News about financial stability, central banking and theory of money
Former PIMCO economist Mc Culley has issued a new WP with former IMF economist Poszar called Does Central Bank Independence Frustrate
the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap? Well worth reading! (50 pages)
Martin Wolf devoted a long blog post to the paper in April, and the issue is sure to be high on the policy agenda as the discussion of economic policy in Europe continues.
Randall Wray has an interesting reflection on Wolfs post here, and you can read here for a very opposite view form Bundesbank chief Weidmann.
One thing is sure, as Ron Paul noted, central bank management and policy will surely be hot topics ahead.
You can watch a Bloomberg interview with Mc Culley here
Recent post from Krugman in NYT recommends the Norwegian band Katzenjammer as the right music “to cheer me up after a cold, very rainy day”. Great band and great PR!
Just a small news on the pipeline for those interested in the environmental degradation of the US mainland.
The recent Journal of Central Banking includes various papers from a 2011 Boston Fed Conference in honor of Ben Friedman. His closing remarks are well worth reading, as he delivers some rather critical comments to the profession. The first is the obsession with “money” when the crisis clearly showed that inside credit mattered most:
In retrospect, the economics profession’s focus on money—meaning
various subsets of instruments on the liability side of the banking
system’s balance sheet in contrast to bank assets, and correspondingly
the deposit assets on the public’s balance sheet in contrast
to the liabilities that the public issues—turns out to have been a
half-century-long diversion that did not serve our profession well.
But, accepting that credit matters, led him to question the key assumption of the representative agent:
If all agents were identical, there would of course be no reason for
any one of them to borrow from, or lend to, another. Hence turning
our focus toward credit, at the substantive level, also bears immediate
methodological implications. The resulting analysis needs to be
more subtle and, regrettably, more complicated than if what mattered
were simply money.
He concludes with some “big think” and notes that
I believe the time has now arrived for the
economics profession to examine how well our financial system is
doing its job and at what cost. I mentioned earlier that we need
some replacement for the full-rationality assumption as a disciplining
methodology for macroeconomic research, but that devising that
replacement will be difficult. I think there is a further reason, in addition
to the difficulty, behind economists’ reluctance to pursue this
path: fear that dropping the full-rationality assumption may turn
out to be subversive of the role of markets, and in particular the
financial markets, in our economy.
As he notes at the very end, there is plenty to do!
You may want to destroy the weekend by this short post on growth of ECB’s balance sheet. Quite informative, and as noted before, it is happening while the ECB is publicly talking about restraint. Happy weekend.
Governor Tarullo gave this statement in Congress on Thursday. He confirmed impressions from meetings with Fed, Treasury and FDIC in December, that the administration is really not interested in this proposal and therefore want a “soft” implementation. They will not draw a bright line that define “proprietary trading”, but rather initiate a data monitoring system to see what is going on before taking a strong stance. Read: Most current transaction will be allowed until further notice.He notes that regulating on trading intent is hard, but surely there are other ways to limit the extent of speculative trading?
In the meantime, the Government in the UK has supported all the proposals from the Independent Commission on Banking, including “ringfencing” of the big banks retail operations.It remains to be seen if they will have any more luck in delimiting “prohibited activities”.
As noted in a post last week, Philipp Hildebrand of the Swiss National Bank has been under strong pressure to quit since it was revealed that his wife had been engaged in foreign exchange speculation prior to the decision to fix the Euro – Swiss franc rate last fall. Today, he resigned, citing that he could not prove 100 % that the accusations of insider trading was wrong. He noted that it was important for him to have confidence as central bank president, and that confidence had been shaken. He also noted that he had fought hard to keep the job, but concluded that his position had become untenable.
The question is now what will happen with the EUR-CHF floor; SocGen are speculating that it may go too. The inflation rate is already negative (deflation) and manufacturing declining due in part to the strong franc. We will just have to wait and see.
The book Debt: The First 5,000 Years by David Graeber is essential reading if you want to understand what is happening now and how to get out of the mess.Gillian Tett in FT reviewed the book back in September (to her credit, she was ahead of many) and now it is quoted daily. And recently her colleague, Martin Sandbu (yes, a Norwegian) picked up the line in his well written piece just before Xmas. Graeber, who is an anthropologist, reviews the history of debt and suggest that the need for a Jubilee is imminent.
For a short version that essentially says the same as Graeber, read this article by Michael Hudson in Frankfurter Algemeine Zeitung.
Steve Keen from Australia has also proposed a new debt Jubilee in his recent post on the Debtwatch Maifesto (see also my earlier post on his BBC interview).
He suggests that the the choice now is either one and a half decade of self imposed austerity (i.e. repeating the mistakes of the 1930s) or some form of Jubiliee that can speed up the debt de-leveraging process. His suggestion is a form of Quantitative Easing Policy where we all receive the money (rather than the banks) and those of us with debt are required to pay of that debt before anything else. Those without debt will be free to spend the money. In this way we can get the wheels running again, reduce the debt/GDP ratio and start growing. Otherwise, we are doomed to a slowgrowth-highdebt scenario.
This is the show everybody has been waited for all week. The previous democratic senator, governor, and CEO of Goldman Sachs is appearing before the Agricultural Committee to respond to question related to the 8th largest bankruptcy in US history, of Global MS. Corzine’s written testimony is posted here.
For more coverage, see: Rolling Stone Magazine New York Times Deal maker Reuter
Bloomberg reports that the TBTF issues again is being addressed in the Senate. Senator Brown (D-Ohio) has earlier tried to limit the size of mega banks in the Dodd-Frank legislation, but failed then. Today there will be a hearing in the Senate Senate Subcommittee on Financial Institutions and Consumer Protection to again address the issue. Among the witnesses will be Sheila Bair, former head of the FDIC and an outspoken critic of the large banks.
Also on the hill, yesterday there were hearings on the implementation of the Dodd-Frank bill. Chairman Johnsen noted that he in particular looked forward to progress report on the rule making for the Volcker rule. Not surprisingly, the financial industry, and the Fed and the US Treasury, think the proposal is not such a good idea. The web-cast from the hearings, including Fed governor Turello is posted here.
Financial Stability News 