Really good links - QE2 as a signal - Gold and monetary policy - QEII - EMH - Clearinhouse panic

Menzie Chinn - QE2 as a signal - "There is some mystery why the impact on the exchange rate has been so much more marked than that on long term rates. As several observers have observed, QE2 is fairly small in quantitative magnitude, and in terms of implied impact on duration adjusted interest rates. Theory suggests offsetting inflation and liquidity effects from open market operations, so the impact on observed nominal rates could in principle be small (and in either direction).
        I think a large chunk of the impact comes from the fact that QE2 signals additional information about the willingness of the monetary authorities to undertake actions to stimulate the economy, perhaps by future injections. I will also observe that the likelihood of a sensible fiscal policy declined after the mid-term elections (that is the US will more likely undertake contractionary fiscal policy by not offsetting state spending reductions), so that from a simple Mundell-Fleming model, we should expect dollar depreciation."

Gavyn Davies - The gold price is not a very useful signal - "In the graph, which is drawn on a log scale, the gold price has risen in a virtual straight line for the whole of the past decade. There have been some periods when the gold price has fallen, but these have not lasted very long.
        Over the same period, global price inflation has had periods of rising (before 2007) and falling (after 2007). Government debt ratios and budget deficits have similarly had periods of improvement and deterioration. The dollar has seen years in which its trend has been rising, and years where the reverse has been true. Global current account imbalances have widened, and then narrowed. The gold price has risen when measured in “inflationary” currencies like the dollar, and it has also risen (though by less) when measured in “deflationary” currencies like the yen. In other words, it is not at all clear what the rise in the price of gold has been warning us about.<..>
        Consequently, I am genuinely unsure about what the gold market is signalling which could be useful to policy makers, unless it is just a general message that “things are worrying, so get your house in order”. That may be true, but it does not tell us what to do next."

Tyler Cowen - QEII - "I'm not sure it will work, because it won't fix the housing market, may not restore the demands for wealth-elastic goods in a sustainable manner, may not restore the normal flow of credit to small businesses, may not lower subjective estimated risk premia, and may not fix the general disconnect between expectations and reality. The effects on long-term interest rates are murky. "

Brad DeLong - EMH - "He [Summers] (and I) never were believers in the efficient markets hypothesis. How could we be? Look around: there are idiots! The market's prices are the results of a wealth-weighted voting mechanism: the more money you have, the bigger is your weight in the market's average. People who have done well in the recent past thus have more weight than people who have done badly. But those who have done well me be irrational trend-chasers who have been lucky and those who have done badly may be sober-sided fundamentalists whose time has simply not yet come. The questions of the degree to which the limited amount of risk-averse smart money can leverage itself and profit from all this noise in the market by reducing it is a fascinating and subtle one. But nobody thinks that the answer is that the noise simply does not matter, is ironed out into insignificance."

Craig Pirrong - Clearing, voting and panics - "One other historical note that illuminates another important cost of heterogeneity. In Banking Panics of the Gilded Age, Elmus Wicker shows that with one notable exception (the Panic of 1873), the New York Clearinghouse was unsuccessful in dealing with financial panics and contagion. (NYCH was a bank clearinghouse, not a derivatives clearinghouse, but there are important similarities. Most importantly, NYCH had the ability to mutualize some risks.) Wicker argues that conflicts between heterogeneous members were the main impediment in dealing with panics. Although mutualization of risks would have mitigated panic (because the banks collectively were more likely to be solvent than any individual bank), mutualization transferred wealth from the stronger banks to the weaker ones. The inability to overcome this distributive conflict stymied the ability of the NYCH to respond to crises in an effective way. Thus, not only can heterogeneity increase the likelihood of a problem at a CCP (due to its effect on the severity of moral hazard problems), it can reduce the effectiveness of a CCP in dealing with a crisis situation."