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

Sunday, November 7, 2010

Really good links - Kocherlakota and bubbles - Capping the climate change - Bernanke and stock market - Basel 3

Narayana Kocherlakota, President, Federal Reserve Bank of Minneapolis - Housing bubbles, credit bubbles and government bond bubbles - "Insufficiently stringent bank regulation may have relatively little impact on bank profits, but nonetheless lead scarce factors (finance talent, land) to be overvalued. <..>
        There has been a great deal of discussion about how monetary policy should respond to bubbles. I will have nothing to say on this issue. In the United States, monetary policy generally takes the form of open market operations. In an open market operation, the Federal Reserve exchanges some govenment liabilities (reserves) for other government liabilities (Treasuries or securities issued by govenment-sponsored enteprises) of equal market value. In this way, the Federal Reserve can influence the composition of outstanding government liabilities, but not the total value of outstanding government liabilities. (The latter is shaped by Congress.)
        As we will see, in the rational bubble framework, the time path of the total value of government liabilities matters a great deal for economic outcomes. However, the composition of those liabilities is, at a minimum, less essential. Hence, I abstract from the latter consideration entirely–and, in doing so, I abstract from monetary policy. <..>
        Because of the government’s ability to tax, public sector bubbles may be more stable than private sector bubbles."

Andrew Restuccia - Thomas Crocker - Newly released paper details origins of cap-and-trade - Inventor now believes it's the wrong approach to climate change - "Cap-and-trade, which Crocker said is not “inappropriate by any means” to reduce greenhouse gas emissions, works better for traditional pollutants like sulfur dioxide, because “incremental emissions of SO2 do a great deal of damage.”
        “Whereas with respect to greenhouse gases,” he continued, “the marginal damages of an additional bit of greenhouse gas is not going to do much harm.”
        Because each additional increment of SO2 that is emitted into the atmosphere is so detrimental to the environment, a proper policy must give certainty with respect to quantity, Crocker said. Cap-and-trade puts a hard cap on emissions and therefore controls emissions quantity. A carbon tax, on the other hand, provides certainty with respect to pricing — it imposes a certain cost on carbon — but does not set a limit on how much carbon can be emitted across the economy.
        Greenhouse gases, Crocker argued, are not as incrementally dangerous as SO2 and other pollutants. Therefore, price certainty, delivered through a carbon tax, is more important."

Scott Sumner - Dating game (Bernanke and stock market) - "If I had some literary talent, I’d try a dating analogy for the game that Bernanke and the stock market are playing. Bernanke sends out some sweet talk, the stock market responds with enthusiasm. That emboldens Bernanke (a rather shy guy) to send out a bit more sweet talk, with the confidence his ‘policy tools’ are not viewed as being impotent. I think you can see why I’ll stay away from literature, I couldn’t even write trashy romances. <..>
        The way the stock market responded to rather vague and unimpressive rumors of monetary ease, suggests to me that credibility is the last thing Bernanke needs to worry about. The stock market seems like a lonely girl who laps up anything she hears from a sweet-talking guy with a very big wallet in his back pocket. A cheap date.
        What do you guys think? Is Krugman right, or is it easy for the Fed to impress the markets? No need to even mention marriage (i.e. higher inflation targets), just give her a wink and a nod, and promise you’ll spend $600b on the date."

Pablo Triana - Basel III - "By keeping total capital requirements almost intact, demanding that the core equity component of those requirements be substantially raised, and insufficiently modifying the mechanisms through which asset risks are measured, the new Basel III regulatory regime still allows for the possibility of a banking blow-up while making it harder for banks to produce juicy returns.
        While banks can still sink abruptly, the journey enjoyed before that happens might be less glamorous than was the case previously (due to the lower return on earnings implied by the harsher equity demands). In fact, Basel III could well result in a perverse combination of higher risks and lower returns."

Nick Rowe - Monetary policy and Daylight Savings Time

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