tag:blogger.com,1999:blog-2546602206734889307.post1561136696282568322..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: Can central banks make 3 major mistakes in a row and stay independent?Mainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger37125tag:blogger.com,1999:blog-2546602206734889307.post-1913636033841459852016-04-13T18:31:27.915+00:002016-04-13T18:31:27.915+00:00The central bank cutting interest rates *is* fisca...The central bank cutting interest rates *is* fiscal consolidation.<br /><br />First and foremost, banks lend based on income. Interest rates are not as big a consideration as the mainstream makes them out to be.<br /><br />Second, lower rates directly reduce government spending and the budget deficit.<br /><br />Third, the propensity of savers to spend their interest income is greater than borrowers borrowing to spend. And on top of that, the economy as a whole is a large net saver holding lots of government bonds.<br /><br />Fourth, lower rates imply lower storage costs for businesses, dragging down inflation.<br /><br />As a result of these reasons, lower interest rates directly reduce demand and total spending in the economy, and are categorically not inflationary in any sense.<br /><br />The natural rate of interest is zero, and it should be left there forever. Without central bank manipulation of the interest rate market, the "interest rate" will always drift back to 0%.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-31922156293533528952016-04-13T08:12:56.215+00:002016-04-13T08:12:56.215+00:00It’s undeniable that errors on financial leverage,...It’s undeniable that errors on financial leverage, austerity and capacity are not confined to economists working in central banks, which is why I think you are sometimes over-defensive of ‘mainstream economics’. So there is indeed no guarantee that moving responsibility for monetary policy operation would lead to better results, but there are important questions of accountability here.<br /><br />In the UK, CBI is supposed to entail a clear distinction between government responsibility to define the mandate (such as an inflation target) and the BoE’s responsibility to take the operational decisions to deliver the objectives defined in that mandate. I accept that such an arrangement is not inherently undemocratic but neither side seems to be living up to what is expected of them.<br /><br />On the government side, politicians need to review the mandate to keep it appropriate in changing circumstances. There is a risk that continual fiddling would bring us back to the election cycle for economic decision making (although the costs of this are often exaggerated, certainly compared to those of the crash and austerity). This could be avoided by obliging government to confirm or revise the mandate within the first year of a Parliamentary session, with any change after that difficult and with political cost. My aim here is to prevent politicians hiding behind CBI.<br /><br />On the Bank side, we also need more accountability. So I propose that the Governor should be obliged to draft a letter of resignation for the Chancellor to consider, whenever a mandated target is missed for three consecutive months, unless the Governor had earlier notified the Chancellor that he did not possess the tools to achieve it. Here I want to force admission of the limits of monetary policy.<br /><br />So perhaps we don’t need to drop ‘central bank independence’ but we need to change how it works.Anonymoushttps://www.blogger.com/profile/10623963884259918737noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-80566182237442917162016-04-12T22:43:31.715+00:002016-04-12T22:43:31.715+00:00Do you mean exclusively? Or would it be sufficient...Do you mean exclusively? Or would it be sufficient for the government to be able to "add in" at will either from tax revenues or by ordinary sovereign borrowing.Hannahnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-4054040618216155502016-04-12T18:41:00.041+00:002016-04-12T18:41:00.041+00:00Yes I may not have been clear but I know where you...Yes I may not have been clear but I know where you stand. What I mean is that anyone criticizing central bank independence on the basis of the mistakes you listed would fool himself to believe that it might have been better with a non-independent central bank. Because the most vociferous critics of central banks (at least in the general media) are in fact right-wing people. See "audit the Fed" in the US and Dr Schäuble's recent comments about how the ECB was responsible for the rise of AFD (Alternativ für Deutschland, the far-right "populist"party). <br /><br />Everyday the German media is full of comments about how evil the ECB is - not because it didn't do enough of course but because it did too much. As you know they were furious about the ECB buying sovereign bonds and challenged that in court. They believed that soaring interest rates in the periphery were very good because it provided those countries an incentive to reform. Also negative interest rates are absolutely against the laws of nature, and let's not even talk about helicopter money which would mean instant Armageddon.David Belayhttps://www.blogger.com/profile/18104613548562361802noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-75477669754628625832016-04-12T17:51:42.273+00:002016-04-12T17:51:42.273+00:00And i just came across split of government debts. ...And i just came across split of government debts. 1/3 is to foreign gov.<br />1/3 to government agencies (to itself)<br />1/3 to local gov and banking which includes pensioners and other funds.<br />Total of 14% of federal debt is held by pensioners and individual holders.<br /><br />So raising the interrest rates up to 2% where is not affecting rates to private borrowers would have some miniscule impact on idividual income, but still some impact.Critical Tinkererhttps://www.blogger.com/profile/08540226813192385645noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-56270299808023673422016-04-12T17:44:30.449+00:002016-04-12T17:44:30.449+00:00And again European banks bought homeowners debt wh...And again European banks bought homeowners debt which turned sour first which caused banks to turn sour.<br />So, again, if you watch private agents leverage it should show warning signs before banks colapse.<br />In Big Short movie it showed how long they hid homeowners high leverage and colapse from admitting it to balance sheet of banks.<br />Everything would be fine for banks if there was no private sector leverage going too high and then collapsing.<br />But, yes, banking leverage allowed for homeowner leverage.Critical Tinkererhttps://www.blogger.com/profile/08540226813192385645noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-54801148319192204292016-04-12T12:16:28.193+00:002016-04-12T12:16:28.193+00:00CB independence is lingue used to be used exclusiv...CB independence is lingue used to be used exclusively for colonies. Before that it meant independent to pursue monetary policy unrestrained by fix to gold.<br /><br />Floating FX and debt only in own currency countries do not have any use of the term Independent CB.<br /><br />You adopted colonial lingue for your own empire. That is so funy. Drinking your own colonial poison. Political independence is sold to colonies as some form of independence to mask monetary dependence on the empires.Critical Tinkererhttps://www.blogger.com/profile/08540226813192385645noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-61173659357606930002016-04-12T09:28:52.111+00:002016-04-12T09:28:52.111+00:00On 1. In the UK it is pretty clear that the banks ...On 1. In the UK it is pretty clear that the banks had to be bailed out because of their own investments overseas, not excessive private sector borrowing. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-88589964104430305372016-04-12T09:26:29.027+00:002016-04-12T09:26:29.027+00:00I think the key point here is that the government,...I think the key point here is that the government, not the central bank, should be deciding how much resources a NIB has. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-68686792859542223452016-04-12T09:23:57.982+00:002016-04-12T09:23:57.982+00:00And Martin is wrong. Unconventional monetary polic...And Martin is wrong. Unconventional monetary policy, almost by definition, is untested and is therefore (given lags) unreliable. Fiscal policy by contrast has much more certain impacts. That was the point that monetary policy makers should have made, and did not. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-17362449267463537192016-04-12T08:58:01.251+00:002016-04-12T08:58:01.251+00:00On 1.:
It is not bank leverage but private leverag...On 1.:<br />It is not bank leverage but private leverage that should be the warning sign. The bank leverage destabilized banks only because private borrowing turned sour, just as the increasing private leverage turned Great Moderation spining.<br />Without critical private leverage banking leverage could go on increasing indefinetly without problems given the safety of the underlying loans to PRIVATE sector.<br /><br />On 2. Spot on. They should have been much more honest about their helplessness and only Ben Bernanke was vaguely honest about it in Congressional inquery.<br /><br />On 3.<br />As monetary policy is helpless bellow 2% interest rate because banks do not offer such rates to private sector, why would be raising up to that level be more effective?<br />Interest rate income is the answer.<br />Even tough such income is predominantly to banks but Pensioner's claim is not without a base.<br /><br />Interest rate up to 2% is not going to change banking rates offered to private sector for loans but it would for savings. <br />The spread will become smaller and with it a real interest rate.Critical Tinkererhttps://www.blogger.com/profile/08540226813192385645noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-24242561872645053252016-04-12T06:39:38.183+00:002016-04-12T06:39:38.183+00:00Can we be less clear?
They examine in ancient tim...Can we be less clear?<br /><br />They examine in ancient times the entrails of chickens. And still we hire those who just might speak truth to the entertained. Well-diluted by distraction and propaganda. Being paid-for, our conflicts of interest unspoken. Claims to be above excepted.<br /><br />Endless is the scope for invention and research and public debate around straws in the wind, claims of value in offers of leadership and expansion of claims as to the negligence of others. None bear comparison with the brute facts of inequality, of fear and corruption, of misery and worse in our unemployment, under-employment and mis-employment, directed against conscience or to the death of conscience by the power we give or allow to self-concentrating Money and its quislings.<br /><br />Our markets should be working, can only work 'for us', within the framework of real democracy, driven by our agreed securely equal votes, our full equal-income citizenship being agreed conditional only on our good-standing in the exercise of conscience, any penalties only on judgement by our peers, with due care, on findings from any charges of laziness or criminality, to include any findings of malice and perjury and wilful economy with the truth.<br /><br />Imagine, if applicants for work turned-up 'already paid', employers able to bid for their agreed service, all fees high or low for that service going to the labour agency, each fee subject to continuous micro-adjustment to ensure an aggregate national-hire for macroeconomic steadiness, against wind and tide and all other vicissitudes.<br /><br />With equal partnership, informed and agreed, what could go wrong?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-4212531107944518342016-04-12T04:41:50.668+00:002016-04-12T04:41:50.668+00:00Just for reference, the financial sector has not a...Just for reference, the financial sector has not actually been fixed. See the works of Bill Black for one of many people who have analyzed this. The sector became riddled with fraud, which was the root cause of the increased leverage and the 2008 crash.<br /><br />The fraud is still there. It was papered over with a wall of money, but it's building up for a second collapse. The leverage is rising, but of course it's even better hidden now (the fraudsters learn from experience).<br /><br />This is a deeper strike at the heart of the central bank than anything else; they bailed out *crooks*, and a lot of people realize it. If bankers had gone to prison, the central banks would have more credibility.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-43423201888181708012016-04-12T04:36:33.633+00:002016-04-12T04:36:33.633+00:00"The growth we enjoyed up to about 1980 was a..."The growth we enjoyed up to about 1980 was a one off and is not to be repeated; that we are in a lower growth era - that is until some other major innovation comes along to give us another push forward ."<br /><br />We've got one major push forward coming, which is the switch to renewable energy. This is causing a boom, right now, we're in the early days of it, and it will sweep around the globe.<br /><br />However, this is probably the *last*. We're already producing enough to sate most people's basic needs; the population will have to drop to match agricultural carrying capacity, and it is already doing so due to the 'demographic transition'; almost everything is manufactured by machine; when all of this is being produced with renewable energy, we are basically set for a steady-state society, where the only improvements are in quality of life.<br /><br />We need to fix our governments and economies because after the solar boom fades out, "growth-based" economics is not going to be functional any more.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-85888525338284931772016-04-11T23:54:05.906+00:002016-04-11T23:54:05.906+00:00I think Robert Jones makes a fair point. Too much ...I think Robert Jones makes a fair point. Too much emphasis is given to cyclical factors, leaving secular factors ignored. This allows monetary theorists to bang on incessantly about appropriate policy as if nothing else counts. This monetary fetishism is detrimental to sound policy development. The Great Moderation is largely ascribed to sound monetary management, at least that's what the central bankers will tell us. I believe it had more to do with a new phase of commercialization of emergent technologies, same as the 1950s and 1960s. I believe we are currently in an interregnum where technological saturation has occurred, awaiting the next burst of new technology commercialization. Other than the rise of China to pre-eminence and the 2008/09 slump and ensuing dislocation, nothing much has happened in the world economy. Monetary theorists have very short vision and limited insight, blaming the current malaise (feeble growth, deflation) on ineffective monetary policy. Sometimes central banks are just irrelevant to current state of affairs.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-73616309026316065282016-04-11T19:18:46.025+00:002016-04-11T19:18:46.025+00:00Hi,
I've got a few questions about a PQE poli...Hi,<br /><br />I've got a few questions about a PQE policy directed at a National Investment Bank, which you've discussed in the past. Would it have to encompass "helicopter money" per se or could it be more like "standard" QE with the Bank of England holding some kind of asset in the NIB which they could potentially sell back at a later date to bring the money out of circulation? (Possibly with some kind of compulsory buy back by the Government to keep the assets in public hands). <br /><br />Is there any absolute reason why this could only be used at the ZLB or could it be used to manage the money supply in quote "normal times," while maintaining interest rates at a slightly higher level?<br /><br />Thanks.Hannahnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-71050814425080315492016-04-11T18:13:27.507+00:002016-04-11T18:13:27.507+00:00As Martin Sandbu points out, while the first and t...As Martin Sandbu points out, while the first and the third criticism may be right, the second is wrong:<br /><br />http://www.ft.com/intl/martin-sandbu-free-lunch (read the April 11 article)JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-67579569021249237242016-04-11T11:47:26.466+00:002016-04-11T11:47:26.466+00:00I accept the realism of Magnus' points but I s...I accept the realism of Magnus' points but I still think mistakes 1 and 2 are more significant than most (including our blogger until today) recognise. <br /><br />It's not just that the independent Central Banks sighed and decided to do what they could when politicians failed to turn the fiscal taps on. On the contrary, at least in Europe and the UK, the CBs were vocally advocating more austerity, saying quite openly that politicians who argued for spending more (though, curiously, less often politicians who argued for taxing less) were simply trying to buy votes. The independent status of the BoE and ECB added a lot - in retrospect far too much - weight to these interventions and allowed the creation of what Krugman called the VSPs - Very Sensible People. These were perhaps epitomised by Jean-Claude Juncker, when still PM of Luxembourg, who was quoted as saying "We all know what we should do; we just don't know how to get reelected when we do it." <br /><br />So, I would still argue that independent Central Banks worked very well when the challenge was to bring inflation down. However, that independence is an active, and significant, hindrance when policy needs to go the other way.DavidShttps://www.blogger.com/profile/11679346381085854499noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-65828105792061847212016-04-11T10:59:53.609+00:002016-04-11T10:59:53.609+00:00On 'justification', I can only repeat that...On 'justification', I can only repeat that what happens is not always based on what is rational. <br /><br />On austerity, I do not think pointing out basic economics is meddling. What the Fed did not do (until later) is to say clearly that fiscal stimulus was necessary (to achieve the Fed's goals). They should have. But on this the Fed were saints compared to the UK and especially the ECB.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-9006958934490664852016-04-11T10:54:03.018+00:002016-04-11T10:54:03.018+00:001. Are you saying that increased leverage does not...1. Are you saying that increased leverage does not make the financial sector much more vulnerable to shocks?<br /><br />2. In talking about austerity I'm talking about the recovery from recession once the financial sector had been fixed by central banks doing what central banks have to do. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-68237205141487136832016-04-11T10:26:20.795+00:002016-04-11T10:26:20.795+00:00So, should economists have seen the Financial Cris...So, should economists have seen the Financial Crisis coming?StuartPhttps://www.blogger.com/profile/13748038209546648459noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-72986442794450564622016-04-11T08:47:08.154+00:002016-04-11T08:47:08.154+00:00Really, the 'financial crisis' started lon...Really, the 'financial crisis' started long before any market crises were seen. These were just the unavoidable symptoms of the underlying, long-running problem: the vast disconnect between price and value for a huge range of financial and other assets.<br />Does anyone really think that an increase in public spending could have corrected for a vast misallocation of resources spanning many years?<br />StuartPhttps://www.blogger.com/profile/13748038209546648459noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-55551709369170593722016-04-11T08:23:39.951+00:002016-04-11T08:23:39.951+00:00See the previous comment and my reply. This is not...See the previous comment and my reply. This is not me arguing that after these 3 counts ICBs should be out, but rather what I think might happen. If ever I believed politicians and voters made rational decisions this was dispelled by austerity. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-16453441709254662972016-04-11T08:19:16.111+00:002016-04-11T08:19:16.111+00:00I agree. #2 is critical here, and that was what my...I agree. #2 is critical here, and that was what my two posts that I link to in the last paragraph of this post were all about. I also agree with your final point (hence my last paragraph), but as you say rational assessments are optimistic.<br /><br />I agree, which is the point of my last paragraph. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-39752948390526263582016-04-11T08:07:13.479+00:002016-04-11T08:07:13.479+00:00I don't buy the argument that these errors wil...I don't buy the argument that these errors will erode support for central bank independence. Support for a systematic approach seems very strong. Replacing one discretionary authority with another (central bank vs government) doesn't really guarantee fewer errors will be made and I think it would be hard to sell...<br /><br />I think you might see a change in the mandate but so far the reaction to the first 2 mistakes is giving central banks more and not less power. Even helicopter money seems to be a way to move fiscal policy under central bank mandate.<br /><br />At the end of the day the only alternative to central bank independence is direct government control. But the errors you cite are government errors as well.<br /><br />The first is only easy to see ex-post: the reaction to the crisis was very strong. For example the no cut in 2008 followed by an emergency cut few days later was a bad mistake, but congress rejected the stimulus as well. So that's really a draw.<br /><br />The second is mostly a government error.<br /><br />On the last one the jury is still out, but it's still linked to government fiscal restraint.<br />Mrs Mhttps://www.blogger.com/profile/01216427173474292567noreply@blogger.com