Archive for the ‘Financial Markets/ Finance’ Category

The Monetary Helicopters Are Coming: Friedman’s or MMT’s?

March 30, 2020

Well, well, well. Just as I had recently written that whether we like it or not, most central banks would be be following Modern Monetary Theory.

Willem Buiter in Proj Synd piece writes:


2008 crisis was a endogenous shock whereas Covid19 is an exogenous one`

March 30, 2020

Jon Danielsson, Robert Macrae, Dimitri Vayanos, Jean-Pierre Zigrand in this piece point to differences between the two shocks:

Comparison between the coronavirus crisis and the global systemic crisis of 2008 is inevitable, but seen through the lens of exogenous and endogenous risk they are quite different. 

2008 was a global systemic financial crisis fuelled by the endogenous interactions of market participants. The forces of the crisis fed on deep weaknesses in the financial system that had built up out of sight.

COVID-19 is an exogenous shock to the economy, and the question is whether there are sufficient latent weaknesses for it to prey on. We think this unlikely. Instead, the locus of the problem lies outside the financial industry, in a real economy in which shops, services and business are being closed by state fiat, and the income of employees involved is collapsing.   

In turn, that means the appropriate policy response cannot be limited to reducing interest rates or purchases of corporate or sovereign bonds on the open market, but should also encompass forbearance and targeted help and similar policies. 

With the most vulnerable part of the financial system – the banks – in much better shape now than in 2008, we feel that this is not the real problem and that any solution focused primarily on the financial system would fail.   

From one shock to another…

The road to funding in Australian Dollars..

March 30, 2020

The idea of original sin has again come to the fore. The original sin means most of the emerging nations cannot issue their bonds in their own currencies. This is because of several factors like lack of macro fundas, lack of deep markets and so on. This leads to problems as most countries then issue bonds in foreign currencies and when you have a Covid19 kind of crisis and currency depreciates, the liabilities suddenly balloon leading to defaults.

Here is an interesting research by Elliott James and Christian Vallence on Australia’s journey to issuing most of its overseas bonds in AU Dollar:

A key feature of Australia’s financial system is that nearly all liabilities are denominated in, or hedged into, Australian dollars. A pre-condition for this state of affairs is that investors are willing to hold Australian dollar-denominated assets. Investor confidence in Australian dollar assets is supported by Australia’s sound institutional framework, history of positive macroeconomic outcomes, and well-functioning financial system.

Australia’s journey to funding in its own currency spanned nearly a century and involved various costs. Today, these funding arrangements confer substantial benefits to the Australian economy, including by reinforcing the same positive economic, financial and institutional outcomes that made Australian dollar funding possible in the first place.



Europe is at last channeling Alexander Hamilton..

March 26, 2020

Jacob Funk Kirkegaard of PIIE in this piece says Europe has finally found its Hamilton. Hamilton had rescued US in 1790 and Europe is doing the same. Just that Lagarde as a central bank head has to play the role:


Will the pandemic crisis lead to multidisciplinary economics?

March 26, 2020

Mohammed El Erian in Proj Sync piece:

Given how extensive government interventions are likely to be this time around, it is critical that policymakers also recognize the limits of their interventions. No tax rebate, low-interest loan, or cheap mortgage refinancing will convince people to resume normal economic activity if they still fear for their own health. Besides, as long as the public-health emphasis is on social distancing as a means of quashing community transmission, governments won’t want people venturing out anyway.

All the issues raised above are ripe for more economic research. In pursuing these avenues of inquiry, many researchers in advanced economies will find themselves inevitably rubbing up against development economics – from crisis management and market failures to overcoming adjustment fatigue and putting in place better foundations for structurally sound, sustainable, and inclusive growth. Insofar as they adopt insights from both domains, economics will be better for it. Until recently, the profession has been far too resistant to eliminating artificial distinctions, let alone embracing a more multidisciplinary approach.

These self-imposed limits have persisted despite abundant evidence that, particularly since the early 2000s, advanced economies are saddled with structural and institutional impediments that have stifled growth in a manner quite familiar to developing economies. In the years since the global financial crisis in 2008, these problems have deepened political and societal divisions, undermined financial stability, and made it more difficult to confront the unprecedented crisis that is now knocking down our door.

Will there be a uniform currency in a cashless economy?

March 26, 2020

Walter Engert and Ben S. C. Fung of Bank of Canada in this short paper

Is cash necessary for a uniform currency? Consider the following transaction: a person could exchange a bank deposit for cash at face value and then deposit that cash at face value in another bank, thereby forcing a deposit transfer at face value via cash.1 In this way, cash could be used to establish a fixed one-to-one exchange rate between different bank deposit monies. In the absence of cash, obviously, it would not be possible to conduct this kind of transaction. So, without cash, would our uniform currency break down? In this note, we consider whether a uniform Canadian currency would continue in a cashless economy.

The next section provides some historical background, briefly recounting the experience of establishing a uniform Canadian currency in the 19th century. As will be seen, the institutional environment was very different than it is today. Section 3 then explains how a uniform currency is maintained in a contemporary setting and shows that cash is not important to achieve this outcome. As a result, a uniform currency would be maintained in Canada even if a cashless economy were to develop.


South African Reserve Bank warns the public that it is not withdrawing banknotes and coin

March 24, 2020

Trust human beings to do anything. When humanity is facing one of its worst crisis, we still see some people tying to find a way to cheat people.

See this case in South Africa:

The South African Reserve Bank (SARB) has been made aware of fake news that involve a scam claiming that it is “recalling” money from the public. It is believed that criminal elements are visiting the homes of members of the public telling them to hand over banknotes in their possession because the banknotes have been contaminated with the Corona virus. These criminal elements carry fake SARB identification and provide false receipts in lieu of the banknotes “collected” which they purport can be collected from any of the banks.

The SARB has neither withdrawn any banknotes or coins nor issued any instruction to hand in banknotes or coins that may be contaminated with the COVID-19 virus. The SARB will NOT, under any circumstances, send employees or representatives to collect cash from the public. If members of the public are approached by individuals purporting to be SARB employees or representatives, to hand in their cash, they should refuse and contact local police.


A Greater Depression?

March 24, 2020

Dr Doom Nouriel Roubini in the Proj Synd piece:

With the COVID-19 pandemic still spiraling out of control, the best economic outcome that anyone can hope for is a recession deeper than that following the 2008 financial crisis. But given the flailing policy response so far, the chances of a far worse outcome are increasing by the day.


Unless the pandemic is stopped, economies and markets around the world will continue their free fall. But even if the pandemic is more or less contained, overall growth still might not return by the end of 2020. After all, by then, another virus season is very likely to start with new mutations; therapeutic interventions that many are counting on may turn out to be less effective than hoped. So, economies will contract again and markets will crash again.

Moreover, the fiscal response could hit a wall if the monetization of massive deficits starts to produce high inflation, especially if a series of virus-related negative supply shocks reduces potential growth. And many countries simply cannot undertake such borrowing in their own currency. Who will bail out governments, corporations, banks, and households in emerging markets?

In any case, even if the pandemic and the economic fallout were brought under control, the global economy could still be subject to a number of “” tail risks. With the US presidential election approaching, the COVID-19 crisis will give way to renewed conflicts between the West and at least four revisionist powers: China, Russia, Iran, and North Korea, all of which are already using asymmetric cyberwarfare to undermine the US from within. The inevitable cyber attacks on the US election process may lead to a contested final result, with charges of “rigging” and the possibility of outright violence and civil disorder.

Similarly, as I have  previously, markets are vastly underestimating the risk of a war between the US and Iran this year; the  of Sino-American relations is accelerating as each side blames the other for the scale of the COVID-19 pandemic. The current crisis is likely to accelerate the ongoing balkanization and unraveling of the global economy in the months and years ahead.

This trifecta of risks – uncontained pandemics, insufficient economic-policy arsenals, and geopolitical white swans – will be enough to tip the global economy into persistent depression and a runaway financial-market meltdown. After the 2008 crash, a forceful (though delayed) response pulled the global economy back from the abyss. We may not be so lucky this time.

Terrible news all around..

Gulzar has a round up of more such depressing articles

Could MMT rescue us from the Covid19 crisis?

March 23, 2020

My new piece in MC.

I must admit am no expert on MMT. This was just an attempt to understand what MMT folks are saying on the crisis and whether their ideas deserve a hearing this time around.

Covid19: What would Roosevelt do? What would Keynes say?

March 23, 2020

Prof Pavlina R. Tchernev of Bard College in this Proj Synd piece wonders what would FDR do if faced with the Covid19 crisis?

The US government should pull out all the stops in mitigating the economic fallout from COVID-19, not just by disbursing cash to all households, but also by implementing a federal job guarantee and many other long-overdue policies. After all, for a self-financing government, money is no object.

Prof Robert Skiledesky asks What will Keynes say:
One hopes that governments will not have to choose between higher prices and increased taxes to finance efforts to combat the COVID-19 pandemic. But it’s not too early for policymakers to start thinking about how to pay for this particular war.
Mind is buzzing with all kinds of possibilities…

Comparing Covid19 to GFC 2008 is not approporiate..

March 20, 2020

Stephen Roach in this Proj Synd piece:


Popular governments may be a sign of future financial crises

March 20, 2020

A post on LSE blog. Summarises this paper which says popular governments can be a sign of future financial crisis mainly in emerging economies:

One well-documented predictor of financial crises are credit booms and capital flow bonanzas. Indeed, many banking and current account crises (sudden stops) have been preceded by unusual expansion of domestic and/or external credit (see for example Reinhart and Reinhart 2008Forbes and Warncock 2012Schularick and Taylor 2012Mendoza and Terrones 2012). To the best of our knowledge, however, not much research has focused on early warning indicators outside the realm of economic variables.

In this post, which is based on our research in Herrera et al. (2020), we discuss the role of political bonanzas (large increases of government popularity) in the run-up to financial crises, showing that this political variable can be helpful to predict crises. We propose new cross-country measures of government popularity, which covers more than 100 countries as far back as 1984. Specifically, we propose the use of the “International Country Risk Guide” (ICRG) sub-indicator of “government stability”, which measures “the government’s ability to carry out its declared program(s), and its ability to stay in office” and which we show is closely related to actual public opinion data for those countries and episodes for which actual government approval data is available (e.g. from Gallup)…..


Why do political booms precede financial crises only in emerging markets? We argue that governments with lower initial levels of popular support have more incentives to ride political booms simply because there is more margin for increasing their popularity than in advanced economies. Furthermore, if there is also high uncertainty about the government’s quality to begin with, then riding a boom also has more potential to change public opinion. Indeed, these preconditions are more typical in young democracies (including many emerging markets) rather than established ones – we show that government popularity in emerging markets is significantly lower than in advanced economies and also more volatile, meaning that the public is more uncertain about the quality of its politicians.

In our model, this implies that popularity is more responsive to the perceived economic environment and to governments’ actions and policies. To match this rationale, we further show empirically that governments with lower initial popularity levels are more likely to experience financial crises in the future. This result holds even in the subsample of emerging markets.

In sum, emerging markets may be more prone to crises than advanced economies because their governments, having on average a lower reputation and more uncertain quality, can gain more in popularity from riding credit booms that are doomed to fail.

Obviously the research is based on past data. Much of today’s developed world shows similar govts as emerging economies..


Central banks’ “whatever it takes” moment: Will it help?

March 18, 2020

Central banks are again trying to throw the sink at the financial markets. They are searching for  a comment similar to Mario Draghi’s “Whatever it takes” which helped save Euro (atleast that is what we are told).

Some comments on the central bank actions:


RBI-Occasional Papers-Vol. 40, 2019

March 17, 2020

RBI has published its latest occasional paper series Vol 40:

1. Fiscal Rules and Cyclicality of Fiscal Policy: Evidence from Indian States

Dirghau Keshao Raut and Swati Raju examine the impact of fiscal rules on the cyclicality of fiscal policy of Indian states using data for the period from 1990 to 2018. The results suggest that fiscal rules have reduced pro-cyclicality of fiscal policy, particularly in terms of development expenditure, in the post-FRL period. Fiscal deficit also changed its nature from pro-cyclical in the pre-FRL period to acyclical in the post-FRL period. Capital outlay displayed acyclical behaviour in both pre-and post-FRL periods.

2. Payment Systems Innovation and Currency Demand in India: Some Applied Perspectives

Dipak R. Chaudhari, Sarat Dhal and Sonali M. Adki postulate currency demand for transaction purposes driven by income effect, and a payment technology induced substitution effect working through velocity of currency. Innovations in payment systems have shown a statistically significant long-run inverse relationship with currency demand in India. However, the magnitude of its coefficient indicates that the substitution effect of payment systems on currency demand is smaller than the dominant income effect.

3. Can Financial Markets Predict Banking Distress? Evidence from India

Snehal S. Herwadkar and Bhanu Pratap test whether equity markets provide any lead information about stress in the banking system before quarterly data become available to the supervisors. The authors find that markets are able to price-in the banking stress concurrently but not much in advance. As the supervisory data are available with a lag, there is some merit in incorporating market-based information to track banking distress. Interestingly, the findings suggest that markets are relatively less efficient in providing such lead information in the case of public sector banks vis-à-vis private sector banks.

The last paper is interesting. Did equity markets do better in indicating stress at Yes Bank given it is a private sector bank?

Helicopter money: The time is now

March 17, 2020

Jordi Gali in voxeu:

Yes Bank rescue: echoes of the 1998 LTCM Bailout

March 17, 2020

My new article in Bloomberg Quint.

The Yes Bank consortium bailout is quite similar to consortium bailout of LTCM (Long Term Capital Management) in US in 1998.   I explore the connections…

Capital market integration can reduce misallocation: Evidence from India

March 16, 2020

Interesting research by Natalie Bau and Adrien Matray. They try and find out whether India’s capital market reform has helped firms increase output and productivity:


Contagion of Fear: Bank failures during Great Depression

March 16, 2020

Kris James Mitchener and Gary Richardson in a new NBER working paper:

The Great Depression is infamous for banking panics, which were a symptomatic of a phenomenon that scholars have labeled a contagion of fear. Using geocoded, microdata on bank distress, we develop metrics that illuminate the incidence of these events and how banks that remained in operation after panics responded. We show that between 1929-32 banking panics reduced lending by 13%, relative to its 1929 value, and the money multiplier and money supply by 36%. The banking panics, in other words, caused about 41% of the decline in bank lending and about nine-tenths of the decline in the money multiplier during the Great Depression.

Surprised to see money multiplier being given prominence in banking/monetary research..

The Virus and the Australian Economy

March 12, 2020

Guy Debelle, Deputy Governor gives a speech on impact of Covid19 virus on Australian economy:

I had been intending to talk about investment, the theme of this conference. But, given the circumstances, instead I will provide a summary of how the Bank is seeing developments in the economy at the moment.[1] I will provide our assessment of where the economy was ahead of the onset of the coronavirus as well as an assessment of the effect of the virus to date, including on financial markets.

The December quarter national accounts confirmed our assessment that the Australian economy ended 2019 with a gradual pick-up in growth. Growth over the year was 2¼ per cent, up from a low of 1½ per cent. Consumption growth was a little stronger in the quarter, although still subdued. We had estimated that the bushfires will subtract around 0.2 percentage points from growth across the December and March quarters, but besides that, economic growth was set to continue to pick up supported by low interest rates, the lower exchange rate, a rise in mining investment, high levels of spending on infrastructure and an expected recovery in residential construction.

On the global side, around the turn of the year there were indications that the global economy was coming out of a soft patch of growth. The trade tensions between China and the US had abated, surveys of business conditions were picking up and industrial production was improving. Financial conditions were very stimulatory and supporting the pick-up in global growth.

Since then, there is no doubt that the outbreak of the virus has significantly disrupted this momentum, initially in China and now more broadly. We do not have a clear picture yet on the disruption to the Chinese economy caused by the virus and the measures put in place to contain the virus. But the following two graphs provide some sense of the significant disruption to the Chinese people and economy.

On the recent rate cut:

Turning to monetary policy, the Board met last week and decided to lower the cash rate by 25 basis points to 0.5 per cent. This decision was taken to support the economy by boosting demand and to offset the tightening in financial conditions that otherwise was occurring.

The reduction in the cash rate at the March meeting was passed in full through to mortgage rates. The cash rate has been reduced by 100 basis points since June. This has translated into a reduction in mortgage rates of 95 basis points. This has occurred through the combination of a reduction in the standard variable rate of 85 basis points, larger discounts to new borrowers and existing borrowers refinancing to take advantage of larger discounts. While a lower and flatter interest rate structure puts pressure on bank margins, it is important to remember that the easing in monetary policy will help support the Australian economy which in turn supports the credit quality of the banks’ portfolios of loans.

The virus is a shock to both demand and supply. Monetary policy does not have an effect on the supply side, but can work to ensure demand is stronger than it otherwise would be. Lower interest rates will provide more disposable income to the household sector and those businesses with debt. They may not spend it straight away, but it brings forward the day when they will be comfortable with their balance sheets and resume a normal pattern of spending. Monetary policy also works through the exchange rate which will help mitigate the effect of the virus’ impact on external demand.

The effect of the virus will come to an end at some point. Once we get beyond the effect of the virus, the Australian economy will be supported by the low level of interest rates, the lower exchange rate, a pick-up in mining investment, sustained spending on infrastructure and an expected recovery in residential construction.

The Government has announced its intention to support jobs, incomes, small business and investment which will provide welcome support to the economy. The combined effect of fiscal and monetary policy will help us navigate a difficult period for the Australian economy. They will also help ensure the Australian economy is well placed to bounce back quickly once the virus is contained.


How Wells Fargo top management is grilled by US House Financial Services Committee: Lessons for India?

March 12, 2020

The Wells Fargo misseling accounts scam happened in 2016 but the officials continued to be grilled by the US authorities.

The US House Committee on Financial Services continues to grill the officials at Wells Fargo. There was a hearing on 11 March 2020.

The statement of Chair Maxine Water read as follows:

Today, we receive testimony from Elizabeth Duke and James Quigley, who until earlier this week served as chair of the board of directors of Wells Fargo & Company and Wells Fargo Bank, respectively. Both resigned after I called for their resignations following the release of a scathing Majority staff report on Wells Fargo’s compliance failures and their individual failures as board chairs.

But their resignations do not absolve them of their failures. Directors at Wells Fargo and institutions across this country must understand that they are the last line of defense when it comes to protecting their companies’ shareholders, employees, and customers. And while Ms. Duke and Mr. Quigley said they resigned to “avoid distraction,” let me be clear that this is not a distraction—we are examining misconduct and dereliction of duty.

Over the past decade, Wells Fargo’s board, management, and regulators have all failed to fix the company’s internal control weaknesses that caused enormous harm for millions of consumers throughout the country.

The Majority staff’s report examined Wells Fargo’s compliance with five consent orders that required the company’s board and management to clean up the systemic weaknesses that led to widespread consumer abuses and compliance breakdowns. As board members, Ms. Duke and Mr. Quigley were responsible for ensuring that Wells Fargo’s CEO and other management executed an effective program to manage those risks. However, the Majority staff report found that Wells Fargo’s board:

    1. Failed to ensure management could competently address the risk management deficiencies;
    2. Allowed management to repeatedly submit materially deficient plans to address consumer abuses;
    3. Prioritized financial considerations over fixing consumer abuses; and,
    4. Did not hold senior management accountable for repeated failures.

The Majority staff report also revealed attitudes and failures on the part of Ms. Duke and Mr. Quigley that are dismaying.

When the Consumer Financial Protection Bureau included Ms. Duke on letters requesting actions from the bank, she responded asking, “Why are you sending it to me, the board, rather than the department manager?” This was surprising to CFPB officials, and gives the appearance of a see-no-evil mentality from Ms. Duke, and an unwillingness to exercise oversight required of her as a member of the board.

Mr. Quigley also did not appear to understand the gravity of his board responsibilities. When the Office of the Comptroller of the Currency wanted to schedule a meeting with the bank’s directors to discuss “progress and accountability,” Mr. Quigley told other bank officials that he was, “currently scheduled to be in the Galapagos Islands on these dates,” and commented that “the sense of urgency is surprising…”

These statements were made after several public enforcement actions against Wells Fargo for massive consumer abuse scandals.

While Ms. Duke and Mr. Quigley have resigned, they must be held accountable for the dereliction of their duties as members of Wells Fargo’s board.

Hmm. For all you know Elizabeth Duke served on the Federal Reserve Board and then joined Wells Fargo.

We should adopt some of these practices to figure large scale banking frauds in India. We have a problem in all possible banking sectors: NBFCs, HFCs, Cooperatives, Public Sector Banks and now Private Sector Bank. However, we hardly see the Parliament grilling executives and regulators.

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