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.”
SRF, Tagesgespräch, June 16, 2016. HTML with link to MP3.
Neue Zürcher Zeitung, June 16, 2016. PDF, HTML. Ökonomenstimme, June 17, 2016. HTML.
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”.
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.]
In the NZZ,
The IMF’s debt sustainability analysis paints a bleak picture … about previous IMF assessments and about the prospects for Greece.
According to a Pew Research Center survey, Poles and Hungarians hold the most favorable view of the European Union. In most countries, attitudes have become more skeptical.
From The Economist’s Graphic detail:
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.
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.
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.
From the FT.
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.
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. …
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.
… by year, country and status, from the FT.
June 1st marks the official opening of the longest railway tunnel on Earth, cutting through the Alps.
Official website. Profile of the rail track between Zurich and Lugano. Report about the contender.
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.
In the FT, Martin Wolf discusses Mervyn King’s proposal to make the central bank a “pawnbroker for all seasons” as laid out in King’s recent book “The End of Alchemy.”
Lord King offers a novel alternative. Central banks would still act as lenders of last resort. But they would no longer be forced to lend against virtually any asset, since that very possibility must create moral hazard. Instead, they would agree the terms on which they would lend against assets in a crisis, including relevant haircuts, in advance. The size of these haircuts would be a “tax on alchemy”. They would be set at tough levels and could not be altered in a crisis. The central bank would have become a “pawnbroker for all seasons”.
The key part of this quote is “could not be altered in a crisis.” Central banks and governments have always found it very difficult to commit not to support systemically (or politically) important players ex post. This problem lies at the heart of many problems in the financial system and elsewhere. By assuming that central banks could commit under the proposed arrangement, the proposal abstracts from a key friction.
In the Richmond Fed’s Econ Focus, Eric Leeper explains his views.
My view is that central banks have put far too many resources into understanding tiny fluctuations and too few resources into the things that actually matter. …
Something like the basic Taylor rule doesn’t really serve as a useful litmus test for what policy is doing in the face of these DCDs, so it’s a little bizarre to me that a lot of central banks routinely calculate what the path of the interest rate would be with a simple Taylor rule as if that’s a useful benchmark. It’s not obvious to me what that’s a benchmark for.
Now, how all of [current policy] ties into the active/passive framework is really an open question. A lot of it depends on what you think is going to happen to the Fed’s balance sheet.
… the recovery from the Great Depression in 1933 when Roosevelt took the United States off the gold standard. Going off the gold standard converted government debt from effectively real debt to nominal debt because the price level under the gold standard was beyond the control of the government. At the same time, the fiscal actions Roosevelt undertook were what nowadays we would call an unbacked fiscal expansion. … This is like a fiscal rule that says the government will run deficits until the price level recovers to some pre-depression level. And the Fed was just keeping the interest rate flat. So it looked a lot like passive monetary/ active fiscal.
The thing is, there’s not a lot of theoretical justification for creating these walls. What we’re finding more and more is that there’s always some role in optimal policy for using surprise inflation to revalue debt and bond prices, so long as there is some maturity to government debt. … maybe it is a slippery slope once you’re in the political realm. But from an academic perspective, if your objective is to arrive at a rule that would be mechanically followed by a central bank, then there’s no harm in having fiscal variables enter that rule.
On VoxEU, Torben Andersen and Jonas Maibom point out that empirical findings of a positive correlation between efficiency and equity need not contradict elementary theoretical predictions.
The trade-off [between efficiency and equity] applies at the frontier of the possibility set of combinations of economic performance and income equality available to policy makers. If policies and institutions are ‘well-designed’, the country is at the frontier. There is no free lunch and a trade-off inevitably arises.
However, there may be many historical, institutional and political reasons why countries are not at the frontier. … in which case there is scope for improvements in both economic performance and income equality.
This insight leaves one important message. In cross-country comparisons … differences in the distance to the frontier should be accounted for …
In the NZZ, Michael Schaefer reports about a study that analyzes the portfolio composition of public sector entities and social security institutions. Cantons and the Federation mostly hold cash. The SNB’s portfolio is among the riskiest.
He wants to “fix the country the right way and from the ground up.” His economic policy proposals are well known (among economists), see here. He also wants to confront North Korea and Iran.
In the FT, Mehreen Khan offers a “Greek debt dilemma cheat sheet.”
