Archive for the ‘Financial Markets/ Finance’ Category

Financial Gerontology: An emerging new sub-field in finance..

June 27, 2019

Haruhiko Kuroda, Governor, Bank of Japan in this speech talks about Financial inclusion in aging society:

As we get older, we all become physically weaker. Declining mobility means we can no longer take it for granted that we can easily visit bank branches. Deteriorating eyesight and hearing ability may impair our capacity to fill out a form or understand a face-to-face explanation. Declining cognitive ability may create difficulty in making financial decisions. Moreover, there is the risk that senior citizens will become victims of financial crime. In 2018, among all recorded cases of so-called special fraud in Japan — such as telephone-based identity deception — 78 percent of the victims were aged 65 and over.

Financial inclusion is therefore an extremely important social agenda in an aging society, as it ensures that senior citizens — who may have difficulty in visiting banks or making financial transactions due to age-related decline — can continue to use financial services with confidence and benefit as much as possible from these services.

In the field of what is known as “financial gerontology,” there has been discussion about ways to make the adult guardianship system more effective in order to protect the rights of senior citizens with cognitive decline. The use of innovative digital technologies has also been considered. For example, using biometric technology for identity verification and mobile payments will enable senior citizens to have secured access to financial services without actually visiting bank premises. Moreover, the use of speech recognition technology will enable financial transactions to be made without the need for physical writing or keyboard skills. Advances in technology may create increasingly comprehensive financial services that are better tailored to the needs of the individual senior citizen.

These new financial services for senior citizens can also be a great business opportunity for financial institutions. On the other hand, as technology advances, the risk of technology abuse will increase, and vigilance is therefore essential to maintain security.


Though, in India we hear the opposite. How these technologies have made it difficult for aged people to access their own deposited money.

As societies age across the world, financial gerontology is going to be an important are of study.



Non-performing loans in the euro area: How they were halved?

June 26, 2019

Nice speech by Andrea Enria, Chair of the Supervisory Board of the ECB:


Twenty Years of the ECB’s monetary policy: Trial by Fire

June 26, 2019

Mario Draghi of ECB summarises the twenty years of monetary policy of ECB:

The euro was introduced twenty years ago in order to insulate the Single Market from exchange-rate crises and competitive devaluations that would threaten the sustainability of open markets. It was also a political project that, relying on the success of the Single Market, would lead to the greater integration of its Member States.

On both counts, the vision of our forefathers has scored relatively well. Imagine where the Single Market would be today, after the global financial crisis and rising protectionism, had all countries in Europe been free to adjust their exchange rates. Instead, our economies integrated, converged and coped with the most severe challenge since the Great Depression.

That leads me to four observations.

First, the integration of our economies and with it the convergence of our Member States has also greatly increased. Misalignments of real effective exchange rates between euro area countries are about a half those between advanced economies with flexible exchange-rates or countries linked by pegged exchange rates and they have fallen by around 20% in the second decade of EMU relative to the first.[20]

Second, the dispersion of growth rates across euro area countries, having fallen considerably since 1999, is since 2014 comparable to the dispersion across US states.

Third, this has been driven in large part by the deepening of European value chains, with EMU countries now significantly more integrated with each other than the United States or China are with the rest of the world.[21] Most EMU countries export more with each other than with the US, China or Russia. Fourth, employment in the euro area has reached record highs and in all euro area countries but one stands above its 1999 level.

But the remaining institutional weaknesses of our monetary union cannot be ignored at the cost of seriously damaging what has been achieved. Logic would suggest that the more integrated our economies become, the faster should be the completion of banking union and capital markets union, and the faster the transition from a rules-based system for fiscal policies to an institution-based fiscal capacity.

The journey towards greater integration that our citizens and firms started twenty years ago has been long, far from finished, and with broad but uneven success. But overall, it has strengthened the conviction of our peoples that it is only through more Europe that the implications of this integration can be managed. For some, that trust may lie in a genuine faith in our common destiny, for others it comes from the appreciation of the greater prosperity so far achieved, for yet others that trust may be forced by the increased and unavoidable closeness of our countries. Be that as it may, that trust it is now the bedrock upon which our leaders can and will build the next steps of our EMU.

Whatever the criticisms, EU polity continues to move ahead with the integration. People had questioned Euro right at inception and believed it would break down soon, but that has not happened.

Mixed reactions over Facebook’s Libra project..

June 21, 2019

Mixed reactions to the FB’s Libra project.

Mark Carney, Governor of Bank of England gives a cautious welcome:


20 Years of European Economic and Monetary Union

June 20, 2019

The Annual European Central Bank Forum at Sintra, Portugal was held recently. The papers and videos are all on the website.

In particular, this speech by EC President Jean Claude Junker is interesting. He points to “six moments in time, six lessons in history that have shaped the euro and the European Union as we know it.”

Lesson 1: The euro is a political project for our grandchildren
Exchange Rate Mechanism Crisis 1992

Lesson 2: The rules do not need to be stupid
The Stability and Growth Pact crisis 2003

Lesson 3: The euro is a matter of common interest
Greece 2010

Lesson 4: The euro requires resolve
Mario Draghi’s ‘whatever it takes

Lesson 5: The euro is irreversible
Greece crisis July 2015

Lesson 6: The euro is a strategic asset in today’s world
The Iran nuclear deal and the international role of the euro


History of Australian equity market: 1917-79

June 19, 2019

Thomas Matthews of RBA in this paper:

This paper presents stylised facts about the historical Australian equity market, drawn from a new hand-collected unit record dataset on listed companies from 1917 to 1979. Among other things, I show that: i) dividends for the early 20th century were lower than previously believed; ii) the realised returns on equities has averaged about 4 percentage points above that on government bonds since 1917, somewhat lower than previous estimates; iii) the share of profits paid out as dividends increased substantially after the introduction of franking credits in the 1980s; iv) the current industry composition of the stock exchange is atypical relative to history, despite it being dominated by essentially the same companies for the past century; and v) price-to-earnings ratios are currently almost exactly at their very long-run average, in contrast with the experience of some other countries.

Good stuff!

Financial revolution in Republican China: 1900-1937 (rare case of finance being freed from State)

June 14, 2019

Nice research by Prof Debin Ma of LSE:


Growing use of local currencies in Japanese trade with Asian countries

June 12, 2019

Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu in this research:

Japan exports to neither advanced nor Asian countries in yen, as would be expected. Using questionnaire data, this column shows why Japanese exporters tend to choose destination currencies in their exports to advanced countries and why the US dollar, rather than the yen, is more often used in their exports to Asia. It also presents new evidence that the share of local currency has recently increased markedly, while that of the US dollar has declined, in Japanese exports to Asia. 


When a regulator takes over a bank..

June 10, 2019

China Banking and Insurance Regulatory Commission recently took over Baoshang Bank on 24-May-2019.

The regulator answered the questions raised by Financial Times.

Interesting times!

Daniel Defoe, Cooperative Banks and challenges facing German economy..

June 10, 2019

Another fascinating speech by Jens Weidmann of Bundesbank.

He points how Defoe once wrote about need to have savings/cooperative banks in England. But they took shape in Germany:

Three hundred years ago, a book was published that has since gone down in history as one of the most printed publications of all time.[1] It tells the tale of the son of a Bremen merchant who went by the name of Kreutznaer. This young man embarks on a sea voyage, is enslaved, then escapes, then procures a plantation in Brazil, and finally becomes stranded on a desert island. You will all know the protagonist by the name of Robinson Crusoe.

This story by the British writer Daniel Defoe immediately became a resounding success. Indeed, just one year after the original edition was published, as many as four German translations were already on the market, and Defoe lost no time in penning two sequels.

You might not be aware that Daniel Defoe had another bright idea that was also very well received, though it didn’t occur to him until quite some time later. Even as far back as 1697, he was recommending that “that all persons in the time of their health and youth, while they are able to work and spare it, should lay up some small part of their gettings as a deposit in safe hands … to relieve them if by age or accident they come to be disabled”. If an institution were created for this purpose in every county in England, he wrote, poverty might easily be suppressed by helping people to help themselves.

However, the kind of savings institution which Daniel Defoe had in mind was first established not in England, but in Hamburg. It was here, in the year 1778, that the “Ersparungsclasse der Allgemeinen Versorgungsanstalt” was established – the world’s very first savings bank. So you could say that holding the German Savings Banks Conference here in Hamburg is a kind of homecoming. And if we look a little closer at the philosophy behind the savings banks, we can see a key aspect of the social market economy: the idea of “prosperity for all”. Having unfettered access to markets – in this case, to banking services – promotes this idea, and it is integral to Germany’s economic model.

Nice bit. Indian cooperative movement which started in 1904 (and many other countries) took insights from German savings banks.

He then speaks about challenges facing German economy: High current account surplus, China effect and so on…


The procyclicality of banking: evidence from the euro area

June 10, 2019

Harry Huizinga and Luc Laeven research this hot issue of bank procylicality in Euro area:

A high procyclicality of banks’ loan loss provisioning is undesirable from a financial stability perspective, as it implies that bank capitalisations are more negatively affected at the trough of the business cycle, exactly when capital market conditions for banks are at their weakest. This column finds that provisioning procyclicality in the euro area is about twice as high as in other countries. This has important implications for the supervision of euro area banks going forward.

Skills of a Risk Manager in finance: C# / .NET full-stack Developer?

June 7, 2019

Interesting job vacancy at BIS:


How the State uses law to create value from nothing…

June 7, 2019

Katharina Pistor has a fascinating piece on financial history:

If there ever was a magic ingredient for seemingly making something from nothing, it is law. Law can transform a simple commitment into an enforceable claim. And with a few additional legal steroids that grant asset holders priority, durability, convertibility and universality, law can turn a simple asset into a capital asset, as I explain in my new book The Code of Capital. Notes, currencies, bonds, asset-backed securities (ABS), and their derivatives exist only in law; without it markets for these assets would neither exist nor have scaled to multi-trillion-dollar markets that span the globe. The history of credit, or private money, is thus inextricably linked to the willingness of states to throw public power behind private commitments made on an unknown future.

France’s haute cuisine was not created overnight; it evolved over centuries in a process of trial and error, through endless efforts to refine the ingredients, the tools and the cooking processes. And so similarly was the evolution of minting private money from law. First came notes, or IOUs, the most basic form of private money. Then, the notes were placed on legal steroids, which gave us the bill of exchange. In legal parlance, they were made “negotiable”: anyone in possession of the note could now demand payment, not only from the original debtor, but from anyone who had endorsed the bill with a signature on the back. And no one who had endorsed the bill could raise objections that arose of the contract for which they had accepted the obligation. Cloaked in these creditor protection devices, bills became highly fungible, or money-like. Long chains of payment commitments linked producers to markets, creditors to debtors, cities to the country side, and major trading centers to each other in early modern Europe. These webs of bills became our first payment system thanks to legal protections offered by common law courts and to special statutes that trading cities throughout Europe adopted to ensure that they could be enforced in their jurisdiction.

Ever since, private money has proliferated, taking new forms along the way: Corporate bonds, asset backed securities, derivatives and claims stacked on top of one another to create squared and cubed variants followed suit. Dissecting these assets into their legal compounds, we find the basic elements of the code of capital: property, collateral, trust, corporate, bankruptcy, and contract law. These devices shield asset pools from too many creditors; they create priority rights by some claimants over others, and they make it possible to tailor assets to the specific needs of investor – to feed their risk appetite or their need for regulatory arbitrage. Refined and perfected over time, the basic legal ingredients have remained remarkably stable throughout the centuries – even as acronyms and financial jargon suggest new creations.

She points how today’s financial firms and crisis in them are all similar to previous firms and crisis in them:

In the end, all cooking is done with water, even in France where in the nineteenth century the Péreire brothers invented the Crédit Mobilier, the first leveraged banking operation on a large scale. They called their invention “banking without money”. They established a bank (the CM), capitalized it with only partially paid up shares, raised additional funds from bond holders and depositors, and invested in major infrastructure projects and banking ventures across Europe. The bank paid huge dividends to attract new shareholders, which in turn attracted more creditors, so that, for a while, the bank boomed. However, it all ended in tears with a bail-out orchestrated by the Banque de France. And yet, the basic scheme was soon emulated by others: “ponzi finance”, or leveraged investment in need of constant refinancing, as Minsky would much later call it, was born. 

loser scrutiny suggests that Lehman’s structure was remarkably similar to that of the Crédit Mobilier (CM). Unlike CM, it did not invest in infrastructure, but it issued and traded in what seemed to be highly liquid financial assets – just as LTCM had done. Lehman Brothers had over 200 registered subsidiaries as well as many more investment vehicles. The shares of these subsidiaries comprised the major assets of the parent, which guaranteed the debt its subsidiaries and sub-subsidiaries raised. Lehman operated as an integrated global financial intermediary with its profit center in New York. It made use of every legal tool in the kit to carve out assets, shield these assets from a multitude of competing creditors, and raise funds on repo markets, all the while ploughing profits back to the parent company’s shareholders. When the market for these financial assets dried up, liquidity evaporated. The only truly liquid asset available at that point was (and always is) state money – but Lehman was denied access to it. When the Fed determined that Lehman had no adequate collateral to lend against, this meant the end of Lehman.


Can MMT explain Israel’s growth story?

June 7, 2019

Tyler Cowen writes on Israel’s growth story:

From about 1973 to 1985, Israel had very high rates of inflation at one point reaching over 400%. That was the result of excessively loose monetary policy. Over time, printing money at such a clip took in successively less government revenue, as Israelis adjusted to the inflation and worked around it by holding less cash and denominating their contracts in foreign currencies. The inflation stopped giving macroeconomic benefits, even for government revenue, and Israel moved toward a regime of lower inflation and fiscal strength, to the benefit of the country’s longer-term growth.

This is a classic episode of MMT — “Modern Monetary Theory” — getting it wrong, as argued by Assaf Razin in his recent study of Israeli macroeconomic history. Under MMT, monetary policy can cover government spending, and fiscal policy can regulate price levels. Israel wisely followed more mainstream approaches.

Assar Razin’s NBER paper is here:

This essay offers an economic-history perspective of the long struggle towards macroeconomic stability. The paper is a broad analytical overview of major exogenous shocks and shifts in macroeconomic policy and institutions in Israel since the 1977-1985 great inflation through the global financial crisis and the effects of those shifts on long term growth, inflation, the business cycle, the Phillips curve and related economic developments.

The paper will discuss three main issues.

The first one on the inflation crisis focuses on the 1985 stabilization and on its impact on subsequent reform of monetary institutions.

The second discusses the impact of globalization on growth, inflation and the Phillips curve.

The third contains a discussion of the reasons for the relatively good performance of Israel during the 2008 global crisis, including foreign exchange market intervention.

Henceforth we highlight: (1) the role of macro-populism in generating hyperinflation; (2) the role of seigniorage revenue in generating the hyperinflation; (3) distributive effects of inflation stabilization, which are political driving forces behind the need for across-the-broad-coalition for a successful stabilization policy; (4) the effects of globalization on the Philips Curve and thereby on domestic inflation– means of transforming an inflation regime to a one with price stability; (5) the role of financial prudence regulatory institutions, which serve to explain the Israeli macroeconomic robustness in the face of the 2008 external depression-deflation global forces; and, (6) Israel’s government-deficit and money-creation experience, which help evaluate recent theory—the Modern Monetary Theory (MMT).

On MMT, Razin says:

Fiscal policy has been recently given greater emphasis in the post-2008 crisis that nominal interest rates appear to be persistently low — and below the annual growth rate of nominal GDP. This recent phenomenon generated renewed debate on the role of “printing money” in financing government deficits. Modern Monetary Theory, or MMT,  argues that a country borrowing in its own currency can finance fiscal stimulus by  printing money.

That is, governments able to issue fiat money can’t go bankrupt,  regardless whether investors are willing to buy their bonds. By extension, MMT would
allow the government to control inflation through tax policy. Instead of asking the Fed  to stabilize prices through monetary policy, the government could raise taxes when  prices get too high and cut taxes when prices get too low.

However basic  macroeconomics wisdom suggests that deficit finance by money issue won’t leave banks  sitting idle on their newly acquired reserves; they’ll convert them into currency, which they lend to individuals. So the government indeed ends up financing itself by printing  money, getting the private sector to accept pieces of paper in return for goods and  services, and this would lead to inflation. Recall that a deficit financed by money issue is
more inflationary than a deficit financed by bond issue.

When the central bank  purchases a government bond in the open market in exchange for commercial bank  reserves, all it does is substitute a very short‐term liability (reserves have zero maturity) for a longer‐term liability. That is, a central bank purchase of government bonds simply  alters the maturity structure of the consolidated government’s liabilities, and thereby  pushing up inflationary pressures.


But then I am not sure whether MMT applies to Israel under high inflation. MMT applies under low inflation with no price constraints. What we saw in Israel was just the opposite where inflation was very high.

The Macroeconomics of the Greek Depression: Would devaluation have helped

June 3, 2019

Gabriel Chodorow-Reich, Loukas Karabarbounis, Rohan Kekre in this NBER paper analyse the Greek depression:

The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, we develop and estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust.

Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression.

Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects.

By contrast, shifting the burden of adjustment from taxes toward spending or from capital taxes toward other taxes would generate significant longer-term production and consumption gains.


Why Americans prefer Socialism? Changing contours of the word..

May 31, 2019

Prof Tim Taylor in his superblog points to a Gallup Poll which asks people their views over Socialism.

In 1942 around 25% said it is a good thing which has risen to 43% in 2019. Having said that, those saying it is a bad thing has also risen from 40% to 51%:

I’ve been coming around to the belief that most modern arguments over “socialism” are a waste of time, because the content of the term has become so nebulous. When you drill down a bit, a lot of “socialists” are really just saying that they would like to have government play a more active role in providing various benefits to workers and the poor, along with additional environmental protection.

Here is some evidence on how Americans perceive “socialism” from a couple of Gallup polls, one published in May 2019 and one in October 2018. The May 2019 survey found that compared to 70 years ago, not long after World War II, both more American favor and oppose socialism–it’s the undecideds that have declined.

But when people say they are in favor of “socialism” or opposed to it, what do they mean? 

He says the traditional idea of socialism was government’s economic control. Now people prefer socialism because of high inequality:

Seventy years ago, the most common answer for a person’s understanding of the term “socialism” was government economic control, but that answer has fallen from 34% to 17% over time. Now, the most common answer for one’s understanding of socialism is that it’s about “Equality – equal standing for everybody, all equal in rights, equal in distribution.” As the Gallup folks point out, this is a broad broad category: “The broad group of responses defining socialism as dealing with `equality’ are quite varied — ranging from views that socialism means controls on incomes and wealth, to a more general conception of equality of opportunity, or equal status as citizens.” The share of those who define “socialism” as “Benefits and services – social services free, medicine for all” has also risen substantially.  There are also 6% who think that “socialism” is “Talking to people, being social, social media, getting along with people.”

The October 2018  survey also asked whether the US already had socialism. Just after World War II, when the US economy had experienced extreme government control over the economy and most people defined “socialism” in those terms, 43% said that the US already had socialism. Now, the share of those who believe we already have socialism has dropped to 38%. One suspects that most of those who think we have socialism are not happy about it, and a substantial share of those who think we don’t have socialism wish it was otherwise. Clearly, they are operating from rather different visions of what is meant by “socialism.”

There’s no denying that the word “socialism” adds a little extra kick to many conversations.  Among the self-professed admirers, “socialism” is sometime pronounced with an air of defiance, as if the speaker was imagining Eugene Debs, five times the Socialist Party candidate for President, voting for himself from a jail cell in the 1920 election. In other cases, “socialism” is pronounced with an air of smiling devotion in the face of expected doubters, reminiscent of the very nice Jehovah’s Witnesses or Mormons who occasionally knock on my door. In still other cases, “socialism” is pronounced like a middle-schooler saying a naughty word, wondering or hoping that poking round with the term will push someone’s buttons, so we can mock them for being uncool. And “socialism” is sometime tossed out with a world-weary tone, in a spirit of I-know-the-problems-but-what-can-I-say.

My own sense is that the terminology of “socialism” has become muddled enough that it’s not  useful in most arguments. For example, say that we’re talking about steps to improve the environment, or to increase government spending to help workers. One could, of course, could have an argument over whether the countries that have bragged most loudly about being “socialist” had a good record in protecting worker rights or the poor or the environment. One side could yelp about Sweden and the flaws that arise in a market-centric economy;  the other side could squawk about the Soviet Union or Venezuela and the flaws of a government-centric economy. (As I’ve argued in the past, I view the Scandinavian countries–and they view themselves–as a variation of capitalism rather than as socialism.)

While those conversations wander along well-trodden paths, they don’t have much to say about–for example–how or if the earned income tax credit should be expanded, or the government should assist with job search, or if the minimum wage should rise in certain areas, or how a carbon tax would affect emissions, or how to increase productivity growth, or how to address the long-run fiscal problems of Social Security. Bringing emotion-laden and ill-defined terms like “socialism” into these kinds of specific policy conversations just derails them.

Thus, my modest proposal is that unless someone wants to advocate government ownership of the means of production, it’s more productive to drop “socialism” from the conversation. Instead, talk about the specific issue and the mixture of market and government actions rules that might address it, based on whatever evidence is available on costs and benefits.

This was like we called it in India: Mixed economy…

IMF @ 75: When Lord Keynes pays a visit to the organisation he created…

May 31, 2019

Nice piece by Atish Ghosh, IMF’s historian in Finance & Development, a quarterly magazine released by IMF.

The piece is written in a conversation style between Keynes and Lagarde. Keynes visits IMF on its 75th anniversary. He is surprised to see a woman at helm of affairs and that too a French! Also surprised how the Great Britain to which he once belonged is not that great anymore:


What is behind the recent global slowdown?

May 30, 2019

Hyun Song Shin, Economic Adviser and Head of Research of the BIS in this speech tries to answer the question. He says the main reason is deep interconnections between trade and finance. With financial sector continuing to bleed, this has affected trade and global growth:

Financing of working capital to sustain manufacturing and trade shines a light on the role of the banking sector. Banks are crucial for the provision of trade financing, and a strong banking sector augments the firms’ own financial resources to meet working capital needs.

Yet the banking sector has been stuck in low gear since the GFC. While post-crisis reforms have increased the resilience of banks by enhancing their loss-absorbing capacity, banks’ lending growth has been disappointingly weak. Above all, the book equity of the banking sector, which serves as the foundation for banks’ lending, has stalled.

Graph 6 shows that book equity growth has slowed drastically since the GFC, reflecting in part the low profitability of the banking sector, as well as continued dividend payouts and share buybacks. As book equity is the foundation for the lending by banks, the slow pace of book equity growth has gone hand in hand with stagnant lending growth.10The sharp break in trend in equity and asset growth since the GFC is a graphic illustration of how, even a full decade after the crisis, the banking sector has not recovered from it. This is not just a story about Europe. The group of 75 large banks depicted in Graph 6 are drawn from around the world.

The weakness of the banking sector shines a light on the unintended side effects of a prolonged period of monetary accommodation that has weighed on bank profitability through negative interest rates and compressed long-term rates. It is commonplace to say that monetary policy is overburdened in the current economic environment, not least from the BIS. But this is a point that is especially relevant for the impact of monetary policy on GVCs and manufacturing activity. Bank lending and corporate balance sheet strength are key to the financial backing underpinning GVCs. While low interest rates in advanced economies have helped bolster consumption and support strong employment growth, the impact on bank lending that bears more directly on GVCs has been arguably less effective. Nor can we say that the impact of monetary policy on corporate leverage has been unambiguously positive. Companies have taken advantage of low long-term interest rates to borrow long-term through capital markets, and have used the proceeds in financial transactions, either in acquisitions or to buy back their own shares. Real investment unrelated to property is more closely tied to the health of the manufacturing sector and has been subdued. More recently, leveraged loans issued by less creditworthy firms have been receiving increasing attention from policymakers as a potential source of financial stress for firms.

Once the growth of manufacturing and trade through more intensive use of GVCs has run its course, relying excessively on manufacturing and goods trade may be setting the global economy up for disappointment. The experience of 2017 serves as a useful lesson. During 2017, manufacturing and trade grew strongly on the back of accommodative credit conditions and a weaker dollar. However, as we have been seeing in more recent months, some of the expansion of activity was vulnerable to a reversal of credit conditions.

These considerations bring us to the importance of the composition of demand and the role of fiscal policy. When the appropriate opportunities for long-term public investment arise, fiscal stimulus – through such investment projects taking advantage of low long-term interest rates – may be one way to reorient the economy towards domestic activity. The important point here is that such a reorientation would aid the rebalancing of the composition of demand as well as its overall size. The issue of fiscal space and long-run sustainability of public debt will then need to be addressed. These issues are beyond the scope of my presentation today, but I am sure they will figure in the discussions at this forum. I look forward to a lively debate.


Bernanke, Paulson and Geithner: Three Musketeers co-author a book on financial crisis

May 29, 2019

Ben Bernanke, Hank Paulson and Tim Geithner were the three musketeers who did the firefighting during the 2008 crisis (some would say they created the crisis as well!).

After writing their own accounts (Courage to Act by Bernanke, On the Brink by Paulson, Stress Test by Geithner) they have co-written a book: Firefighting – The Financial Crisis and its lessons.

Howard Davies not just informs about this new book but also reviews it. In this Churchill’s quote is worth nothing:

After World War II, Winston Churchill confidently asserted that history would treat him kindly because “I propose to write that history.” Now, a decade after the global financial crisis, three of the key players in that episode have co-authored a book that is interesting not so much for its treatment of the past as for its proposals for the future.

What do they say about future?

First, Bernanke, Geithner, and Paulson point out that imposing higher capital requirements on banks caused much credit creation to migrate to the non-bank sector, where US authorities still lack authority to intervene, whether preventively, by requiring higher capital reserves, or by providing financial support to stabilize markets if necessary. They argue for an FDIC-style insurance model for the broader financial system. Quite how that would work is left unclear, but the idea is worth further thought.

Second, they note that the US system of financial regulation has barely been reformed, despite the many weaknesses revealed by the crisis. In their view, “the balkanized financial regulatory system could use reform, to reduce turf battles among redundant agencies with overlapping responsibilities.” They tried to promote change, but only one small agency, the ineffective Office of Thrift Supervision, has been abolished. Even after the Dodd-Frank overhaul, they lament, “there is no single regulator responsible for safeguarding the system as a whole.” That is a damning commentary on the Financial Stability Oversight Council, which was supposed to fulfill that function.

They are a little coy about the identity of those “redundant agencies,” but the Commodity Futures Trading Commission must be on their list. No other country has separate regulators for cash equities on the one hand, and derivatives on the other. Only defensive congressional fiefdoms prevent rational reform in that area.

The third proposal is targeted principally at the Trump administration, though Congress is again also implicated. Bernanke, Geithner, and Paulson believe that current US fiscal policy is deeply misguided. The deficit is too high, at a time when the economy is growing healthily. That is bad economics today, and, more important, the authorities could, as a result, find it difficult to relax fiscal policy to combat a future recession. As they put it, “the use of fiscal adrenaline could be limited just when it is needed most.” There is an urgent need to “restock the emergency arsenal,” particularly when there is relatively little scope to relax monetary policy. The Fed began a process of normalizing monetary policy, but has not completed the job, and President Donald Trump is doing what he can to prevent them from doing so, by heckling from the sidelines.

The Three Musketeers remain positive about some elements of the post-crisis program. Bank capital has been greatly strengthened, and the transparency of the derivatives markets materially enhanced. Those changes make the financial system safer. But their agenda for further reform is substantial, and fundamental.

And, next time, we may not be as fortunate in the quality and resourcefulness of our crisis managers – or in the wisdom of their political masters.

🙂 I think the last line was a pun!

The Irish crisis: Lessons for small central banks

May 29, 2019

Patrick Honohan was the Governor of Central Bank of Ireland (2009-15) during the 2008 crisis which hit the economy badly. He has penned a book on his years at the central bank: Currency, Credit and Crisis Central Banking in Ireland and Europe.

He shares some lessons on


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