Archive for the ‘Speech / Interviews’ Category

40th anniversary of China’s economic reform and the 70th anniversary of its central bank: Some perspectives

December 28, 2018

Yi Gang, Governor of the People’s Bank of China, gives a speech on the twin anniversaries:

This year marks the 40th anniversary of the reform and opening-up and the 70th anniversary of the founding of the People’s Bank of China (PBC). As components of China’s tremendous achievements in the progress of the reform and opening-up, historic changes in the financial sector have taken place in the past four decades, and a modern financial market system has been broadly established which, adapting to the socialist market economy with Chinese
characteristics, is vital and internationally competitive.

And over the past 70 years, under the leadership of the Communist Party of China (CPC), the PBC has made extensive exploration and innovation, overcome formidable obstacles, pioneered in the promotion of financial development, reform and opening-up at different times, kept creating new prospects for the financial sector, and made significant contributions to China’s economic and social development.

In China it is clear. Central Bank functions under the aegis of the Government and there is no quarrel over central bank independence. The markets do not even care whether the central bank is any independent or not.

Gang lists several changes which have gone in the 40 years in financial sector. Useful speech as we know little of the developments in China..

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“A Noteworthy Woman”: Viola Desmond who featured on Canada’s $10 note..

December 27, 2018

An interesting way of honoring noteworthy women is by featuring them on currency notes!

Carolyn Wilkins of Bank of Canada in this speech does this really well:

Thank you all for being here for the opening of A Noteworthy Woman, our temporary exhibition about the imagery on Canada’s new $10 bank note. The process to choose the first Canadian woman to be featured on a regular bank note was exciting, and it inspired many. We received more than 26,000 submissions.

This exhibition retraces our journey with Canadians to collect ideas. It tells the story of the 12 amazing women who, in the end, were considered for the honour, and of Viola Desmond and her lasting legacy as a human rights icon in Canada.

The artifacts in the exhibit are evocative reminders of Viola Desmond’s life and the time in which she lived. The focus has, of course, been on that day in a movie theatre in Nova Scotia in 1946. A successful business woman was denied a seat downstairs, was arrested and jailed, then ultimately convicted and fined for doing what was right in a system that was wrong.

Yet, that day in the theatre was not the first time Viola Desmond had experienced systemic racism. She had always dreamed of opening her own beauty salon, but the 1930s was not a time when a woman-and especially a black woman-could easily succeed. Nova Scotia beauty schools would not accept her, so Viola trained in Montréal and the United States. She then returned to Halifax to open her own studio in 1937, during the depths of the Great Depression. Viola Desmond had been an inspiration for years before she bought that fateful movie ticket.

Our exhibition includes mementos from Viola Desmond’s business and seats from the movie theatre where her public battle began.

More poignant still is Viola Desmond’s free pardon, granted in 2010 by the government of Nova Scotia, which recognized that she was innocent of the conviction that had remained on her record for 63 years. She never got to see justice served. It is a pleasure and honour to have Wanda Robson here today to share this moment dedicated to her sister.

The exhibition also highlights other design features of the vertical $10 note, which centre on the theme of human rights and social justice. You will find an image of an eagle feather, an excerpt from the Charter of Rights and Freedomsand an image of the Canadian Museum for Human Rights, where Wanda Robson spent the first new $10 note 10 days ago.

We could not leave out of the exhibition the important stories of the 11 inspirational women who were also considered for the bank note. These remarkable women overcame barriers, created significant change and left Canada better because of their contributions.

Soon, many Canadians will carry a Viola Desmond note in their wallets. But the lessons of her life must continue to be told. That’s why I’m glad that, through this exhibition, people will be able to learn more about her history, and Canada’s history. It is by interpreting our past that we inform our future.

Hmm…

20 years of Euro: Why single market is not just an extension of the globalisation process

December 19, 2018

Interesting speech by Mario Draghi of ECB.

He discusses the Euro project and tries to dispel several myths around the project. European countries were struggling after WW-II and wanted to avoid future wars. This led to the political leaders to try and build economic integration within members. They first started allowing easier trade policies between the  countries. After initial gains from intra-EU trade, the growth from trade began to plateau. This was largely because trade was mainly done in intermediate goods.

The Single Market was conceived during a period of weakness in the European economy. Annual growth had averaged just 2.2% from 1973 until 1985 in the 12 countries that would go on to form the euro area[1], down from 5.3% between 1960 and 1973. Growth potential had also fallen from about 5% per year at the beginning of the 1970s to around 2% per year by the beginning of the following decade.

The typical response of governments to low growth was to increase fiscal deficits. From 1973 to 1985, public deficits in the euro area 12 averaged 3.5% of GDP, while in Italy the average was 9% of GDP. Unemployment rose from 2.6% in 1973 to 9.2% in 1985 for the euro area 12. In Italy, it climbed from 5.9% to 8.2% over the same period.

But the EU had a powerful tool at its disposal to raise growth: the common market. 

One reason that growth potential had decelerated was that intra-EU trade growth had stalled in the early 1970s, because the common market covered mainly intermediate goods where growth was already saturated. Trade in sectors with high R&D and skill content was restricted by non-tariff barriers, preventing productivity spillovers.[2]

The Single Market offered a way to remove these barriers, reverse the decline in economic potential, and bring more people back into work.

The Single Market was different than Globalisation:

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Nobel Prize 2018 lectures

December 10, 2018

The lectures are up on the Nobel website:

  1. People must understand the gravity of global warming. This involves intensive research and resisting false and tendentious reasoning.
    2. Nations must raise the price of CO2 and other greenhouse-gas emissions.
    3. Policies must be global and not just national or local. The best hope for effective coordination is a climate club.
    4. Rapid technological change in the energy sector is essential.

 

How economy and banking differs in western US compared to eastern US?

December 10, 2018

Interesting speech by Randal Quarles, Vice Chairman for Supervision at Federal Reserve.

We all know that throughout the history of the West, banking and finance have played an important role as vital infrastructure for the economy. That remains true today, although it is often overlooked in the traditional litany of issues critical to the West. A strong banking industry is necessary for households and businesses to engage in the spending, saving, and investment that constitute economic activity, and one of the purposes of financial regulation is to ensure that banks continue to be able to serve this purpose. So it is my plan today to talk about the economy of the West and link the recent and future performance of the western economy to the central and supportive role banks play as vital infrastructure in their communities.

But what is Western US?

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Profile of Caludia Goldin: Why history is important, role of women in labor force and new expansion of NBER…

December 4, 2018

Nice profile of Prof Goldin in IMF’s Finance & Development:

Born in 1946 in the Bronx, a borough of New York City, Goldin recalls an early fascination with investigation and intellectual discovery, immersing herself in the wonders of Manhattan’s museums as she fell in love first with archeology, then bacteriology. She went to Cornell University initially to study microbiology but came to embrace the humanities and social sciences, especially history and economics, which became her undergraduate major. She completed her doctorate in industrial organization and labor economics in 1972 at the University of Chicago.

Goldin explains why history is important to economics, citing the book The Race between Education and Technology (2008), which she wrote with fellow Harvard labor economist Lawrence Katz, who is also her husband.

“Larry Katz and I looked at changes in income inequality post-1980 versus pre-1980 and investigated the theory that inequality has risen more post-1980 because of skill-biased technological change,” Goldin says. “History allowed us to understand that skill-biased technological change is not new but has been around for a very long time and to identify the longer-term forces at work.”

The earnings gap between more-educated and less-educated workers was also wide in 1915, then narrowed until the 1950s, and then expanded again in the 1980s, Goldin and Katz found. By studying the whole century, they saw that changes in the supply of and demand for college-educated workers explain most of the fluctuation in wage premiums for better-educated workers. These ups and downs reflect a race between education and technology as the education system keeps up with evolving technologies’ changing demands for skills.

On women’s role in economics:

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The significance of academic research and teaching for the Swiss model for success

December 3, 2018

Looks like an interesting speech by Thomas Jordan of Swiss National Bank. As the speech is in German we just get abstract of the speech in English.

Academia has been undermining teaching and prefers research over teaching. It is nice when a central banker says teaching is as important:

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Central Bank accountability and the importance of explaining its actions: Case of Mauritius

November 30, 2018

Central bankers are often cribbing about lack of independence but seldom mention whether they are accountable enough.

Yandraduth Googoolye, Governor of the Bank of Mauritius in this speech talks about accountability. More importantly, says criticism from media is welcome:

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New commemorative coin launched to mark 100 years since Irish women won the right to vote

November 29, 2018

I just blogged about how German women won right to vote 100 years ago.

Irish women won the right too same time. The central bank has launched a new EURO 15 coin to mark the event.

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Thinking about regulating shadow banks and renaming shadow banks as non-banks…

November 28, 2018

Luigi Federico Signorini in this speech talks about the need for regulation of non-banks.

He also points how Financial Stability Board has changed the nomenclature of shadow banks:

With the completion of Basel 3, the post-crisis overhaul of banking regulation is essentially over; with a limited number of exceptions, the only issues remaining for the next few years will be the implementation of reforms and the evaluation of their effects, intended or otherwise, over time. Banks, however, do not comprise the entire financial sector.

Arguably, non-bank financial intermediation has taken on an increasing role in the global financial system and poses new challenges to regulators. The attention of international co-ordinating bodies such as the FSB is therefore now mainly, and rightly, directed towards what used to be known by the vaguely derogatory name of ‘shadow banking’ but is now more neutrally termed ‘non-bank financial intermediation’. The aim of this speech will be to explore the emerging risks from non-banks, to describe the (not insignificant, but still inchoate) regulatory response so far, and to speculate about a possible agenda for
the medium-term future.

Global non-bank finance concerns everybody, even countries where banks continue to play a dominant role in the internal financial system, like Tunisia – or Italy, for that  matter. In a globally interconnected financial system, no country stands alone; none can remain isolated from market shocks and turbulence whose ultimate source may be in faraway parts of the globe. This is a key point for emerging market and developing economies.

Witness the recent experience of the ‘taper tantrum’, when a number of emerging economies faced external financial conditions that had tightened abruptly and higher generalised risk premia in reaction to a policy decision taken by the US authorities. On that occasion the countries affected found that the negative repercussions on their economy stemming from the generalised repricing of assets could not be mitigated through policy actions (either by relying on floating exchange rates or through capital  flow management measures). It has also become apparent that a low degree of financial deepening may actually increase the sensitivity of emerging asset markets to external shocks.

The issue with non-bank finance, it will be argued, is not the stability of individual intermediaries—micro-prudential risk. As the risk connected to managed assets is borne almost entirely by the ultimate investor, rather than by the manager itself, it is not, or not mainly, the possible default of the manager that should concern regulators.

On the other hand, the actions of asset managers may affect the financial system and the  general economy through their systemic consequences on market developments. The key questions are then whether, to what extent and under what conditions non-bank intermediation can amplify market movements and determine instability. It is, therefore, essentially a macro-prudential question. Understanding and measuring such risks will require data, research and careful reflection; tackling them is likely to require new or reinforced supervisory tools and, quite possibly, a broader mandate for supervisory authorities.

Hmm

We are again seeing some concerns from non-banking financial sector. Here is another recent speech from Luis de Guindos, Vice-President of the ECB.

We need to go beyond self-interest or we’re doomed: Jean Drèze

November 27, 2018

Nice interview of Jean Dreze. Kudos to G-Sampath of Hindu for asking pertinent questions.

Here is a sampler:

In general, economists are a part of the problem and not the solution. Would you agree?

Well, economics can be a very useful discipline if studied critically. But if you are not critical, then it can become toxic. If you take economic models at face value, you could end up being in a world of your own.

But even as a discipline, economics seems biased against the poor.

It’s not just economics. In many disciplines, if you look at the history of ideas, it is essentially ideas that are convenient for the privileged and the powerful that tend to flourish; they are the ones that get sponsored, the ones around which conferences are organised, and so on. In contrast, ideas that are deemed threatening to the established order tend to be sidelined.

Can you give an example?

Take the idea that competition is good not only for economic efficiency but also for social welfare. This is questionable even in terms of mainstream economic analysis. But the way it is taught is that, except in cases of asymmetric information or other market failures, there is general compatibility between competition and social welfare. On the other hand, ideas about the value of cooperation, which are equally important, have not been developed much. Another example is the concept of exploitation. We do not learn anything about it, and it is not even a word we use in economics courses. How can you understand the labour market in India, or the Indian economy without thinking about exploitation? Economic ideas like asymmetric information could help, but somehow they tend to be used for other purposes.

Isn’t ‘exploitation’ a ‘Marxist concept? Maybe that’s why it’s not in mainstream economics?

It’s not a Marxist concept, it’s a common sense concept. But it is perhaps seen as something that doesn’t belong in the discipline. We do have a conceptual tool to think about exploitation — the whole literature on asymmetric information. But this is just a big term to describe something as simple as, “I know something that you don’t, and I wont tell you.” In effect, this is just lying, but we don’t call it lying.

So if economics does have a conceptual tool to study exploitation, where is the problem?

The problem is in how it is used. If you look at the literature on asymmetric information, it started focussing very quickly on the concerns of the privileged, primarily the employers, the lenders — what if the labourer does not do the work he is supposed to do, what if the borrower does not repay, and so on. The whole thing started being looked at not from the point of view of the exploited but from the point of view of the exploiter. So, by this process of selection of ideas, we end up losing sight of a lot of things that are extremely important, such as exploitation, cooperation, class, caste. That’s why economists can end up, despite all their skills and brilliance, as not very reliable advisers on matters of social policy.

Much more in the interview..

The first D-Mark notes were printed by US based Bureau of Engraving and Printing..

November 27, 2018

Interesting speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank. The speech is about US-Germany relations.

Your decision to invite me, a representative from the Bundesbank, to speak on this topic today is particularly fitting. That is because the Bundesbank has been nurturing major transatlantic relations from day one.

To be precise, the very creation of the Deutsche Bundesbank – or should I say, that of its predecessor, the Bank Deutscher Länder – is very much tied up with an American, and British, project: the currency reform in 1948.

The Allies deemed this reform necessary in order to combat the steady depreciation of the German currency. To put the project into practice, it was also necessary to create the right German institutions.

But the Americans’ support didn’t end there. Would you believe that the first Deutsche Mark banknotes were designed and printed in the United States?

Take a look at one of these original Deutsche Mark notes and you will quickly see the signature style of the responsible Bureau of Engraving and Printing and the similarity to US dollar notes. So the Bundesbank – and its predecessor, the Bank deutscher Länder – enjoy close and amicable relations with the Federal Reserve System that go back a long way.

For one thing, there is the quasi-institutionalised cooperation at the international level which came into being when the Deutsche Mark was pegged to the US dollar as part of the Bretton Woods monetary system.

Nowadays, the Federal Reserve and the Bundesbank meet at regular intervals to share their views, such as within the G 20 framework or at the Bank for International Settlements in Basel.

And for another thing, the Bundesbank has been a fixture at the New York financial centre since back in 1963, and it has had its own representative office there since 1986. You see, the United States and the New York financial centre were becoming increasingly important for the Bundesbank’s operations. We do, after all, hold a great deal of our reserve assets in US dollars.

Hmm..

 

Considerations for a cashless future in Sweden and Australia

November 26, 2018

Two speeches:

Riksbank is clearly headed the cashless way. Australia is also gradually moving towards less cash if not cashless.

Why did France lag England (and much much more)..

November 23, 2018

This is a fascinating interview of Prof John Nye. It is done by Tyler Cowen (who else).

Is John Nye the finest polymath in the George Mason economics department?

Raised in the Philippines and taught to be a well-rounded Catholic gentleman, John Nye learned the importance of a rigorous education from a young age. Indeed, according to Tyler he may very well be the best educated among his colleagues, having studied physics and literature as an undergraduate before earning a master’s and PhD in economics. And his education continues, as he’s now hard at work mastering his fourth language.

On this episode of Conversations with Tyler, Nye explains why it took longer for the French to urbanize than the British, the origins of the myth of free-trade Britain, why Vertigo is one of the greatest movies of all time, why John Stuart Mill is overrated, raising kids in a bilingual household, and much more.

He is quite a Polymath..

France vs England:

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Choosing the best monetary policy framework for Canada..

November 23, 2018

Canada is undergoing a review of its monetary policy framework:

In 2021, the Bank of Canada and the Government of Canada will renew their agreement on Canada’s inflation-control target. First signed in 1991, the agreement is renewed every five years and provides a vital touchpoint around which to frame the Bank’s broader ongoing research into issues related to monetary policy frameworks. 

Nice speech by Carolyn Wilkins, DG of Bank of Canada who reviews the various frameworks:

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Trust in financial services in Australia and last bank failure in Australia was in 1931…

November 21, 2018

I had written a  piece on how culture/ethics/trust is becoming one of the main talking points amidst central banks.

Philip Lowe, Governor Reserve Bank of Australia, joins in with this speech. Australia is going through its own sets of troubles with bankers found to be mis-selling financial products and services.

What I found more interesting was his mention of this bank failure in Australia:

Finance is all about trust. When a deposit is placed in a bank, we trust it will be repaid. We also trust financial institutions to invest our hard-earned savings for us. And we trust them to provide us with sound advice. Without this trust, the financial system cannot operate properly and the economy cannot prosper. As the first line of the Banking and Finance Oath says: ‘Trust is the foundation of my profession’.[1] I encourage everybody in the finance sector to read this oath regularly and to live by it.

Australia’s banks have a strong record of being worthy of the trust that is placed in them to repay deposits. The last bank failure in Australia that resulted in a loss to depositors was almost 90 years ago, back in 1931, and it was a very small bank and depositors lost only a small fraction of their deposits.

This is a positive record that few countries can match. This strength was apparent during the financial crisis a decade ago and has served Australia well. The Australian banks are strongly capitalised and have considerable liquidity buffers. On the whole, they have also managed credit risk effectively, reporting few problem loans by global standards. This means that we can have a high level of trust in the ability of Australia’s banks to repay depositors. Indeed, our strong and stable banking system is one of the Australian economy’s strengths.

It is in other areas, though, where trust has been strained. It is clear that the behaviours highlighted by the Royal Commission have dented the community’s trust in parts of our financial sector.

It is quite a record really.

This paper further explains:

Only three banks failed during the 1930s ñ two small trading banks (the Primary Producers Bank and the Federal Deposit Bank) and the Government
Savings Bank of NSW. The Government Savings Bank was brought down by political turbulence as much as the economic conditions. While the
Commonwealth Bank provided some limited support to two of these banks, it was later criticised for not taking a more active role, particularly since two of the banks were solvent when they suspended payment.

In 1930, the Primary Producers Bank of Australia accounted for less than 0.5 per cent of Australian banksí deposits. Most of its customers were farmers, and
as the prices of primary produce fell the bank suffered a steady drain on its resources. Over the 18 months prior to the bankís closure, it lost 40 per cent of its
deposits.

In April 1931, the bank sought the assistance of the Commonwealth Bank in anticipation of a run following the suspension of the Government Savings Bank.
The Commonwealth Bank provided an unsecured overdraft of £100 000 and a loan of £295 000 secured by government bonds, a fixed deposit at another bank
and the bankís premises. The Primary Producers Bank actively sought amalgamation with the other trading banks and overseas financial groups. While
the Commonwealth Bank considered arranging joint action with the trading banks to avoid closure of the Primary Producers Bank, the other banks decided against the proposal. In the wind-up of the bank depositors were not quite fully paid, losing just 1.25 per cent of the value of their deposits (Royal Commission into the Monetary and Banking Systems 1937).

Need to read more amd more about different banking systems across the world….

What are we learning about Artificial Intelligence in Financial Services?

November 16, 2018

Federal Reserve Governor Lael Brainard takes us through this interesting fascinating topic.

My focus today is the branch of artificial intelligence known as machine learning, which is the basis of many recent advances and commercial applications.2 Modern machine learning applies and refines, or “trains,” a series of algorithms on a large data set by optimizing iteratively as it learns in order to identify patterns and make predictions for new data.3Machine learning essentially imposes much less structure on how data is interpreted compared to conventional approaches in which programmers impose ex ante rule sets to make decisions.

The three key components of AI–algorithms, processing power, and big data–are all increasingly accessible. Due to an early commitment to open-source principles, AI algorithms from some of the largest companies are available to even nascent startups.4 As for processing power, continuing innovation by public cloud providers means that with only a laptop and a credit card, it is possible to tap into some of the world’s most powerful computing systems by paying only for usage time, without having to build out substantial hardware infrastructure. Vendors have made it easy to use these tools for even small businesses and non-technology firms, including in the financial sector. Public cloud companies provide access to pre-trained AI models via developer-friendly application programming interfaces or even “drop and drag” tools for creating sophisticated AI models.5 Most notably, the world is creating data to feed those models at an ever-increasing rate. Whereas in 2013 it was estimated that 90 percent of the world’s data had been created in the prior two years, by 2016, IBM estimated that 90 percent of global data had been created in the prior year alone.6

The pace and ubiquity of AI innovation have surprised even experts. The best AI result on a popular image recognition challenge improved from a 26 percent error rate to 3.5 percent in just four years. That is lower than the human error rate of 5 percent.7 In one study, a combination AI-human approach brought the error rate down even further–to 0.5 percent.

So it is no surprise that many financial services firms are devoting so much money, attention, and time to developing and using AI approaches. Broadly, there is particular interest in at least five capabilities.8 First, firms view AI approaches as potentially having superior ability for pattern recognition, such as identifying relationships among variables that are not intuitive or not revealed by more traditional modeling. Second, firms see potential cost efficiencies where AI approaches may be able to arrive at outcomes more cheaply with no reduction in performance. Third, AI approaches might have greater accuracy in processing because of their greater automation compared to approaches that have more human input and higher “operator error.” Fourth, firms may see better predictive power with AI compared to more traditional approaches–for instance, in improving investment performance or expanding credit access. Finally, AI approaches are better than conventional approaches at accommodating very large and less-structured data sets and processing those data more efficiently and effectively. Some machine learning approaches can be “let loose” on data sets to identify patterns or develop predictions without the need to specify a functional form ex ante.

What do those capabilities mean in terms of how we bank? The Financial Stability Board highlighted four areas where AI could impact banking.9 First, customer-facing uses could combine expanded consumer data sets with new algorithms to assess credit quality or price insurance policies. And chatbots could provide help and even financial advice to consumers, saving them the waiting time to speak with a live operator. Second, there is the potential for strengthening back-office operations, such as advanced models for capital optimization, model risk management, stress testing, and market impact analysis. Third, AI approaches could be applied to trading and investment strategies, from identifying new signals on price movements to using past trading behavior to anticipate a client’s next order. Finally, there are likely to be AI advancements in compliance and risk mitigation by banks. AI solutions are already being used by some firms in areas like fraud detection, capital optimization, and portfolio management.

Hmm…

One believes that sooner than later we will either have technologists in top management at central banks (even banks) or the top management will have to undergo rigorous tech training. This is no more science fiction but day light reality.

Why we should be interested in the history of currencies

November 15, 2018

Swiss National Bank issued a press release about Ernst Baltensperger’s history of the Swiss franc to appear in Italian. The book was written in 2012 and is available in German and French editions. Sigh! Will have to wait for English edition.

Anyways, further research took me to this wonderful speech by Ernst titled: Why we should be interested in the history of currencies.

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IMF building case for Central Bank Digital Currencies (and mentions hundis too!)

November 15, 2018

Christine Lagarde in this speech discusses discusses pros and cons of issuing a central bank digital currency.

But before discussing CBDC, it was really surprising to see IMF chief mentioning hundis:

Let me begin with the big issue on the table today—the changing nature of money. When commerce was local, centered around the town square, money in the form of tokens—metal coins—was sufficient. And it was efficient.

The exchange of coins from one hand to another settled transactions. So long as the coins were valid—determined by glancing, scratching, or even biting into them—it did not matter which hands held them. But as commerce moved to ships, like those that passed through Singapore, and covered increasingly greater distances, carrying coins became expensive, risky, and cumbersome.

Chinese paper money—introduced in the 9th century—helped, but not enough. Innovation produced bills of exchange—pieces of paper allowing merchants with a bank account in their home city to draw money from a bank at their destination.

The Arabs called these Sakks, the origin of our word “check” today. These checks, and the banks that went along with them, spread around the world, spearheaded by the Italian bankers and merchants of the Renaissance. Other examples are the Chinese Shansi and Indian Hundi bills.

Suddenly, it mattered whom you dealt with. Was this Persian merchant the rightful owner of that bill? Was the bill trustworthy? Was that Shanxi bank going to accept it? Trust became essential—and the state became the guarantor of that trust, by offering liquidity backstops, and supervision.

Why is this brief tour of history relevant? Because the fintech revolution questions the two forms of money we just discussed—coins and commercial bank deposits. And it questions the role of the state in providing money.

Hundis has long been forgotten by researchers in India barring those history folks. Nice to see Lagarde mentioning hundis along with Sakks and Shansi..

Now to CBDC:

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Policy dilemmas and the role of the central bank in advising government (Lessons for India?)

November 9, 2018

Karnit Flug, the outgoing Governor of Bank of Israel gave her farewell speech.

In Israel, the Governor plays an official role as an advisor to the government. This often leads to questions over independence:

A natural question that arises in this respect is why at the Central Bank? Should the economic advisor to the government be the Governor of the Central Bank?

This question was debated within the bank of Israel, among some of the people sitting here today. While we were discussing the new Bank of Israel Law, Stan was initially of the view that the role of an economic advisor to the government puts the bank in a constantly contentious position Vis a Vis the government and may undermine the banks’ independence in its core responsibility. I was the Director of the Research Department at that time, and argued in favor of maintaining the role of economic advisor in the law, which was eventually what was decided. Several years later, when I became Governor, I met Stan (in Basel, at a BIS meeting) following one of the heated debates I had with the government, and told him that now I understand and sympathize with his initial view against having the role of the economic advisor. Stan surprised me when he said that looking from the outside, he is even more convinced of the importance of this role of the Bank of Israel.

 This question was also posed to an independent evaluation committee which was invited to evaluate the BOI’s research department back in 2012. In their report, they said, and I quote: “We came to the Bank very skeptical of any central bank having the responsibility of being an advisor, much less the advisor, to the government on economic policy”. Following a thorough discussion with many relevant stakeholders within and outside the bank, they concluded: “Absent fundamental changes in other Israeli institutions, we agree that the Bank must continue to play the critical role of advisor to the government policy”

 Indeed, the argument against the CB’s role in economic policy advice because it enhances the friction between the Bank and the government and thus may undermine the Bank’s independence in its core responsibilities is not unique to the role of economic advisor.  In fact, this debate resembles the discussion regarding the question that is debated extensively among central bankers as to how wide should our responsibilities and mandates be defined. I have heard the argument that in some issues the decisions reflect political priorities as opposed to pure economic welfare maximization decisions, and therefore should be left to the politicians, or that they may undermine the central banks’ credibility or independence. These are valid arguments, and certainly, my tenure as governor has demonstrated that providing a well-grounded position on some sensitive or publically debated policy issues does raise the level of friction with the government.

 However, when we think about designing institutions, we should not think in the abstract, and we never start from scratch. We should take the starting point into account, and asses what is the likelihood that a change will get us closer to some “ideal institutional design” (if such exists). Given that this role has been defined in the original BOI law from 1954 as one of the main responsibilities of the BOI and its Governor, the basic infrastructure of knowledge and highly professional staff, and reputation has been built at the BOI to serve this responsibility. I also believe that the credibility of the central bank is enhanced, not damaged, by the quality research and policy recommendations it provides. In that regard, it may even contribute to the public support of an independent central bank. 

And as to friction between the central bank and the political system, during my term it was in fact most intense around issues related to the core activity of the Bank of Israel in supporting financial stability. The quest for enhancing competition in the provision of financial services, which we all share, led to heated debate as to the scope, the speed and the specifics of the financial sector reform. It centered around our insistence on ensuring that the reform does not undermine financial stability that was sometimes taken for granted by our partners in the design of the reform. In the past, the friction was most intense regarding the disinflation process, and Jacob Frankel who sits here, can certainty testify to that.

So, we’ve had frictions in the past and will probably have them in the future, and we should be able to withstand them. We should provide a quiet, behind closed doors policy advice in some cases, and contribute to a better-informed public debate on key policy questions. I believe that within the current political context, where policies tend, more than in the past, to focus more on short term benefits and ignore longer term risks and costs, it is essential that an independent well regarded institution provides solid policy analysis and advice, and helps explain this to the public.  So, I believe that retaining the economic advisory role by the Central Bank in the 2010 BOI law has served the country well.

Official or non-official, central bankers are advisers to the government. Frictions between central banks and government should be celebrated as it gives different viewpoints. But these frictions are best held behind closed doors as Governor Flug says.

This is how it used to be in India/RBI as well. Reading volumes of RBI History, one goes through several of these frictions. Pity and tragic that these frictions are coming out in open and bit too regularly at that…


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