Micro Aggression and Political Correctness

In the NZZ, Andrea Köhler qualifies the micro aggression debate on US college campuses as a “witch hunt.”

Um keine Missverständnisse aufkommen zu lassen: Der allgemeine Konsens, Diskriminierung zu ahnden, ist hier nicht gemeint. Selbstverständlich gilt es, traumatisierte Menschen zu unterstützen und Minoritäten zu schützen; letzteres hat das Attentat von Orlando einmal mehr deutlich gemacht. Doch die Hypersensibilität an den Universitäten unterminiert jede Form des intellektuellen Denkens, das per definitionem in der Auseinandersetzung mit unterschiedlichen Positionen gedeiht. Von Humor oder Ironie ganz zu schweigen.

Im Unterschied zur ersten Political-Correctness-Welle, die in den 80er und 90er Jahren den historischen und literarischen Kanon herausforderte, geht es heute nicht mehr um die Diversifizierung des Lehrplans oder das Aufbegehren gegen die Diskriminierung marginalisierter Minderheiten, sondern um das emotionale Wohlbefinden einer Generation, die als verwöhnt und übersensibel gilt. Mit diesem aus dem Ruder gelaufenen Kinderschutz wird den Studierenden eine psychische Fragilität attestiert, der der kleinste Dissens als «traumatisierend» gilt.

Jonathan McMillan’s “The End of Banking”

Jonathan McMillan proposes a systemic solvency rule which stipulates that

[t]he value of the real assets of a company has to be greater than or equal to the value of the company’s liabilities in the worst financial state. (p. 147)

That is, the financial assets of a company have to be financed by equity. This reminds of Kotlikoff’s limited purpose banking, see here and here. McMillan (who is actually two persons, a banker and a journalist) argues that Kotlikoff’s proposal

is a step in the right direction to address the boundary problem, [but] it creates an overwhelming public authority [that monopolizes monitoring]. Moreover, it does not solve the boundary problem. Limited purpose banking requires the regulator to differentiate between financial and nonfinancial companies. … Finding clear legal criteria to categorize a company as financial is impossible. (p. 140)

OMT Does Not Manifestly Exceed ECB Competences

The German Federal Constitutional Court has decided that the policy decision on the OMT program does not “manifestly” exceed the competences attributed to the European Central Bank:

If the conditions formulated by the Court of Justice of the European Union in its judgment of 16 June 2015 (C-62/14) and intended to limit the scope of the OMT programme are met, the complainants’ rights under Art. 38 sec. 1 sentence 1, Art. 20 secs. 1 and 2 in conjunction with Art. 79 sec. 3 of the Basic Law (Grundgesetz – GG) are not violated by the fact that the Federal Government and the Bundestag have not taken suitable steps to revoke or limit the effect of the policy decision of the European Central Bank of 6 September 2012 concerning the OMT programme. Furthermore, if these conditions are met, the OMT programme does not currently impair the Bundestag’s overall budgetary responsibility.

US Labor Market and Monetary Policy

In a blog post, Stephen Williamson argues that the US labor market is doing just fine.

Given recent productivity growth, and the prospects for employment growth, output growth is going to be low. I’ll say 1.0%-2.0%. And that’s if nothing extraordinary happens.

Though we can expect poor performance – low output and employment growth – relative to post-WWII time series for the United States, there is nothing currently in sight that represents an inefficiency that monetary policy could correct. That is, we should expect the labor market to remain tight, by conventional measures.

CAD-Coin

In the FT, Philip Stafford reports about a digital currency initiative by the Bank of Canada and commercial banks. It

will involve issuing, transferring and settling central bank assets on a distributed ledger via a token named CAD-Coin.

But:

The Bank of Canada said the experiment was a proof-of-concept and confined to interbank payment systems. … “None of our experiments are to develop central-bank issued e-money‎ for use by the general public.”

“Dirk Niepelt über die Folgen eines Brexit für die Schweiz (What Brexit Means for Switzerland),” SRF, 2016

SRF, Tagesgespräch, June 16, 2016. HTML with link to MP3.

  • Half-hour-long interview on the Swiss news channel.
  • Topics include monetary policy, exchange rates, financial stability, Brexit.

“Elektronisches Notenbankgeld ja, Vollgeld nein (Reserves for All, But no Sovereign Money),” NZZ, 2016

Neue Zürcher Zeitung, June 16, 2016. PDF, HTML. Ökonomenstimme, June 17, 2016. HTML.

  • Vollgeld seems attractive because it decouples the supply of money from intermediation. By enabling everyone to use legal tender for electronic payments, electronic base money would satisfy a need.
  • Vollgeld would prevent bank runs, at least partly; render deposit insurance unnecessary and reduce moral hazard; could help stabilize the credit cycle; and would redistribute seignorage to the central bank.
  • But these objectives can be obtained with less intrusive means.
  • Moreover, a Vollgeld system would be hard to enforce. Banks and their clients would establish new means of payment to circumvent the regulation. And in times of crisis, the central bank would feel obliged to provide liquidity assistance and bail outs.
  • The central problem is not that private money is used for transactions; it rather is that the money’s users rely on the central bank to guarantee the substitutability of private money and base money. In a democracy, the central bank cannot credibly let large parts of the payment system go under.
  • A sudden, forceful change of regime does not offer a credible way out of this trap.
  • But letting the general public access central bank reserves without abolishing private money from one day to the other may open a path towards a new arrangement where the public learns to distinguish between private and base money and where only the latter is publicly guaranteed.

Science and the Senate

The Economist’s Graphic Detail reports about research documenting that

While the Senate’s interest in science is generally quite low, Senate Democrats are three times more likely than Republicans to follow science-related Twitter accounts like NASA or the National Oceanic and Atmospheric Administration. Interest in science, the authors conclude, “may now primarily be a ‘Democrat’ value”.

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Covered Interest Parity and the Risk-Taking Channel

In a speech, Hyun Song Shin points out that CIP increasingly fails to hold: the Dollar interest rate implied by FX swaps vis-a-vis the Euro, Yen, Pound or Swiss Franc is “too high.” Moreover, the deviation is negatively correlated with the Dollar’s spot exchange rate: When the Dollar appreciates, the deviation from CIP widens.

Shin argues that bank behavior explains the deviation:

… the US dollar is used widely throughout the global banking system, even when neither the lender nor the borrower is a US resident. … The consequence of the dollar’s international role in transactions is that the global banking system runs on dollars.

… key feature of the risk-taking channel is that when the dollar depreciates, banks lend more in US dollars to borrowers outside the United States. Similarly, when the dollar appreciates, banks lend less, or even shrink outright the lending of dollars. In this sense, the value of the dollar is a barometer of risk-taking and global credit conditions.

… The breakdown of covered interest parity is a symptom of tighter dollar credit conditions putting a squeeze on accumulated dollar liabilities built up during the previous period of easy dollar credit. During the period of dollar weakness, global banks were able to supply hedging services to institutional investors at reasonable cost, as cross-border dollar credit was growing strongly and easily obtained. However, as the dollar strengthens, the banking sector finds it more challenging to roll over the dollar credit previously supplied.

One way to summarise the finding is that there is a “triangle” that links a stronger dollar, more subdued dollar cross-border flows, and a widening of the cross-currency basis against the dollar.

With the Euro’s rising role as an international funding currency CIP deviations also show up for the Euro.

… the risk-taking channel for the euro is starting to show the tell-tale negative relationship between a weaker currency value and expanding cross-border lending in that currency; it was not there before the crisis, but has emerged since the crisis.

The upshot:

The financial channel of exchange rates operates when currency appreciation elicits valuation changes on borrower balance sheets. …

When we do international finance, we often buy into the “triple coincidence” where the GDP area, decision-making unit and currency area are one and the same … Currency appreciation or depreciation then acts on the economy through changes in net exports. [But that’s misleading.]

Sovereign Debt in Bank Balance Sheets

In the FT, Martin Arnold reports about estimates by Fitch according to which

European banks would have to raise up to €170bn of extra capital or sell almost €500bn of sovereign debt if regulators push ahead with plans to break the “doom loop” tying lenders to their governments …

The European Commission and the European Central Bank support steps in that direction while some European governments oppose them.

Financial Transactions Tax—Stalled

In the FT, Jim Brunsden reports that the European Commission’s 2013 proposal to install a financial transactions tax has not made much progress. At least nine countries have to sign up.

The report highlights that key differences remain on how to craft exemptions from the tax, including the problem of how to shield transactions in other non-participating EU countries such as Britain. Other splits concern how to protect market-making activities by banks, and also what carveouts should apply for derivatives that are used by traders to hedge risk when they buy sovereign debt.

New Questions about Greece’s Indebtedness

On the FT’s Alphaville blog, Matthew Klein reports about discrepancies between IMF and Greek (and EU) assessments of Greek net indebtedness. The IMF appears to report lower Greek financial asset holdings than the Greek Central Bank.

Matthew Klein quotes the Greek Central Bank:

We would like to clarify that the Bank of Greece compiles its financial accounts, from which data on the general government’s net debt are derived, according to European standards. The Bank of Greece’s data are compatible with the ECB’s and Eurostat’s rules (ESA 2010) regarding financial accounts and are used as an integral part in the production of the Monetary Union’s Financial Accounts. These data can also be accessed through the ECB’s Statistical Data Warehouse at http://sdw.ecb.europa.eu/reports.do?node=1000002429.

The IMF’s series on the general government’s net debt come from its WEO database and are not necessarily based on official statistics provided by Greek Statistical authorities. We understand that they may be compiled by IMF’s desk economists (and not its Statistics Department) and we cannot vouch for their accuracy, since they are adjusted according to the programming needs of the IMF. At first glance, they appear to be based on outdated information contained in past EDP [excessive deficit procedure] documentation.

Human Intelligence and Helpless Infants

The Economist reports about research by Steven Piantadosi and Celeste Kidd from the University of Rochester who tried to explain why humans tend to be intelligent. Their answer: Because human babies are extraordinarily helpless when compared with other animals.

… human infants take a year to learn even to walk, and need constant supervision for many years afterwards [indeed]. That helplessness is thought to be one consequence of intelligence—or, at least, of brain size. In order to keep their heads small enough to make live birth possible, human children must be born at an earlier stage of development than other animals. …

… helpless babies require intelligent parents to look after them. But to get big-brained parents you must start with big-headed—and therefore helpless—babies. The result is a feedback loop, in which the pressure for clever parents requires ever-more incompetent infants, requiring ever-brighter parents to ensure they survive childhood.

Deposit Insurance: Economics and Politics

On VoxEU, Charles Calomiris and Matthew Jaremski discuss the origins of bank liability insurance. They argue that it is redistribution, not the aim to boost efficiency, which explains a lot of the action.

… there are two theoretical approaches to explaining the creation and expansion of deposit insurance. The first is an economic approach grounded in potential efficiency gains from limiting bank runs (i.e. the public interest motivation). The second is a political approach grounded in the rising power of special interest groups that favoured insurance as a means to access subsidies (i.e. the private interest motivation).

… Because insurance reduces the incentive for market discipline, it may increase fundamental insolvency risk … whether, on balance, bank liability insurance reduces or increases risk … is an empirical question. Economic theories of liability insurance only make sense on economic grounds if the gains from liquidity risk reduction tend to exceed the moral hazard or adverse selection costs from reduced market discipline.

… Political models seek to explain why liability insurance may be chosen to favour certain groups in society even when it imposes large costs on society in the form of higher systemic risk for banks. In this context, liability insurance needs to be understood as part of an equilibrium political bargain achieved by a winning political coalition. …

… we review empirical evidence about, first, which factors are shown to be instrumental in creating bank liability insurance; and second, evidence about the consequences of passing insurance … We find that political theories are much more consistent with both sets of evidence.

… the historical push for liability insurance in the US came from a coalition of small rural bankers and landowning farmers …

Worldwide, bank liability insurance remained a unique (and controversial) policy choice of the US until the late 1950s, but it spread rapidly throughout the world in recent decades …

Like the adoption of liability insurance in the US, the recent global wave of legislation creating and expanding insurance can also be traced to political influences. …

The expansion of liability insurance has been generally associated with reductions in banking system stability …

The political theories of liability insurance point to a major political advantage. It provides an effective means for a government to supply hard-to-trace subsidies to particular classes of bank borrowers … agricultural borrowers or urban mortgage borrowers …

Liability insurance can create a subsidy for banks (which they can pass through, in part, to borrowers) only if prudential regulation and supervision permit banks to take risks at the expense of the insurer. Thus, lax regulation and supervision are an important part of the political bargain that allows liability insurance to deliver subsidies to banks and targeted borrowers. …

The Massachusetts Historical Commission And American Political Sclerosis

On his blog, John Cochrane happily reports about apparent agreement between Larry Summers and himself regarding the dangers of regulatory overkill and incompetence of government officials.

John writes:

This is a watershed. Here is the kind of reach out for middle ground that could unlock our political and economic sclerosis.  Larry is likely to be in government again sooner or later, and I hope he will push hard for this — and with more effect than the last hundred or so anti-red-tape and regulatory reform commissions.

Basic Income

In the FT, John Kay points out that basic income proposals have one major drawback: They are very—expensive.

Not everyone agrees. Switzerland will hold a national referendum on the introduction of an unconditional basic income on June 5th, 2016. The supporters of the proposal write:

A basic income already exists today. Everyone obtains one from somewhere; otherwise we would not be able to live. In our society today, no one can survive without an income. The level of a basic income is currently included in the existing incomes. The shift that is needed now is to make current incomes free of conditions up to the level of this basic economic security. In fact, the introduction of an unconditional basic income does not cost anything. To assure basic security by means of a social contract will bring about a new situation for income of all origins. It opens up the possibility for negotiations at all levels. Principally, the existing incomes could be decreased by the amount of the basic income.

Addendum: The Economist discusses the pros and cons of universal basic income proposals.