Archive for the ‘Speech / Interviews’ Category

The possible trinity of financial inclusion and the five kinds of financial illiterates..

July 23, 2015

SS Mundra of RBI speaks on financial inclusion and has some interesting insights.

He says unlike the impossible trinity of macroeconomics, here there is a possible trinity of inclusion:

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Building real markets for the good of the people..

June 11, 2015

How times have changed. Earlier any mention of markets automatically meant it is real and good for the people. Not anymore.

Mark Carney of BoE (while releasing the Bank’s Fair and Effective Markets Review Releases Final Report) says we need to build such markets:

 Almost 350 years ago, the Great Fire destroyed the City of London and rendered 100,000 people homeless. It took half a century to rebuild. The legacy of the Great Fire endures, including such Wren masterpieces as St Paul’s and his twenty-five other steeples that survive today within the City’s precincts. But the Fire’s legacy is not limited to how the City looks, it extends to what the City does. 
 
The blaze led Nicholas Barbon to establish the first insurance company, an innovation to fulfil a social need: the sharing of risk. Public authorities complemented private initiative.   
There was a Royal Proclamation that set standards for wider roads and houses built from brick and stone instead of timber. And Parliament passed the Parish Pump Act to prevent “mischiefs that may happen by fire” by establishing fire brigades and improving water supply. So that spark in Pudding Lane ignited much more besides the Great Fire itself:
  • the provision of liquidity to limit contagion;
  • a recognition that clear, well-understood codes contribute to the greater good; and
  • a belief that financial markets can solve real world problems.  

From the coffee houses that served as meeting places for entrepreneurs and merchants; to the exchanges that supported the trading of financial claims; to a central bank that acted as lender of last resort: a rich infrastructure developed to support markets that served the UK and the world.  As it grew into the world’s leading economic and trading power, the UK also became its centre of financial capitalism.

 By the early 20th century, though no longer the world’s largest economy, the UK was still its hub of international finance.  It held close to a half of the world’s stock of overseas investments and traded one third of all negotiable instruments. 
The City has retained its pre-eminence through market innovation.  From eurobonds to emerging market debt, credit derivatives and centralised clearing; the City has continually created new financial products and markets to serve the real economy. Today the City remains the leading global financial centre.  The UK is the venue for 40% of foreign exchange trading volume, half of all trades in OTC interest rate derivatives, and more than two-thirds of trading in international bonds.  More international banking activity is booked in London than anywhere else, and the UK is host to the world’s third largest insurance sector as well as its second largest asset management industry. UK markets matter for global commerce.  But above all, our markets matter for our prosperity.
How this crisis changed things:
Though markets can be powerful drivers of prosperity, markets can go wrong. Left unattended, they are prone to instability, excess and abuse. Markets without the right standards or infrastructure are like cities without building codes, fire brigades or insurance. Poor infrastructure allowed the spark of the US subprime crisis to light a powder keg under UK markets, triggering the worst recession in our lifetimes.  
Poor ‘soft’ infrastructure such as codes of conduct that too few read and too many ignored.\ Faulty ‘hard’ infrastructure like interest rate and foreign exchange benchmarks that were quite literally fixed; and Weak banks whose light capital and heavy reliance on short-term funding created a tinder box.
Central banks shared in these failings, operating a system of fire insurance whose ambiguity was anything but constructive when global markets were engulfed in flames. The Bank of England’s general approach was consistent with the attitude of FICC markets, which historically relied heavily on informal codes and understandings.  That informality was well suited to an earlier age.  But as markets innovated and grew, it proved wanting. 
Most troubling have been the numerous incidents of misconduct that exploited such informality, undercutting public trust and threatening systemic stability.  This has had direct economic consequences.  Mistrust between market participants has raised borrowing costs and reduced credit availability.  Falling confidence in market resilience has meant companies have held back productive investments.  And uncertainty has meant people have hesitated to move job or home.  These effects are not trivial, and they have reduced the dynamism of our economy in the post-crisis years.Widespread mistrust has also had deeper, indirect costs.  Markets are not ends in themselves, but powerful means for prosperity and security for all.  As such they need to retain the consent of society – a social licence – to be allowed to operate, innovate and grow.  Repeated episodes of misconduct have called that social licence into question. 
We have all been let down by these developments.  And we all share responsibility for fixing them.

It is really surprising to see such reflections. For all you know, BoE and London were seen as the benchmarks for anything in finance.

What are real markets?

I believe everyone in this room would agree: we need real markets for sustainable prosperity. Not markets that collapse when there is a shock from abroad.  Not markets where transactions occur in chat rooms.  Not markets where no one appears accountable for anything.
Real markets are professional and open, not informal and clubby.  Participants in real markets compete on merit rather than collude online. Real markets are resilient, fair and effective.  They maintain their social licence. Real markets don’t just happen; they depend on the quality of market infrastructure.
Robust market infrastructure is a public good, one in constant danger of under-provision because the best markets innovate continually.  This inherent risk can only be managed if all market actors, public and private, recognise their responsibilities for the system as a whole. The City has a special responsibility given London’s pre-eminent position in global markets, which is why it has already brought so many ideas and such energy to advance financial reform.
He then goes onto the various reforms underway to make financial markets real markets. It is ironical to see markets being shaped by govts and central banks of all players.
The key is humility and not let hubris set in. For years we have been told that we have arrived at a perfect real market framework which will continue to deliver prosperity to people. And then it was upto others to inch towards this kind of policy setting. And now we know how much of these ideas were not just plain wrong.

What have we learned from the crises of the last 20 years?

June 2, 2015

Stan Fisher sums up the lessons he has learnt over the years.

He misses the most important lesson – know the financial history and know it really well. Infact history is not even a word in the speech. Infact, if one follows history then you are unlikely to hype certain phases of economic and stock market growth as a new dawn or something. And then as the crisis enfolds, you know what you have to do. After all, there is nothing unique about having a crisis. History keeps you humble and grounded.

Another thing is how despite likes of Prof. Fisher wanting to be seen as market promoting economists, actually just talk about  government and central bank interventions. These evry interventions end up sowing the seeds of the next crisis.

Swiss monetary policy facts… and fiction

May 22, 2015

Trying times for SNB. Jean-Pierre Danthine of the central bank defends its policies.

In one if the myths it says central bank does not have unlimited powers as it is imagined:

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How IDFC is transitioning to a bank and what to expect?

May 22, 2015

Personally, I think IDFC was made into a bank a wee bit too early. Given how China and even India is pushing new development financial institutions to fund infra, we might have to soon look at domestic front too. We actually might need a few more IDFCs in future.  Anyways, nothing can be done now. In finance, we have to go in circles and keep pulling out old wine in new bottle.

In this interview, IDFC chief Rajiv Lall explains how the transition is happening. Interestingly, the bank starts big from MP of all places:

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History of India’s forex market..

May 5, 2015

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

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

 

Who would mortgage their children?…Developed countries of all people?

April 14, 2015

Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority has this interesting speech on the topic.

He begins quoting from 1942 movie:

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Central Banks and the King Midas touch…

February 25, 2015

One big lesson from the recent crisis should have been to ignore whatever econs and their inspired central banks have been telling us for some years now. Their role should have been marginalised. But the dependence on them and their wisdom has only risen.

We were told by celebrated econs that how central banks could have avoided great depression only if they eased their policy for an extended period of time. This became a wisdom of sorts and accepted at a wide scale. We could have only known the utility if this wisdom if there was another such crisis and had to wait for nearly eighty years for such an event to occur. And as the event struck, the ideas were implemented in frenzy. This was to ensure if Lords of Finance part II is written, it has just the opposite results. Alas we now know the limitations of this frenziness. It is all over the place.

In this spirit, it is interesting to read this speech by Kirsten Forbes of BoE. She invokes the lessons from King of Midas and how central banks behaved like one:

When the legendary King Midas initially received the power to turn everything he touched into gold, he deemed it highly successful; the benefits of being able to create immense wealth with simply the touch of his finger far outweighed any costs. During the financial crisis, many central banks used less glamorous tools to create base money – sharp reductions in interest rates and quantitative easing. These measures played a critically important role in helping economies stabilize and recover.

King Midas soon realized, however, that this power of wealth creation came with unexpected side effects – from making his food inedible to turning his daughter into a lifeless statue. As these costs accumulated, King Midas eventually wished to give up his “golden touch” and return to normality. Similarly, is the current UK policy of near-zero interest rates beginning to generate substantial costs? Is there a point where any costs accumulate such that they outweigh the benefits? Could near-zero interest rates become less “golden”?

And then we have a similar kind of story. What were cited as the benefits of low rates have become limitations as well.

But the Ms. Forbes story is incomplete. It is actually the case that central bankers behave like King Midas most of the time. They wash their hands but then quickly forget the lessons and become the king again. Whether rates are low or high, they try and behave like King Midas. The whole idea is to show that there is some magic to their actions and things will indeed turn into gold. They have a huge audience in the name of market players and media which keeps wishing for the magic. The monetary policies have become a huge magic show of kinds in the process.

In reality central banks are like those tailors which designed clothes for the king with economy being the king.  Only to realise the king had no clothes really. If the illusion works, they are called as magicians and all kinds of awards are honored.  As reality sicks in, the yesteryear heroes are discarded and new ones created. The game of illusion goes on.

As academicians, they keep warning us over the monetary illusion but there is a huge demand for being an illusionist. The aura and power of being the king is too tempting for anyone to ignore.

So the game shall continue…

1st hundred years of the Bank of Finland..

February 18, 2015

Mr Seppo Honkapohja of Bank of Finland has a nice speech on the history bit.

It is the 4th oldest central bank in the World:

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The Austrian School: The History, The Principles, and How It Got Its Name

February 16, 2015

This is as good as it gets. A really useful audio interview of Mark Thornton on the school which remains ignored in economic teaching.

Right at the beginning Dr. Thornton points how the school teachings were missed in all his economic courses. Then there is a great discussion on how Fischer remains relevant to policymakers but not Mises. He calls central banks as legal counterfeiters of currency which is an interesting oxymoron of sorts.

In this informative interview, Mark Thornton details how Carl Menger started the Austrian school of economics, and the possible Greek and Roman philosophical roots the school observes. Dr. Thornton and host Frank Conway also discuss the important limitations to Austrian economic thinking, how von Mises’ papers got in the hands of Nazi Germany and then the Soviets, and the different economic perspectives and predictions of Ludwig von Mises and Irving Fischer.

India is the world’s largest psephocracy… only secondarily the world’s largest democracy.

February 16, 2015

Nice interview of Ashis Nandy. Pretty straight forward and front foot batting.

He reflects on recent AAP victory and future for BJP:

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Transformative Rise of Austrian Economics…

February 9, 2015

Superb interview of Prof Peter Boettke of GMU.

One major loss of the economic teaching is this school is hardly taught. At best someone is going to mention it randomly or some book will have a box briefing about the school. It is a pity that with economists talking so much about free markets , do not give much space to the school which is freest of them all.

But then as Prof Boettke says, the school is finding a resurgence in popularity given massive failures of the current economic thinking. I mean it is not about figuring who is right and who is wrong. Students have to first know what the ideas of various schools are before they can decide the right and wrong.

What is FSLRC all about?

February 3, 2015

Ajay Shah links to this speech by Justice Srikrishna, the chair of FSLRC report.

A pretty straight forward speech. He starts with the proposed changes in FSLRC which range from consumer protection to macro management.

In the end he says:

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How macroeconomics has changed since the crisis…(getting more behavioral)

December 31, 2014
Wouter den Haan of London School of Economics sums up the changes in “the discipline”. The best bit is it is an interview which one can actually just hear rather than read the piece:

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Building family businesses in Arab world..

December 16, 2014

Nice interview of Sulaiman Abdulkadir Al-Muhaidib, chairman of Saudi conglomerate Al Muhaidib. Gives you glimpse of the strong tradition of family business in Saudi.

First some bit about the group. It is an investment company:

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How the Banking Union has transformed banks’ IT requirements..

December 10, 2014

This is an unusual speech but seeing how banking is shaping up could be the most usual thing to talk about. In things like banking union, one would usually see things like banks’ capital requirements, quality of assets and so on.

Dr Joachim Nagel, of the Bundesbank talks on IT requirements of banks post the banking union:

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Improving the security and cost-effectiveness of banknotes…

December 8, 2014

Management of currency notes is  one of the least focused tasks of monetary management. The origin of central banks largely came from this activity. There were many banks which issued their own notes convertible into some commodity (mainly gold). Some of these banks over-issued these notes, leading to problems of liability management. The governments then decided to have one bank issue notes which eventually came to be known as central bank. Then gradually, these banks were given additional tasks. Earlier, the banks had both deposits and currency as liabilities. But with central banks coming in picture, the currency became liabilityty of the central bank and deposits of banks.

Mr François Groepe of the South African Reserve Bank has comments  on this currency management business:

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Will Hong Kong become irrelevant as Mainland China opens up?

December 8, 2014

Nice speech by Mr, Norman Chan of HKMA.

He says there is no reason why HK should decline as mainland China opens up. Both have their own strengths. He shows through statistics how things between the two regions have only improved overtime.

By leveraging on each other’s strengths bot can gain:

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Bank of Finland’s 200 years..

November 18, 2014

Seppo Honkapohja of Bank of Finland has this interesting speech covering history of the central bank. It was established in 1811 making it the 4th oldest central bank.

The journey from being a central bank established by Russians to becoming a EMU member is all captured:

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Evolution of money…from playing cards to e-currency

November 18, 2014

Superb speech from Carolyn Wilkins of Bank of Canada.

In particular she points to this picture placed in one of BoC  halls which shows evolution of money.

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