Collateral Values in ECB Operations

In the NZZ, Kjell Nyborg questions whether the collateral values of the securities the ECB accepts in monetary policy operations reflect market values. He argues that the valuation is discretionary and politicized.

Meine Analyse macht deutlich, dass der Besicherungsrahmen in der Euro-Zone in unterschiedlicher Ausprägung unter all diesen Problemen leidet. Das öffentliche Verzeichnis der zulässigen notenbankfähigen Sicherheiten enthält 30 000 bis 40 000 verschiedene Wertpapiere, von Staatsanleihen bis hin zu unbesicherten Bankanleihen und forderungsbesicherten Wertpapieren (Asset-Backed Securities). Die überwiegende Mehrheit dieser Wertpapiere hat keinen Marktpreis. Ungefähr ein Drittel all dieser Sicherheiten wird in nichtregulierten Märkten gehandelt. Zudem können Banken nichtmarktfähige Anlagen und Wertpapiere mit «privaten Ratings» verwenden, die nicht im öffentlichen Verzeichnis sind. Daher basieren die Werte der Sicherheiten mehrheitlich auf Modell- statt auf Marktpreisen. Interessanterweise ziehen Banken es vor, Sicherheiten zu benutzen, bei denen häufiger theoretische Preise verwendet werden. Generell tendiert die Besicherungspolitik der Euro-Zone zu risikoreichen und illiquiden Sicherheiten. Die untergeordnete Rolle des Marktes sieht man auch an der Häufigkeit, mit welcher die Sicherheitsabschläge für die Repo-Geschäfte des Euro-Systems aktualisiert werden: Dies geschieht lediglich alle drei bis vier Jahre.

Im Kern des Geldsystems in der Euro-Zone gibt es somit wenig Spielraum für Marktkräfte oder Marktdisziplin. Insgesamt kann die Besicherungspolitik des Euro-Systems als expansiv beschrieben werden. Die Liste notenbankfähiger Sicherheiten ist äusserst umfangreich und oft auf die «Bedürfnisse» von Banken in verschiedenen Ländern zugeschnitten. Sicherheiten können, zum Beispiel, durch Staatsgarantien aufgewertet werden. … Weil es im Kern des Euro-Geldsystems an Marktkräften und Marktdisziplin fehlt, entsteht ein Vakuum, das von anderen Kräften, wie Rating-Agenturen und der Politik, aufgefüllt wird.

… Ich dokumentiere, dass DBRS eine ausschlaggebende Rolle innehatte, indem sie über eine lange Zeit hinweg Italien und Spanien ein Rating von A– und Portugal ein solches von BBB– gab. Das hob den Wert der in diesen Ländern begebenen Sicherheiten um ungefähr bis 200 Mrd. € an und kann als unterstützende Massnahme für indirekte Bail-outs interpretiert werden.

Im Dezember 2011 und Februar 2012 hat die EZB eine ihrer wichtigsten geldpolitischen Massnahmen vor dem Beginn des Quantitative Easing implementiert. … Um aus dieser Möglichkeit Vorteil zu schlagen, hat die italienische Regierung gleichzeitig eine präzedenzlose Anzahl von Garantien für Bankanleihen mit niedrigem oder gar keinem Rating gesprochen. Damit erhöhte sie deren Besicherungswert. Darüber hinaus hat die EZB mehr als 10 000 unbesicherte, auf nichtregulierten Märkten gehandelte Bankanleihen der öffentlichen Liste notenbankfähiger Sicherheiten hinzugefügt, obwohl der aggregierte Wert notenbankfähiger Sicherheiten die Nachfrage von Banken nach Zentralbankgeld schon bei weitem überstieg.

Krypto Currencies and Privacy

On Wired, Andy Greenberger discusses Monero, Dash, and Zcash, krypto currencies that provide more privacy than bitcoin and its derivatives.

Unlike commercial services like PayPal, Bitcoin allows anyone to spend money online without providing identifying details. But if someone’s Bitcoin address is linked with their real identity, any transaction from that address is entirely visible on the public blockchain … Hiding those transactions requires taking extra steps, like routing bitcoins through “tumblers” that mix up coins with those of strangers—and occasionally steal them—or using techniques like “coinjoin,” built into some bitcoin wallet programs, that mix payments to make them harder to trace. “If I pay my rent in Bitcoin, it wouldn’t be that hard for the landlord to figure out how much money I earned if I don’t take extra precautions” …

Monero … implements a few features that Bitcoin still can’t offer. It uses a technique called “stealth addresses” to generate addresses for receiving Monero that are essentially encrypted; the recipient can retrieve the funds, but no one can link that stealth address to the owner. It employs a technique called “ring signatures,” which means every Monero spent is grouped with as many as a hundred other transactions, so that the spender’s address is mixed in with a group of strangers, and every subsequent movement of that money makes it exponentially more difficult to trace back to the source. And it uses something called “ring confidential transactions,” which hides the amount of every transaction.

…

Monero isn’t the first cryptocurrency designed to offer a financial privacy panacea: Dash, formerly known as Darkcoin, integrates the “coinjoin” technique that allows bitcoin users to mix their transactions with a few other spenders in what Todd calls a weaker form of anonymity than Monero offers. More recently, Zcash debuted with the strongest anonymity promises yet—it uses cryptographic tricks designed to make tracing a transaction not only unlikely, but mathematically impossible. Zcash has yet to be integrated into dark web markets, though, and still requires wielding the command line to use.

Ageing Economies Grew Faster

That’s what Daron Acemoglu and Pascual Restrepo document in an NBER working paper.

Figure 2 [below] provides a glimpse of the relevant pattern by depicting the raw correlation between the change in GDP per capita between 1990 and 2015 and the change in the ratio of the population above 50 to the population between the ages of 20 and 49. … even when we control for initial GDP per capita, initial demographic composition and differential trends by region, there is no evidence of a negative relationship between aging and GDP per capita; on the contrary, the relationship is significantly positive in many specifications.
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In an article published in 2012 with Martín Gonzalez-Eiras (see also the VoxEU column), we provide a theory that can account for this finding.

Happiness

In the FAZ, molecular biologist and Tibetan monk Matthieu Ricard advises to find “happiness” (“Glück, innere Zufriedenheit”) by acquiring certain attitudes:

Wir Buddhisten, aber auch Psychologen, verstehen unter Glücklichsein keinen für sich alleinstehenden Gefühlszustand, sondern eine Gruppe von menschlichen Eigenschaften. Dazu zählen innere Freiheit, emotionale Ausgeglichenheit, altruistische Liebe, Mitgefühl. Für mich kann Glück nicht eigennützig sein. Wer sich selbst die ganze Zeit ins Zentrum stellt, fühlt sich mit der Zeit elend und ist obendrein verwundbar. Denn auch ich-zentrierte Personen kommen nicht ohne andere Menschen aus.

Um zu innerer Zufriedenheit zu gelangen, muss man den entgegengesetzten Weg gehen, und zwar die anderen Menschen ins Zentrum stellen, indem man diesen mit Wohlwollen, Großzügigkeit, Mitgefühl und Altruismus begegnet. Großzügig und freundlich zu sein, erzeugt ein Gefühl von innerer Harmonie. Diese Form von Glücklichsein nutzt sich zudem nicht ab, wie das bei den hedonistischen Freuden der Fall ist, sondern wird mit der Zeit immer stärker und verringert außerdem die Verletzlichkeit.

BIS Research Review

In an Independent Review of BIS Research, Franklin Allen, Charles Bean and José De Gregorio conclude that

… BIS research clearly ‘punches above its weight’ compared to its central bank peers. Finally, the relative performance of the BIS has clearly improved over the past five years, a tribute to the influence of the previous (Steve Cecchetti) and current (Claudio Borio and Hyun Shin) leadership …

They recommend, among other points:

The research programme should have a more clearly defined long-term focus, be less driven
by short-term needs, and seek to be more holistic in approach.

The internal culture should be more open to challenge and research should avoid focussing
on generating results to support the ‘house view’.

Redistribution at the EU Level

On VoxEU, Paolo Pasimeni and Stéphanie Riso argue that at the EU level, cross-border redistribution is limited:

The EU budget accounts for roughly 1% of the EU’s GDP. Around 80% of it, on average, returns back to each country in the form of various allocated expenditures, and only a limited part is actually redistributed among countries. On average over the past 15 years, the redistribution operated by the budget at the level of the EU was equal to 0.2% of the Union’s GDP. As a matter of comparison, the average yearly cross-border flows operated through the federal budget in the US between 1980-2005 was equal to 1.5% of GDP (d’Apice 2015).

Daniel Quinn’s “Ishmael”

In Daniel Quinn’s “Ishmael,” a gorilla offers his perspective on human civilization and the narratives surrounding it.

Ishmael—the gorilla—characterizes the early agricultural revolution as the takeoff of the nowadays-dominant “Takers’” culture, a culture that does not only reject the hunter-gatherer and herder life of “Leaver” tribes but also finds it acceptable to eradicate the latter. The Takers reject the notion that man is part of a balanced, competitive and evolving natural system; but this rejection places humanity on a trajectory ultimately leading to self-destruction.

The gods realized that “of all the trees in the garden, only the Tree of the Knowledge of Good and Evil could destroy Adam.” (9, 6) And so they forbid Adam to taste the fruit of that tree. (He tasted anyway.) The ban constitutes a mystery for Takers. For they think of themselves as destined to rule the world, and “knowledge of good and evil is fundamentally the knowledge the rulers of the world must exercise, because every single thing they do is good for some but evil for others.” (9, 7)

According to Ishmael, the mystery is solved by noting that Genesis reflects a narrative of the Semites, a Leaver people, who experienced the expansion of the Taker culture as Cain slaughtering his brother Abel. The Hebrew later adopted the tale but could no longer make sense of it because they had adopted the Taker culture.

Ishmael makes some other points: “The Takers accumulate knowledge about what works well for things. The Leavers accumulate knowledge about what works well for people.” (10, 8) “The Takers are those who know good and evil, and the Leavers are … those who live in the hands of the gods.” (11, 6) The Leavers are in a position to evolve; they are part of the general community of life, while Takers believe that creation came to an end with man. (12, 3) “The Takers’ story is, ‘The gods made the world for man, but they botched the job, so we had to take matters into our own, more competent hand.’ The Leavers’ story is, ‘The gods made man for the world …; this seems to have worked pretty well so far, so we can take it easy and leave the running of the world to the gods.’” (12, 6)

How Derivatives Markets Responded to the De-Pegging of the Swiss Franc

In a Bank of England Financial Stability Paper, Olga Cielinska, Andreas Joseph, Ujwal Shreyas, John Tanner and Michalis Vasios analyze transactions on the Swiss Franc foreign exchange over-the-counter derivatives market around January 15, 2015, the day when the Swiss National Bank de-pegged the Swiss Franc. From the abstract:

The removal of the floor led to extreme price moves in the forwards market, similar to those observed in the spot market, while trading in the Swiss franc options market was practically halted. We find evidence that the rapid intraday price fluctuation was associated with poor underlying market liquidity conditions, in particular the limited provision of liquidity by dealer banks in the first hour after the event. Looking at longer-term effects, we observe a reduced level of liquidity, associated with an increased level of market fragmentation, higher market volatility and an increase in the degree of collateralisation in the weeks following the event.

Determinism and Free Will

In the Stanford Encyclopedia of Philosophy entry on Causal Determinism, Carl Hoefer suggests in the concluding section (Determinism and Human Action) that there is hope for those who want to believe in free will:

There is a long tradition of compatibilists arguing that freedom is fully compatible with physical determinism; a prominent recent defender is John Fischer (1994, 2012). Hume went so far as to argue that determinism is a necessary condition for freedom—or at least, he argued that some causality principle along the lines of “same cause, same effect” is required. …

Physics, particularly 20th century physics, does have one lesson to impart to the free will debate; a lesson about the relationship between time and determinism. Recall that … the fundamental theories … if they are deterministic at all, are time-symmetrically deterministic. That is, earlier states of the world can be seen as fixing all later states; but equally, later states can be seen as fixing all earlier states. …

Nor does 20th (21st) -century physics countenance the idea that there is anything ontologically special about the past, as opposed to the present and the future. In fact, it fails to use these categories in any respect, and teaches that in some senses they are probably illusory. So there is no support in physics for the idea that the past is “fixed” in some way that the present and future are not, or that it has some ontological power to constrain our actions that the present and future do not have. It is not hard to uncover the reasons why we naturally do tend to think of the past as special, and assume that both physical causation and physical explanation work only in the past present/future direction (see the entry on thermodynamic asymmetry in time). But these pragmatic matters have nothing to do with fundamental determinism. If we shake loose from the tendency to see the past as special, when it comes to the relationships of determination, it may prove possible to think of a deterministic world as one in which each part bears a determining—or partial-determining—relation to other parts, but in which no particular part (region of space-time, event or set of events, …) has a special, privileged determining role that undercuts the others. Hoefer (2002a) and Ismael (2016) use such considerations to argue in a novel way for the compatiblity of determinism with human free agency.

Pecuniary Externalities and Aggregate Demand Externalities

In Econometrica, Emmanuel Farhi and Iván Werning neatly summarize how their work on demand externalities fits in the literature.

… pecuniary externalities, which were first shown to arise when a simple friction, market incompleteness, is introduced into the Arrow–Debreu framework (see, e.g., Hart (1975), Stiglitz (1982), Geanakoplos and Polemarchakis (1985), Geanakoplos, Magill, Quinzii, and Dreze (1990)). The logic is as follows. When asset markets are incomplete and there is more than one commodity, a redistribution of asset holdings generically induces relative price changes in spot markets, in each state of the world. These relative price changes, in turn, affect the spanning properties of the limited assets that are available, potentially improving insurance. Such a pecuniary externality is not internalized by private agents. As a result, the equilibrium is generically constrained inefficient: it can be improved upon by interventions in the existing financial markets. Similar results obtain in economies with borrowing constraints that depend on prices of goods and assets, or when contracting is constrained by private information (see, e.g., Greenwald and Stiglitz (1986)). … [Other work in this literature includes Caballero and Krishnamurthy (2001), Lorenzoni (2008), Farhi, Golosov, and Tsyvinski (2009), Bianchi and Mendoza (2010), Jeanne and Korinek (2010), Bianchi (2011), Korinek (2011), Davilla (2011), Stein (2012), Korinek (2012a, 2012b), Jeanne and Korinek (2013), Woodford (2011).]

… Instead of pecuniary externalities, our theory emphasizes aggregate demand externalities. In addition to providing a new foundation for macroprudential policies, our framework, focusing on monetary policy and nominal rigidities, is well posed for the joint study of monetary and macroprudential policy.

… using a perturbation argument similar in spirit to that in Geanakoplos and Polemarchakis (1985), we show that equilibria that are not first best can be improved upon by interventions in financial markets, except in non-generic knife-edge cases. … In [the pecuniary externality] literature, the key frictions lie in financial markets themselves; in our baseline model, we assume complete markets. Pecuniary externalities rely on price movements; in our framework, price rigidities tend to negate such effects. Our results are instead driven by aggregate demand externalities that arise from nominal rigidities.

The Early Bank of England and its Contemporaries

In the Journal of Economic Literature, William Roberds reviews Christine Desan’s “Making Money: Coin, Currency, and the Coming of Capitalism” and he provides his own perspective on European monetary history.

… the transition of the Bank of England’s notes from the status of experimental debt securities (in 1694) to “as good as gold” (1833) required more than a century of legal accommodation and business comfort with their use.

Desan emphasizes England’s traditions of nominalism (as opposed to metallism) and monetary restraint as well as early experiments in monetary substitution in laying the foundations for the Bank of England’s success. Lobbying played its role, too.

Roberds discusses the experience of note issuing institutions in other countries.

At the time of the Bank’s founding, there were about twenty-five publicly owned or sponsored banks operating in Europe. These institutions are largely forgotten today; most were dissolved by the early nineteenth century and only one continues in existence, Sweden’s Riksbank. …

These banks were run by and for the merchant communities in their respective cities [Amsterdam, Genoa, Hamburg, and Venice] … The existence of the early municipal banks depended on a form of nominalism more extreme than what prevailed in contemporary England. Merchants in these “banking cities” were required by law and by custom to settle all bills of exchange (the dominant form of commercial credit) with transfers of money on the ledgers of the local public bank. The practical advantage of such a restriction was that it reduced or eliminated the possibility of settlement in the debased coins … the municipal banks’ ledger money was often seen as more reliable than the typical coin in circulation …

Most of these banks failed after getting involved in speculative episodes, hyperinflation, or political turmoil. The Bank of England was lucky.

“Kosten eines Vollgeld-Systems sind hoch (Costly Sovereign Money),” Die Volkswirtschaft, 2016

Die Volkswirtschaft 1–2 2017, December 21, 2016. HTML, PDF.

Banning inside money creation would be unnecessary, insufficient, not enforceable, and besides the point. The way forward is to grant everyone access to central bank reserves and let investors choose between reserves and deposits.

Zoroastrianism, Mandaeism, Yazidism

The NZZ runs a series on endangered religious minorities in the middle East.

Daniel Steinvorth reports about Yazidis. More on Yazidism.

Inga Rogg reports about the gnostic Mandaeans in Irak. More on Mandaeism.

Ulrich von Schwerin reports about the Zoroastrian heritage in Iran. More on Zoroastrianism.

Switzerland’s New Immigration Law

In the Guardian, Jon Henley reports about Switzerland’s new immigration law. The Swiss parliament rejected quotas on EU workers, contrary to what a 2014 referendum demanded. Instead, the new law requires that residents be given priority in new job vacancies.

[C]ross-border commuters to Swiss jobs, plus EU residents in Switzerland, will be able to register with a Swiss job centre and get the same treatment as Swiss citizens.

Thomas Schelling

In the Washington Post, Henry Farrell writes about Schelling’s work and how it shaped the Cold War.

Schelling’s contribution was to show how the two sides could think systematically about coordinating (where they had common interests) and deterring each other from unwanted actions (where they did not). This arguably gave rise to a much more stable world — the world of the Cold War — where both sides struggled with each other for dominance, but tacitly agreed on some of the rules of the game, and didn’t try to push each other too far. The Cold War was organized around deterrence, and deterrence mostly rested on Schelling’s ideas about credible threats. …

The U.S. stationed a small garrison in Berlin, which was embedded deep in East German territory, and indefensible against any serious attack. As Schelling described it, these soldiers’ job was not to defend the city but to die if it were attacked. This would then trigger a large scale U.S. response, since no U.S. president could tolerate the USSR killing American soldiers and not retaliate. Hence, by the logic of credible threats, the USSR would not attack Berlin.

In the New York Times, William Grimes writes that

Schelling analyzed superpower negotiations in the way that he analyzed the conflicts between, say, a blackmailer and his client, a parent and a child, or management and labor. In each case, he wrote, “there is a mutual dependence as well as opposition,” with each side seeking out tests of strength at less than crisis levels. …

one side in a negotiation can strengthen its position by narrowing its options … He also argued that uncertain retaliation is more credible and more efficient than certain retaliation. …

“The Strategy of Conflict” introduced the concept of the focal point, often called the Schelling point, to describe a solution that people reach without benefit of communicating, relying instead on “each person’s expectation of what the other expects him to expect to be expected to do.” …

Professor Schelling moved on to other social questions that seemed to be fertile ground for game theory, notably the dynamics behind racial change in American neighborhoods.

Certain Bribe Giving Should Be Treated As Legal

In a 2011 paper, Kaushik Basu argued that “harassment bribes”—bribes that people give to officials in order to get what they are legally entitled to—should be treated as legal. The reasoning is as follows:

Under the current law [treated as illegal], … once a bribe is given, the bribe giver and the bribe taker become partners in crime. …

Under the new law [treated as illegal], when a person gives a bribe, she will try to keep evidence of the act of bribery so that immediately after the bribery she can turn informer and get the bribe taker caught. The upshot of this is not that the bribe taker will get caught but he will not take the bribe in the first place.

Thanks to JP Koning.