Archive for the ‘Speech / Interviews’ Category

Iceland’s crisis, its successful stabilization program, and the role of the IMF

September 19, 2018

Nice lecture (must read) by Poul M. Thomsen of IMF summing the aftermath of the Iceland crisis.

The lecture is titled as: Ragnarök: Iceland’s Crisis, its Successful Stabilization Program, and the Role of the IMF.  In Norse mythology, Ragnarök is a series of future events, including a great battle, foretold to ultimately result in the death of a number of major figures, the occurrence of various natural disasters, and the subsequent submersion of the world in water.

Upfront, some humility is needed:

To me, it seems entirely appropriate that I should mark the tenth anniversary of Lehman’s collapse with you here in Iceland, in a country that was one of the first in the path of the financial tsunami that followed.

I will not get into why Iceland had become so vulnerable—why the banking system had been allowed to explode in size relative to the Icelandic economy during a very short period, relying on a funding model of aggressive foreign borrowing. Much has already been said about this, and it is clear that there is ample blame to go around—in Iceland and abroad.

Indeed, if I was to get into this, I would have to admit that we at the IMF also have to be humble. Among several things that we in retrospect might want to have done differently, we had for a while moved Iceland from the standard 12‑month cycle for our surveillance missions to a 24‑month cycle, reflecting a benign view on vulnerabilities. The same was the case for Cyprus, another small country that would soon be engulfed in a deep crisis.

Instead, he focuses on the policies to ease the crisis:



Exploring the agora and learning some economic history from Greeks…

September 11, 2018

Nothing better than seeing a German visiting Greece and reviewing latter’s economy. Also drawing econ history lessons from Greece which have obviously been forgotten.

Jens Weidmann of Bundesbank does both these tasks in this speech. He first mentions Agora:

Greece is often said to be the cradle of Western civilisation, and rightly so. One could say that the Greeks invented the way we think. Or, in the words of the English poet Percy Shelley: “We are all Greeks. Our laws, our literature, our religion, our arts have their root in Greece.”1 The lasting impact becomes obvious when one considers the many words of Greek origin in our modern-day languages: words like “policy”, “democracy”, “economy”, but also “idea”, “theory” and “dialogue”.

Austrian thinker Karl Popper observed once – and I quote: “The war of ideas is a Greek invention. It is one of the most important inventions ever made. Indeed, the possibility of fighting with words and ideas instead of fighting with swords is the very basis of our civilization, and especially of all its legal and parliamentary institutions.”2

How could this kind of discourse have been invented? A key step may have been that ancient Greeks created a public meeting place in the very heart of the city-state: the “agora”. Here, citizens exchanged views, discussed politics and celebrated cultural events. The best-known example of an ancient agora is situated not far from here.

Just a few years ago, Joachim Gauck, then Federal President of Germany, said in a speech that Europe would need an agora in order to develop a common European civic spirit.3 So this idea of a forum for public discourse is still with us today. And, indeed, a culture of open debate and a lively democracy are hallmarks of present-day Greece.

Yet the ancient agora not only allowed an exchange of views, but, more tangibly, also defined the marketplace of a city (as it still does in modern Greece). Here, merchants and craftsmen sold their products. In this respect, it set an essential foundation for prosperity.

The link between the economic and political spheres also provides the blueprint for my speech this evening. In particular, I am looking forward to sharing some thoughts on the Greek economy and my view on European integration with this distinguished audience.


He then reviews Greek situation which despite some progress has a long way to go. He brings agora back in discussion:

As a matter of fact, European policymakers learned from past mistakes and did things better. However, the achievements seen so far are not enough. There is consensus among experts that additional reforms are needed to further reduce the euro area’s vulnerability to crises. Yet it is not clear which path to choose going forward. For some time now, an intensive debate has been taking place on the future structure of the monetary union. A number of concepts and proposals are on the table. They differ over the weight they each accord to risk sharing and joint liability on the one hand, and to individual responsibility, a rules-based regime and the avoidance of false incentives on the other.

Either way, however, it is crucial for the stability of monetary union that the liability principle is complied with. In a nutshell, it stipulates that whoever decides on an action must also bear the consequences of that decision – by reaping the benefits or suffering any disadvantage or loss. It would be neither fair nor sustainable if decisions could be made at the expense of others. Wrong incentives would be created.

For example, insurance can encourage the policyholder to take on more risks. This is the essence of moral hazard. And again, the ancient Greeks provide us with an illustrative example since they may have been the first to come up with a commercial insurance scheme.

Back then, unpredictable weather conditions and piracy rendered maritime trade a highly dangerous venture. But the ingenious Greeks invented rather complex contracts for a loan which could be used for equipping or repairing a ship and which would not have to be repaid if the ship was lost on its journey. If the ship made a successful return, the creditor received its principal plus massive interest on top, reflecting the risks involved and the insurance premium. However, if the loan exceeded the value of the ship, there was an incentive for the ship-owner to simply keep the loan and make off with it.

Thanks to a speech ascribed to the Athenian orator Demosthenes, we know of a certain Hegestratos.6 He is said to have planned to sink his own ship during the journey – with all passengers and cargo on board. Unfortunately for him, he was caught in the act, jumped overboard and was not seen again. Nevertheless, the incident, which may have been the first case of insurance scam in history, led to a complicated legal dispute between an alleged co-conspirator and a creditor.

Fast-forward more than 2,300 years, the Maastricht framework was based on a clear understanding of the liability principle. Member states would remain autonomous in terms of their economic and fiscal policies. The flip-side then was the “no bail-out” clause. Both actions and liability were located at the national level and, thus, aligned.

Today, many Europeans call for greater risk sharing. If such a joint liability were established, corresponding sovereignty rights would need to be transferred to the European level, too. Otherwise, the set-up could contribute to a possible resurgence of unsound developments. However, my impression is that the willingness to cede sovereignty rights to Brussels is rather limited in most of the euro area member states. For the time being, therefore, reforms must fit within the existing Maastricht framework.

But that does not wholly rule out elements of joint liability. I concede, for example, that a common deposit insurance could contribute to a more stable financial system, as it would reduce the risk of bank runs.

However, the balance between actions and liability requires that risks that arose under national responsibility cannot be mutualised. They would have to be reduced before the scheme is established. If not, a common deposit insurance would lead to a redistribution of inherited risks.

Hmmm.. Nice way to link history with current developments.

State Government Market Borrowings in India – Issues and Prospects

September 3, 2018

Nice speech by Mr BP Kanungo of RBI.

He reviews the market borrowings in India by State Governments.


Monetary policy as a study of nocturnal activity

August 29, 2018

Jerome Powell gave this recent speech at Jackson Hole Symposium.

In conventional models of the economy, major economic quantities such as inflation, unemployment, and the growth rate of gross domestic product (GDP) fluctuate around values that are considered “normal,” or “natural,” or “desired.” The FOMC has chosen a 2 percent inflation objective as one of these desired values. The other values are not directly observed, nor can they be chosen by anyone. Instead, these values result from myriad interactions throughout the economy. In the FOMC’s quarterly Summary of Economic Projections (SEP), participants state their individual views on the longer-run normal values for the growth rate of GDP, the unemployment rate, and the federal funds rate.

These fundamental structural features of the economy are also known by more familiar names such as the “natural rate of unemployment” and “potential output growth.” The longer-run federal funds rate minus long-run inflation is the “neutral real interest rate.” At the Fed and elsewhere, analysts talk about these values so often that they have acquired shorthand names. For example, u* (pronounced “u star”) is the natural rate of unemployment, r* (“r star”) is the neutral real rate of interest, and Π* (“pi star”) is the inflation objective. According to the conventional thinking, policymakers should navigate by these stars. In that sense, they are very much akin to celestial stars.

For example, the famous Taylor rule calls for setting the federal funds rate based on where inflation and unemployment stand in relation to the stars. If inflation is higher than Π*, raise the real federal funds rate relative to r*. The higher real interest rate will, through various channels, tend to moderate spending by businesses and households, which will reduce upward pressure on prices and wages as the economy cools off. In contrast, if the unemployment rate is above u*, lower the real federal funds rate relative to r*, which will stimulate spending and raise employment.

Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly.

Hmm.. Nice way to show what mon policy does..:-)

He points how policy in previous years has erred in estimating the positions of these stars:

Around 1965, the United States entered a period of high and volatile inflation that ended with inflation in double digits in the early 1980s. Multiple factors, including monetary policy errors, contributed to the Great Inflation. Many researchers have concluded that a key mistake was that monetary policymakers placed too much emphasis on imprecise–and, as it turns out, overly optimistic–real-time estimates of the natural rate of unemployment.6

Figure 3 compares the CBO’s current view of the natural rate of unemployment in that era with an estimate by Athanasios Orphanides and John Williams of the rate as policymakers perceived it in real time. From 1965 to the early 1980s, this real-time estimate of u* was well below where hindsight now places it. The unemployment rate over this period was generally well above the real-time natural rate, and contemporary documents reveal that policymakers were wary of pushing the unemployment rate even further above u* (figure 4, top panel).7 With the benefit of hindsight, we now think that, except for a few years in the mid-1970s, the labor market was tight and contributing to inflation’s rise (figure 4, lower panel).

It is now clear that the FOMC had placed too much emphasis on its imprecise estimates of u* and too little emphasis on evidence of rising inflation expectations. The Great Inflation did, however, prompt an “expectations revolution” in macroeconomic thinking, with one overwhelmingly important lesson for monetary policymakers: Anchoring longer-term inflation expectations is a vital precondition for reaching all other monetary policy goals.8

Hmm… In 1990s they avoided similar mistake:

The second half of the 1990s confronted policymakers with a situation that was in some ways the flipside of that in the Great Inflation. In mid-1996, the unemployment rate was below the natural rate as perceived in real time, and many FOMC participants and others were forecasting growth above the economy’s potential. Sentiment was building on the FOMC to raise the federal funds rate to head off the risk of rising inflation.9 But Chairman Greenspan had a hunch that the United States was experiencing the wonders of a “new economy” in which improved productivity growth would allow faster output growth and lower unemployment, without serious inflation risks. Greenspan argued that the FOMC should hold off on rate increases.

Over the next two years, thanks to his considerable fortitude, Greenspan prevailed, and the FOMC raised the federal funds rate only once from mid-1996 through late 1998.10 Starting in 1996, the economy boomed and the unemployment rate fell, but, contrary to conventional wisdom at the time, inflation fell.11

Once again, shifting stars help explain the performance of inflation, which many had seen as a puzzle. Whereas during the Great Inflation period the real-time natural rate of unemployment had been well below our current-day assessment, in the new-economy period, this relation was reversed (figure 3). The labor market looked to be tight and getting tighter in real time, but in retrospect, we estimate that there was slack in the labor market in 1996 and early 1997, and the labor market only tightened appreciably through 1998 (figure 4). Greenspan was also right that the potential growth rate had shifted up. With hindsight, we recognize today that higher potential growth could accommodate the very strong growth that actually materialized, let alone the moderate growth policymakers were forecasting.12

The FOMC thus avoided the Great-Inflation-era mistake of overemphasizing imprecise estimates of the stars. Under Chairman Greenspan’s leadership, the Committee converged on a risk-management strategy that can be distilled into a simple request: Let’s wait one more meeting; if there are clearer signs of inflation, we will commence tightening.13 Meeting after meeting, the Committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined.

This wait and watch approach is also called the Brainard principle as Powell tells us later in the speech.

Here is Anantha Nageshwaran calling the speech as Hole in Jackson Hole, where he says Powell is basically contradicting himself.



How governments bank with their central bank: Case of Australia

August 24, 2018

One of the least known aspect of central bank operations is how the governments bank with them. After all central bank is banker to the government and plays a crucial role in government policies. But both the government and central banks are usually silent about these operations.

This is a rare speech from Lindsay Boulton Assistant Governor of Reserve Bank of Australia. He gives us some insights into how Australian government banks with their central bank.

There are two banking services RBA provides to the government:


The difficulty of being a monetary/banking policymaker in Europe: Balancing European and nationalistic interests

August 16, 2018

Ms Sabine Lautenschläger of ECB in this interview speaks about the state of banking developments and regulation in Euroarea. The interview talks about other things such as lack of women representation in central banking, stronger state of US banks and so on.

But what was most interesting is the way she balances her answers. The interviewer asks her a country specific question but she just replies for the Euroarea as a whole:


What will the financial world look like in 2028?

August 14, 2018

Ravi Menon, Managing Director of the Monetary Authority of Singapore, engages in this so scenario planning for financial sector in 2028.

The speech is titled:  Financial regulation – 20 years after the Global Financial Crisis. Mr. Menon says in these 20 years we have also seen another crisis in 2023 which he terms as  Global Cyber Crisis of 2023!

Mr Mark Gould, Acting President, Federal Reserve Bank of San Francisco, Ladies and gentlemen, friends and colleagues, good morning. And welcome to the Symposium on Asian Banking and Finance 2028. 

It was 13 years ago, in 2015, that the Federal Reserve Bank of San Francisco and the Monetary Authority of Singapore (MAS) began this collaborative journey of organising this Symposium.

  • Let me, on behalf of MAS, thank Mark and his colleagues at the San Francisco Fed for the fruitful partnership and warm relationship over the years.

This Symposium began in 2007 to consider the lessons learned from the 1997 Asian Financial Crisis.

  • Since then, we have lived through two other major crises – the Global Financial Crisis of 2008 and the Global Cyber Crisis of 2023.

Today, I would like to take stock of the evolution of financial regulation over the last 20 years, since the Global Financial Crisis.  I think three broad themes characterise this journey:

  • first, fixing the fault lines that led to the Global Financial Crisis;
  • second, managing the risks posed by FinTech while harnessing its benefits;
  • third, defending against systemic cyber risk.

He looks at several ongoing and futuristic themes. One actually feels it is more a speech on technology than finance

For instance on DLTs:


The evolution of Reserve Bank of India as a full-service national institution

August 6, 2018

I just figured Dr YV Reddy has put up a website which has all his major speeches as a policymaker and post his policymaker avatar.

One such speech looks at evolution of RBI as what Dr Reddy calls as a full-service national institution. This is even bigger than the oft cited term for RBI as a full-service central bank and its evolution being different from the other central banks in the world. By calling it a national institution, Dr Reddy looks at the several development activities RBI has undertaken (both willingly and by force) in its history.

In conclusion, the RBI has been serving the nation since Independence to the best of its capacities and acquired a reputation for high integrity and professional competence. Over a period, it has won the trust of people at large and the financial system, particularly the banking system. However, the extent to which and the way it could serve the nation has been dictated by the demands from the government and evolving economic compulsions.

In doing so, it wore different caps, custodian of the trust of people in money and finance; the protector of integrity of banking system, the policy instrument for development and adviser to State Governments also.

It was sometimes an agent, often an adviser, and to the extent feasible, an operationally independent central bank.

Over a period of 70 years, RBI has earned the respect of people at large, domestically, and admiration of many, globally, as a full service national financial institution.

The speech was given at State Bank of Pakistan and it would have been great if the former Governor of RBI even discussed the RBI events during partition. But perhaps given the sensitivity of the matter, he avoided it. Even then some anecdotes etc could have been included by looking at the brighter aspects of RBI functioning during the Partition.

Another thing is the speech is hardly critical of any development within RBI. The evolution is discussed mostly in the positive light and no missteps are discussed in its nearly 85 year journey. Dr Reddy has such wide experience and has been a student of world monetary affairs for a very long time. By touching on certain matters which offers scope for improvement and introspection, one could be made to think over future of RBI and central banking in general.

Nevertheless, a good overview…

Milton Friedman interview on methodology, popular writing vs academic writing, his influences and many more things…

August 3, 2018

We just had Prof Milton Friedman’s 106th birthday on 31 July.

I came across this interesting interview of the late Prof which has some interesting discussion on his approach on doing economics.


The history and future of Quantitative Easing…

July 26, 2018

Ben Broadbent of Bank of England reviews the experiences of QE policy. He remembers Friedman and Shwartz’s work on US monetary history:

In 2002, the University of Chicago held a 90th birthday party for the great American economist Milton Friedman. One important guest was Anna Schwartz, who four decades earlier had co-written with Friedman the landmark book A Monetary History of the United States.

It’s possible that, even among those of you prepared to give up a pleasant July evening to come to a talk by a central bank official, an 800-page tome entitled “A monetary history of [anywhere]” won’t have found its way to the very top of your holiday reading list.

But it’s actually a gripping read, especially the chapter about the Great Depression. It also has a claim as the most influential piece of economic history ever written. The book pioneered a new “narrative” approach to identifying independent changes in monetary policy – the idea being that, to separate these from the more automatic (“endogenous”) reactions of policymakers to the economy you needed to scour the historic record and understand how their decisions were actually taken.

It changed economists’ perceptions of the role of monetary forces, including monetary policy, in economic fluctuations. For example, it helped to establish the view that the effects of monetary policy on real variables – real national income or its distribution, for example – are in the long run negligibly small. You cannot permanently enrich a country, or raise real wages, simply by easing monetary policy and engineering some inflation.

Equally, the book argued that policy can have very powerful effects at shorter, cyclical horizons. In particular, it claimed that the Great Depression could have been averted had the US Federal Reserve not over-tightened policy in the late 1920s and if had it acted more precipitously to loosen it once the downturn
began. The appropriate measures would have included an earlier abandonment of the gold standard. They would also have involved “large-scale open-market purchases”, designed to contain the rise in private-sector bond yields and supply reserves to the banking system. We have a new name for this – we now call it
“Quantitative Easing” – but the policy itself is not new.

He says QE is not printing money and has had impacted on the lines of Friedman/Schwartz:

QE has often been described as a “new-fangled” policy, something that involves “printing money” and has served only to engineer large rises in the prices of financial and other assets, benefiting only the better off. 

Broadly speaking I don’t think any of these things is true. It’s not new; it’s not exactly printing money; equity and house prices are in real terms still comfortably below their pre-crisis levels; inequality hasn’t risen – nor, according to the most detailed analysis available, did easier monetary policy have any net impact on it.

To be sure, asset prices would probably have fallen further had QE and other measures not been put in place in 2009. The same goes for the economy itself. As far as we can tell, asset purchases provided significant support to aggregate demand, even if it wasn’t enough to offset fully the extended contractionary
effects of the crisis. Perhaps Friedman and Schwartz over-emphasised the failures of the US Fed as a cause of the Great Depression. But I don’t think anyone can reasonably argue it was worth risking those same mistakes a second time.

Later rounds of QE may have been less effective than the first. In the US, where the Fed has begun to shrink its balance sheet, its “QT” announcements appear to have had very little impact. At least in part, that’s likely to be by design. The pace of unwind is very gradual. And the FOMC emphasised that, to the
extent a shrinking balance sheet tightened monetary conditions the official interest rate would be commensurately lower (than it would otherwise have been). The overall stance of policy would be set to ensure the central bank meets its objectives.

The same is true here. Our task remains to hit the inflation target and we will always seek to ensure that the combined effects of the APF and of more conventional changes in Bank Rate are set to that end. 

The debates on QE being a success or failure will interest econs for a long time…

The UK’s productivity problem: hub no spokes

July 16, 2018

Andy Haldane yet again. How he has made a habit of giving such amazing speeches which are so detailed and yet so simple. One could add  the phrase Haldanesque for any such future central banker speeches.

In his recent speech (40 pages), Andy talks about how UK has a productivity problem (there were talks of giving Bank of England a productivity target). Its productivity has stagnated over the years, The break-up statistics show that the largest firms continue to do well but it is mainly the smaller ones which have not withstood the test of times. Thus we see a kind of inequality in productivity distribution as well, where haves thrive and have nots barely survive. He further argues that real problem is that ideas seem to spread slowly across the economy. Thus there is hub but no spoke:

The UK faces perhaps no greater challenge, economically and socially, than its productivity challenge. Meeting that challenge would deliver benefits to workers in improved wages and skills and to companies in greater efficiency and profitability. It would also contribute to closing inequalities of income, wealth and
opportunity which have rightly and increasingly pre-occupied policymakers over recent years.

The UK has a rich, in some respects world-leading, endowment of innovation and talent. This is, however, unevenly spread. Developing an institutional infrastructure, which draws on the UK’s comparative advantage in innovation but which spreads its benefits more widely, would support the long tail of UK companies and the people who work for them. It would help close the pay and productivity gaps between the best and the  rest, the present and the past, the in-crowd and the out. It would put the rhyme back into R&D. The returns to doing so are difficult to quantify precisely. As a thought-experiment, imagine the bottom three quartiles of the UK productivity distribution saw their productivity gap with the quartile above closed. That would boost UK levels of productivity by around 13%.

This would close a large part of the productivity shortfall relative to its pre-crisis trend. And it would make inroads into closing the productivity gap with the
US and Germany. In today’s prices, it would boost the level of UK GDP by around £270 billion. In closing those gaps, a useful intermediate objective would be to create in the UK a leading-edge diffusion infrastructure, to rival and complement its leading-edge innovation infrastructure. This boost our world (and, with luck, our World Cup) rankings. Inclusive innovation could serve as a conduit to inclusive growth. The UK’s innovation hub would get the spokes it needs to reach every sector, every region, every worker. It would be an industrial strategy for everyone.

The speech was given in end of June, so obviously no World Cup is coming home..:-)

Overall, another Haldanesque speech…

KYC’s new full-form: Know Your Culture

July 13, 2018

Interesting speech by Jay Clayton, SEC’s Chairperson. Apart from central bankers, even securities market regulators are worried over slipping culture in financial services industry.

Clayton says looking at culture is no more optional but a must.


Comparing financial integration in Britain and France (also 4 ways types of financial history)

July 11, 2018

I just came across this lecture series organised by State Bank of Pakistan (celebrating its 70 years) in the memory of Zahid Husain, the first Governor of the bank. Quite interesting set of speakers since 1975.

The sixth lecture was given by Prof Charles Kindleberger and needless to say it a is a superb read. Prof Kindleberger discusses how financial integration differed in Britain (where finance picked up) compared to France (where it remained limited to Paris).

He points to this interesting work by Charles Jones who said there are 4 ways to write financial history:

  • Orthodox: The problem through time is to curb the tendency to overissue banknotes or overlend.  So, you will ahve authorities rising from time to time to curb this tendency. This leads to rise of a central authority such as a central bank who monpolises banknotes and regulates the credit system.
  • Heroic: Starting a particular innovation or institution which leads to manifold rise in financial activity. Like the industrial banks in India or mortgage markets and so on.
  • Populist: Opposite of orthodox where there is opposition to this centralisation and support for financial activity outside the major centre. This is especially true in case of US where there was support for so called wildcat banking despite its flaws.
  • Statist: This holds that banks were created to serve the needs of the State/Government. Jones mentioned that central banks in Canada, Australia and Argentina fit in this category.

Prof Kindleberger adds that these histories do not remain static and one keeps moving from one form to another. For instance central banks in both England and France started for Statist reasons but then diverged. Bank of England became more orthodox as it tried to curb adventurous financial activity outside of London. Whereas in Paris, there were elements of both Orthodoxy and Populism.

Just fascinating way to categorise research on financial history. Even the whole discussion on financial history of Britain and France is worth a read..



Making Paris an international financial centre via innovations…

July 9, 2018

This blog has pointed multiple times how Paris is making bids to become an  international financial centre post Brexit (one, two, three).

In this speech, Banque de France Governor, François Villeroy de Galhau, highlights how they are using an innovation approach:

Why is the Banque de France involved in financial innovation? Because we are at the crossroads of a European choice and a national ambition. The European choice is that of a federal Eurosystem, with a single monetary policy that is naturally decided centrally but whose implementation is decentralised at the level of each national central bank. The national ambition is to be the central bank for markets within the Eurosystem. For the Banque de France, this is a tradition recognised over the 20 years of the euro, backed by its high-quality teams, and is the first of our Ambitions 2020 strategic plan commitments. This is a win-win situation: for the Eurosystem – which will benefit from many of these innovations – but also for the French economy and the Paris financial centre.


He highlights five recent innovations done by the Banque  from developing a single market for collateral to blockchain technologies.

It’s when markets are running hot that flags need raising

June 29, 2018

Agustin Cartens in this speech:

At first glance, the skies above financial markets look sunny, notably for credit markets. Term and credit spreads as well as volatility are very low by historical standards, while valuation and asset prices are high. But, as we argue in our just-released BIS Annual Economic Report, clouds are gathering on the horizon.

Indeed, showers have already dampened spirits in some emerging markets. And worse could come if a further rise in the US dollar tightened financial conditions around the world: after all, post-crisis, companies in emerging economies and elsewhere have been all too eager to tap markets, while investors have been all too eager to oblige them.

Will the stresses remain isolated? Or should we be worried about a more intense and widespread build-up of pressure? 

Central banks still find it hard to forecast financial markets, just as meteorologists are not always successful in predicting the weather. At the BIS, we have come to appreciate how unrewarding it can be to flag risks when markets are running hot. Yet that is precisely when risks tend to be highest.

Indeed, our analysis indicates that the risks ahead are material. A decade of unusually low interest rates and large-scale central bank asset purchases may have left many market participants unprepared, and have contributed to a legacy of overblown balance sheets. Financial conditions are easier than before the financial crisis, when many investors, households, corporations and sovereigns were caught out in the rain with no umbrella. And there is no denying that the room for manoeuvre in terms of monetary and fiscal policies is narrower today than at that time.


Building Europe as a digital financial centre?

June 29, 2018

One one hand Europe is seen going down the drain. On the other hand, there are hopefuls. Denmark central bank chief said Europe is not doing as badly as it may sound.

Prof. Joachim Wuermeling of Bundesbank has been arguing that Brexit provides Europe an opportunity: to create a digital financial centre. in In a new speech he again makes these points.  

Ladies and gentlemen, as much as we greatly regret the United Kingdom’s decision to leave the EU, we must nonetheless look forward and consider how financial services can be delivered in the European Union in the future.

First, we need to observe the consequences of Brexit from the perspective of each individual bank. Banks have so far avoided making any major changes, not least because they are also busy coping with large-scale acute challenges and their financial implications. So it is easy to lose sight of strategic issues. It’s not just Brexit that’s shifting the tectonic plates under banking – digitalisation and regulation are two other key drivers of change. When traditional structures and markets are broken up this way, the cake will be redivided – some will lose out, but some will get a bigger slice. There is a real danger that adhering at all costs to traditional positions in London risks missing out on new opportunities in the EU – though not by everybody: those who don’t will be the winners. So I would urge you not to lose sight of medium and long-term strategic options.

Second, we also have to consider the repercussions of Brexit in terms of its impact on the EU financial market as a whole. What we are looking at here is nothing less than the financing of the European economy, especially at a time when the global economic and financial order is becoming increasingly shaky. Earlier EU initiatives – the single financial market, the banking union, and the capital markets union – all had an inward focus. And with London, Europe had an international financial centre. This will now change. Hence the question of whether we in the EU 27 should aspire to developing a globally competitive financial centre that is more than the sum of its parts here in Frankfurt, Paris, Amsterdam or Dublin. François Villeroy de Galhau, the governor of the Banque de France, recently spoke of an integrated network with centres specialised in various activities – and I am thinking along the same lines, which include major efforts to harness digital potential as well.

I would like to help kick off a broad, forward-looking debate surrounding the concept of a digital financial centre of Europe.

Hmm..It is quite amazing how Europe continues to compete to have a financial centre on lines of London. This is as historical as it can get.

There are three pillars to this digi financial centre:

It’s an idea based on three pillars.

First, a networking pillar. Today, Europe’s financial services potential is spread over various locations. It does not have a cumulative effect. However, for a fully-fledged financial ecosystem to truly flourish, there needs to be enough providers and users of financial services in the local market. At present, no European financial centre can tick this box. The continental venues could, however, tap into an aggregate potential if they were to form a network in which any financial product can be bought and sold in any quantity at any time, just as you would expect from a globally competitive financial centre.

The second pillar is digitalisation. Financial centres in continental Europe need robust digital market infrastructure that leverages all the state-of-the-art digital capabilities – of which distributed ledger technology (DLT) is but one. Only then can these centres overcome fragmentation and replicate agglomeration effects of physical proximity. The Eurosystem will also be expected to contribute here, seeing as it already provides a key piece of infrastructure for payments in the shape of the TARGET system.

These first two pillars create a digital network across European financial centres. But to make the most of Europe’s potential as a “financial Amazon”, market-driven specialisation will also be needed as a third pillar. Specialisation can help deliver economies of scale, increase the potential for innovation, and achieve excellence. In an environment of “coopetition” – a neologism merging the words cooperation and competition, European financial centres could cooperate, compete and, at the same time, hone their own areas of expertise. But this is a vision for the future.

It’s a picture of the future that is also very much in our own inherent interest as a central bank, because the more that financial flows end up where our system is in force, the more we are able to promote financial and price stability as well as a strong currency.


21st century cash: Central banking, technological innovation and digital currencies

June 12, 2018

Of all the stuff one has read on digital currencies, this speech by Fabio Panetta is one of the best. As the Deputy Governor of the Bank of Italy, he provides a lot of clarity on the several issues regarding digital currencies.

First he discusses what digital currency mean in terms of the two functions of money: means of payment and store of value. He says the unit of account does not mean much here as a dollar in Physical notes or a dollar in digital form mean the same thing.

  • Means of Payment: He says central bank digital currency will be beneficial for people without a bank account. In terms of payments CBDC will at best just provide competition to already existing private payment systems. It will also reduce cost of cash but then costs of computing will rise.
  • Store of Value: Currently there are costs to storing physical money which will disappear with CBDC. However, there could be issues as CBDC could compete with  bank deposits leading to so called runs on banks as mentioned by other central banks. Thugh, he does not see this as a problem as banks provide much wider services and people will not easily transfer their deposits.

One needs to balance the risk and benefits:

The risks and benefits of CBDCs are two sides of the same (digital) coin, related to the role of money as a means of payment and a store of value. Recourse to a CBDC as a means of payment may well have benefits, but their precise nature is uncertain and they may still be too small to justify the introduction of a
digital currency. Moreover, the issuance of a CBDC may become less positive on balance if we take into account the potential effects on the demand for commercial bank deposits. The risks and benefits would be  affected by the characteristics of the CBDC, but in any event the risks would not disappear altogether.

The business case for introducing CBDCs remains at best unclear. However, like all issues related to technological innovation, the costs, benefits and risks of digital currencies are likely to change rapidly in the future. This suggests that central banks should continue to examine the potential effects of digital
currencies. Indeed, many of them are currently engaged in research and technical experimentation with a CBDC. The Riksbank, Bank of England, and Bank of Canada, to name a few, are actively analyzing the issue. Some have gone even further, such as the Central Bank of Uruguay, which has launched a pilot
project.14 At Banca d’Italia, we are also studying how a CBDC would impact our financial system and monetary policy, and we are working within the Eurosystem on trials using DLT, which might prove useful for a digital currency. Researchers are also actively reflecting on CBDCs. Today’s conference is a notable example.

Then he discusses some open issues like anonymity aspect of currencies:

Probably the most important issue is whether the digital currency should be traceable or whether it should be designed to guarantee, to the extent possible, anonymity. Cash has always been an incredible instrument: it allows for third-party anonymity in transactions and leaves no trace. While this implies that it is an effective means of payment for illicit activities such as money laundering, the financing of terrorism or tax evasion, it also ensures privacy for its users.

The possibility of tracing our digital transactions may have important economic and ethical implications. Imagine for a moment that payments data suggested that spending on alcohol and the probability of defaulting on a loan are positively correlated. Based on such evidence, a bank might decide to reject a loan demand by an applicant with high expenditure on alcohol, even though the correlation does not reflect any ex-ante causal relationship between these two variables but could be simply due, for example, to an ex-post common psychological factor.16 Though it may be over simplified, this example emphasizes that we need to address carefully the privacy issues that may stem from digitization, and in particular from the introduction of a CBDC. Today these risks are still
limited, as in most countries retail transactions are concluded mainly with cash, and the record of our electronic payments represents an imprecise screening device. This is changing rapidly, however.

Just who should decide on the degree of anonymity associated with the use of a CBDC? Clearly, this is more than just a technical issue, and as such, the choice does not belong to central banks alone but also to the political sphere. We need to think carefully, right now, about how to make the introduction of a CBDC fully compatible with the rights of individuals and about how to square the increasing availability of information on the private lives of each one of us in relation to our political views, state of health, or sexual orientation, with the protection of our personal freedom and with the rules that govern the functioning of a modern liberal democracy.

Hmm. This is an important public policy question.

Lots more in the speech.

Europe: An economic powerhouse in the future?

June 11, 2018

Amidst all the gloom and doom in Europe, there are some optimists as well.

In this speech, Denmark Central Bank Governor Lars Rhode, shares his more positive  outlook:

Today, I would like to highlight four observations:

First, Europe is better than its reputation. Economic performance keeps abreast with other advanced economies. The rumours of its demise are simply exaggerated.

Second, all major advanced economies will have to adjust to lower potential growth. It’s a fact, as headwind from slowing productivity growth and ageing
kicks in. Europe is no exception. 

Third, free global competition is the main driver of innovation. Europe suffers from an R&D gap relative to global hotspots. But innovation
is not a zero-sum game: Prosperous neighbours do not make Europeans worse off. In fact, productive rivalry stimulates new ideas.

Finally, Europe needs a fully developed Single Market for financial services. The Single Market has been an engine of growth for decades but is still
incomplete. The Banking Union is an important step towards allowing consumers and businesses to reap the benefits from cross-border competition. It will also
be the case for Denmark – if we join. 

He says there are three Europes:


How to think like an economist?

June 5, 2018

Nice interview of Bill Dudley, outgoing President of NY Fed:

He speaks on what it means to think like an econ and how econs differ in Wall Street and Policy:


Q: Lawyers sometimes refer to ‘thinking like a lawyer.’ How would you describe what it means to ‘think like an economist?’
The classic joke is that economists are ‘on the one hand…on the other hand.’ Lawyers are advocates for a given point of view and prosecute under a well-defined set of rules of law. I think of lawyers as advocates and economists as almost like a justice balance—where they’re trying to weigh the evidence very carefully to see where the preponderance of the evidence lies.

So economists may be a little bit more open-minded to the facts—not to say that lawyers aren’t, but a lawyer’s job is to do something, to advocate a position, to protect a positon. So they’re starting with a very strong
a priori view. I think economists start with a priori views, in the form of a hypothesis, but if the evidence is inconsistent then they start to change the theory and hypothesis, as opposed to arguing that the evidence is obviously not applicable.

Q: You were an economist on Wall Street before joining the Fed. What differences have you noticed between Wall Street economists and the research-oriented economists here on Liberty Street?
A big difference is that Wall Street economists cover a broad range of topics. When I was at Goldman Sachs we had four people covering the U.S. economy—they covered pretty much the gamut of all the policy issues that might have some economic content. Wall Street economists try to synthesize an abundance of information into material that’s useful for the person who’s trying to figure out the world that we live in. A research economist is trying to push the frontier of knowledge outward, so that’s a very different goal.

At the New York Fed, research economists play a hybrid role. They’re doing research that’s trying to push out that knowledge frontier. But they’re also taking all of their knowledge and analytical ability and applying it to real-world policy problems. In my mind, a good research department in a Federal Reserve Bank consists of people who are top-notch in terms of their academic qualifications and ability, and who are interested in real-world policy problems—which creates a tremendous value for the Bank.

He also discusses about how culture matters so much in finance.


The extraordinary ways weather has changed human history

May 31, 2018

Fascinating interview of Andrew Revkin who has written this book on history of weather. I mean how little we know of fundamental things such as weather which pretty much shape everything around us.

I think that most of us feel like we’re pretty much in control most of the time. But one thing we can’t control is the weather. How much has weather determined the course of human history?

On every level, climate change on long time scales has really powerfully shaped human history; it’s in the section in the book on the exodus from Africa. People at Columbia and other universities looked at things like seabed records in the Red Sea or near North Africa and found that there’s sort of a wobbling weather pattern over time. The Sahara Desert, as National Geographic has written about many times, was sometimes grassland and green. There are stone carvings there, people and paintings of people swimming in lakes in the Sahara.

Weather shapes our communities and our responses to the environment in different ways. The Dust Bowl was a long and extraordinary drought, with human landscape changes exacerbating the conditions to create the dust. And that had a pretty transformational impact that reverberated for a long time.

Talk about the role of weather in the outcome of conflict. Can you explain that?

Weather has influenced wars throughout history. For the book, we chose a World War II example: Russia and winter. Winter was always Russia’s biggest ally. Anyone who tried to invade Russia near winter, if they didn’t get the job done quickly, they were going to be in deep trouble.

When the Spanish Armada tried to attack England, it was stray changes in the winds that favored England and contributed to the defeat of the Spaniards. There are more examples throughout history.

There are some really strange ways that weather has messed with us through the ages; most bizarre to me in the book was the hail story. Apparently, hail can commit mass murder.

There is this one mysterious case high in the Himalayas where someone looked into a lake and found a horrific scene of slaughtered people preserved there. The presumption was that it was warfare. But then a crew of scientists from National Geographic took a closer look at the forensic analysis. All the wounds were from the top down, from some large kind of object, and the presumption was that it was hail. There was nothing around to indicate it was a weapon. You think about hurricanes and flooding, but hail causes some of the biggest financial losses every year, very consistently, in the United States.

Should try get a copy of the book.

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