Costs of Negative Interest Rates

James McAndrews of the Federal Reserve Bank of New York doubts the merits of negative interest rates. He lists the following types of complications:

  1. Avoidance
  2. Legal and operational frictions
  3. Economic frictions
  4. Pass-through to market rates, and retail v. wholesale
  5. Effects of negative rates on the health of financial intermediaries
  6. Signal of deflation
  7. Public acceptance

Macroeconomic Policy

In a Vox column, Olivier Blanchard distills ten takeaways from an IMF conference on “Rethinking Macro Policy. Progress or Confusion?’” He lists them under the following headings:

  1. What will be the ‘new normal’?
  2. What the new normal will be matters a lot for policy design
  3. Can we hope to limit systemic financial risk?
  4. Should monetary policy go back to its old ways?
  5. Instrument rules
  6. Macroprudential tools or financial regulation
  7. Should central banks keep their independence?
  8. Little progress on the design of fiscal policy
  9. The complex effects of capital flows
  10. How much can the international monetary system be improved?

The Wisdom of the Crowds: Medicine

The internet helps to reduce information frictions. In finance (see here). All over the place. And in medicine: For patients who seek a more reliable diagnosis, Crowdmed offers access to thousands of “medical detectives,” professional and otherwise. Here is how it works:

  1. Complete our online patient questionnaire and upload your medical information, all of which can be done anonymously.
  2. Decide how long you want your case to be online and how you wish to reward the volunteers who help solve it.
  3. CrowdMed’s patented prediction market technology then collects and filters diagnostic and solution suggestions from the Medical Detectives who participate in your case.
  4. You can invite our entire community to help, or limit participation to our top case solvers.
  5. At the end of this process, you’ll receive a detailed report containing the best suggestions to discuss with your doctor.
  6. Payment is a snap, and if CrowdMed results aren’t accurate you get your money back.

Cost-Benefit Analysis in Development Aid

GiveWell ranks charities by effectiveness and transparency.

GiveWell’s vision is a world in which donors reward effectiveness in improving lives.

GiveWell recommends Against Malaria Foundation or GiveDirectly, among others, but does not recommend UNICEF or Grameen Foundation.

Cash-On-Delivery Development Aid

The Economist reports about cash-on-delivery schemes in development aid. Payments are made only after jointly agreed objectives have been met. The means to achieve those goals are left for the recipient country to choose—management by objectives.

True, potentially corrupt or negligent country officials can be monitored less tightly than with other schemes. But evidence discussed in the article suggests that such monitoring might not be very fruitful anyway. Moreover, sufficiently well specified objectives should in principle help to curb moral hazard and thus, reap the benefits of subsidiarity.

“Leben ohne Bargeld (Life without Cash),” SRF, 2015

SRF, Echo der Zeit, May 18, 2015. AUDIO, HTML.

  • The availability of cash has costs: It eases tax evasion and money laundering and obstructs monetary policy at the zero lower bound.
  • But it also has benefits.
  • And the zero lower bound constraint can be relaxed otherwise, using taxes or an exchange rate.

Removing the Zero Lower Bound on Interest Rates

Imperial College London (the business school’s Brevan Howard Centre), CEPR and the Swiss National Bank organized a conference on this topic in London.

Most of the speakers agreed that giving central banks the option to move interest rates much further into negative territory would be valuable; and that deposit rates lower than minus half a percent p.a. are difficult to sustain without triggering major cash withdrawals. There was less agreement on how to avoid such withdrawals. Some favored phasing out cash, as this would also render tax evasion and money laundering more difficult; others were unwilling to sacrifice the privacy benefits of cash. But many speakers emphasized that there are other possibilities to achieve the same objective. (See my earlier blog post.)

The Confidence Elite

The Economist reports about a study on firms’ recruitment policies and interprets the results of the study as a “guide on how to join the global elite.” Here is what it takes:

  • Intelligence and diligence: Ideally documented by a degree from a US Ivy League college, Oxford or Cambridge.
  • Sophistication and smartness: A job in consulting, ideally with McKinsey or the Boston Consulting Group; with a big law firm; or in investment banking, ideally with Goldman Sachs. To land such a job, one needs to impress and convince one’s future colleagues (the actual consultants, lawyers or bankers are interviewing, not the human resources department). And this requires a sense of immediate camaraderie:

    … they behave predictably: they follow a set script, starting with some ice-breaking chit-chat, then asking you about yourself, then setting a work-related problem. That makes them desperate for relief from the tedium. Be vivacious. Hang on their every word. And flatter their self-image as “the best of the best” and the most jet-lagged of the jet-lagged.

  • “Fit:” Diversity is attractive, but only a little bit of it. The recruiters are looking for people to work and socialize with (think of all the evenings in airport lounges). Similarities help.

    This overwhelming emphasis on style rather than substance may seem an odd way to select members of the 1%. But those at the top of the consulting, investment-banking and legal professions know that the most prized possession in uncertain times is not brainpower, but self-confidence. For all the talk of the world becoming dominated by a “cognitive elite”, in reality it appears it is nothing more than a “confidence elite”.

In the same issue, The Economist reports about research to show that the “strength of [one’s] handshake predicts the length of … life.” Confidence, it seems, makes you healthy and successful.

Update (25 May 2015)

In the FT, Gillian Tett also discussed the study. She wrote:

… Nor is an Ivy League education sufficient per se. Instead, what these companies are looking for in the interview process is what they often describe as “polish” or “pedigree” — as evidenced in thousands of tiny social cues and cultural patterns. … In theory, this “pedigree” is meant to reflect individual merit and talent; in practice, though, it is hard for students to engage in extracurricular activity unless they come from an elite background to start with.

“Working-class students are more likely to enter college with the notion that the purpose of higher education is learning in the classrooms, and invest their time and energy accordingly,” Rivera observes. “But the [fact that] these students focus on academic rather than extra-curriculum pursuits adversely affects their job prospects,” she adds, describing how time and again the people interviewing candidates for jobs made decisions based on subjective issues such as whether a candidate had “polish”, “breadth” — and “pedigree”.

Princeton University Press’ website of the book.

ERNs Rather Than CoCos?

The Economist reports about a proposal by Jeremy Bulow and Paul Klemperer for equity recourse notes (ERNs) that could bolster a bank’s equity after negative shocks. While contingent convertible bonds (CoCos) are converted into equity when bank capital falls below a defined threshold, ERNs would convert when the share price fell below a trigger price. Moreover, the new shares would be valued at the trigger price even if the share price had fallen much lower. Low share prices thus would trigger both a conversion and a partial default.

Olivier Blanchard To Leave IMF

Chris Gilles reports in the FT about Olivier Blanchard’s plans to retire as IMF chief economist. Olivier emphasized the importance of academic research and challenged the Washington consensus. Under his watch, the IMF

  • questioned the benefits of unrestricted capital flows;
  • suggested higher inflation targets;
  • emphasized costs of “austerity.”

As the article points out not all of these initiatives were successful.

Fintech Competition for Banks

In a series of articles, The Economist reports about technology companies that compete with traditional banks in areas ranging from lending to payments and wealth management.

The introductory article refers to AngelList and references reports by Goldman Sachs (The Future of Finance, copy posted here), BCG and Accenture. And it highlights two factors driving the structural change which I have also emphasized in a recent article: Technology and vanishing trust in banks. The other articles cover:

Updates—some more firms in the business:

CreditGate24.

Pressure to Liberalize Services in Germany

Joachim Jahn and Manfred Schäfers report in the FAZ about pressure by the European Commission and the IMF to liberalize personal services in Germany. The IMF expects less regulation/protection of architects, tax advisors and the like to increase services growth. The tax advisors warn that liberalization would create conflicts of interest for the service providers.

Greece’s IMF Loan Rollover

Kerin Hope and Shawn Donnan report in the FT that Greece used IMF special drawing rights to repay the IMF loan.

Members are required to pay a nominal interest rate to the IMF on the gap between their actual SDR holdings and their allocation, making this week’s move by Athens the equivalent of taking out a low-interest loan from the fund to pay off another.

Greece Will Default …

… or so it seems. Kerin Hope reports in the FT that

[t]he Greek parliament has approved a law proposed by the leftwing Syriza-led government overturning civil service reforms by the previous government aimed at streamlining the country’s inefficient public sector.

13’000 civil servants are to be rehired. The “institutions” have not been consulted. The municipal police force will be revived.

Swiss Withholding Tax Refunds Subject to Restrictions

Katharina Fontana reports in the NZZ about a decision by Switzerland’s highest court concerning the refund of withholding tax on dividends to foreign investors. According to the ruling such refunds may be denied if the investors are found to have engaged in financial engineering with the purpose to help clients circumvent the Swiss withholding tax.

Greece vs Eurozone vs IMF

Peter Spiegel reports in the FT that

Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors.

Update (May 6, 2015)

According to other reports the IMF downplays disagreement among lenders. Peter Spiegel and Stefan Wagstyl report in the FT:

Officials involved in the talks said the IMF was not seeking large-scale debt relief immediately. Instead, it was warning that any concessions to Athens that allowed the government to post lower budget surpluses — the likely trajectory of the current talks — would require debt relief to make up the difference.

And Ht reports in the NZZ: According to an IMF spokesperson

Poul Thomsen, der Chef der Europaabteilung des Fonds, [hat] in jener Sitzung darauf hingewiesen, dass der Bedarf an zusätzlicher Finanzierung und an Schuldenerleichterungen zur Sicherstellung der Schuldentragfähigkeit umso grösser werde, je mehr man in den Verhandlungen von den ursprünglichen, 2012 vereinbarten Massnahmen und Zielen (des zweiten Hilfspakets) abweiche.

… Doch Moscovici betonte am Dienstag, über die Schulden werde man erst nach einer Einigung über das Reformpaket reden können. Es ist ein offenes Geheimnis, dass dannzumal auch über ein drittes Hilfspaket gesprochen werden muss.

Richtig ist laut Verhandlungskreisen, dass der IMF an den Treffen der «Brussels Group» eine besonders harte Haltung gegenüber Athen einnimmt. Er muss seine eigenen Regeln unter anderem bezüglich der Schuldentragfähigkeit einhalten, um weitere Gelder auszahlen zu können. Am anderen Ende des Spektrums der beteiligten Institutionen steht die EU-Kommission, die ein Auseinanderbrechen der Euro-Zone um fast jeden Preis verhindern will. Werde deren Irreversibilität angetastet, komme sofort die Frage auf, wer der Nächste sei, sagte Moscovici.

In the meantime, the Greek government argues that disagreement among “institutions” makes it impossible to find a compromise. Panagis Galiatsatos reports in the NZZ:

… der Internationale Währungsfonds (IMF) bestehe mit Vehemenz auf strukturellen Reformen (Rentenreform, Liberalisierung des Arbeitsmarkts) und mehr Flexibilität bei der Bestimmung der Primärüberschusses, weil er von einem weiteren Schuldenschnitt ausgehe. Im Gegensatz dazu verlange die EU-Kommission, die einen Schuldenschnitt partout nicht wolle, hohe Primärüberschüsse. Das beweise, dass die Gläubiger in keinem Verhandlungsfeld kompromissbereit seien, während die griechische Regierung Kompromissbereitschaft signalisiert habe.