Archive for the ‘Central Banks / Monetary Policy’ Category

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:

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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:

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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:

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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:

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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:

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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..

Why budget and experts should not obsess over fiscal deficit target…

May 11, 2015

Sashi Sivramkrishna of NMIMS (Bengaluru) has written a much needed piece. Slightly late as Budget hype is over but nevertheless.

It says Budget should be about governance and other issues. Fiscal Deficit is an outcome dependent on many factors and is not really in control of the govt. All this obsession only leads to fiscal gimmikry as finance minister only tries to meet the target and ignores the rest.

Nations, unlike households, do not face budget constraints. Fiscal defi cit targets therefore cannot be the objective of macroeconomic policy. Instead, budget discussions must focus on governance, supply-side bottlenecks and on policies to raise aggregate demand.

….It is time that the Indian government recognises the immense policy space available to it as a sovereign nation and does not succumb to unnecessary constraints imposed on it by rating agencies and media hype. So why are myths about the need to balance budgets propagated by the economics community? One possible answer is what Samuelson once mentioned to Mark Blaug:

I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one  of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and ineffi ciency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in away that the long-run civilised life requires (qtd in Wray 2010).

This obsession over fiscal and inflation targets has all become so stupid really. It seems nothing else matters. Just like the west, we have moved macroeconomics to just these two numbers and two institutions (fin min and central bank) which has made us miss many a things.

HDFC Bank offers unsecured personal loans in just one minute..

May 7, 2015

This blog is really interested in the new products/technology offered by financial firms and banks.

Came to know of this loan  from HDFC Bank where you get a loan processed in just one minute.

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Common sense on the financial crisis – don’t blame financial markets

May 7, 2015
Patrick Minford of  Cardiff Univ has this piece:

Well, you get what you sow. Before the crisis there was tremendous hubris around what finance and monetary policy can do. The whole thing was to just deregulate finance and let central banks be free from govt (and be slave to finance). As both collapsed, they are all out to blame each other. The econ models may show one factor ruling over other (as is the case in this article), but we know such models have limitations. Just change a few equations and results could be very different.

The financial crisis was a combination of many things but above all it was hubris in economic and finance thinking which paved the way..

Flip flop over Indian central bank’s new roles/objectives..

May 7, 2015

Ever since the Budget 2015-16, there has been a lot of noise around Finance Bill which was to redefine Indian central bank’s new role. Actually the role isn’t anything new but was to become more precise and defined in form of inflation targeting.

Like all other IT central banks this would have meant RBI giving up all the powers to look at so called multiple indicators. The objective shall be just one – target inflation. Despite limitations of the IT framework which has been exposed during this crisis, we have gone ahead with the framework. Even the so called independence idea that IT central banks are more independent needs to be questioned.

But then we have gone ahead with these ideas (without much debate), so we should stick by it and make all the necessary changes required to make the framework consistent as explained here.

But  what is it that we see? The parts of Finance Bill which were to make this new policy consistent have been rolled back. Even worse is to see  experts who  hyped these changes have celebrated it as a victory of Indian central bank! They see that Indian central bank will continue to maintain its powers and not lose it to irresponsible govt. Really? This is just like the emperor’s new clothes story where the tail0r keeps fooling the king and public that there is something really fashionable the king is wearing but the reality was he was not wearing anything at all.

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Real meaning of central bank independence – independent from govts but slaves to financial markets

May 5, 2015

A nice rejoinder by Anantha Nageshwaran on the overhyped idea of central bank independence.  – http://tgs.nationalinterest.in/2015/05/05/central-bank-independence/

He says CBI means independent from govt but complete slaves to financial markets:

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History of India’s forex market..

May 5, 2015

Nice speech by G Padmanabhan, retiring ED of Indian central bank http://www.bis.org/review/r150410c.pdf

He handled the forex department and tells this useful story of evolution of Indian forex market. A good read..

 

Could machines put Central Bankers out of a job?

April 28, 2015

Interesting post reviewing  a paper by Prof. Randall Kroner. He says technology could make jobs of banks and central banks irrelevant. So what Milton Friedman espoused technology can achieve:

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Game of Thrones Economics: Why Doesn’t Westeros Have A Central Bank?

April 27, 2015

I have no idea about Game of thrones or Westeros.But this article on why there is co central bank in the game is interesting.

The Austrians would be happy seeing no such thing and attribute the success of the game for its absence. Whereas other schools might add that to spice the game, a central bank is a must…

Rethinking macroeconomic policy…

April 23, 2015

Oliver Blanchard sums up the views on macro policy at recently held IMF/WB meetings.

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