"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Thursday, October 7, 2010

Really good links - Monetary imbalances vs. financial stability - Stock market returns (Bill Hester) - Old monetarism - Brad DeLong

J├╝rgen Stark, Member of the Executive Board of the ECB - Monetary imbalances vs. financial stability - "Not all historical episodes of private sector money and credit balances going off track have been followed by threats to financial stability. But, every major economic crisis in the 20th century was preceded by the emergence of monetary imbalances. <..>
        The Great Depression is another case in point. It is certainly true that the banking crisis brought about by the failure of central banks to understand their role as a lender of last resort under the gold standard was detrimental. But equally detrimental was the sheer unavailability of monetary data that could have signalled the need, given the collapse in money and credit, for monetary policy to be accommodative much earlier on, to a higher degree and for much longer."

Bill Hester - Do Past 10-Year Returns Forecast Future 10-Year Returns? - "Can the process of forecasting long-term stock market returns be simplified to include just one step – calculating the prior decade's return? This is one of the arguments that analysts are currently using to convince investors that the coming decade will offer above-average returns. It's important to take a closer look at the argument because it's become widely discussed and reported. A strategist at a major investment bank argued recently that poor 10-year trailing returns is reason enough to expect lofty returns over the next decade. A similar argument was recently made in Barron's, and by various mutual fund companies. <..>
        The argument that above-average long-term returns typically follow periods of poor past long-term returns is not wrong, it's just incomplete. The more complete argument is above-average long-term returns can be expected to follow long periods of low or negative, provided that they end with low P/E multiples on smoothed earnings and precede a period where the economy can be expected to enjoy robust growth. Today, valuations are at levels that have normally been followed by 10-year returns that are well below average. At the same time, based on a template from more than a dozen prior credit crises, the argument that the economy will grow strongly over the coming decade finds little support."

Nick Rowe - Was Milton Friedman right after all??? - "Suppose you were a monetary economist in the US in the 1930's. And suppose you knew that currency was a medium of exchange, but you didn't know that demand deposits at fractional reserve banks were also media of exchange. You would have noticed the runs on banks, and bank closures, but you wouldn't think that these had anything to do with the supply of money. As far as you knew, the money supply, which you thought of as currency, would have seemed OK. You would completely miss the fall in the money supply.
        Maybe we are like that now. Maybe a large part of the money supply is dark matter. We didn't see it fall. We saw the runs on the shadow banking system, but didn't see how it affected the money supply.
        I have no idea if this is right. It probably isn't. But I'm not as confident as I used to be..."

Brad DeLong - Standard open market operations - "And it is the exact shape of the financial excess demand--which will always be, empirically, a mixed matter--that determines which strategic governmental interventions will be most effective. Printing up more government bonds will fail when the root problem is excess demand for money and money demand is not very interest-elastic. Standard open market operations in short Treasuries will fail when the root problem is excess demand for bonds-as-savings-vehicles or for high-quality assets and money demand is very interest-elastic."

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