Financial Stability News

News about financial stability and central banking

Monthly Archives: September 2011

Ron Suskind confused about equity and debt

You may have read (about) Ron Suskin’s new book  Confidence Men on Wall Street, the financial crisis and the making of a president. I thought the book was a good read. Interesting background on the making of the Volcker rule and gossip on Summers departure. I have to admit beginning in the middle, to get fast to my interesting sections. Obviously I will have to go back an read the rest, as this post is accusing Suskind of getting his economics wrong:

The fundamental problem is that Suskind is stunningly ignorant of basic macroeconomics, financial markets, the financial crisis, and financial regulations — basically, all the subjects you’d need to understand in order to write a competent book about the Obama administration’s economic team.

If you read the post, where some of the most glaring mistakes are quoted, e.g. about equity and debt in the discussion about rescuing Citigroup, you can judge for yourself. Still, though, I thought the part I read was interesting and will go back and read the rest.

Bank of Canada Governor Carney clashes with JP Morgan chief Dimond

The story of their “clash” at at closed meeting at the IIF the other day is old. Now Mark Carney’s speech is published, and it is well worth reading. He counter three objections to Basel 3 from global banks: Uneven implementation across countries, leakages to the shadow banking sector, and negative impact on growth. He rebuts all three. Discussion about shadow banking is interesting, as he sketch four different ways the FSB might approach the problem.

BBC trader became an instant YouTube hit

With more that 1 million hits in one day, the BBC trader became an instant hit yesterday. However, it appears that the guy is more of an attention grabber than a real trader. He is trading on his own, so not entirely a hoax. But as an independent trader, he can speak freely. And his views could well be representative of many traders.

Zero Hedge carries a story today with quotes from the head of trading at Uni Credit (so he should be representative) that in effect goes further than Rastani, i.e. the euro is dead and Apocalypse is just around the corner. READ!

Vickers Commission Response: Ring-fencing doesn’t solve the “too-big-to-fail” problem | the new economics foundation

Vickers Commission Response: Ring-fencing doesn’t solve the “too-big-to-fail” problem | the new economics foundation.

NEF (UK think tank) don’t think the IBC report goes far enough. They favor a full split of banking, i.e. narrow banking and an end on fractional reserve banking. For more on their views form an associated academic, you can read their submission to the Vicker’s commision.

Watch this amazing trader on BBC

This post on Naked Capitalism on Monday is just amazing – and quite scary. The guy is essentially saying that the politicians are powerless to fix the crisis, that the economy is run by Goldman Sachs and the pension funds and that we all should run and save our assets (in case we have any!). And remember, it is people like him that are supposed to take care of our pension funds. Is this efficient markets and optimal allocation? I guess not.

Lucas on taxes in Europe

WSJ had an interview with Nobel price winner Robert Lucas last weekend. There he suggested that the economic problems in Europe was due to the high (marginal) taxes, especially affecting the women labor participation rate negatively. He referred to research by Ed Prescott to substantiate this claim. There has been many reactions, among them this post in EView. It show that the evidence is actually the other way around, i.e. that the participation rates are highest in those countries with high marginal rates. So much for ideology and empirical work in economics!

 

Krugman on Lucas and DSGE

Krugman summarizes thirty year of history of economics in today’s blog. Funny thing is RBC was considered dead in the 1980s, but then  reemerged with a vengeance in the 2000s to dominate universities and central banks. According to the theory, shocks were external in nature (technology and/or preference shocks) and unemployment voluntary. But as Krugman observes: … the idea that the unemployed during a recession are voluntarily choosing to take time off is something only a professor could believe. But the math was impressive, and RBC became a self-contained, self-replicating intellectual world.

Question is how will the DSGE paradigm react to the current crisis and the obvious lack of effective demand (i.e. traditional Keynesian problem)? The recent Brooking’s report “Rethinking Central Banking” gives some clues (see my earlier blog). As they noted, the prevailing paradigm needs to be replace by something else – but what?

Avinash Persaud defends Basel III

He has long been a vocal critic of the Basel process where the banking sector captured regulators and got regulation by internal models (i.e. by themselves). Today, however, Persaud turns around and defends Basel III as the best we can get now.
Interesting observation at the end, that we need more risk transfer, i.e. insurance companies and pension funds should absorb more long term risk, but solvency II moving them in other direction. See also IMF GSFR, chapter 2 for more on this issue.

Do mutual funds make crises worse? |

Raddatz and Schukler from the World Bank find that mutual funds are procylical and bond funds spread contagion across borders. They conclude that

The findings have important policy implications. Some proposals suggest a shift from banks to a mutual-fund model to avoid runs and contagion effects.

  • This shift will not necessarily solve the problem that banks entail, since our results show that runs and contagion are possible even in equity funds.

So much for splitting banks into narrow banks and investment banks / mutual funds. Perhaps not so easy to have mutual funds (and pensions funds) finance all long term investment.

As noted by the latest IMF report GFSR, chapter 2, insurance companies and pensions funds are going short due to the crisis and Solvency II. So where to draw the line. May be vicker’s isn’t so bad after all?

BIS WP by Borio on the Savings Glut

This blog carries an interesting story on Borio and Disyatat’s recent WP where they criticize the prevailing view that the savings glut (and low interest rates) caused the financial crisis. You can find the WP on the BIS web site. At least read the annex, which is very good!