an unstable one. For starters, the lag time between changes in the money supply and price movements is long, variable, and unpredictable. Given this, targeting consumer prices in the next 2-3 years will not guarantee that the value of money remains stable in the long term.

Moreover, different methods of collecting consumer prices yield different results, depending on how housing costs are treated and the hedonic adjustment applied. In short, monetary policy has been shaped by an imprecise, small, and shrinking subset of prices that exhibits long and variable lags vis-à-vis changes in the money supply. Unfortunately, monetary policymakers’ effort to operationalize the objective of ensuring that the value of money remains stable has taken on a life of its own. Today’s economics textbooks assume that a primary objective of central banks is to stabilize consumer prices, rather than the value of money.

Furthermore, economists now understand inflation as a rise in consumer prices, not as a decline in the value of money resulting from an excessive increase in the money supply. Making matters worse, central banks routinely deny responsibility for any prices other than consumer prices, ignoring that the value of money is reflected in all prices, including commodities, real estate, stocks, bonds, and, perhaps most important, exchange rates.

In short, while price stabilization through inflation targeting is a commendable objective, central banks’ narrow focus on consumer prices – within a relatively short time frame, no less – is inadequate to achieve it. This was highlighted by the surge in many countries’ housing prices in the run-up to the 2008 financial crisis, the steep decline in asset and commodity prices immediately after Lehman Brothers collapsed, the return to asset-price inflation since then, and recent large currency fluctuations. All are inconsistent with a stable value of money.

I mean all this has been so obvious but the obsession with IT continues.

Infact Weber says central banks need to look at multiple things:

Central banks’ exclusive focus on consumer prices may even be counterproductive. By undermining the efficient allocation of capital and fostering mal-investment, CPI-focused monetary policy is distorting economic structures, blocking growth-enhancing creative destruction, creating moral hazard, and sowing the seeds for future instability in the value of money.

Within a complex and constantly evolving economy, a simplistic inflation-targeting framework will not stabilize the value of money. Only an equally complex and highly adaptable monetary-policy approach – one that emphasizes risk management and reliance on policymakers’ judgment, rather than a clear-cut formula – can do that. Such an approach would be less predictable and eliminate forward guidance, thereby discouraging excessive risk-taking and reducing moral hazard.

History hints at what a stability-oriented framework could look like. In the last quarter of the twentieth century, many central banks used intermediate targets, including monetary aggregates. Such targets could potentially be applied to credit, interest rates, exchange rates, asset and commodity prices, risk premiums, and/or intermediate-goods prices.

Short-term consumer-price stability does not guarantee economic, financial, or monetary stability. It is time for central banks to accept this fact and adopt a comprehensive, long-term monetary-policy approach – even if it means that, in the short term, consumer-price inflation deviates from what is currently understood as “price stability.” Temporary fluctuations in a narrow and imprecisely measured CPI are a small price to pay to secure the long-term stability of money.

Indian central bank had exactly this kind of framework only to be rejected by the fashionable IT framework. Some IT central banks like say BoE, ECB, etc have atleast understood the limitations of IT game. They have missed the forest for the woods and continue to pay for their mistakes. But they still call them as IT central banks and have added the euphemism flexible to it.

 Most fashionable economic ideas of today are only proved as duds in future.  This is because we believe too much in scientification of economics. Some idea works in some time and we make a big deal of it and think it will work all the time. Soon the idea is projected as a big theory. The theory becomes even bugger if it comes from the hallowed schools of economics in US. And here is an idea whose limitations have been exposed in the crisi.s But it continues to remain.

Has Mario Draghi lost his touch? If yes, that is good news for Eurozone..

June 5, 2015

There was a time when Mario Draghi was the most celebrated central banker of the world. His famous words “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”  stirred European  markets like nothing else could. Suddenly markets jumped and ECB ended up lowering yields without spending a penny. This was in 2012 and 2013 leading to several awards for the central banker.

And now we are in 2015, The same news sites which celebrated Draghi are wondering whether the central banker has lost his touch. One’s luck in central banking can only stretch so far. It is the usual story. The awards should instead be titled as the luckiest central banker of the year. Those central banks who claim that they are not cheerleaders of markets are living in utopia. The success of a central banker is just dependent on how markets perceive and cheer the monopolist leader. Most of these awards anyways are usually sponsored by the financial street directly or indirectly.

On to Draghi:


What have we learned from the crises of the last 20 years?

June 2, 2015

Stan Fisher sums up the lessons he has learnt over the years.

He misses the most important lesson – know the financial history and know it really well. Infact history is not even a word in the speech. Infact, if one follows history then you are unlikely to hype certain phases of economic and stock market growth as a new dawn or something. And then as the crisis enfolds, you know what you have to do. After all, there is nothing unique about having a crisis. History keeps you humble and grounded.

Another thing is how despite likes of Prof. Fisher wanting to be seen as market promoting economists, actually just talk about  government and central bank interventions. These evry interventions end up sowing the seeds of the next crisis.

Another country which has successfully Dollarised – Ecuador..

May 28, 2015

Yesterday Prof Hanke wrote about Panama dollarising, today he writes about Ecuador doing the same.

He starts with continued woes of Venezuela, and then gets to Ecuador:

Facing this inflationary theft, Venezuelan’s have voted with their wallets. Indeed, they have unofficially begun to dollarize the economy. But, the only way to establish the rule of law in the monetary sphere is to officially dollarize the economy by officially dumping the hapless bolivar and replacing it with the U.S. dollar.

Ecuador, where I served as the chief advisor to the Minister of Finance, when that country dollarized, offers some lessons that merit Caracas’ attention.

Ecuador represented a prime example of a country that was incapable of imposing the rule of law and safeguarding the value of its currency, the sucre. The Banco Central del Ecuador was established in 1927, with a sucre-U.S. dollar exchange rate of 5. Until the 1980s, the central bank periodically devalued the sucre against the dollar, violating the rule of law. In 1982, the central bank began to exercise its devaluation option with abandon. From 1982 until 2000, the sucre was devalued against the dollar each year. The sucre traded at 6,825 per dollar at the end of 1998, and by the end of 1999 the sucre-dollar rate was 20,243. During the first week of January 2000, the sucre rate soared to 28,000 per dollar.

In the case of Ecuador, the inability of the government to abide by the rule of law was, in part, a consequence of traditions and moral beliefs. Ecuadorian politics have traditionally been dominated by elites (interest groups) that are uninhibited in their predatory and parochial demands on the State. With the lack of virtually any moral inhibitions, special interest legislation was the order of the day. For example, during the rout of the sucre in 1999, laws were passed that allowed bankers to make loans to themselves. In addition, state guarantees for bank deposits were introduced. These proved to be a deadly cocktail, one that allowed for massive looting of the banking system’s deposit base. This, as well as the collapsing sucre, enraged most Ecuadorians.

With the rule of law (and the sucre) in shambles, President Mahuad announced on January 9, 2000 that Ecuador would abandon the sucre and officially dollarize the economy. The positive confidence shock was immediate. On January 11—even before a dollarization law had been enacted—the central bank lowered the rediscount rate from 200% a year to 20%. But, this newfound ray of hope was threatening to some, and during a 24-hour period (January 21–22), a coup d’état ensued. While the Mahuad government was toppled, the coup was a bungled affair and the former Vice President Gustavo Noboa assumed the Presidency. He honored Mahuad’s dollarization pledge. On February 29, the Congress passed the so-called Ley Trolebus, which contained dollarization provisions. It became law on March 13, and after a transition period in which the dollar replaced the sucre, Ecuador became the world’s most populous dollarized country on September 13.

With much the same enthusiasm as Ecuador’s coup plotters and the rigidity of a dogmatic cleric, the critics of dollarization condemned it as something akin to voodoo economics. Well, the critics have been predictably proven wrong.

The misery index is an objective measure of just how well dollarization has worked. The index is equal to the sum of the inflation rate (end of year), bank’s lending interest rates and unemployment rate, minus the actual percentage change in GDP per capita. Simply put, a high index means higher misery.

In Ecuador, prior to the implementation of dollarization in 2000, the country sustained a misery index of over 120. The public suffered greatly from inflation, but after dollarization was implemented, high inflation was stifled and misery drastically fell. The accompanying chart shows the direct link between dollarization and the immediate and sustained decrease in misery. From 2003 through 2014, the misery index in Ecuador has been remarkably constant at around 20 — one of the lowest in Latin America.

Interesting cases on monetary systems around the world..

Monetary Policy and the Onset of the Great Depression: The Myth of Benjamin Strong as Decisive Leader

May 27, 2015

This is the title of a recent book by Mark Toma and is reviewed here.

I mean Great Depression research still remains so relevant. More importantly, scholars are undoing whatever we have learnt about the depression. One such common lesson is role that Ben Strong of NY Fed could have played in resolving the depression if he was alive. After all it was Milton Friedman who made this idea popular.

Not anymore as it has been discussed in this book. AS the reviewer points out:

Mark Toma’s short, but dense Monetary Policy and the Onset of the Great Depression: The Myth of Benjamin Strong as a Decisive Leader provides a revisionist history of the Benjamin Strong leadership years at the Fed leading up the Great Depression. Despite the title, the book focuses entirely on this period and doesn’t delve into the actual causes of the Great Depression. Rather than provide a casual explanation of the Great Depression per se, Toma’s project is to convince monetarist and Austrian economists that both of their accepted histories of the Great Depression are empirically unfounded. Thus, Toma argues that mismanaged monetary policy — tightening per the monetarist narrative or loosening per the Austrian narrative — can be ruled out as a causal factor of the Great Depression.

In questioning the Strong decisive leader theory — the theory that Benjamin Strong played a decisive role in the monetary policies of the 1920’s as the President of the influential New York Federal Reserve Bank and that his untimely death ultimately led to the wrong-headed policies that brought on the Great Depression — Toma does not stand alone. Temin (1989, 35), Wheelock (1992), and Brunner and Meltzer (1968) all question the strong leader hypothesis. However, Toma discredits each of their theories and forges a completely new explanation for why Strong’s leadership was not a decisive factor. Toma makes the case that the Fed operated as a self-regulating, decentralized system. According to Toma, this system operated effectively as intended, so the credit for Friedman and Schwartz’s (1963, Ch. 6) description of the 1921-1929 Fed era as the “high tide” of the Fed system should go to the founders of the Fed, not Benjamin Strong.

Overall, the book would have benefitted from a more thorough engagement with the modern literature. Instead of addressing modern developments and more nuanced and refined arguments in the monetarist and Austrian tradition, Toma sets up the book against the narratives of Rothbard (1975) and Friedman and Schwartz (1963).

Hmmm.. Have not read the book so no comments.

All I can say is we have this tendency to glorify certain individual and try and make him/her accountable for all goods/bads especially in an institutional setting. Reality is a lot different and one has to see a broader political picture.  What matters more is how political systems have designed certain institutions and the structure therein. This is a much more important story and plays out for a longer period of time. Person based stories last only till the luck lasts..

It is also important to note how certain narratives remain despite them being proven wrong/right by subsequent scholars..

Most central banks do one thing well: they produce monetary mischief..

May 27, 2015

Says Prof Steve Hanke in this post. More so in case of emerging economies.

So what is the solution? Well, give the mon pol function  to a more responsible country. One option is dollarise. Panama is a good example:


A political party in Barcelona pledges to print local currency for the region..

May 22, 2015

Interesting article on money something Austrian school might be happy seeing.

In local Barcelona elections, one of the party has said it will print local currency on winning:


The Fed Takes a Beating on Amazon’s Best-Sellers List

May 22, 2015

Interesting point by  of Mises.

He shows that books on Federal Reserve and its revered chair have taken a beating in rankings:

Interestingly, Amazon’s list of best sellers in the “monetary policy” category is a veritable parade of anti-Fed and anti-central bank books. Having not read all of them, I certainly can’t endorse all of them, and many of them surely contain questionable economics and fanciful claims about central banks. (Jim Grant’s great new book is in there, though.)

On the other hand, the fact that such books dominate the book sales in this category tells us a thing or two about how the near consensus of approval once enjoyed by the Fed (and other Western central banks) is long gone — thanks largely to Ron Paul’s 2008 campaign. Had we a list like this from 10 or 15 years ago, it probably would have been dominated by books like Bob Woodward’sMaestro, which basically made the case that Alan Greenspan was an inimitable genius. (You can pick up a hardback copy of Maestro for one cent, by the way.



Swiss monetary policy facts… and fiction

May 22, 2015

Trying times for SNB. Jean-Pierre Danthine of the central bank defends its policies.

In one if the myths it says central bank does not have unlimited powers as it is imagined:


ECB to stop giving journalists advance copies of speeches

May 21, 2015

Gradually central banks are going backwards on the communication and transparency bit. This blog had pointed how there was an issue with speech of one of the members of ECB (one of the most independent central banks)

Now ECB has decided to act on this and decided to stop giving speech copies in advance to journalists. Though the two are not related as the reporters did not have access to the speech in this case:

The European Central Bank will no longer release in advance the speeches of its executive board members to journalists under embargo, a bank spokesman said Wednesday. The decision, which has been under consideration for several months by the ECB’s communications department, is aimed at ensuring the widest possible access to ECB speeches, the spokesman said, adding that it was becoming increasingly difficult to determine which journalists should have access to embargoed comments. ECB speeches at times contain market relevant information.

The ECB will post speeches of its board members on its website when they are scheduled to begin, without making them available to journalists ahead of time under embargo as the ECB had done for many years.

The decision, which takes effect immediately, came one day after the public release of comments by executive board member Benoit Coeuré caused a stir in financial markets. Mr. Coeuré  said the ECB would front load bond purchases under its €1.1 trillion ($1.2 trillion) quantitative easing program in May and June to account for a summer lull in bond markets.

The comments prompted a surge on Tuesday in European stock and bond prices, and cheapened the euro.

Mr. Coeure had actually made his remarks at a nonpublic event in London on Monday evening that included hedge fund managers and other investors. The ECB didn’t make the speech public until the following morning.

The problem had nothing to do with journalists having speeches under embargo, because the comments weren’t released to reporters until Tuesday morning. The ECB had intended to make Mr. Coeure’s speech available Monday night when he gave it, an ECB spokesman said Tuesday, “but an internal procedural error meant this did not happen until the morning.”

Still, the episode appeared to have accelerated the communications department’s decision to do away with embargoed releases of speeches.

A much more important thing is to stop the central bankers from talking in closed door places..

What was Osama Bin Laden’s interest in Federal Reserve?

May 21, 2015

Actually the question should have instead been “Why wouldn’t Laden be interested in Fed”? Given how he and his team masterminded  US destruction, knowledge of Federal Reserve would have been crucial. As Fed controls the financial matters not just in US but across the world as well, know how of the same would have been crucial. That is a different story on whether he knew the Fed really well or not.

So this post shows how Osama’s library has a book on Fed:

Osama bin Laden’s bookshelf included dozens of books about American power, the war on terrorism and Islam. Among them was a tract by an antisemitic author who harbored conspiracy theories about the Federal Reserve.

The Office of the Director of National Intelligence on Wednesday released the listof hundreds of books, reports and other documents found during the 2011 raid on bin Laden’s compound in Pakistan. Several of the items had economic themes.

Among the documents was a letter “to the American people,” in which bin Laden says the U.S. war against al Qaeda hurt the dollar. “How will you win a war whose cost is like a hurricane blowing violently at your economy and weakening your dollar?” he wrote. (In fact, the dollar did weaken after the war began, though a more experienced financial analyst might attribute that to the effects of a recession and global economic conditions. Of course, the Fed also had a hand in the dollar’s drop.)

Among the longer works in bin Laden’s compound: “Confessions of an Economic Hit Man,” a 2004 book in which economist John Perkins presents theories about how the world economic order is driven by U.S.-based institutions such as the International Monetary Fund and World Bank.

“The Secrets of the Federal Reserve” grew out of work that its late author, Eustace Mullins, said was commissioned in 1949 by the poet Ezra Pound, who backed fascists in World War II and was later held by the U.S. in a Washington mental institution. (Mullins, like Pound, published fiercely antisemitic work. He also was a Holocaust denier.) In his book on the Fed, Mullins conveys some familiar attacks on the U.S. central bank, its origins and its structure.

From the book’s foreword:

“I have sounded the toxin that the Federal Reserve System is not Federal; it has no reserves; and it is not a system at all, but rather, a criminal syndicate. From November, 1910, when the conspirators met on Jekyll Island, Georgia, to the present time, the machinations of the Federal Reserve bankers have been shrouded in secrecy. Today, that secrecy has cost the American people a three trillion dollar debt, with annual interest payments to these bankers amounting to some three hundred billion dollars per year, sums which stagger the imagination, and which in themselves are ultimately unpayable. Officials of the Federal Reserve System routinely issue remonstrances to the public, much as the Hindu fakir pipes an insistent tune to the dazed cobra which sways its head before him, not to resolve the situation, but to prevent it from striking him.”

The book is 208 pages in hardcover, 224 in paperback, and posted in full as a PDF online. No word on whether bin Laden actually read any of it.

Hmmm.. might be an interesting read..


Why growing central banker powers are such a problem and need to be curbed..

May 20, 2015

It is not just growing power of actions of central banks/bankers which are a problem. The impact of their words and what they choose to say has become such a problem as well.

This is one such example:


Averting Financial Crises: Advice from Classical Economists (Thornton and Bagehot)

May 19, 2015

Superb article on financial history by Thomas Humphrey of Richmond Fed.

He reviews the basic ideas of Thornton and Bagehot on lender of last resort (LOLR) and then sees how Fed policy fits within those ideas:


Ushering payment revolutions in India by creating more competit..

May 18, 2015

This blog had earlier pointed how NCPI, a public sector organisation is shaping payments revolution in India.  The blog had also added that one should also be thinking whether private players would have done a better job.

Think it this way. Payments is like a utility and microeconomics tells you that natural monopoly does a better job in such cases. It is only after a certain scale as been reached can one break the monopoly and open it up to private players. This we have seen in electricity, telecom etc and experiences differ from country to country.

This article argues that we could be better off if NCPI gives way to more private competition:

The Indian economy is predominantly cash-driven with only 5 per cent of the country’s Personal Consumption Expenditure done electronically. This shows that there is a huge unexplored market for payment companies. It will require all players across the payments value chain to create much greater innovation in payment services. In other words, greater competition and collaboration will be beneficial for all segments like consumer, financial institutions, merchants as well as the government by creating innovative solutions that meet the needs of different segments of the society.

However, the current scenario does not provide conducive environment for innovation, given that over 90 per cent of the markets electronic flows (this includes ATM volumes, POS volumes and E-commerce) are controlled by one network National Payments Corporation of India (NPCI). If we create an open environment and allow technology and service companies to participate, it would make much greater payment service proliferation possible in the country with greater innovation.

The US is a classic example of how innovation and technology breakthroughs happen in an open competitive environment and how different business models emerge in a short period of time. By providing open environment and open system, you create a vibrant entrepreneurship class, to drive innovation. Once we create an open system for all technologies to compete, we will be able to create a much more vibrant economy.

Comparison with US is futile. People moved to cards and internet payments much earlier. So there was a scale for private players to come and play. We need comparisons with relevant countries.

The article goes on to point how Aadhar payment system should be opened up and examples drawn from Mastercard etc kind of companies.

Payments is an area of economics (if I can call it that) which is deemed as highly boring. Due to technology, the space has become highly spiced..


The recent surge in bond yields and the disconnect from fundamentals..

May 13, 2015

Despite easing policy stance, Indian govt bond yields jumped in India tracking MAT issue and global volatility. This led to certain corporates shelving plans to raise corporate bonds as well.

The rising yields have dampened the sentiment among investors. According to issue arrangers, Steel Authority of India (SAIL) and GIC Housing Finance are among companies that were planning to raise funds through private placement of bonds but have deferred the issuances after seeing the response. The yield on the 10-year benchmark government bond has hardened by 19 basis points in the last two weeks in line with global debt market yields, over concerns of rising oil prices. A weaker rupee and foreign fund outflows from the domestic share and debt markets have also been hurting.

“Due to the recent volatility of markets and upsurge in yields, companies are postponing their bond issuances. The appetite of investors has got impacted. GIC Housing Finance and SAIL postponed their issuances. Both were planning to raise three-year paper but they found the bid levels high for raising funds,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

Similar trends are seen across some countries as well. Of all countries, Germnay has seen a jump in yields. The article says how stability breeds instability:

Central banks are getting a painful lesson in how their efforts to stabilize markets and boost their economies can, occasionally, do the opposite. The latest example is the brutal selloff in the German bond market. Yields on the 10-year German government bond, or “bund,” hit 0.67% Tuesday, up more than half a percentage point in just three weeks.

It’s hard to pinpoint a fundamental factor driving this. Yes, the European economy is doing better than expected, and Greece has, for now, avoided default or an exit from the euro as it wrangles further with its creditors over the terms of its bailout. Both factors have attenuated the “flight to safety” that made bunds so attractive.

But the main driving factor driving yields up is more technical than fundamental, and is in a strange way the result of central banks’ success in pushing yields down. Those efforts have led investors and traders to take on bigger positions, according to strategists atJ.P. Morgan. But when prices start to move against them, they respond by shrinking their positions, which can accelerate the movement in prices.

This is not the first time it’s happened. Last October, it was Treasurys, whose yields shot from 1.865% to 2.15% in a single day and eventually climbed to 2.4%. In the spring of 2013, something similar happened to Japanese government bonds.

What all three had in common, according to Nikolaos Panigirtzoglou and his colleagues at J.P. Morgan, is that all were driven by investors and traders using a risk management technique called “value at risk” (or VaR) that causes them to take on larger positions when volatility is low, because the steep price swings that inflict large losses are less likely.

Central banks have bought massive amounts of government bonds and used forward guidance to reassure investors that interest rates will remain near zero for a long time to come, a strategy aimed at lowering the cost of credit, encouraging investors and businesses to invest more, and raise inflation, which is now too low.

In the process, they have taken much of the guess work out of interest rates in recent years, causing bond market volatility to collapse. In that environment, VaR encourages traders to take on ever large positions. Markets are now heavily populated by VaR-sensitive investors: hedge funds, mutual fund managers, dealers and banks.When volatility ticks up, VaR also prods them to unwind those positions to avoid big losses, causing volatility to spike higher.

These movements are further exaggerated by the decline in bond market liquidity, i.e. the lack of dealers willing to take the other side of a client’s trade, due to a variety of structural and temporary factors. For example, dealers routinely “borrow” bonds from long-term holders such as insurance companies to facilitate their transactions. But German investors have become increasingly reluctant to lend out their precious bunds. Liquidity has been a particular problem for the futures contract on the 30-year bund, J.P. Morgan says.

“This volatility induced position cutting becomes self- reinforcing until yields reach a level that induces the participation of VaR-insensitive investors, such as pension funds, insurance companies or households,” Mr. Panigirtzoglou and his colleagues write. They refer to these episodes as “VaR shocks.”

VaR’s limitations are well known. By design it excludes or downplays rare episodes of extreme volatility. It is meant as a risk management tool, not a robotic buy or sell device. Yet VaR mimics the limitations of our own brains, which have trouble assuming circumstances that are at odds with those we have recently lived through.

Hmm.. Further:

Decades ago the late economist Hyman Minsky identified a similar phenomenon in the broader economy. A long period of steady growth with low inflation can persuade firms, workers and investors that recessions and crises are a thing of the past, and take on more risk as a result, for example by buying overvalued assets with debt.

“Stability is destabilizing,” Mr. Minsky said. He didn’t survive to see that prediction come true with a vengeance in 2008, an event Paul McCulley, then of Pimco, dubbed a “Minsky moment.”

Thus, in a larger sense, central banks’ efforts to hold down bond yields suffer from a similar shortcoming to their much bigger efforts to stabilize the economy, hold inflation low, and maximize employment. The more successful they are, the more they plant the seeds for a reversal of that success.

This is not a reason to abandon those efforts, because most of the time, they succeed (and are, in any event, better than the alternative, which is to do nothing). It is a reason to be aware of their limitations.

It also means central bankers need to be careful before assuming that market prices reflect fundamental developments. Many saw the big drop in German bond yields until mid-April as a ringing affirmation of the success of the European Central Bank’s bond-buying program. Similarly, some will see the recent selloff as evidence of failure. Neither sentiment is true.

Most of the time central banks only go wrong. The hubris they show over their control over economy only leads to huge failures later on. You keep going back to Austrians who have deplored all this rise of central banking and their interventions in economy..


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