Paul Krugman - Strange Arguments For Higher Rates - "Rajan’s argument boils down to two assertions:
1. Raising rates a bit wouldn’t significantly deter investment.
2. “Unnaturally low” interest rates are distorting asset prices.
The first thing to say about these two assertions is that they are essentially contradictory. If the difference between current rates and the rates Rajan wants is trivial — just a wafer thin mint — how can that same difference be leading to a major distortion in financial markets? Are we to believe that an interest rate change that matters not at all to firms making real investments somehow has huge effects on speculators? And actually, don’t asset prices themselves matter for real investment?"
Dino Kos - German bonds aren’t the havens they appear to be - - "One compelling reason to hold Bunds (or German bank deposits) is if investors believe a euro break-up is likely and wish to position themselves to have holdings converted into Deutschemarks. That scenario cannot be ruled out. However, euro area officials have been clear: monetary union will be defended and defaults are not on the agenda. That suggests peripheral countries will remain in the euro area and taxpayers in the core are susceptible to additional “calls” for cash in the future."
John Dizard - Euro bondholder haircuts would help - "After the Lehman collapse, only Kazakhstan systematically resorted to bondholder haircuts to pay part of the cost of bank restructuring. I believe they’ll be followed by other authorities."
Scott Sumner - Post-modern macroeconomics - "So why does The Economist imply that a policy of “price stability” failed to ensure economic stability? I think there are two reasons. First, they think the financial crisis (not falling inflation) caused the recession. And second, they don’t think monetary policy could have done much to prevent the fall in inflation."
James Hamilton - Gold and inflation - "There's a common thread to all the above figures, and it's not fears about inflation. Instead it's worries about the level of real economic activity, showing up in a flight to safety. U.S. Treasuries remain the instrument of choice for investors who think nothing looks safe.
But with the long-run fiscal challenges facing the United States, are 10-year Treasuries really the safest place to put your money? The yellow metal seems to be one way some people are hedging that bet."
Monday, June 14, 2010
Friday, June 11, 2010
Really great links - Fed - Central banks and stockmarkets
Andy Harless - Fed and Mankiw rule - "Basically, once we recognize that quantitative easing is an option – and one that is no longer being pursued – we can draw the conclusion that the Fed is much tighter today than what the Mankiw Rule would suggest. Indeed, relative to the Mankiw rule, the Fed is much tighter than at any time during the Greenspan-Bernanke years. Since 1957, when the core CPI data series begins, there have only been two times when the Fed was as tight as it is today relative to the Mankiw Rule. One was in 1973, when the effect of Nixon’s price controls was artificially reducing the retrospective inflation rate used in the Mankiw Rule. The other was during the early 1980’s, when the Fed was targeting monetary aggregates rather than interest rates and attempting (with great success) to reduce the inflation rate dramatically."
Roger Farmer - How to reduce unemployment - A new policy proposal - "A fiscal stimulus is ineffective in my model because it can shift one of the equilibrium relationships, but not the other. In terms of Figure 2, a fiscal expansion shifts the ME curve to the right but leaves the NA curve in its depressed state. As a consequence, the interest rate rises and crowds out private consumption expenditure. I see two possible resolutions to this problem.
First, an investment tax credit that changes the trade-off between holding private capital and government debt would act to shift the NA curve to the right. In combination with a fiscal expansion, this seems to be a promising avenue to explore.
Second, an extension of the quantitative easing that has been engaged in by national central banks throughout the world holds some promise to directly influence asset markets. An extension of this policy would involve the direct intervention of central banks in national stock markets by offering to exchange government debt for private equity at a fixed price."
Roger Farmer - How to reduce unemployment - A new policy proposal - "A fiscal stimulus is ineffective in my model because it can shift one of the equilibrium relationships, but not the other. In terms of Figure 2, a fiscal expansion shifts the ME curve to the right but leaves the NA curve in its depressed state. As a consequence, the interest rate rises and crowds out private consumption expenditure. I see two possible resolutions to this problem.
First, an investment tax credit that changes the trade-off between holding private capital and government debt would act to shift the NA curve to the right. In combination with a fiscal expansion, this seems to be a promising avenue to explore.
Second, an extension of the quantitative easing that has been engaged in by national central banks throughout the world holds some promise to directly influence asset markets. An extension of this policy would involve the direct intervention of central banks in national stock markets by offering to exchange government debt for private equity at a fixed price."
Wednesday, June 9, 2010
Really great links - Tinkerbell in New Keynesian models - Trust - Germany and Spain - Happiness
Nick Rowe - Tinkerbell in New Keynesian models - Absolute must-read - "Framing matters. Tinkerbell is real and all-pervasive. She flies in New Keynesian models all the time.
A. In the IS curve in old Keynesian models, a fall in the real rate of interest causes an increase in demand.
B. In the IS curve in New Keynesian models, a fall in the real rate of interest causes an increase in current demand, relative to planned future demand.
C. In the IS curve in New Keynesian models, a fall in the real rate of interest causes a decrease in planned future demand, relative to current demand.
A and B sound very similar. It's just that B adds an extra variable (planned future demand) that can shift the IS curve. An increase in planned future demand will shift the IS curve to the right. That sounds quite plausible from an Old Keynesian perspective anyway. If planned future demand increases, expected future incomes should increase too, and so people will want to consume more today, and firms will want to invest more today. So B makes the New Keynesian IS curve sound very similar to the Old Keynesian IS curve. It isn't. They are very different.
C sounds totally different from B. But it's not. C and B are logically equivalent. They are just different ways of describing the same Euler equation that underlies the New Keynesian IS curve. C is a way of describing the New Keynesian IS curve that forces you to realise that it is very different from the Old Keynesian IS curve."
Tyler Cowen - Trust - "Call me naive, but I believe that most of these politicians would in fact prefer to spend the money and hand out goodies to favored constituencies.
What may be destroying economic recovery is not fiscal contraction, but rather lack of trust, "Trust" is an underused word in macroeconomics."
Edward Chancellor - The dreadful potential of frugality - "Germany wants countries, such as Spain, to get their public finances in order. Yet if Spain is to reduce its fiscal deficit without too much pain, two conditions are necessary. First, the country’s trade position must shift into surplus. This is problematic since labour costs are high relative to Germany and Spain cannot devalue its currency. Second, the private sector must move back into deficit. Yet it is difficult to see Spanish households and companies wanting to borrow more given the ongoing problems caused by the collapse of the property bubble."
Eric Falkenstein - Arthur Brooks on happiness - "Arthur Brooks, president of the AEI, has a new book out, The Battle, and he makes an interesting claim. He states that the key factor in one's happiness--not experiential happiness, but 'remembered happiness' that is more correlated with 'life satisfaction', see Kahneman on the difference--is 'perceived earned success'. This is the willingness and ability to create value in your life or the life of others. He states that if you ask someone if they feel like they are creating such value, they are happy, regardless of how much they make. Giving people money, via welfare or inheritance, does not make people happy, because this if anything discourages the effort needed to find and develop such a niche."
A. In the IS curve in old Keynesian models, a fall in the real rate of interest causes an increase in demand.
B. In the IS curve in New Keynesian models, a fall in the real rate of interest causes an increase in current demand, relative to planned future demand.
C. In the IS curve in New Keynesian models, a fall in the real rate of interest causes a decrease in planned future demand, relative to current demand.
A and B sound very similar. It's just that B adds an extra variable (planned future demand) that can shift the IS curve. An increase in planned future demand will shift the IS curve to the right. That sounds quite plausible from an Old Keynesian perspective anyway. If planned future demand increases, expected future incomes should increase too, and so people will want to consume more today, and firms will want to invest more today. So B makes the New Keynesian IS curve sound very similar to the Old Keynesian IS curve. It isn't. They are very different.
C sounds totally different from B. But it's not. C and B are logically equivalent. They are just different ways of describing the same Euler equation that underlies the New Keynesian IS curve. C is a way of describing the New Keynesian IS curve that forces you to realise that it is very different from the Old Keynesian IS curve."
Tyler Cowen - Trust - "Call me naive, but I believe that most of these politicians would in fact prefer to spend the money and hand out goodies to favored constituencies.
What may be destroying economic recovery is not fiscal contraction, but rather lack of trust, "Trust" is an underused word in macroeconomics."
Edward Chancellor - The dreadful potential of frugality - "Germany wants countries, such as Spain, to get their public finances in order. Yet if Spain is to reduce its fiscal deficit without too much pain, two conditions are necessary. First, the country’s trade position must shift into surplus. This is problematic since labour costs are high relative to Germany and Spain cannot devalue its currency. Second, the private sector must move back into deficit. Yet it is difficult to see Spanish households and companies wanting to borrow more given the ongoing problems caused by the collapse of the property bubble."
Eric Falkenstein - Arthur Brooks on happiness - "Arthur Brooks, president of the AEI, has a new book out, The Battle, and he makes an interesting claim. He states that the key factor in one's happiness--not experiential happiness, but 'remembered happiness' that is more correlated with 'life satisfaction', see Kahneman on the difference--is 'perceived earned success'. This is the willingness and ability to create value in your life or the life of others. He states that if you ask someone if they feel like they are creating such value, they are happy, regardless of how much they make. Giving people money, via welfare or inheritance, does not make people happy, because this if anything discourages the effort needed to find and develop such a niche."
Monday, June 7, 2010
Really great links - Krugman on solvency - Econbrowser: recovery sluggish - Raghu Rajan - Structural crisis - Dilbert
Paul Krugman - Solvency - "As you can also see, by the debt-and-deficit criteria the US, UK, and (as you can’t see) Japan look similar enough to the crisis countries that if you didn’t know better, you might expect them to be in the same boat.
But they aren’t. As of right now, the interest rates on 10-year bonds are 3.59% in the UK, 3.36% in the US, 1.29% in Japan. CDS spreads for Japan and the UK are only about a third of the level for Italy.
So what does one make of this? One possible answer is, just you wait — any day now there will be a Wile E. Coyote moment, the markets will realize that America is Greece, and all hell will break loose. The other answer is to note that all the crisis countries are in the eurozone, while the US, UK, and Japan aren’t — and to argue that having your own currency makes all the difference.
I’ll choose door number 2."
James Hamilton - Current economic conditions - "Yes, we're still in the economic recovery phase, and yes, it still looks pretty sluggish."
Raghu Rajan - Response to Paul Krugman - "I reproduce Paul Krugman’s “econometric” claim above that Fannie and Freddie did not help cause the crisis above (I do not claim the Community Reinvestment Act was a big factor). I respond only because I have received hate mail from his followers. Paul is, of course, a great theoretical Nobel-prize-winning economist, so his attacks must be taken seriously (and I did take his trade theory classes at MIT, in the interest of full disclosure). Unfortunately, much of the “Fannie and Freddie did not contribute to the crisis” battalion makes arguments that have serious holes. Since these arguments are so prevalent they need to be rebutted again and again (the claimed unwillingness to listen to argument can be played on both sides).
The key graph in Paul’s argument is Figure 4. He claims that restrictions on Fannie and Freddie starting in 2004 kept their share of originations of total residential mortgage originations down, even while housing prices inflated. But this is irrelevant to the question. What we care about though is the amount of Fannie and Freddie’s originations in the sub-prime residential mortgages. And from every source I have seen, these took off precisely in 2004. Indeed, as I argue in my book Fault Lines, in the period 2004-2006 these two giants purchased $ 434 billion in sub-prime mortgage-backed securities. A measure of the size of these purchases is that in 2004, they accounted for 44 percent of the market for these securities. Calomiris and Wallison argue that Fannie and Freddie’s arms were twisted into doing more of this kind of lending starting in 2004 precisely because Congress had them in a vice because of the scandal."
Barry Ickes - Structural Rigidities and Financial Crisis - "Sometimes it is hard to understand the connection between structural rigidities and financial crises.
...
The specific example is rent control. This is quite severe in Portugal:
What is the connection to the financial crisis? Well, these rules limit production of rental housing, and thus force people to purchase rather than rent housing.
Scott Adams - Dilbert - "Let's talk about morality. Can you justify owning stock in companies that are treating the Earth like a prison pillow with a crayon face? Of course you can, but it takes some mental gymnastics. I'm here to help.
If you buy stock in a despicable company, it means some of the previous owners of that company sold it to you. If the stock then rises more than the market average, you successfully screwed the previous owners of the hated company. That's exactly like justice, only better because you made a profit. Then you can sell your stocks for a gain and donate all of your earnings to good causes, such as education for your own kids."
But they aren’t. As of right now, the interest rates on 10-year bonds are 3.59% in the UK, 3.36% in the US, 1.29% in Japan. CDS spreads for Japan and the UK are only about a third of the level for Italy.
So what does one make of this? One possible answer is, just you wait — any day now there will be a Wile E. Coyote moment, the markets will realize that America is Greece, and all hell will break loose. The other answer is to note that all the crisis countries are in the eurozone, while the US, UK, and Japan aren’t — and to argue that having your own currency makes all the difference.
I’ll choose door number 2."
James Hamilton - Current economic conditions - "Yes, we're still in the economic recovery phase, and yes, it still looks pretty sluggish."
Raghu Rajan - Response to Paul Krugman - "I reproduce Paul Krugman’s “econometric” claim above that Fannie and Freddie did not help cause the crisis above (I do not claim the Community Reinvestment Act was a big factor). I respond only because I have received hate mail from his followers. Paul is, of course, a great theoretical Nobel-prize-winning economist, so his attacks must be taken seriously (and I did take his trade theory classes at MIT, in the interest of full disclosure). Unfortunately, much of the “Fannie and Freddie did not contribute to the crisis” battalion makes arguments that have serious holes. Since these arguments are so prevalent they need to be rebutted again and again (the claimed unwillingness to listen to argument can be played on both sides).
The key graph in Paul’s argument is Figure 4. He claims that restrictions on Fannie and Freddie starting in 2004 kept their share of originations of total residential mortgage originations down, even while housing prices inflated. But this is irrelevant to the question. What we care about though is the amount of Fannie and Freddie’s originations in the sub-prime residential mortgages. And from every source I have seen, these took off precisely in 2004. Indeed, as I argue in my book Fault Lines, in the period 2004-2006 these two giants purchased $ 434 billion in sub-prime mortgage-backed securities. A measure of the size of these purchases is that in 2004, they accounted for 44 percent of the market for these securities. Calomiris and Wallison argue that Fannie and Freddie’s arms were twisted into doing more of this kind of lending starting in 2004 precisely because Congress had them in a vice because of the scandal."
Barry Ickes - Structural Rigidities and Financial Crisis - "Sometimes it is hard to understand the connection between structural rigidities and financial crises.
...
The specific example is rent control. This is quite severe in Portugal:
The discrepancy is a result of 100-year-old tenancy rules, which have frozen the rent of hundreds of thousands of tenants and protected them against eviction in Portugal.José Gago da Graça owns a Portuguese real estate company and has two identical apartments in the same building in the heart of Lisbon. One rents for €2,750 a month, the other for almost 40 times less, €75.
What is the connection to the financial crisis? Well, these rules limit production of rental housing, and thus force people to purchase rather than rent housing.
When the opportunities to borrow at low rates -- due to the euro -- presented themselves, Portuguese households took advantage. Rather than rent and save, households were pushed, by rent control, to borrow and purchase. That would not be so bad if the price of housing was not experiencing a bubble."The post-revolution rules helped protect tenants, but also led to a chronic shortage of rental housing. This, in turn, persuaded a new generation of Portuguese to tap recently into low interest rates and buy instead — often in new suburbs — thereby exacerbating the country’s mortgage debt and leaving Portugal with one of Europe’s lowest savings rates, of 7.5 percent.
Scott Adams - Dilbert - "Let's talk about morality. Can you justify owning stock in companies that are treating the Earth like a prison pillow with a crayon face? Of course you can, but it takes some mental gymnastics. I'm here to help.
If you buy stock in a despicable company, it means some of the previous owners of that company sold it to you. If the stock then rises more than the market average, you successfully screwed the previous owners of the hated company. That's exactly like justice, only better because you made a profit. Then you can sell your stocks for a gain and donate all of your earnings to good causes, such as education for your own kids."
Thursday, June 3, 2010
Four myths about European Central Bank
1. Losses on Greek bonds will create inflation
No. Imagine ECB becomes insolvent after Greek default. In this case ECB will lose control of inflation only if there is a run on ECB. During a run on ECB, EUR LIBOR will become lower than ECB deposit rate, meaning that ECB's contractionary policy rate increases would not be honored by the interbank market. Some commentators have raised the possibility of a run on ECB in the form of unilateral exit of Germany from the Eurozone. In my view this is highly unlikely. It is important to recognize that only member states can execute a run on ECB, but commercial banks cannot, as they are regulated by ECB.
Canadian economist and mega-blogger Nick Rowe has raised the possibility that inflationary expectations will arise because ECB has overpaid for Greek junk bonds. However in the comments he has conceded that ECB can successfully operate with negative equity: "Paying interest on reserves is equivalent to the ECB issuing bonds. Issuing bonds doesn't change the net worth of the ECB. But nevertheless, you have a good criticism here. The NPV of a central bank is much greater than the assets on its balance sheet. It's the NPV of all future seigniorage. In other words, it might have to buy an awful lot of really junk bonds in order to trash its balance sheet sufficiently. Hmmm."
2. ECB is sterilising purchases of Greek bonds
No. ECB will provide unlimited 3 month liquidity in a scheduled longer term refinancing intervention on 30 June 2010. This means that any sterilisation will be reversed according to the desires of commercial banks. Only when ECB will stop full allotment in longer term refinancing operations we will be able to talk about real sterilisation. So far the purchases of Greek bonds are de-facto unsterilised.
The instrument of ECB's sterilisation operations is one week term deposits. These deposits are eligible as a collateral in ECB's refinancing operations. Short maturity of deposits and eligibility as a collateral means that these deposits are almost as liquid as overnight deposits at ECB. This is confirmed by the tiny premium on one week deposits required by commercial banks as compared to the ECB overnight deposit rate. We can safely conclude that ECB's sterilisation operations have only minor effect on removing the liquidity in Eurozone.
3. Sterilisation of purchases of Greek bonds is needed to prevent inflation
No. Even with the enormously huge monetary base ECB can control inflation by increasing policy rates. Sterilisation might be desirable for the fine-tuning of the yield curve, but is not necessary for the containment of inflation. Stephen Williamson, the guru of new monetarism, says that sterilisation is an inefficient way of controlling inflation (his models imply that even fine-tuning of the yield curve by sterilization won't work).
4. Current tensions in interbank markets are comparable to Lehman Brothers. For example, WSJ writes: "Euro-zone banks placed a record €316.4 billion ($387.1 billion) in the ECB's ultra-safe overnight deposit facility, ECB data showed Wednesday, bringing back memories of the days following the collapse of U.S. investment bank Lehman Brothers in 2008."
No. The use of ECB's overnight deposit facility is just an indication of the bloated balance sheet of ECB. The balance sheet is bloated precisely because ECB is successfully preventing the repeat of Lehmanesque financial tensions by adding huge amounts of liquidity. In fact, during Lehman crisis, ECB has fought the financial tensions much more successfully than the Fed. ECB started providing unlimited liquidity on October 15 2008. If only Fed had copied the aggressive liquidity stance of ECB in 2008...
No. Imagine ECB becomes insolvent after Greek default. In this case ECB will lose control of inflation only if there is a run on ECB. During a run on ECB, EUR LIBOR will become lower than ECB deposit rate, meaning that ECB's contractionary policy rate increases would not be honored by the interbank market. Some commentators have raised the possibility of a run on ECB in the form of unilateral exit of Germany from the Eurozone. In my view this is highly unlikely. It is important to recognize that only member states can execute a run on ECB, but commercial banks cannot, as they are regulated by ECB.
Canadian economist and mega-blogger Nick Rowe has raised the possibility that inflationary expectations will arise because ECB has overpaid for Greek junk bonds. However in the comments he has conceded that ECB can successfully operate with negative equity: "Paying interest on reserves is equivalent to the ECB issuing bonds. Issuing bonds doesn't change the net worth of the ECB. But nevertheless, you have a good criticism here. The NPV of a central bank is much greater than the assets on its balance sheet. It's the NPV of all future seigniorage. In other words, it might have to buy an awful lot of really junk bonds in order to trash its balance sheet sufficiently. Hmmm."
2. ECB is sterilising purchases of Greek bonds
No. ECB will provide unlimited 3 month liquidity in a scheduled longer term refinancing intervention on 30 June 2010. This means that any sterilisation will be reversed according to the desires of commercial banks. Only when ECB will stop full allotment in longer term refinancing operations we will be able to talk about real sterilisation. So far the purchases of Greek bonds are de-facto unsterilised.
The instrument of ECB's sterilisation operations is one week term deposits. These deposits are eligible as a collateral in ECB's refinancing operations. Short maturity of deposits and eligibility as a collateral means that these deposits are almost as liquid as overnight deposits at ECB. This is confirmed by the tiny premium on one week deposits required by commercial banks as compared to the ECB overnight deposit rate. We can safely conclude that ECB's sterilisation operations have only minor effect on removing the liquidity in Eurozone.
3. Sterilisation of purchases of Greek bonds is needed to prevent inflation
No. Even with the enormously huge monetary base ECB can control inflation by increasing policy rates. Sterilisation might be desirable for the fine-tuning of the yield curve, but is not necessary for the containment of inflation. Stephen Williamson, the guru of new monetarism, says that sterilisation is an inefficient way of controlling inflation (his models imply that even fine-tuning of the yield curve by sterilization won't work).
4. Current tensions in interbank markets are comparable to Lehman Brothers. For example, WSJ writes: "Euro-zone banks placed a record €316.4 billion ($387.1 billion) in the ECB's ultra-safe overnight deposit facility, ECB data showed Wednesday, bringing back memories of the days following the collapse of U.S. investment bank Lehman Brothers in 2008."
No. The use of ECB's overnight deposit facility is just an indication of the bloated balance sheet of ECB. The balance sheet is bloated precisely because ECB is successfully preventing the repeat of Lehmanesque financial tensions by adding huge amounts of liquidity. In fact, during Lehman crisis, ECB has fought the financial tensions much more successfully than the Fed. ECB started providing unlimited liquidity on October 15 2008. If only Fed had copied the aggressive liquidity stance of ECB in 2008...
Really great links - Bernanke's toxic waste - China - Greece
Nick Rowe - Bernanke - "In my old post, I said that Ben Bernanke was betting on the economic recovery, using the Fed's own assets, by buying toxic waste. If there is no recovery, he loses the bet, the toxic assets become worthless, and the increase in the monetary base becomes permanent, because the Fed can't afford to retire the extra money. If there is a recovery, he wins the bet, the toxic assets are worth at least what he paid for them, and the increase in the monetary base can be temporary, because the Fed can afford to retire the extra money. That's the demand curve of recovery."
Scott Sumner - Is China a free market success - "So to summarize, to the extent that China is a free market, it is an economic success, and to the extent it is statist, it is mostly a failure (excluding some sectors like transport.) But the question “Is the Chinese miracle due to a free market economy?” is nonsensical. It isn’t a miracle at all; it is a country rapidly transitioning from being extremely poor to having a so-so economy. That is all."
Felix Salmon - Consensus on Greece - "There was quite a lot of consensus on the panel, and not in a good way: everybody agreed that the bailout of Greece was only postponing the inevitable, and many people reckoned that it wasn’t going to postpone it very long: one pair of hedge fund managers in the audience reckoned that it would last about six months before the default finally happens.
The form of the default, too, seemed pretty clear: an act of parliament in Greece would do most of the work, given that most Greek debt is issued under Greek law. It will be a par exchange — the new bonds will have the same face value as the old bonds, but with lower coupons and extended maturities — so that with a bit of accounting fudgery, no banks would need to mark their Greek debt to market and take a huge loss. And Greece, in a fiscal bind, will probably at some point start issuing its own scrip alongside the formal national currency of the euro, much as California did in 2009."
Scott Sumner - Is China a free market success - "So to summarize, to the extent that China is a free market, it is an economic success, and to the extent it is statist, it is mostly a failure (excluding some sectors like transport.) But the question “Is the Chinese miracle due to a free market economy?” is nonsensical. It isn’t a miracle at all; it is a country rapidly transitioning from being extremely poor to having a so-so economy. That is all."
Felix Salmon - Consensus on Greece - "There was quite a lot of consensus on the panel, and not in a good way: everybody agreed that the bailout of Greece was only postponing the inevitable, and many people reckoned that it wasn’t going to postpone it very long: one pair of hedge fund managers in the audience reckoned that it would last about six months before the default finally happens.
The form of the default, too, seemed pretty clear: an act of parliament in Greece would do most of the work, given that most Greek debt is issued under Greek law. It will be a par exchange — the new bonds will have the same face value as the old bonds, but with lower coupons and extended maturities — so that with a bit of accounting fudgery, no banks would need to mark their Greek debt to market and take a huge loss. And Greece, in a fiscal bind, will probably at some point start issuing its own scrip alongside the formal national currency of the euro, much as California did in 2009."
Tuesday, June 1, 2010
Really great links - Mistakes were made - Tax cuts - ECB - Gold
Charles Evans - Policy easing was not enough - "The U.S. central bank's liquidity support was helpful in containing the 2008 financial crisis but it could have done more, Federal Reserve Bank of Chicago President Charles Evans said on Tuesday. "While the liquidity support we provided the economy was very helpful, it was clearly not enough," Evans, who is not a voting member of the U.S. interest rate-setting panel, said during a panel session at a seminar in Seoul.
"Given the huge resource gaps, and low and declining inflation, more monetary accommodation was appropriate," he added."
Mark Thoma - Why I Changed My Mind about Tax Cuts - "Initially I was critical of how the tax cuts were targeted since so much ended up going to saving rather than consumption. This is the part I am rethinking.
There are different types of recessions, and this one can be termed “a balance sheet” recession. It had a big impact not just on bank balance sheets, but on household (and, for that matter firm) balance sheets as well. Households were particularly hard hit due to declines in stock prices and declines in the value of housing. These losses were large, they upset plans for things such as retirement, and households needed to refill the holes in their balance sheets that had been created (this includes paying off debt).
How do they refill their balance sheets? By saving more and consuming less (paying off debt is a form of saving). Thus, as the recession took hold, we saw a large increase in the saving rate and a corresponding fall in consumption. The tax cuts were an attempt to reverse the decline in consumption, but instead they mostly raised the amount that went into saving.
But that has a benefit. Households are not going to start consuming normally again until their balance sheets are repaired. The faster the holes in their balance sheets are refilled, and tax cuts can help with this, the faster the households can return to their normal rates of consumption — a prerequisite for the economy to return to normal.
So the targeting of the tax cuts that was OK after all. You don’t see the effects of balance sheet rebuilding in the data initially because the tax cuts are being used to fill up balance sheets, there’s no immediate effect on consumption, output, employment, etc., to observe in the data. But since balance sheets are refilled faster, we will emerge from the recession sooner, and that’s an important benefit of tax cuts that’s often overlooked."
Spiegel - ECB - "Bonds worth about €3 billion are now being purchased on every trading day, with €2 billion of the bonds coming from Athens. At the moment, there is no improvement of the situation in sight. "The ECB and the national central banks operating on its behalf are currently the only buyers to speak of," says one market insider.
This policy effectively makes the ECB a so-called "bad bank" (a bank that buys up toxic assets as a means of helping out other institutions), all protestations of its president to the contrary. The pile of junk bonds on the ECB's balance sheet continues to grow. The fact that the ECB is keeping prices artificially high is downright encouraging banks to unload their risky assets onto the central bank.
Thorstein Polleit, the chief economist of Barclays Capital Deutschland, puts it this way: "The ECB is creating excess supply by buying at overinflated prices." In other words, many creditors are more inclined to sell their risky assets to the central bank under these terms. "It's a free lunch," says a top Frankfurt banker. "Anyone who doesn't take advantage of this opportunity to get rid of his securities now only has himself to blame.""
David Rosenberg - Still bullish on gold - What would Moses buy? - "The above makes the bullish case for gold that much more alluring in terms of relative shifts in the supply curve for fiat currency against bullion. What is encouraging too is that after reading the columns in Barron’s (page 38) and the FT (page 10) over the weekend, there are still plenty of skeptics out there on the gold price outlook. Bulls need skeptics — there is nothing worse than universal beliefs as they lead to overcrowded trades. What makes gold different is that, unlike paper money backed by the good word of the government, it has withstood the test of time for thousands of years. It is malleable. It is durable. It can be trusted. It is not the liability of any government. It has an inelastic supply curve. How many times is gold mentioned in the Old Testament? Try 391 times. How many references to silver? Try 117 times. How many times is paper currency mentioned from Noah, to Abraham, to Moses? None. Nada. Efes. Gornisht. Nihil. Rien. Nichts. Niente."
"Given the huge resource gaps, and low and declining inflation, more monetary accommodation was appropriate," he added."
Mark Thoma - Why I Changed My Mind about Tax Cuts - "Initially I was critical of how the tax cuts were targeted since so much ended up going to saving rather than consumption. This is the part I am rethinking.
There are different types of recessions, and this one can be termed “a balance sheet” recession. It had a big impact not just on bank balance sheets, but on household (and, for that matter firm) balance sheets as well. Households were particularly hard hit due to declines in stock prices and declines in the value of housing. These losses were large, they upset plans for things such as retirement, and households needed to refill the holes in their balance sheets that had been created (this includes paying off debt).
How do they refill their balance sheets? By saving more and consuming less (paying off debt is a form of saving). Thus, as the recession took hold, we saw a large increase in the saving rate and a corresponding fall in consumption. The tax cuts were an attempt to reverse the decline in consumption, but instead they mostly raised the amount that went into saving.
But that has a benefit. Households are not going to start consuming normally again until their balance sheets are repaired. The faster the holes in their balance sheets are refilled, and tax cuts can help with this, the faster the households can return to their normal rates of consumption — a prerequisite for the economy to return to normal.
So the targeting of the tax cuts that was OK after all. You don’t see the effects of balance sheet rebuilding in the data initially because the tax cuts are being used to fill up balance sheets, there’s no immediate effect on consumption, output, employment, etc., to observe in the data. But since balance sheets are refilled faster, we will emerge from the recession sooner, and that’s an important benefit of tax cuts that’s often overlooked."
Spiegel - ECB - "Bonds worth about €3 billion are now being purchased on every trading day, with €2 billion of the bonds coming from Athens. At the moment, there is no improvement of the situation in sight. "The ECB and the national central banks operating on its behalf are currently the only buyers to speak of," says one market insider.
This policy effectively makes the ECB a so-called "bad bank" (a bank that buys up toxic assets as a means of helping out other institutions), all protestations of its president to the contrary. The pile of junk bonds on the ECB's balance sheet continues to grow. The fact that the ECB is keeping prices artificially high is downright encouraging banks to unload their risky assets onto the central bank.
Thorstein Polleit, the chief economist of Barclays Capital Deutschland, puts it this way: "The ECB is creating excess supply by buying at overinflated prices." In other words, many creditors are more inclined to sell their risky assets to the central bank under these terms. "It's a free lunch," says a top Frankfurt banker. "Anyone who doesn't take advantage of this opportunity to get rid of his securities now only has himself to blame.""
David Rosenberg - Still bullish on gold - What would Moses buy? - "The above makes the bullish case for gold that much more alluring in terms of relative shifts in the supply curve for fiat currency against bullion. What is encouraging too is that after reading the columns in Barron’s (page 38) and the FT (page 10) over the weekend, there are still plenty of skeptics out there on the gold price outlook. Bulls need skeptics — there is nothing worse than universal beliefs as they lead to overcrowded trades. What makes gold different is that, unlike paper money backed by the good word of the government, it has withstood the test of time for thousands of years. It is malleable. It is durable. It can be trusted. It is not the liability of any government. It has an inelastic supply curve. How many times is gold mentioned in the Old Testament? Try 391 times. How many references to silver? Try 117 times. How many times is paper currency mentioned from Noah, to Abraham, to Moses? None. Nada. Efes. Gornisht. Nihil. Rien. Nichts. Niente."
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