Financial Stability News

News about financial stability, central banking and theory of money

Monthly Archives: August 2012

The impact of persistent negative interest rates

This post gives a good review of the issues and consequences of pesistent Negative Interest Rate Policy (NIRP)

The NIRP acronym is misleading, however, because unlike ZIRP, NIRP isn’t actually an official “policy” per se, but rather a symptom of a broken financial system increasingly starved for good ‘collateral’.

This phenomena, thought by many to be of short duration, is now having its impact on investors, especially insurance companies and pension funds.

The impact is felt only gradually, but will get worse if NIRP continues. Together with the crisis in the real economy, this dosn’t look good.

The neglected part of international financial reform: Liquidity regulation | vox

This Vox post by Stefan Schmitz from the central bank of Austria, is quite interesting. He describes the current back-peddaling on the liquidity regulation by key policy makers and argue strongly that the regulation should be implemented as planned.

If this collides with a shortage of safe assets, banks should reduce their short-term net cash outflows (p. 6)

This mismatch between the need for safe assets and the growing size of the financial (trading) sector is something I dealt with in my Levy WP 712: Shadow banking and the limits of central bank liquidity support.

It will indeed be interesting to see how the this regulatory fight will be influenced by the ongoing crisis.

Central bankers should admit their mistakes

Intersting summer interview with top brass Andy Haldane in Bank of England. He reflect on the state of economics and the need for financial reform.

He makes the case for fundamental uncertainty (as adwocated by Keynes and Hayek) and notes that this insight somehow got lost from economics and finance for the better part of 20 or 30 years! Quote:

I think one of the great errors we as economists made in pursuing that was that we started believing the assumptions of economics, and saying things that made no intellectual sense. The hope was that, by basing models on mathematics and particular assumptions about ‘optimising’ behaviour, they would become immune to changes in policy. But we forgot the key part, which is that the models are only true if the assumptions that underpin those models are also true. And we started to believe that what were assumptions were actually a description of reality, and therefore that the models were a description of reality, and therefore were dependable for policy analysis. With hindsight, that was a pretty significant error.

As for financial regulation, he thinks we may have to go even further in rethinking finance and banking before the crisis is over.

Quite an interesting read from a key central banker today.