Conflicts of Interest at Bern’s Inselspital?

In the NZZ, Daniel Gerny and Simon Hehli report about potential conflicts of interest at Bern’s university hospital, the Inselspital.

A cardiologist found evidence of negative health effects of in vitro fertilization, which the Inselspital offers. But unusually, the hospital’s PR department didn’t advertize the findings. The motivation to keep quiet, according to the PR department, was that the findings are of relevance also for other groups at the hospital, and that this would have to be taken into account:

Publiziert wurde die Berner Studie im renommierten Fachmagazin «Journal of the American College of Cardiology». Seit Tagen sind die Untersuchungsergebnisse in aller Munde. … Umso erstaunlicher, dass ausgerechnet Scherrers Arbeitgeber, das Inselspital, der Studie keine grosse Beachtung schenkt: Aktiv wird darüber nicht informiert, eine Medienmitteilung ist nicht vorgesehen. Dabei waren sich die Studienautoren sehr wohl bewusst, welche Resonanz ihre Arbeit auslösen würde. Sie machten die Kommunikationsabteilung des Spitals deshalb gezielt und frühzeitig auf ihre Arbeit aufmerksam. Doch diese winkte kurzerhand ab: Im vorliegenden Fall wolle man keine aktive Medienarbeit betreiben, beschied sie in einer Mail, die der NZZ vorliegt. Als Erklärung für diesen Entscheid führt das Inselspital an die Adresse der Forschenden unter anderem an, «dass Ihre Ergebnisse direkt einen anderen Fachbereich der Insel-Gruppe tangieren. Da wir für die gesamte Gruppe die Kommunikation betreiben, müssen wir auch dies berücksichtigen.»

Negative Value Added of Switzerland’s Agricultural Sector

Farmers in Switzerland receive about CHF 2.7 billion in direct financial support annually. Total financial support by the federal and cantonal governments equals more than CHF 4 billion. But according to a report published by Zurich based think tank Avenir Suisse, this financial support constitutes just a minor part of the transfers from society at large to farmers, due to explicit and implicit subsidies, privileges, and—most importantly—negative externalities.

A list of privileges compiled by Avenir Suisse.

Avenir Suisse estimates the value added of Swiss agriculture to be hugely negative.

Die heutige Schweizer Landwirtschaft resultiert in einer negativen Wertschöpfung von minus 15,8 Mrd. Fr. pro Jahr. Damit kostet sie uns umgerechnet rund 1,8 Mio. Fr. pro Stunde.

In the NZZ, Nicole Rütti reports.

“Macroeconomics II,” Bern, Fall 2018

MA course at the University of Bern.

Time: Wed 10-12. KSL course site. Course assistant: Lukas Voellmy.

The course introduces Master students to modern macroeconomic theory. Building on the analysis of the consumption-saving trade off and on concepts from general equilibrium theory, the course covers workhorse general equilibrium models of modern macroeconomics, including the representative agent framework, the overlapping generations model, and possibly the Lucas tree model. Lectures follow chapters 1–4 (possibly 5) in this text.

“Central Bank Digital Currency: Why It Matters and Why Not,” VoxEU, 2018

VoxEU, August 20, 2018. HTML.

  • To a first approximation, inside and outside money are substitutes—the introduction of CBDC does not change the equilibrium allocation.
  • Bank incentives and central bank incentives might be affected though.
  • CBDC could increase the incentive to extend credit but might undermine the political support for implicit financial assistance to banks.

Germany, or the Bundesbank Caves In

In the FAZ, Philip Plickert reports that Deutsche Bundesbank changed its terms of business. Starting August 25, the Bundesbank may refuse cash transactions with a bank if the Bundesbank fears that, counter to the bank’s assurances, the cash transaction might help the bank or its customers evade sanctions or restrictions with the aim to impede money laundering or terrorism finance.

Conveniently, this will allow the Bundesbank to reject a request by European-Iranian Handelsbank to withdraw several hundred Euros.

Die staatliche Europäisch-Iranische Handelsbank (EIHB) in Hamburg hatte Anfang Juli bei der Bundesbank beantragt, mehr als 300 Millionen Euro in bar abzuheben. Nach Informationen der F.A.Z. war sogar von 350 bis 380 Millionen Euro die Rede. Dem Vernehmen nach soll es sich um Guthaben der iranischen Zentralbank bei der EIHB handeln. … Derzeit prüft die Finanzaufsicht Bafin, ob die EIHB die Vorschriften zur Prävention von Geldwäsche und Terrorfinanzierung einhält. Diese Prüfung könne sich hinziehen, heißt es in Berlin aus dem Finanzministerium. Bis die Bafin ihr Urteil abgibt, dürften die geänderten AGB der Bundesbank greifen.

The US has pressured the German government to prevent the cash withdrawal. And the Bundesbank closely cooperates with the Federal Reserve.

In ihren geänderten Geschäftsbedingungen ist explizit die Rede davon, dass auch die „drohende Beendigung von wichtigen Beziehungen zu Zentralbanken und Finanzinstitutionen dritter Länder“ ein Ablehnungsgrund für Bargeldgeschäfte sein könne.

In July, JP Koning had blogged about the bank’s request. His conclusion was:

There are sound political and moral reasons for both censoring Iran and not censoring it. Moral or not, my guess is that most nations will breathe a sigh of relief if German authorities see it fit to let the €300 million cash withdrawal go through. It would be a sign to all of us that we don’t live in a unipolar monetary world where a single American censor can prevent entire nations from making the most basic of cross-border payments. Instead, we’d be living in a bipolar monetary world where censorship needn’t mean being completely cutoff from the global payments system.

The sooner the Bundesbank prints up and dispatches the €300 million, the better for us all.

In an earlier column, Koning had described the difficulties for financial institutions worldwide to circumvent U.S. financial sanctions.

“Reserves For All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence,” CEPR, 2018

CEPR Discussion Paper 13065, July 2018. PDF. (Personal copy.)

I offer a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.

Mobile Phone Use and Cognitive Functions

In Environmental Health Perspectives, Milena Foerster, Arno Thielens, Wout Joseph, Marloes Eeftens, and Martin Röösli report findings that suggest potential adverse effects of adolescents’ mobile phone use on cognitive functions.

We found preliminary evidence suggesting that RF-EMF may affect brain functions such as figural memory in regions that are most exposed during mobile phone use. Our findings do not provide conclusive evidence of causal effects and should be interpreted with caution until confirmed in other populations. Associations with media use parameters with low RF-EMF exposures did not provide clear or consistent support of effects of media use unrelated to RF-EMF (with the possible exception of consistent positive associations between verbal memory and data traffic duration). It is not yet clear which brain processes could be potentially affected and what biophysical mechanism may play a role. Potential long-term risk can be minimized by avoiding high brain-exposure situations as occurs when using a mobile phone with maximum power close to the ear because of, for example, bad network quality.

Financial Sanctions, the USD, and the EUR

On Moneyness, JP Koning discusses the ability or not of the U.S. treasury to enforce financial sanctions overseas. Focusing on the Iran sanctions that ran from 2010 to 2015 (with strong international support) and are scheduled to be reimposed soon (without such support) Koning compares the U.S. sanctions regime to an exclusivity agreement that a large retailer imposes on a manufacturer.

Foreign banks in places like Europe were free to continue providing transactions services to Iran, but if they did so they would not be able to maintain correspondent accounts at U.S. banks. To ensure these rules were enforced, U.S. banks were to be fined and U.S. bank executives incarcerated if found guilty of providing accounts to offenders. Fearful bank executives were very quick to comply by carefully vetting those that they offered correspondent banking services to.

Having a U.S. correspondent account is very important to a non-US bank. If a European bank has a corporate customer who wants to make a U.S. dollar payment, the bank’s correspondent relationship with a U.S. bank allows it to effect that payment. Since the revenues from U.S. dollar payments far exceeds revenues from providing Iranian agencies and corporations with payments services, a typical European bank would have had no choice but to abandon Iran in order to keep its U.S. correspondent account.

But what would happen if Iran were to invoice in EUR rather than USD and make payments using an account at a European bank, bank X say, without direct links to the U.S. and no U.S. correspondent account? The answer to that question depends on whether the U.S. treasury would be prepared to sanction a third financial institution, bank Y say, that collaborates with bank X (or a business partner of bank X) and relies on a U.S. correspondent account. In the most extreme scenario bank Y would be the European Central Bank.

One scheme would be to set up a single sanctions-remote bank that conducts all Iranian business. To defang the U.S. Treasury’s threat “do business with us, or them, but not both!”, this bank should not be dependent on U.S. dollar business. Without a U.S. correspondent, the Treasury’s threat to disconnect it from the correspondent network packs no punch. … Crude oil buyers from all over Europe could have their banks wire payments to [bank X’s] account via the ECB’s large value payments sytem, Target2. [Bank X] could also open accounts for companies in India, China, and elsewhere who want to buy Iranian crude oil with euros.

… There is also the extreme possibility that the U.S. would impose travel bans on the ECB itself, in an effort to force ECB officials to remove [bank X] from Target2. Here is one such threat: “Treasury this week designated the governor of Iran’s central bank—does any European country think Treasury can’t designate their own central bank governor too?” Look, the idea of preventing Mario Draghi from travelling to the U.S., or blocking his U.S. assets, sounds so unhinged that it’s not even worth entertaining.

The reason Iran and its trading partners were not able to break sanctions between 2010 and 2015, according to Koning, is that Europe (specifically the German chancellor Angela Merkel) supported the U.S. administration and imposed its own sanctions on bank X, cutting it off the SWIFT and Target2 networks.

Bullshit Jobs and Corporate Correctness

In the New Yorker, Nathan Heller reviews David Graeber’s “Bullshit Jobs.”

In the course of Graeber’s diagnosis, he inaugurates five phyla of bullshit work. “Flunkies,” he says, are those paid to hang around and make their superiors feel important: doormen, useless assistants, receptionists with silent phones, and so on. “Goons” are gratuitous or arms-race muscle; Graeber points to Oxford University’s P.R. staff, whose task appears to be to convince the public that Oxford is a good school. “Duct tapers” are hired to patch or bridge major flaws that their bosses are too lazy or inept to fix systemically. (This is the woman at the airline desk whose duty is to assuage angry passengers when bags don’t arrive.) “Box tickers” go through various motions, often using paperwork or serious-looking reports, to suggest that things are happening when things aren’t. (Hannibal is a box ticker.) Last are “taskmasters,” divided into two subtypes: unnecessary superiors, who manage people who don’t need management, and bullshit generators, whose job is to create and assign more bullshit for others. …

Graeber comes to believe that the governing logic for such expansion isn’t efficiency but something nearer to feudalism: a complex tangle of economics, organizational politics, tithes, and redistributions, which is motivated by the will to competitive status and local power.

My view is that what Graeber describes is a reflection of growing “corporate correctness,” the tendency

  • to structure and regulate everything, and often in an incompetent way;
  • to focus on appearance rather than content (think of power point);
  • to avoid responsibility by forming commissions and commissioning reports; and
  • to replace common sense by a mentality of box ticking, buzz wording, and bull shitting.

Of course, corporate correctness transcends the corporate sector. Universities and the public sector are leading the way.

Redenomination Risk in the Eurozone

In a CEPR discussion paper Christian Bayer, Chi Kim, Alexander Kriwoluzky analyze redenomination risk during the European debt crisis and how the European Central Bank’s interventions affected this risk. They conclude that the risk fell in the case of Italy but increased for France and Germany.

From the abstract:

… first estimate daily default-risk-free yield curves for French, German, and Italian bonds that can be redenominated and for bonds that cannot. Then, we extract the compensation for redenomination risk from the yield spreads between these two types of bonds. Redenomination risk primarily shows up at the short end of yield curves. At the height of the euro crisis, spreads between first-year yields were close to 7% for Italy and up to -2% for Germany. The ECB’s interventions designed to reduce breakup risk successfully did so for Italy, but increased it for France and Germany.

See also this earlier blogpost.

Marx was Right—Partly

According to René Scheu in the NZZ.

Die zehn «Massregeln» für die «fortgeschrittensten Länder», in die das «Kommunistische Manifest» mündet, lesen sich aus heutiger Sicht wie ein sozialdemokratisches Programm, dem auch viele softbürgerliche Politiker sogleich vorbehaltlos zustimmen würden. Starke Progressivsteuer, Geldmonopol der Nationalbank, Zentralisation des Transportwesens, nationale Industriepolitik, Verstaatlichung des Bauernstandes und unentgeltliche Erziehung aller Kinder gehören längst zu den Errungenschaften avancierter Wohlfahrtsstaaten – damit sind wohlgemerkt bereits sechs der zehn Punkte erfüllt….

Marxens Kritik zielt nicht auf den Unternehmer und Eigentümer als solchen, sondern auf den Bourgeois, der auf der faulen Haut liegt und auf Kosten anderer lebt. …

Der Verfasser des «Manifests» ist kein Moralist, sondern ein geradezu passionierter Ökonomist der ersten Stunde.

And according to The Economist:

  • Modern “capitalism” often reduces to rent seeking: The Economist mentions “corporate bureaucrats”, “management consultants”, “professional board members”, “retired politicians (who spend their twilight years sponging off firms they once regulated)”.
  • It is global (WEF).
  • It has a tendency towards monopoly (Google, Facebook, …).
  • It yields an army of casual workers (gig economy).
  • But Marx overestimated poverty and underestimated reform.

Isaiah Berlin: Karl Marx and his Environment.

CBDC-Skepticism-Skepticism

On their blog, Stephen Cecchetti and Kermit Schoenholtz voice doubts regarding the usefulness of universal central bank digital currency (U-CBDC). They argue:

… in an effort to retain their deposit base, commercial banks would surely raise the interest rate they offer to their customers relative to the rate on U-CBDC. … the introduction of U-CBDC would cause a substantial fraction of deposits to shift to the central bank, with the remainder prone to exit in a period of financial stress.

… if the Federal Reserve were to issue U-CBDC, we expect that this would not only hollow out the U.S. commercial banking system, but also destabilize the financial system in a range of countries.

… what would the central bank become? As its U-CBDC liabilities grow, its assets will need to expand as well. And, since commercial banking will have shrunk, so will the sources of private credit. At this point, the central bank turns into a commercial lender. It will become the state bank. In the allocation of funds, it will substitute increasingly for the discipline of private suppliers and markets, inviting political interference in the allocation of capital, slowing economic growth.

The problem with this argument is twofold: First, it disregards the possibility of liability substitution: Deposits may be replaced by other forms of bank debt. Second, bank balance sheet length is equated with lending capacity. But empirically, one is far from a perfect predictor of the other. For example, some countries rely much more heavily on bank credit than others, without obvious implications for intermediation and investment.

… we are compelled to ask what problem it is that U-CBDC is designed to solve. There seem to be three possibilities: the inability of monetary policymakers to set interest rates much below zero; the fact that paper currency is a vehicle for criminality; and the need to broaden financial access. On the first, we currently see little political support for interest rates that go meaningfully below zero. … As for criminal use of paper currency, as we argued in a recent post, there is a strong case for eliminating anything bigger than the equivalent of a U.S. 20-dollar note, but doing so does not imply a need for U-CBDC. Finally, there is financial access. Here, we see technology as providing solutions outside of the central bank [e.g., India’s program of providing costless, no-frills accounts].

Indeed, none of these arguments makes a convincing case for CBDC (especially since only the first one directly relates to the monetary system). But there are two more convincing arguments. First, it is preposterous to have governments prohibit citizens from using cash—the legal tender—for large transactions, and to force them into using privately issued money instead. Opening the central bank’s balance sheet to the public is a more liberal approach than restricting access to financial institutions.

Second, private money creation puts the central bank at a second mover disadvantage, effectively forcing it to serve as lender of last resort during liquidity crises or even as provider of bailout funds. Since the central bank is obliged to safeguard the payment system it cannot escape this disadvantage; regulatory measures—to the extent that they work and do not cause more harm—may alleviate moral hazard but cannot solve the time consistency problem completely. The more payments are conducted using CBDC the less can the banking sector and its customers dictate monetary policy.

To conclude, we see very little upside for central banks to issue retail digital currency. Instead, we see an enormous risk to the commercial banking system and political challenges for central banks. In the end, we wonder: would capitalism survive the introduction of U-CBDC? It may, but we are not at all sure.

As argued above, threats to capitalism also lurk in other corners.

Does CBDC Increase Run Risk?

Central bankers often argue that CBDC would increase the risk of bank runs. On his blog, JP Koning rejects this notion. After all, he retorts, during a confidence crisis bank customers would no longer have to queue to withdraw cash; lender of last resort support would be provided much more quickly; and “large” cash holders would continue to shift funds into treasury bills, not into CBDC.

Koning writes:

The general criticism here is that during a crisis, households and businesses will desperately shift their deposits into the ultimate risk-free asset: central bank money. Presumably when deposits were only redeemable in banknotes (as is currently the case) and one had to trudge to an ATM to get them, this afforded people time for sober contemplation, thus rendering runs less damaging. But if small depositors can withdraw money from their accounts while in their pajamas, this makes banks more susceptible to sudden shifts in sentiment, goes the Carney critique.

I don’t buy it. … even in jurisdictions without deposit insurance, I still don’t think that shifts into digital currency in times of stress would exceed shifts into banknotes. A bank will quickly run out of banknotes during a panic as it meets client redemption requests, and will have to make arrangements with the central bank to get more cash. Thanks to the logistics of shipping cash, refilling the ATMs and tellers will take time. In the meantime a highly visible lineup will grow in front of the bank, exacerbating the original panic. Now imagine a world with digital currency. In the event of a panic, customer redemption requests will be instantaneously granted by the bank facing the run. But that same speed also works in favor of the bank, since a request to the central bank for a top-up of digital currency could be filled in just a few seconds. Since all depositors gets what they want when they want, no lineups are created. And so the viral nature of the panic is reduced.

But what about large depositors like corporations and the rich … ? During a crisis, won’t these sophisticated actors be more likely to pull uninsured funds from a bank, which have a small possibility of failure, and put them into risk-free central bank digital currency?

I disagree. In a traditional economy where banknotes circulate, CFOs and the rich don’t generally flee into paper money during a crisis, but into short-term t-bills. Paper money and t-bills are government-issued and thus have the same risk profile, t-bills having the advantage of paying positive interest whereas banknotes are barren. The rush out of deposits into t-bills is a digital one, since it only requires a few clicks of the button to effect. Likewise, in an economy where digital currency circulates, CFOs are unlikely to convert deposits into barren digital currency during stress, but will shift into t-bills. The upshot is that banks are not more susceptible to large deposit shifts thanks to the introduction of digital currency—they always were susceptible to digital bank runs thanks to the presence of short-term government debt.

Of course, depending on the type of CBDC, central banks might also choose to pay negative interest on CBDC in order to depress demand for it.

“Fiscal and Monetary Policies”

The Journal of Economic Dynamics and Control has published a special issue with the papers of the conference on “Fiscal and Monetary Policies” that the Study Center Gerzensee co-organized with the JEDC, the St. Louis Fed, the University of Bern, and the Swiss National Bank.

This earlier post contains a link to the conference program.