Category: Money and Credit

“Has the BoJ signalled the end of QE as we know it?”

That’s what David Keohane asks in yesterday’s FT Alphaville based on recent Citi and Goldman research notes.

Citi’s Buiter:

“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?””

It ain’t getting easier for central bankers . . .

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 . . .”

Money demand and free banking

Although it’s unlikely to excite anyone outside the tiny fraternity of monetary “trainspotters”, I can’t not mention Detlev Schlichter’s latest piece at The Cobden Centre. It’s a sweetly crafted (and much needed) response to various lines of argument run by some free bankers.

Put simply, free banking means letting banks run under the same laws as any other business, without special benefits or constraints. No central bank, no lender of last resort, no official deposit insurance, no bank regulators, in fact no government involvement in money or banking whatsoever. Radical, for sure, particularly after a century of central banks, fiat currencies, escalating crises and (lately) visceral disdain for bankers. Mainstream economists, if they think about the idea at all, are appalled at the very notion. It’s definitely the 100 to 1 nag in the banking stakes.

Free bankers believe that under such conditions the market would choose some form of “inelastic, inflexible, apolitical money as the basis of the financial system.” Usually that means gold. They also believe competitive pressures, together with the sobering discipline of operating without a safety net, would produce a surprisingly conservative result. It’s far from an unfounded belief; there’s quite a bit of supportive historical evidence from various countries and times.

Like me, Schlichter sees free banking as the best alternative in this imperfect world, not only in terms of banking but also in the flow on effects to everything else. So his argument isn’t with the principle but with certain claims about its operations and their supposed benefits:

The free bankers are correct to point to real-life frictions in the process of satisfying a changed money demand via an adjustment of nominal prices. The process is neither smooth nor instant, but then almost no market process is in reality. Their explanation that a rise in money demand will lead to a drop in money velocity and that this will, on the margin and under normal conditions, encourage additional FRB [fractional reserve banking]and thus an expansion of bank-produced money also strikes me as correct. Yet, the free bankers fail, in my view, to show convincingly why this process would be faster and smoother than the adjustment of nominal prices, and in particular, why the extra bank credit that also comes into existence through FRB would not generate the problems that the Austrian School under Mises has explained extensively.

For anyone still interested (hello . . . hello??), read on here.

P.S. Cross posted at my other site, Conversations at Stanley Park.

Ah! Gold.

Gold’s swoon has triggered a good deal of schadenfreude, some subtle, some less so.

It’s hardly a surprise after eleven years of gains and often tiresome crowing from its more partisan supporters. Question is, apart from the emotional satisfaction of putting the boot in, are these critics justified?

Their complaints seem to revolve around four principal themes: Continue reading “Ah! Gold.”

Pity the Central Banker

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.

♦  ♦  ♦

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”

“Control Rights (and wrongs)”

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[1] 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)””

What to do, what to do

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”

Some further thoughts on financial reform

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”

The Perils of Partisan Commentary

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”

Australia’s Mixed Diagnosis

Credit booms generate economic and financial imbalances. The longer a boom lasts, and the more extreme the expansion, the greater these will be.

The results show up in balance sheets and income statements. Whether it’s an individual household, economic sector or the external position of a country, that entity’s financial statements tell the tale.

In Australia’s case, sectoral debt figures show remarkably divergent trends in credit growth.[1]

At 73.1%, non-financial business debt as a percentage of GDP is only 7% higher than in 1988. The high point in the intervening years was 85.6% in Sept 2007. General government debt (federal and state combined) actually declined, from 42.1% in 1988 to 22.7% now. Prior to the crisis, it hit a low of 13.4%.

The real action was in the household sector, where debt to GDP started at 42% in 1988 and is now 109.7%.

In international terms, Australia’s non-financial business debt is middle-of-the-pack, our government debt perhaps the lowest in the developed world but our households rank near the top. There are countries with higher levels (Switzerland, for example, at 118% in 2007), but there aren’t many of them. Continue reading “Australia’s Mixed Diagnosis”