Financial Stability News

News about financial stability, central banking and theory of money

Category Archives: Capital movements

Swiss Government issues debt at negative interest rates

Investors are paying the Swizz to take care of their monies in these uncertain times. Read this post from Zero Hedge to get the rest of the story.


Making finance servant, not master of the economy

This heading seems like a good companion post to the previous one on hedge funds speculation against the euro countries. It is the title of a presentation by Ann Pettifor at a conference on Just Banking (for program, see here). She gives a good overview of the problems in Europe and then draw extensively on Keynes in her proposal for a radical alternative to the current austerity approach:

Keynes’s six tools for recovery:

First, independent monetary policy: liquidity created by both public and private financial institutions should be directed towards sound public and private investment in productive, job creation activity. Any attempt to divert liquidity/credit into speculation had to be curtailed.

Second, fiscal policy: Keynes understood that it was not enough simply to create liquidity. That money had to be spent, and spent wisely. Today economists and politicians like David Cameron (“.. a fiscal conservative and a monetary activist”) rely simply on monetary policy to inject liquidity into zombie banks. This helps the banks, but does precious little to direct lending to firms and to stimulate recovery.

Third, managing debt de-leveraging: Keynes understood that the vast bubble of debt had to be de-leveraged in a managed way. Some debts inevitably have to be written off, with debtors granted a jubilee – as Steve Keen argues – simply because a high proportion of private debts are ultimately unpayable.

Fourth: regulation of credit creation. To ensure that credit created by the private banking system was aimed at the real economy, and not speculation, Keynes advocated wise regulation of the credit creation powers of private banks (‘tight money’). In other words loans had to be carefully assessed for their ability to generate income to finance repayment; and for their ability to generate sound employment and economic activity.

Fifth: permanently low interest rates. This was one of the central pillars of the Keynesian revolution. It was also the one that invited the greatest hostility from private bankers – whose profits and capital gains depend on exacting high rents from the effortless activity of creating new loans, and from speculative activities.

Six: capital controls are important for a number of reasons. One of the most important reasons for control over the mobility of capital is that management of financial flows gives democracies the freedom and autonomy to conduct their economic policies in the interests of society and the economy as a whole. In the absence of capital control, democracies are subject to the whims and interests of unaccountable global financial elites.

ECB collateral policy anno 2005: One size fits all!

Willem Buiter (LSE, now at Citigroup) was a fierce critic of ECB’s collateral policy back in the mid-2000. He claimed that the collateral policy did not differentiate between the underlying credit risk, and therefore papered over the convergence problems in the periphery countries. See his 2005 paper with Anne Sibert (Birbeck) on “How the Eurosystem’s Treatment of Collateral in its Open Market Operations Weakens Fiscal Discipline in the Eurozone

ECB Chief Economist Ottmar Issing responded in a speech the same year, and stated that:

Let me take the occasion to briefly comment on an idea that seems to gain more and more support. It has been recently argued that the ECB should use its collateral policy as a sanction to exert fiscal discipline on those euro area member states that breach the 3 % limit. One possibility would be for the ECB to impose haircuts on the bonds issued by those governments that fail to comply with the Pact, thereby making those bonds less attractive for counterparties to hold and use as collateral in the ECB’s regular operations.

Although superficially appealing, this suggestion would be misguided. First of all, such a measure would exceed the mandate of ECB’s collateral policy, which is to manage risk in monetary policy operations. Assigning additional roles to collateral policy would deflect it from its primary and crucial purpose.

Second, such a proposal ignores the differentiation already applied by the ECB in valuing collateral. All financial assets offered as collateral, including government bonds, are valued daily at market prices. In its collateral policy, the ECB therefore relies on the judgement of the market to distinguish among government bonds and, implicitly, the fiscal behaviour of member states. Moreover, the ECB sets credit standards for the eligibility of assets as collateral and is bound by the Treaty not to distinguish between government and private issuers in the implementation of these standards.

It is interesting to read his response today, with all the ongoing problems in the sovereign debt markets still unresolved. Buiter’s argument was that the ECB collateral policy was circular, as the market valuation reflected the ECB position that everybody was equal. Thus, the market for sovereign bond converged towards the common low denominator of the German Bunds, enabling periphery countries to borrow at low cost and delay the required real convergence. But that is all history now.

IMF paper supports capital controls

Interesting post in the FT today with reference to new IMF paper that gives academic rationale for the increasing use of capital controls in emerging markets. Far from being “beggar thy neighbor” policies, they find that the negative externalities of the huge inflow of capital from developed countries justifies the restrictions on capital inflows. There is also a reference at the end of the post to the classic paper by Bhagwati that show that capital liberalization is not the same as trade liberalization. If you don’t read the IMF WP, at least read his short paper.