Todd G. Buchholz, a former White House director of economic policy under President George H.W. Bush in this piece:
Ultra-low interest rates have fueled growing support for Modern Monetary Theory, which holds that governments can simply print money and ignore rising public debt levels without having to face the consequences. It is a neat and tempting argument, as long as one ignores history and common sense.
Federal Reserve recently organised a conference on bank supervision (lots of papers here).
Federal Reserve Vice Chair for Supervision Randal K. Quarles delivers a speech in the conference:
In many respects, the focus of today’s conference on bank supervision, rather than regulation, and the relatively recent efflorescence of scholarly attention to that topic, are welcome new developments. In other respects, however, the question of the proper scope of bank supervision is not a new topic at all. In going through some family papers recently, I came across this cri de coeur from one Elton Hall, president of a small bank in Victor, Idaho, as quoted in the Teton Valley News in November, 1921:
The government has so governed [my] bank that [I] no longer knew who owned it. I am inspected, examined and re-examined, informed, required, restrained, and commanded. . . . I am supposed to be an inexhaustible supply of money . . . , and because I will not sell all I have and go out and beg, borrow, or steal money to give away, I have been cussed, discussed, boycotted, talked to, talked about, lied to, lied about, held up, hung up, robbed and nearly drained, and the only reason I am clinging to life is to see what in hell is coming off next.
Were Mr. Hall transported to the District of Columbia in 2020, he would immediately realize that he had clearly had no idea what was “coming off next” if he had thought he was over-imposed upon in Idaho’s Teton Valley in the winter of 1921. But before the bankers in the congregation become too inclined to commiserate with him, I should note that the reason I know anything about Mr. Hall, and the reason his quote is among those family papers, is because his bank failed not so many years thereafter, as did nearly half the small banks in the country between 1920 and 1930. Mr. Hall’s bank on the western slope of the Tetons was acquired by a visionary young banker from Utah by the name of Marriner Eccles. This was during the Roaring ’20s, well before the Great Depression and the Banking Crisis of 1933. Before the evolution of modern supervisory practices, bank failures were extremely common, even in boom times.
So, how should we think about this new, yet very old, question? I’d like to begin as many of you have today, by focusing first on regulation—as a way of throwing into relief some key issues that are both important and hard about its cousin supervision.
Ted Fertik & Naomi R. Lamoreaux in this new NBER paper:
This paper considers the effect of the First World War on large-scale businesses in Second-Industrial-Revolution industries like steel, electricity, and chemicals. For firms in the nations of the Entente, we argue, the war mainly interrupted long-term trends that resumed in the aftermath of the conflict. For Germany, however, the war and its subsequent territorial settlements had a disruptive impact on the economic geography of key industries.
The global restructuring that resulted from the collapse of the Habsburg, Romanov, and Ottoman empires and Germany’s loss of its colonial possessions set up a new kind of international rivalry as German firms sought to regain their dominance by contracting with emerging nations in the European periphery and the Global South to build industrial capacity, forcing Britain and the now capital-rich United States to compete for this business or see their influence in these areas decline.
The end result of this rivalry was the construction of massive steel works in Brazil and other industrializing countries around the world. These investments would provide the foundation for the import-substituting policies of the post-World War II era.
Stefano Giglio, Bryan T. Kelly, and Johannes Stroebel in this new NBER paper:
We review the literature studying interactions between climate change and financial markets. We first discuss various approaches to incorporating climate risk in macro-finance models. We then review the empirical literature that explores the pricing of climate risks across a large number of asset classes including real estate, equities, and fixed income securities. In this context, we also discuss how investors can use these assets to construct portfolios that hedge against climate risk. We conclude by proposing several promising directions for future research in climate finance.
On the modeling side, advances in computational power will allow researchers to model the various feedback loops between climate change and the real economy with increasing sophistication. While the basic economic mechanisms of these models will be similar to those discussed in this review, such modeling advances will provide new and improved quantifications of important objects such as the social cost of carbon.
On the empirical side, there is substantial scope for improvements of the measures of climate risk exposure in different asset classes, and in particular for equity assets. Over the coming years, increased disclosure by firms — whether mandated by regulators or demanded by large investors — will provide new opportunities to measure firms’ exposure to various types of climate risks. In the absence of new data disclosed directly by firms, more creative use of already existing data — such as satellite imagery or text from 10-K statements or earnings calls — can be processed to improve climate risk exposure measures.
Similarly, more sophisticated sentiment analysis can improve our measures of negative climate news, as well as our ability to separately identify news about physical and transition risk. Taken together, these improvements will improve our ability to construct increasingly more effective climate hedge portfolios.
Another important question is to explore the extent to which climate risk, through its effect on asset prices, may affect financial stability. The answer to this question depends, to a large extent, on the degree of concentration of these risks in the portfolios of financial institutions and investors. Measuring this concentration is an important and valuable research agenda. To do this, we require better measures of asset-level risk exposures, which could then be aggregated to the portfolio level. These numbers would allow financial institutions to better manage their climate risk exposures, and regulators to ensure that these risks do not pose a threat to financial stability.
Veaceslav Grigoraș and David Orțan write this paper in Romania central bank working paper series:
This paper dates the business cycles of Romania between 1862 and 2016 for the first time and compares them to those of its peers in the region, but also to those of developed economies. Romania’s interconnectedness with other economies has increased over time: from a largely agricultural economy exposed to wide fluctuations due to crop failures, going through regional integration in the first few decades of the 20th century and forced industrialisation during the communist regime (with an exceptional degree of openness to non-communist economies) and finally reaching European integration as an emerging open economy. The average duration of expansions is the lowest in the sample studied, due to Romania’s highly volatile economy, similar only to that of Greece. The business cycle synchronisation of Romania points towards the significance of its geographical neighbours and of countries in a similar stage of economic development (Bulgaria, Czechoslovakia, USSR, Poland and Hungary).
155 years is quite a period…
Martin C.W. Walker sums up the 9 key questions and the brief answers in this article. The 9 questions are:
1. What is it?
2. Why the sudden interest?
3. What problems does it solve?
4. Are there real-life examples?
5. Does a CBDC need a Blockchain?
6. Are CBDCs good news for cryptocurrencies and blockchain?
7. Does CBDC create any problems?
8. What are the really big questions?
9. Do we really need CBDC?
Fernando Broner, Tatiana Didier, Sergio L Schmukler and Goetz von Peter in this BIS Working Paper:
The paper documents the rise of the South in global finance. International investments between the North and South expanded faster than within the North. Financial integration within the South has grown even faster. By 2018, the South accounted for 24 to 40% of international loans and deposits, portfolio investment and foreign direct investment. This is about 10 percentage points more than in 2001. These trends not only appear in the value of investment, but also in the spread of new links between countries. Our findings hold across many country pairs – ie they are not due to only a few large countries in the South. They also continue to hold when we incorporate offshore financial centers into the analysis.
Michael Blanding of HBSWK cites new research on digital platforms behind much of the hiring:
When it comes to the job hunt, many of us have a traditional view of what it takes to find a new position: A worker searches for available openings, sends in a resume, and waits for an interview.
Much of academic research assumes that’s the way people find jobs, too. From mathematical models to field studies, researchers tend to think that workers submit resumes to open positions. In fact, scholars have learned a lot about discrimination in labor markets by sending resumes to job postings to see who gets called back and who doesn’t.
As Harvard Business School Assistant Professor Rembrand Koning was talking about such studies with colleagues Ines Black and Sharique Hasan from Duke University’s Fuqua School of Business, however, something about that model didn’t seem right.
“It really didn’t jibe with how a lot of people seem to be getting jobs today,” says Koning, a member of the Strategy Unit. “They’re not sending resumes in. They’re being recruited, often through online platforms like LinkedIn.”
Indeed, the rise of digital platforms now enables firms and recruiters to source potential candidates anywhere in the world in a matter of minutes. Instead of waiting for a worker to apply, firms can now hop on a platform and pick out talent they think would be an especially good fit for their needs.
When Koning and his colleagues set out to learn how many workers were being recruited versus applying for jobs directly, statistics from the 1991 General Social Survey were the best they could find. The data showed only 4 percent of workers were recruited to their current jobs, while another third found jobs through referrals, and the lion’s share—some 60 percent—applied directly. Those figures seemed wildly out of date.
“We said, ‘Hey, no one’s measured this recently, so why don’t we do our own nationally representative survey?” The result is a new working paper, Hunting for Talent: Firm-Driven Labor Market Search in America, that quantifies the steep increase in outbound recruiting by firms largely at the expense of incoming resumes.
Basil Guggenheim, Sebastien Kraenzlin and Christoph Meyer of SNB in this paper :
We use unique individual bank-to-bank repo transaction data to empirically assess the efficiency of the existing Swiss financial market infrastructure (FMI) for executing delivery versus payment transactions. This approach enables us to identify its current benefits and drawbacks and discuss how these could be addressed and to what extent distributed ledger technology (DLT) could provide a remedy. We find that the fastest settlement time for repo transactions is 12 seconds, but that settlements are often delayed by more than 10 minutes due to the lack of collateral availability. We conclude that the cross-border availability of securities needs to be addressed by either improving interoperability of existing infrastructures or using new technologies.
Multiple scholars in this voxeu research:
Achieving universal basic literacy and numeracy has long been a policy goal for development agencies working in areas of extreme poverty. This column presents evidence from a bundled intervention in rural Guinea Bissau which suggests that targeted education policies can have substantial positive effects on children’s schooling outcomes. Such policies could play a key role in helping people ‘escape’ the poverty trap, as the education gains from such interventions elevate local children’s attainment levels far beyond those found in neighbouring areas.
….
Recently, interest has grown among economists in the potential for ‘bundled’ interventions to generate transformative change. Advocates for this brand of intervention explain that, in cases of extreme need, interventions with multiple complementary facets have the potential to improve outcomes far more than the sum of the estimated efficacy of their constituent parts. The most famous of these is Banerjee et al. (2015), which reports the results of a six-country study of such a bundled intervention aiming to improve the livelihoods of the very poor. The intervention combined a large asset transfer with training, coaching, and other support. The study found that this intervention led to large sustained gains in income, consistent with an ‘escape’ from extreme poverty.
Howard Davies in this article raises the point that we need to think about independence of financial regulators/supervisors. Just like Central Bank Independence has become an important point of discussion, so should be independence of financial regulation/supervision.
Prof Chinmay Tumbe of IIMA pays a poignant tribute to Kamla Chowdhry on her centenary. Kamla was key to shaping IIM Ahmedabad. Yet her contributions have been missed and ignored all these years. After all these years. her contributions are being recognised thanks to Chinmay.
Axis Mutual Fund has launched a new fund: Axis Special Situations Fund. The New Fund offer is from 4-18 Dec 2020. More details on the find here
I was seeing the presentation behind this new launch. It has interesting slides on how the Indian economy is primed for disruption and behavior is changing post pandemic. It also discusses how some companies are dealing with this change and way digital forces are shaping them.
Agustín Carstens, General Manager of the BIS in this speech looks at central bankers of future:
What if a time-travelling central banker from yesteryear woke up today in a BIS meeting of central bankers? And – after somebody had explained to her why everyone was wearing a mask – what would she think of the topics being discussed? Especially, how amazed would she be at the way tech is driving big changes in finance and central banking? My guess is that she would pick out four or five major themes. Perhaps along these lines.
First, everyone wants to get hold of as much information as possible. And the more data you have, the better. In our modern market economy, the data are distributed around the world. As the costs of data storage have fallen, the global volume of data has surged. Trade-offs are everywhere. Consumers give out their data for a better or a free service, for example. But do they understand what they are giving up? Do we need to sacrifice privacy if we want more efficiency and innovation? Can we ensure privacy while making sure that policymakers get the information they need to ensure the integrity of the system?
Second, money can be – and is being – turned into pure information. Payments are being integrated with digital communications, and private companies are asking, “If it is so easy to send a TikTok video around the world, why isn’t it just as easy to send money?” This is bringing new challenges to how we think of money, and to the role of central banks.
Third, while private companies offer a dizzying array of payment options and financial services, issues of competition loom large. Regulators want banks and other companies to play fair, in other words keep a “level playing field”. But in a complex and globalised world with national regulators and regulatory structures built for traditional business models, how do we ensure this in practice?
And fourth, as we have become more dependent on digital technologies, we are also more vulnerable to their failure (“cyber risk”). While crime – and warfare – have bedevilled all ages, they have now moved to the digital realm. And the financial sector, which central banks supervise, is a particularly common target. Especially in 2020 as we are all working from home.
Prof Timothy Taylor in this post writes on the Coase Theorem at 60.
Steven Medema know more about the history of the Coase theorem than many of us know about our spouses. So whether you are distantly or intimately familiar with the idea, you are likely to pick up some insights in his article, “The Coase Theorem at Sixty” (Journal of Economic Literature, 2020, 58:4, pp. 1045-1128, subscription required).
In the 1960 article by Ronald Coase, “The Problem of Social Cost,” the Coase “theorem” was not actually a theorem, nor does it seem to be the main point of the entirely verbal essay. Coase was working on various questions of regulatory economics, which might be summarized as the question of the appropriate government reaction in situations where market don’t perform well. For example, it had been recognized since the 1920s and the work of A.C. Pigou that some economics activities might involve “externalities,” where social costs were imposed on others who were not part of the market transaction. Pollution is an obvious example. The common policy prescription was that the government should estimate the value of this additional social cost, and then impose a “Pigovian tax” so that the firm producing the externality would face the actual social cost of its action–in effect, it would no longer be able to dump its pollution garbage into the environment for free.
Further:
Medema describes in detail the unfolding of the Coase result over time, as the issues of potential problems, involved parties, information, and incentives have been explored in many contexts–including contexts outside of economics. Here, I’ll close with Medema’s overall summary of this process.
The Coase theorem is, by any number of measures, one of the most curious results in the history of economic ideas. Its development has been shrouded in misremembrances, political controversies, and all manner of personal and communal confusions and serves as an exemplar of the messy process by which new ideas become scientific knowledge. There is no unique statement of the Coase theorem; there are literally dozens of different statements of it, many of which are inconsistent with others and appear to mark significant departures from what Coase had argued in 1960. …
The theorem has never been given a generally accepted formal proof; yet it has been the subject of scores of attempts to “disprove” it in a stream of analysis and debate that continues to this day. It has been labeled a “tautology” and the “Say’s law of welfare economics” (Calabresi 1968, pp. 68, 73), an “illuminating falsehood” (Cooter 1982, p. 28), and even a “religious precept” (Posin 1993, p. 810). Halpin (2007, p. 339) calls the theorem “theoretically degenerate … and ideologically charged.” Usher (1998, p. 3) bundles these various charges together, claiming that the theorem is ”tautological, incoherent, or wrong,” with the specific verdict resting upon to which version of the theorem one subscribes. …
The nature of the theorem’s underlying assumptions is often said to make its domain of direct applicability nil; yet, it has been invoked, criticized, and applied to legal-economic policy issues in thousands of journal articles and books in economics and law … as well as in journals spanning fields from philosophy (Hale 2008) to literature (Minda 2001) to biology (Frech 1973a). Indeed, the Coase theorem may be the only economic concept the use of which is more extensive outside of economics than within it.
Abhishek Kumar and Vidya Kamate of RBI in this working paper study the pricing in OTC currency derivatives markets:
This paper provides empirical evidence on the presence of considerable price discrimination in the Indian over-the-counter (OTC) currency derivatives market. Clients transacting with a single dealer counterparty paid an average markup of 18 paise, which falls to 9 paise for clients transacting with two dealers, and close to zero for clients transacting with ten or more dealers. This alludes to the role of bargaining power in pricing, possibly on account of dealer access. Retail clients (individuals, proprietorship firms and small firms) and unlisted firms were charged a higher markup of 19 paise and 11 paise, respectively, vis-à-vis listed firms and foreign investors, who paid a much lower markup of 3 to 4 paise. A majority (83 per cent) of clients transacted with a single dealer counterparty hinting at difficulties related to dealer access. The findings of the study make a case for improving market access to enhance competition which may result in better pricing for clients.
Sören Karau of Bundesbank in this research paper:
The origins of the Great Depression from 1929-33 are controversial to this day. Among economic historians, a widely-held view is that monetary forces played an important role in causing the depression. On the other hand, the macroeconometric literature has by and large found little evidence of the importance of monetary disturbances as a main cause. However, existing macroeconomic work does not incorporate essential insights from the narrative literature. This raises the question whether the conclusions drawn using formal macroeconometric methods change when taking into account in particularthe workings of the international gold standard more explicitly.
I identify monetary policy shocks in a structural macroeconometric framework and assess their role in causing the initial downturn in prices and production from 1929-31. In deliberate contrast to existing work on the depression, I take an international perspective that builds upon an appreciation of the gold standard system operating at the time.
First, I employ a hand-collected monthly data set that covers a large share of the interwar world economy. Second, derived from a theoretical monetary framework, I model monetary disturbances as shocks to central bank gold demand as measured by the world gold reserve ratio. This is preferable not only on theoretical grounds to, say, interest rate measures of individual countries. It also allows me to employ narrative information to sharpen structural shock identification based on sign restrictions. I do so by imposing a single narrative sign restriction that captures a key shift in US and French monetary policy in 1928.
Shocks to monetary gold demand are key in explaining the initial slide into the depression. Whereas the second phase of the collapse in output in 1931 seems to be linked to factors other than central bank policy, monetary shocks are shown to account for the overwhelming initial fall in production and prices. These findings are robust along a number of dimensions.
Charlotte Gerken of Bank of England in this useful speech again quotes from the animal world:
Good morning. Thank you to Insurance ERM for inviting me to speak at your conference. When I told a colleague I had been asked to give a talk on responses to risk, he told me: “the fox knows many things; the hedgehog knows one important thing.”
I was curious to learn more: this idea came from a fragment of text by an Ancient Greek poet Archilochus of Paros; it inspired Isaiah Berlin’s 1953 essay on Tolstoy’s view of history; and has been used in Jim Collins’s book From Good to Great. What it boils down to is a way of thinking, one that guides how you prepare for and respond to risk: the fox looking at every eventuality; the hedgehog’s one big idea being to curl into a ball and wait for the peril to pass. I’m left with the image of the fox hopping about and getting ever more frustrated as it schemes how to get at the hedgehog.
Today I will take a look at some of the tactical steps we have taken around the financial markets and macro-economic impact of Covid-19 on insurers. And go on to more strategic responses to this and other structural changes, focussing on developments in stress testing and scenario analysis.
There have been times this year when it’s been hard to resist the temptation to react to unfolding events with the hedgehog’s one big idea. Unfortunately, there have been few places where curling up in a ball would not have left you in the path of a massive juggernaut.
Deploying our fox brain we have learned many things and responded tactically to the varying ways the financial markets, macro-economic, and business operational impacts from Covid-19 are affecting us.
…
In finance, the ‘Greeks’ have become synonymous with the inner workings of models for pricing derivatives – a fox-like activity if ever there was one. But thanks to that off the cuff remark by a colleague, I have learned that at least one Greek has much more to tell us about ways of thinking about risk. The detailed, fox-like analysis of individual risks and threats and how to respond to them is essential. And it is just as important to step back and ask ourselves, does all that industry add up to an effective defence against what the world could throw at us? Neither the fox nor the hedgehog has a monopoly on wisdom: as we look forward to 2021, the PRA is determined to learn from these and no doubt from other more exotic creatures.
In an earlier post, I had pointed to a paper which summarised the policies of 4 central banks during the 2020 crisis.
Christian Vallence and Peter Wallis of RBA in this piece broaden the scope and include policies of other central banks:
Central banks in advanced economies have employed a wide range of tools to support their economies and financial systems during the COVID-19 pandemic. Some measures have involved scaling up standard central bank tools or reactivating facilities introduced during the global financial crisis. Other measures are new innovations. The speed at which these tools were deployed and scale of their usage has been unprecedented. These measures have helped to restore functioning of financial markets, lower interest rates, and support the flow of credit to borrowers.
Michael D. Bordo & Mickey D. Levy in this new NBER paper:
In this paper we survey the historical record for over two centuries on the connection between expansionary fiscal policy and inflation. As a backdrop, we briefly lay out several theoretical approaches to the effects of fiscal deficits on inflation: the earlier Keynesian and monetarist approaches; and modern approaches incorporating expectations and forward looking behavior: unpleasant monetarist arithmetic and the fiscal theory of the price level.
We find that the relationship between fiscal deficits and inflation generally holds in wartime when fiscally stressed governments resorted to the inflation tax. There were two peacetime episodes in the early twentieth century when bond financed fiscal deficits that were unbacked by future taxes seem to have greatly contributed to inflation: France in the 1920s and the recovery from the Great Recession in the 1930s in the U.S. In the post-World War II era a detailed examination of the Great Inflation in the 1960s and 1970s in the U.S. and the U.K. suggests that fiscal influences on monetary policy was a key factor. Finally we contrast the experience of the Great Financial Crisis of 2007-2008, when both expansionary fiscal and monetary policy did not lead to rising inflation, with the recent pandemic, which may involve the risks of fiscal dominance and future inflation.
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