Non-Neutral Helicopter Drops

In an August 2014 Economics article, Willem Buiter discussed the conditions for a Friedman-type helicopter drop of money to be effective.

First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Only then will base money be willingly held despite being dominated as a store of value … Second, fiat base money is irredeemable: it is view[ed] as an asset by the holder but not as a liability by the issuer. … Third, the price of money is positive.

Deflation … are therefore unnecessary. They are policy choices. This effectiveness result holds when the economy is away from the zero lower bound (ZLB), at the ZLB for a limited time period or at the ZLB forever.

The feature of irredeemable base money that is key … is that the acceptance of payment in base money by the government to a private agent constitutes a final settlement … It leaves the private agent without any further claim on the government, now or in the future. The helicopter money drop effectiveness issue is closely related to the question as to whether State-issued fiat money is net wealth for the private sector, despite being technically an ‘inside asset’ …

… because of its irredeemability, state-issued fiat money is indeed net wealth to the private sector … even after the intertemporal budget constraint of the State (which includes the Central Bank) has been consolidated with that of the household sector.

Forecasting Exchange Rates

In a Vox column, Michele Ca’Zorzi, Jakub Mućk and Michał Rubaszek argue that exploiting the “Rogoff’s consensus” helps beat the random walk forecast.

… a calibrated half-life PPP model beats overwhelmingly the random walk in relation to real exchange rate forecasting.

… if the speed of mean reversion is estimated, rather than calibrated, the model performs significantly worse than the random walk due to estimation error.

… the mean reverting nature of real exchange rates can be exploited to outperform the random walk in relation to nominal exchange rate forecasting. For both the case of the euro and the dollar we find that the nominal exchange rate has contributed to the mean reversion process of the real exchange rate rather than just followed a random walk.

Parallels between Argentina and Greece

On Project Syndicate, Raquel Fernández and Jonathan Portes offer four lessons from the Argentinian default in 2001 for Greece:

… if the economics are on your side, you can and should ignore politicians prophesying disaster. … a short period of political turmoil can cost surprisingly little compared to a long period of mindless pursuit of misconceived policies. But … Greece must acknowledge that its fundamental problems are of its own making. … Greece is unlikely to enjoy the breathing space provided by a commodity boom. If it is to place itself on the road to a sustainable recovery, it has no time to lose.

Another Estimate of the Haircut on Greek Debt to Come

In a Vox column, Thomas Philippon suggests a 3% rather than 4.5% primary surplus target on fairness grounds. His central points are:

Greece ran a reckless fiscal policy during the boom years, wasting much of the money that it received. There is no question that Greece needs a strong dose of fiscal consolidation. However, Greece’s debt should have been restructured much earlier. This restructuring was prevented by legitimate fears of contagion, and it is not fair to ask Greece to pay for that delay, which reflected a general lack of preparedness among Eurozone policymakers.

Philippon’s estimate is similar to another estimate by Paolo Manasse.

Swiss Leaks

The International Consortium of Investigative Journalists published a report that seems to suggest that HSBC’s Swiss branch violated Swiss laws; helped customers to hide assets; and assisted in money laundering activities. The report is based on information that Hervé Falciani, a former HSBC employee-turned-whistleblower, handed over to French authorities in 2008.

The small print (in the footer of the “Swiss Leaks” website) reads:

There are legitimate uses for Swiss bank accounts and trusts. We do not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Swiss Leaks interactive application have broken the law or otherwise acted improperly.

Additional reporting in The Guardian, FT, NZZ, Süddeutsche Zeitung.

Double Taxation Agreement between Switzerland and Liechtenstein

Günther Meier reports in the NZZ that an updated double taxation agreement between Switzerland and Liechtenstein will come into effect. Switzerland rejected Liechtenstein’s proposal that would allow the principality to levy a source tax on the income of Swiss residents who work in Liechtenstein.

The Purple Plans

Laurence Kotlikoff appeals to “fellow economists and concerned citizens” to endorse plans for

Wealth Inequality, Theory and Measurement

In an NBER working paper, David Weil argues that Thomas Piketty overestimates wealth inequality. In the abstract of the paper, Weil writes:

In Capital in the 21st Century, Thomas Piketty uses the market value of tradeable assets to measure both productive capital and wealth. As a measure of wealth this is problematic because it ignores the value of human capital and transfer wealth, which have grown enormously over the last 300 years. Thus the constancy of the wealth/income ratio as portrayed in his data is an illusion. Further, the types of wealth that he does not measure are more equally distributed than tradeable assets. The approach also incorrectly identifies capital gains due to reduced discount rates as increases in the capital stock.

 

Dietrich Schwanitz’ “Bildung (Cultured Education)”

Dietrich Schwanitz’ book (Wikipedia) covers “Wissen” und “Können” against the background of the German “Bildungskanon”, the liberal education of a cultured, well-bred German-speaker. The very ambition of the endeavor is breath taking and provokes disagreement and objection. But Schwanitz delivers. A lengthy book of nearly 700 pages it is concise and dense and contains lots of food for thought.

Among hundreds of tidbits, here are some:

  • Footnote on the footnote (pp. 461–462).
  • On Switzerland (p. 596):

Was die Schweizer auf dem Hintergrund ihrer eigenen Geschichte bei den Deutschen am wenigsten begreifen, ist, daß sie mit der antiautoritären Kulturrevolution alle bürgerlichen Tugenden so restlos über Bord geworfen haben. Es sind die Tugenden, die ehemals als besonders deutsch galten und jetzt nur noch in der Schweiz eine Heimstatt haben: Solidität, eine gewisse Ordnungsliebe und Pedanterie, Zuverlässigkeit im Ausführen von Aufgaben und Präzision bei der Produktion von Apparaten, und ein Standard der Sauberkeit und Wohlanständigkeit weit über dem europäischen Durchschnitt sowie ein fest verankerter Glaube an Normen und Regeln.

  • In the section about intelligence, a ranking of what might have been the 10 most intelligent men ever (p. 604):

1. John Stuart Mill; 2. Goethe; 3. Leibniz; 4. Grotius; 5. Macaulay; 6. Bentham; 7. Pascal; 8. Schelling; 9. Haller; 10. Coleridge.

  • Short summaries of “books that changed the world” (pp. 635–654).

Viktor Frankl’s “… trotzdem Ja zum Leben sagen (Man’s Search for Meaning)”

The English language translations of Viktor Frankl’s book “… trotzdem Ja zum Leben sagen: Ein Psychologe erlebt das Konzentrationslager” (Wikipedia German, English) were published as “From Death-Camp to Existentialism” and “Man’s Search for Meaning: An Introduction to Logotherapy.” Frankl describes his experience in Auschwitz and other concentration camps with a focus on the psychological changes the inmates went through. The narrative is shocking and Frankl’s ability to maintain a positive attitude to life in spite of the horror he experienced admirable. But I was less impressed by the book than millions of readers before me—it neither provides a systematic account nor a personal narrative.

The sketch “Synchronisation in Buchenwald” at the end of the book (featuring Socrates, Spinoza, Kant, KZ inmates and others) is the best part of the short book. Structured as a stage play it provides insights into Frankl’s thinking.

Germany and the Euro

In an FT oped, Thomas Mayer summarized a rather typical “German” perspective on European monetary policy. In his view, a sound euro needs either full political union or just stringent rules that are enforced. Helmut Kohl promised the former. When it didn’t happen, ECB independence and the Maastricht treaty should substitute. Ex post, Germany should have asked for more, in particular resolution and exit procedures (and, one may add, it should have played by the rules itself). The crises in the Eurozone illustrated governance problems. Merkel feared Grexit and tried to reestablish the rules. She

built a pan-European “shadow state” — a web of pacts to ensure that countries followed policies consistent with sound money.

It has not worked. From Greece to France, countries resist any infringement on their sovereignty and refuse to act in a way that is consistent with a hard currency policy. The ECB is forced to loosen its stance. Worse, it has allowed monetary policy to become a back channel for transfering economic resources between eurozone members, which politicians have refused to allow through fiscal mechanisms they control. This is Germany’s worst nightmare.

How will the situation be resolved? A century ago, Eugen Böhm-Bawerk, the Austrian economist and finance minister, proclaimed laws of economics to be a higher authority than political power. Some Germans say that a hard currency is an essential part of their economic value system. If both are right, politicians will be powerless to prevent Germany’s departure from a monetary union that is at odds with the country’s economic convictions.

 

Extra-Territoriality and Financial Regulation

That’s the title of the annual conference of the Journal of Financial Regulation to be held at the Georgetown University Law Center in June.

The call for papers includes the following paragraphs which provide a nice overview:

Attempts by national regulators to give their regulatory standards extra-territorial effect beyond their own borders have become increasingly popular in fields as diverse as banking, securities and derivatives regulation. The attractiveness of extra-territorial regulation for policy-makers is obvious: in a world still reeling from the 2008 financial crisis, regulators can export policy preferences unilaterally while preventing some of the most malicious forms of regulatory arbitrage that can undermine their effectiveness.

But extraterritoriality can also generate a range of legal and even economic tradeoffs. At a most basic level, when practiced haphazardly it risks clashing with principles of public international law and the comity of nations, in particular when such regulation is enforced with public authority. Furthermore, extra-territorial rules can increase, as opposed to decrease the potential for conflicting or duplicative regulatory policies as other regulators respond in kind. This can lead to increased compliance costs for market participants that reduce liquidity and subject market participants to operational and legal risks that themselves can potentially introduce new forms of systemic risk.

The conference Extra-Territoriality and Financial Regulation, the annual conference of the new Journal of Financial Regulation, will seek to enhance our understanding of these and other important problems. More specifically, the conference will seek to explore topics including, but not limited to:

· the policy motivations for writing extra-territorial rules and the conditions for selecting this approach – this would include considerations from political economy, political science, and state organization theory;
· the advantages and the limits of extra-territorial financial regulation, with particular regard to the different current policy initiatives and their impact on both financial innovation and prudential oversight;
· the relationship between extra-territorial rules and the growing consensus on international standards and global soft law, in particular through international bodies such as the G20, the FSB, the Basel Committee, and others;
· regulatory responses in other jurisdictions, including the likelihood of retaliation or counteracting measures;
· responses by regulated market participants, in particular theoretical or empirical accounts of reactions by the financial industry to the adoption of extra-territorial standards;
· legal considerations for enforcing extra-territorial standards, possibly including problems from all of public international law, conflict of laws, and democratic accountability.