Author Archive for John Barrdear

Page 3 of 39

Policy options for the Euro area [Updated]

Published on 30 November 2011 at 1:38 pm in Economics, Europe, Finance and Politics. Tags: , , , , , , , , , , .

I here list a few policy options for the Euro area that I support, broadly in descending order of my perception of their importance.  Everything here is predicated on an assumption that the Euro itself is to survive and that no member nation of the Euro area is to exit the union.  I don’t claim that this would solve the crisis — who would make such a claim? — but they would all be positive steps that increase the probability of an ultimate solution being found.

  • Immediately establish a single, Euro area-wide bank deposit guarantee scheme.  A single currency must absolutely ensure that a Euro held as money in Greece be the same as a Euro held as money in Germany.  That means that retail and commercial deposits in each should be backed by the same guarantee.  I have no firm opinion on how it should be funded.  The classic manner is through a fee on banks proportional to their deposits, but if Euro area countries ultimately prefer to use a Tobin-style tax on transactions, that’s up to them.  Just get the thing up and running.  Of course, a unified deposit guarantee also requires a unified resolution authority in the event of an insolvent bank collapsing.  There are many and varied forms that fiscal union can take; this is the most urgent of them all.  I am shocked that this does not already exist.
  • The ECB should switch from targetting current inflation to expected future inflation.  The Bank of England already does this.  Accepting that any effect of monetary policy on inflation will come through with a lag (or at least acknowledging that current inflation is backward looking), they “look through” current inflation to what they expect it to be over the coming few years.  This is important.  Current inflation in the Euro area — i.e. the rate of change over the last 12 months — is at 3%.  On the face of it, that might make an ECB policymaker nervous, but looking ahead, market forecasts for average inflation over the coming five years are as low as 0.85% per year in Germany.  They will be much lower for the rest of the Euro area.  Monetary policy in the Euro area is much, much too tight at the moment.  At the very least, (a) interest rates should be lowered; and (b) the ECB should announce their shift in focus toward forward inflation.
  • The ECB should start to speak more, publicly, about forms of current inflation that most affect future inflation.  This follows on from my previous point, but is still logically distinct.  The Fed likes to focus on “core” inflation, stripped of items with particularly volatile price movements.  I don’t much care whether it is non-volatile prices or nominal wages, or even nominal GDP.  I just want the ECB to be speaking more about something other than headline CPI, because it is those other things that feed into future headlines.
  • The ECB’s provision of liquidity to the banking system, while currently large, is not nearly large enough.  The fact that “German Bunds trade below the deposit facility rate at the ECB and well below the Overnight Rate” is clear evidence of this.  I currently have no opinion on whether this ought to be in the form of increasing the duration of loans to Euro area banks, relaxing the collateral requirements for loans or working with member countries’ treasuries to increase the provision of collateral.  I certainly believe (see my second point above) that interest rates should be lowered.  The point, as far as is possible, is to make replacing lost market funding with ECB funding more attractive to banks than deleveraging.
  • A great deal of Euro area sovereign debt is unsustainable; hair-cuts are inevitable and they should be imposed as soon as possible (but, really, this requires that a unified bank resolution authority be established first).  The argument for delaying relies on banks’ ability to first build up a cushion of capital through ongoing profitability.  When banks are instead deleveraging, the problem is made worse by waiting.
  • Credit Default Swaps must be permitted to trigger.  The crisis may have its origins in the the profligacy of wayward sovereigns (frankly, I think the origins lie in the Euro framers not appreciating the power of incentives), but the fundamental aspect of the crisis itself is that various financial assets, previously regarded as safe, are coming to be thought of as risky.  By denying market participants the opportunity to obtain insurance, Euro area policymakers are making the problem worse, not better.  Market willingness to lend to Greece in 2025 will in no way depend on how we label the decisions made in 2011 and 2012.
  • Every member of the Euro periphery should be in an IMF programme.  Yes, I’m looking at you, Italy.  If the IMF does not have sufficient funds to work with, the ECB should lend to it.  All politicians in Euro periphery countries should be speaking to their electorates about multi-decade efforts to improve productivity.  These things cannot be fixed in two or three years.  They can, at best, be put on the right path.
  • For every country in an IMF programme, all sovereign debt held by the ECB should be written down to the price at which they purchase it.   If the ECB buys a Greek government bond at, say, a 20% discount to face value, then that bond should be written down by 20%.  The ECB should not be in a position to make a profit from their trading if Europe finds its way through the overall crisis.  Similarly, the ECB should not be in a position to take a loss, either — they should not be required to take a hair-cut below the price they pay for Euro area sovereign debt.

Note that I have not yet used the phrase “Euro bond” anywhere.  Note, too, that a central bank is only meant to be a lender of last resort to banks.  The lender of last resort to governments is the IMF.

If Euro area policymakers really want to engage in a fiscal union (a.k.a. transfers) beyond the absolutely essential creation of a unified bank deposit guarantee scheme, it is perfectly possible to do so in a minimal fashion that does not lessen the sovereignty of any member nation:  Have a newly created European Fiscal Authority (with voluntary membership) provide the minimum universally agreed-on level of unemployment benefits across the entire area, funded with a flat VAT.  Any member country would retain the ability to provide benefits above and beyond the minimum.  This will have several benefits:

  • Since its membership would be voluntary and it would provide only the minimum universally agreed level, it cannot, by definition, constitute a practical infraction on sovereignty;
  • It will help provide pan-European automatic stabilisers in fiscal policy;
  • It will provide crucial intra-European stabilisation;
  • It will increase the supply of long-dated AAA-rated securities at a time when demand for them is incredibly high; and
  • It will decrease the ability of Euro member countries to argue that they should be able to violate the terms of the Maastricht Treaty at times of economic hardship as at least some of the heavy lifting in counter-cyclical policy will be done for them.

———————-

Update 30 Nov 2011, 13:05 (25 minutes after first publishing the post):

It would appear that the world’s major central banks have announced a coordinated improvement in the provision of liquidity to banks.  This is a good thing. Press releases:

Print 0 Comments

On the limits of QE at the Zero Lower Bound

Published on 22 November 2011 at 12:26 am in Academia, Economics and Finance. Tags: , , , .

When engaging in Quantitative Easing (QE) at the Zero Lower Bound (ZLB), central banks face a trade-off: If they are successful in reducing interest rates on long-term, high-risk assets, they do so at the cost of lowering the profitability of financial intermediaries, making it more difficult for them to repair any balance sheet problems and rendering them more susceptible to future shocks, thereby increasing the fragility of the financial system.

The crisis of 2007/2008 and the present Euro-area difficulties may both be interpreted, from a policymaker’s viewpoint, as a combination of two related events: an exogenous change in the relative supplies of high- and low-risk assets and, subsequently, a classic liquidity crisis. A group of assets that had hitherto been considered low risk suddenly became viewed as high risk. The increased supply of high-risk assets pushed down their price, while the opposite occurred in the market for low-risk assets. Unsure of their counterparties’ exposure to newly-risky assets, the suppliers of liquidity then withdrew their funding. Note that we do not require any change in financial intermediaries’ risk-aversion (their risk appetite) in this story. Tightening credit standards, common to any downturn, serve only to amplify the underlying shock.

Central banks responded admirably to the liquidity crises, supplying unlimited quantities of the stuff and generally at Bagehot’s recommended “penalty rate”. In response to the first problem, and being concerned primarily with effects on the real economy, central banks initially lowered overnight interest rates, trusting markets to correspondingly reduce low-risk and, in turn, high-risk rates. When overnight rates approached zero and central banks were unwilling to permit them to become negative, they turned to QE, mostly focusing on forcing down low-risk rates (out of a concern for distorting the allocation of capital across the economy) and allowing markets to bring down high-risk rates.

Consequently, QE tightens spreads over overnight interest rates and since spreads over blew out during the crisis, this is commonly seen as a positive outcome and even a sign that the overall problem is being resolved. However, such an interpretation misses the possibility, if not the fact, that broader spreads are rational market reactions to an underlying shift in the distribution of supply. In such a case, QE cannot help but distort otherwise efficient markets, no matter what assets are purchased.

Indeed, limiting purchases to low-risk assets may serve to further distort any “mismatch” between the distributions of supply and demand. Many intermediaries operate under strict, and slow moving, institutional mandates that limit their exposure to long-term, high-risk assets. Such market participants are simply unable, even in the medium term, to participate in the portfolio rebalancing that CBs seek. The efficacy of such a strategy may therefore decline as those agents that are able to participate become increasingly saturated in their purchases of high-risk debt (and in so doing are seen as risky themselves and so unable to raise funds from the constrained agents).

Furthermore, QE in the form of open market purchases of bonds, no matter whether they are public or private, automatically implies a bias towards large corporates and away from households and small businesses that rely exclusively on bank lending for credit. Bond purchases directly lower interest rates faced by large corporates (through portfolio rebalancing), but only indirectly stimulate small businesses or households via bank funding costs. In an environment with reduced competition in banking and perceived fragility in the financial industry as a whole, funding costs may not decline in response to QE and even if they do, the decline may not be passed on to borrowers.

In any event, a direct consequence of QE at the ZLB must be a reduction in the expected profitability of the financial industry as a whole and with it, a corresponding decline in the industry’s ability to withstand negative shocks. Given this trade-off, optimal policy at the ZLB should expressly consider financial system fragility in addition to inflation and the output gap, and when the probability of a negative shock rises, the weight given to such consideration must correspondingly increase.

How, then, to stimulate the real economy? Options to mitigate such a trade-off might include permitting negative nominal interest rates, at least for institutional investors; engaging in QE but simultaneously acting to improve financial industry resilience by, for example, mandating industry-wide constraints on dividends or bonuses; or, perhaps most importantly, acting to “correct” the risk distribution of long-term assets. The first of these is not without its risks, but falls squarely within the existing remit of most central banks. The second would require coordination between monetary and regulatory policy, a task eminently suited to the Bank of England’s new role. The third requires addressing the supply shock at its source and so its implementation would presumably be legislative and regulatory.

If further QE is deemed wise, it may also be necessary to grit one’s teeth and shift purchases out to (bundles of) riskier assets, if only maximise their effect. Given the distortions that already occur with low-risk purchases, this may not be as bad as it first seems.

Active monetary research can help inform all of these options, but more broadly, should perhaps focus not just on identifying the mechanisms of monetary transmission but also consider their resilience.

Print 1 Comment

For the first time since 2004q4, US household debt is less than 100% of disposable income

Published on 10 October 2011 at 2:25 pm in USA. Tags: , , , .

In today’s story of household “deleveraging” in America (okay, so this is very, very late since the data were released in August. Still … ):

2011q2 was the first time since 2004q4 that U.S. Household debt was less than 100% of Disposable Personal Income (click on the image for a less squished version):

2005q1 and 2011q1 were both at 100% exactly, or close enough.

In the period 1999q2 to 2006q3, distressed household debt averaged 4.35% and was never higher than 5.06%. Distressed household debt was at 9.86% in 2011q2, having peaked at 11.98% in 2009q4.  As the Fed’s credit conditions report highlights, that was the 6th straight quarter of improvement.  However, the quarter-to-quarter falls have been quite low:  0.04 percentage points (2009q4 to 2010q1), 0.58 p.p., 0.26 p.p., 0.31 p.p., 0.31 p.p. and 0.62 p.p. (2011q1 to 2011q2).  If we assume a continuing fall of 0.4 percentage points per quarter, it’ll take another 14 quarters – that’s 2014q4 – to return to the pre-crisis average.

Of course, a resumption of growth in consumption is not contingent on that happening (maybe we’ll see a jump in incomes for some reason – I’m looking at you, policy makers), but it’s still pretty depressing.

Crucially, too, everything here only looks at aggregate, or average, numbers and if you think the balance-sheet recession story carries any weight at all, you should be very, very interested in the distributional effects.

Print 1 Comment

A simple proposal to improve fiscal policy

Published on 10 October 2011 at 11:55 am in Economics and Politics. Tags: , , , .

Payroll taxes (a.k.a. Employer’s National Insurance Contribution in the UK) should vary inversely with how long the employee had been unemployed at the time of taking the job.

Or, perhaps, there should be a straight discount on payroll taxes for an employee that was unemployed when hired, but the duration for which the discount applies should be proportional to the length of time they had been unemployed.

Either way, this should be a permanent part of the tax system – thereby providing another automatic stabiliser to fiscal policy, both in boom times and recessions.

This idea is not unique to me.

This idea is conditional on Central Bank policy not reducing the fiscal multiplier to zero.

Print 0 Comments

To what extent should the media mention that somebody is from a minority?

Published on 28 August 2011 at 4:28 pm in Ethics, Justice/Law, Sex and Welfare. Tags: , , , , , , , .

It turns out that Tim Cook, the new CEO of Apple, is gay.

Felix Salmon suggests that this makes him the most powerful gay man on earth (an idea of which I am sceptical – surely at least one head of state among all the nations of the world has been queer at some point) and that the media ought to be celebrating this fact, or at least making mention of it:

Personally, I don’t care.  Why should I?  Fundamentally, the only relevant facts are those that inform me about his ability to do his job, and knowing whether he’s a member of ethnic group X, holds religious view Y or is turned on by Z is of no use in that regard.

In a completely post-bigotry world, those things might (or might not!) be included in a puff piece that wanted to tell you about Tim Cook, the man, as a sort of background colour (“raised a Catholic, Mary-Anne’s atheism was a source of family friction in her early adulthood, but …”), but they’d play no part in people’s opinion of him as a manager and so would never appear in a serious article about the future direction of whichever company he works for.

Salmon’s point, I believe, is that (a) we’re not in a post-bigotry world and so there is a lead-by-example case for publicising Cook’s sexuality in the same way that people discussed that Hillary Clinton is female and Barack Obama is black; and (b) even if we were, the media is going out of its way to make no mention of it even in the puff pieces, that it’s going out of its way to self-gag and so, ironically, subtly reinforcing the closet.

I dunno.  I think that stuff like this is only relevant to public discourse — even puff-piece writing — if at some point it helped shape the subject’s motivations in life.  Furthermore, I believe that for at least some queer people now, and eventually for all of them, their sexuality (will have) played absolutely no role in shaping their motivations in anything other than who to look for in a partner.

As such, I’m instinctively sceptical of a need to draw attention to it.  Not even the puffiest of puff pieces would spend time discussing people’s preferences over ice cream flavours unless the subject made a point of bringing up their obsession with chocolate-mint.

When it comes to playing a role as a societal leader, I can’t help but feel that it’s up to Mr. Cook to decide for himself.

Dani and I rewatched “Good Will Hunting” last night.  I think there’s a parallel with the kid who’s a genius.  I always get angry when Ben Affleck’s character (the well-meaning, but idiot friend) tells Matt Damon’s character (the genius) that “you don’t owe it to yourself man, you owe it to me … ’Cause I’d do fuckin’ anything to have what you got. So would any of these fuckin’ guys. It’d be an insult to us if you’re still here in 20 years” [IMDB].  It’s Rawls’ veil of ignorance turned arse-end backwards.  It’s also complete rubbish.

I can see a moral argument for why Rawls’ veil implies that society at large should help people who drew particularly shitty numbers, but why should any one individual be required to do something just because they drew a particularly awesome number?  The whole goddamn point of Rawls’ veil is that nobody consents to it in the first place and so, as a society, we ought to not force people into the pigeon-hole that the lottery put them in.  Just because you were born into a poor family doesn’t mean you have to stay poor.   Just because you’re black doesn’t mean you have to like basketball.  Just because you have an IQ of 180 doesn’t mean you must do research.  Messers Affleck and Damon need to reread “Brave New World”.

Nobody can deny that Barrack Obama is black, but the extent to which he makes speeches to the black community declaring that they can be black, proud and successful is entirely up to him.  People working to bring about racial equality might feel he has an obligation, but he really doesn’t.

If Tim Cook wants to try to improve the acceptance of gay people in society at large, he can, but the idea of saying that he ought to just because he’s gay himself is illiberal.

Print 1 Comment

The US debt-ceiling deal

Published on 1 August 2011 at 12:31 pm in Economics, Politics and USA.

There’s plenty of detail around the traps. As Tyler Cowen says, Ezra Klein has a habit of producing excellent summaries and analysis on this stuff. Here (pdf) is the CBO’s analysis.

I’m disappointed, but not surprised, at the split between cuts to “discretionary” and “mandatory” spending. I choose to hope that at their big, joint summit on the deficit it’ll mostly be entitlement reform, as Americans like to call it, and tax reform.

I’m also disappointed, but again not surprised, that the cuts are not distributed in such a way as to make them stimulative (or at least not contractionary) in the immediate term. On the other hand, as in Britain, there’s a reasonable political economy argument to be made that fiscal retrenchment, conditional on deciding that it needs to happen, must be front-loaded to minimise the PDV of political pain.

I do in principle like the grim-trigger approach to the bipartisan negotiations on phase two of the whole thing, US politics being what they are. I’m dissapointed that increased taxes aren’t in the trigger, but appreciate why they’re not. I’m not at all sure that the gutting of defense spending in the trigger is as asymmetrically bad for the GOP as the Democrats would have liked.

I very much hope that votes in the joint summit to determine phase two cuts are kept sealed (for, say, at least a presidential term).

Print 0 Comments

Updating

Published on 5 July 2011 at 10:36 am in Meta. Tags: .

I’ve updated the blog to version 3.2 of WordPress (the fullscreen editing of posts is nice).  Hopefully there’ll be no problems …

Print 3 Comments

Wanted: CTRL-TAB in my browser to work as ALT-TAB does in windows

Published on 16 June 2011 at 10:03 am in Technology. Tags: , , , , , , , , .

Hey, Google, Microsoft and multitudinous Firefox geeks!

At the moment, both Chrome and Firefox have the same functionality on this:

  • CTRL-TAB cycles through your tabs in the order that you’ve got them physically arranged
  • CTRL-PGUP/PGDN also does this, although obviously CTRL-PGUP goes in the opposite direction

In Internet Explorer, CTRL-TAB works the same as in Chrome and Firefox, but they don’t have the CTRL-PGUP/PGDN functionality.

I don’t know how Safari or Opera work.

I want CTRL-TAB to work in my browser like ALT-TAB does in Windows and APPLESYMBOL-TAB does on a Mac:  The order in which it cycles through them should be the order in which I last viewed them, not the order in which I opened them.  If possible, like the operating system versions, it should also show small images of each tab as I cycle through them.

That is all.

Print 4 Comments

Bitcoin

Published on 14 June 2011 at 6:52 pm in Economics, Finance and Technology. Tags: , , , , .

Discussion of it is everywhere at the moment.

The Economist has a recent — and excellent — write-up on the idea.  My opinion, informed in no small part by Tyler Cowen’s views (here, here and here) is this:

  • Technically, it’s magnificent.  It overcomes some technical difficulties that used to be thought insurmountable.
  • As a medium of exchange, it’s an improvement over previous currencies (through the anonymity) for at least some transactions
  • As a store of value (i.e. as a store of wealth), it offers nothing [see below]
  • There are already many, many well-established assets that represent excellent stores of value, whatever your opinion on inflation and other artefacts of government policy
  • Therefore people will, at best, store their wealth in other assets and change them into bitcoins purely for the purpose of conducting transactions
  • As a result, the fundamental value of a bitcoin rests only in the superiority of its transactional system; for all other purposes, its value is zero
  • For 99.999% of all transactions by all people everywhere, the transaction anonymity is in no way superior to handing over physical cash or doing a recorded electronic transfer
  • Therefore, as a first approximation, bitcoin has a fundamental value of zero to almost everybody and of only slightly more than zero to some people

This thing is only ever going to be interesting or useful to drug dealers and crypto-fetishists.  Of those, I believe that drug dealers will ultimately lose interest because of a lack of liquidity in getting their “money” out of bitcoins and into hard cash.  That only leaves one group …

A note on money as a store-of-value:  When an asset pays out nothing as a flow profit (e.g. cash, gold, bitcoin), then that asset’s value as a store-of-value [1][2] is ultimately based on a) the surety that it’ll still exist in the future and b) your ability to convert it in the future to stuff you want to consume.  Requirement a) means that bread is a terrible store of value — it’ll all rot in a week.  Requirement b) means that a good store of value must be expected to have strong liquidity in the future.  In other words, there must be expected future demand for the stuff.  If you think your government’s policies are going to create inflation, putting your wealth in, say, iron ore, will be an excellent store of value because the economy at large will (pretty much) always generate demand for the stuff.

That makes gold an interesting case.  Since there isn’t really that much real economic demand for gold, using it as a store of value in period T must be based on a belief that people in period T+1 will believe that it will be a good store of value then.  But since we already know that it has very little intrinsic value to the economy, that implies that the T+1 people will have to believe that people in period T+2 will consider it a store of value, too.  The whole thing becomes an infinite recursion, with the value of gold as a store-of-value being based on a collective belief that it will continue to be a good store-of-value forever.

Bitcoin faces the same problem as gold.  For it to be a decent store-of-value, it will require that everybody believe that it will continue to be a decent store-of-value, and that everybody believe that everybody else believes it, and so on.  The world already has gold for that purpose (and gold has at least some real-economy demand to keep the expectation chain anchored).  I’m not at all sure that we can sustain two such assets.

[1] All currencies are assets.  They’re just don’t pay a return.  Then again, neither does gold.

[2] Yes, yes.  Saying that it’s “value as a store-of-value” is cumbersome.  It’s a definitional confusion analogous to free (as in beer) versus free (as in speech).

Print 0 Comments

A taxonomy of aggregate output (Actual, Forecast, Natural, Potential, Efficient)

Published on 4 June 2011 at 11:46 pm in Academia and Economics. Tags: , , , , .

Actual GDP:  Just that

Forecast GDP:  Actual + no further shocks

Natural GDP:  Forecast + full utilisation (i.e. no current or residual shocks, either)

Potential GDP:  Natural + fully flexible prices

Efficient GDP:  Potential + no market power

That then gives three different versions of an output gap:  Actual minus Natural, Potential or Efficient.

For some models, there is no difference between Natural GDP and Potential GDP.  I don’t like those models.

Print 0 Comments