That’s what David Keohane asks in yesterday’s FT Alphaville based on recent Citi and Goldman research notes.
“In some ways, it is startling that the BoJ, while admitting that inflation rates have weakened (even though still forecast to reach the target in 2019), left the policy rate unchanged and picked the new 10-year yield target around current levels. Today’s decision therefore does not imply any further easing.”
The BOJ’s unexpected new approach is probably a stopgap solution to three prickly problems;
- They’ve become way too dominant in the JGB market.
- The flattening of the yield curve and negative short rates are playing hell with bank profitability, and that of the financial system more generally.
- What they’ve been doing isn’t working.
Even assuming steepening the yield curve might do some good and is practically possible, the attempt will bring a new bunch of problems in its wake. Continue reading ““Has the BoJ signalled the end of QE as we know it?””
Doubts about post-crisis monetary policy are finding their way into the mainstream with increasing regularity. What tipped the balance? Two main things, I think.
First, it’s getting tough to argue that it’s working. After eight long years central banks are still mollycoddling their fragile economies and overall indebtedness keeps on growing. Second, faced with this puzzle, rather than re-examine their premises central banks have tended to double down with policies like NIRP, extending QE to corporate bonds and equities as well as canvassing even more radical moves like banning cash and cranking up the helicopters.
None of it’s a good look. Happily, scrutiny of these various idiocies is becoming ever more common.
Central banks and their intellectual handmaidens have owned this conversation for a long time. The weakness of their underlying rationale went mostly unexamined because of the deeply embedded belief that they had a handle on things. Until very recently, the internal contradictions and lack of an endgame never seemed to be considered, except by a heterodox fringe.
So what are these internal contradictions? Continue reading “It ain’t getting easier for central bankers . . .”
In the years following the financial crisis many have wondered (with varying degrees of incredulity) why no senior banking executives were criminally prosecuted.
Instead, as John Cassidy writes in the New Yorker, there’s been a succession of monster settlements between financial institutions and the US Justice Dept.
“We seem to have stumbled into a new form of corporate regulation,” I noted at the time of the JPMorgan settlement [November 2013], “in which nobody in the executive suite is held personally accountable for wrongdoing lower down the ranks, but the corporation and its stockholders are periodically socked with huge fines for past abuses.”
To the extent explanations for the failure to prosecute have been offered, they usually come down to two things.
First, although foolishness and cupidity were ubiquitous in the years leading up to the crisis, proving intent to defraud can be a tricky business as the Justice Dept discovered in its attempt to prosecute two Bear Stearns bankers in 2009.
Second, there’s the “we might end up destroying a systemically important bank” excuse. In other words, the Justice Dept version of “too big to fail”. Continue reading “Why Didn’t Eric Holder Go After the Bankers? | The New Yorker”
If central banking were a stock, you’d go short.
Blue-chip mystique still clings to it but you can feel the reputational parabola slowly gathering momentum on the downside. Its projects are too large and diffuse, the resources to achieve them too crude and there are mounting signs of unhappiness and confusion at the top.
Given their long-standing rock star status, pity the central banker; the fall from grace may be vertiginous.
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The Governor of the Old Lady seems more attuned to this unfolding trend than most. On my reading, he metaphorically ran up the white flag in a recent speech. It was the oddest mixture of explanations, implicit apologies and rationalisations imaginable from such an august perch. Do have a look; it’s not long.
King finished with an amusing touch: “As for the MPC [Monetary Policy Committee], you can be sure we shall be looking for as much guidance as we can find, divine or otherwise. What better inspiration than the memory of those children on Rhossili beach singing Cwm Rhondda.”
Perhaps the South Wales Chamber of Commerce seemed a forgiving place to lay out some of central banking’s many puzzles.
Put simply, his message was: I know what we’re doing seems a bit crazy, and I know all the fundamental problems are still out there waiting to be solved, but what else can we do?
What’s even scarier is that I understand what he means. Continue reading “Pity the Central Banker”
In the wake of the crisis, the question of whether financial markets are capable of effective self-regulation took centre stage. The near unanimous verdict was that they are not. The crisis itself, following on as it did from a period of extended deregulation, seemed to provide a definitive QED. So much so that surprisingly little attention has been devoted to working out why this might be so.
It has, in short, become an article of received wisdom, rarely questioned other than at sites like The Cobden Centre.
Andrew Haldane of the Bank of England did so in a recent speech. Although I’m not convinced he always followed the logic of his analysis to its natural conclusion, he clearly outlined the structural developments that led to the current debacle and offered several sensible policy suggestions.
It was a long speech: the transcript runs to eighteen closely typed pages with a further eleven of references, charts and tables. It would make no sense for me to try to cover the whole thing in any detail: for those sufficiently interested in the topic, do read the original.
What I want to do is bring forward enough of the material to enable a closer focus on some of the more critical issues, and to highlight a few areas where I think Mr. Haldane may be in error.
Continue reading ““Control Rights (and wrongs)””
Martin Wolf has usually managed to moderate his inner interventionist. No longer, it seems. In his most recent column, he casts caution aside:
“The time has come to employ this nuclear option [the printing press] on a grand scale.”
Not doing so, he says, would ensure a renewed recession with increased unemployment, falling house prices, reduced real business investment and so on. I think he’s right that these unhappy events are on the way. Question is, would employing his nuclear option make things any better?
To answer that we need to understand why we’re beset by all these difficulties. Wolf sees the root problem as feeble demand. Again, I think he’s right, but only in the sense that it’s the most visible, proximate cause. There’s a deeper question he doesn’t address; why is demand so weak? If the reasons are structural, throwing money at the problem is unlikely to help. Indeed, it could just as easily make matters worse by impeding the necessary adjustments.
The key question, then, is whether pre-GFC growth was sustainable. If instead it was a hothouse flower, then trying to revive it outside of the conditions that allowed it to flourish is not only impossible but foolish. Continue reading “What to do, what to do”
We’re fooling ourselves if we blame the recent crisis on character defects unique to our time, be it unusually lax regulators, particularly shortsighted politicians, or financial market participants avaricious beyond the norm.
Truth is, each of these qualities fluctuates with the prevailing social mood: they’re inherently pro-cyclical. When it would be ideal from society’s point of view for them to zig, they tend to zag. Nor is there much reason to think this is going to change anytime soon. We’re human, all too human, and so would be well advised to insulate critical social systems from our long-term shifts in sentiment.
Easier said than done, though. Not only because designing foolproof (or, more accurately, resilient) systems isn’t easy, but also because even assuming we do there’s every chance our progeny will find a way to undo them during the next great wave of optimism.
Still, we can but try.
Adair Turner (chairman of the UK Financial Services Authority) and Mervyn King (Governor of the Bank of England) are both acutely aware of this dilemma. Far more than any other senior financial markets officials, they try to get at the deeper underlying causes.
On Monday, October 25th, King gave a talk in New York entitled “Banking: From Bagehot to Basel, and Back Again”. Continue reading “Some further thoughts on financial reform”
Markets, indeed economies as a whole, are complex adaptive systems. Like biological ecosystems, they continuously and spontaneously order themselves in response to unfolding influences, large and small, internal and external.
When it comes to nature, we’re both part of it and a profound external influence. We shape the world around us for ill and sometimes for good, not only through deliberate actions but also, of course, merely by being here. Some of our activities and their consequences in the natural world, were we only willing to listen, could teach us much about how to better manage man-made systems such as the markets and the economy.
Forestry management provides a striking example. Our natural inclination is to put fires out wherever we can, not only to safeguard valuable property but also to protect the forests themselves and their many wild occupants.
In pursuing this practice, however, subtle changes take place over time. Dead trees and fallen branches accumulate and the undergrowth becomes thicker and much more widespread. Finally a fire occurs that we’re unable to stop, one that feeds on all the detritus to produce firestorms so powerful they can at times fundamentally change a whole ecosystem.
The analogy to our economic management in recent decades is obvious, particularly when it comes to the financial system. There too, fires were continuously put out, all with the laudable goal of sidestepping the pain and distress of downturns. Continue reading “Macroeconomic Resilience”
I don’t doubt Krugman’s right to suggest we’re in the early stages of a Third Depression. The last few years have been a first instalment in what will prove to be a drawnout, volatile and painful downturn. I also agree it’s “primarily [about] a failure of policy”. Where we differ is on the nature of these failures.
First though, some points of agreement.
Krugman was vocally unhappy about much of what took place during the boom years. He railed against the excesses of the financial system, and the deregulatory zeal that allowed it to run so completely out of control. He expected it all to end badly, although perhaps not quite to the degree it has. He’s also consistently argued that deflation, not inflation, is the greatest danger for the foreseeable future.
No argument, from me at least, on any of this. Nor do I really want to argue with his critique of the simplistic view put forward by those he terms “the apostles of austerity”; namely, that cutting spending and/or raising taxes won’t bring on further short-term pain. It will. To pretend otherwise is disingenuous at best.
The real question is whether there’s any way to avoid this pain that doesn’t bring even more disastrous consequences in its wake. Continue reading “The Perils of Partisan Commentary”
Spending ain’t spending, to paraphrase the old Castrol ad about oils.
Where government stimulus spending ends up, and how, are quite as vital as the spending itself. In the end, it’s no more immune to the logic of productivity than private investment, even though the primary goal will often be something quite different.
Unfortunately, discussions about the merits of stimulus spending often skate around this issue.
There’s another complication that also too rarely sees the light of day. Each credit induced boom generates its own combination of imbalances and unless government policy takes these into account, efforts to cope with the ensuing crisis will be kneecapped.
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Credit ain’t just credit, either.
By their very nature, booms generated by a fractional reserve banking system don’t result from the lending of genuine savings. Much of the credit produced is in effect ex-nihilo, literally “out of nothing”. Loans are made, recycled back into the banking system when spent and then for the most part lent out again in an endless cycle. Out of it comes a rapidly expanding and intricately interlocked set of IOUs. The only constraints are the reserve requirements (if any) imposed on the system together with a need for continued loan demand.
In a non-fractional reserve system, money lent is no longer available to the lender until it’s paid back. The act of lending is literally the transfer of the use of those funds for the duration of the loan. Not so under our system. As depositors, we all retain access to most of our funds while they are at the same time lent out in the continuous process described above.
As a result, for as long as the credit expansion lasts we’re collectively misled into acting as if there were more resources available than in fact exist. Certain structural consequences must follow and these are common to every credit induced boom.
Continue reading “Diagnosing the Disease”