This one on Jeff Sach's gloomy condemnation of US monetary policy contains a surprising statement:
I confess, I don't see why the Fed can't prevent a recession. Push the value of the dollar down far enough and export and import-competing manufacturing will grow fast enough to prevent a recession. The Fed may not like the inflation that this generates. But I don't see why monetary expansion will necessarily be ineffective in boosting output and employment.
As a naive economist I find that almost alarming; a statement that growth can be achieved whatever the circumstances if monetary growth is allowed to proceed far enough. Unsurprisingly, this occasions a host of comments below. Is this not Philips curve territory? Or is the fact that the US is not being treated like a closed economy, and the rest of the world (Asia at least) is doing well, significant in squaring the circle?
Surely, at some point, just devaluing the US currency cannot bring about endless growth for US citizens? If they have been borrowing off the rest of the world, surely they have to repay at some point, and devaluing the currency the rest of the world is owed in, again surely, has some kind of bad consequence?
This piece about the way the lower sections of US income distribution are not joining in the endless growth is also worth filing away. There is a splendidly pessimistic Malthusian analysis in one of the comments by someone calling himself Maynard, and via his blog I found THIS list of lectures about finance. Christ was a sad man I am, but they look intersting and useful
Tuesday, May 6, 2008
What is so surprising
I've often felt like reflecting on how mystifying it is that the Tories are so popular again, before veering over to the theme of self-doubt, wondering if I have a clue about what people in Britain really think. Then I read Paul Flynn in the Express, and wonder why I was finding it so mystifying.
Here he is ranting about the EU Constitution, which has, apparently, sold us down the river. You can find 100 articles like this for every opposing one in the Guardian.
Actually, what is perhaps more surprising and encouraging is that people like this have been raving on as if Britain were a diminishing speck of land mired in poverty and beseiged on all sides by fanatical murderers, for years and years, during which time the Conservatives have averaged 33%. It must mean that the UK electorate are actually capable of reading quite phenomenal bile and hatred with perfect equanimity, without turning extreme. Cue fatuous comment about us not turning to Fascism in the 1930's. But perhaps Britain is more moderate than a depressing surf of the tabloid commentariat would suggest.
Here he is ranting about the EU Constitution, which has, apparently, sold us down the river. You can find 100 articles like this for every opposing one in the Guardian.
Actually, what is perhaps more surprising and encouraging is that people like this have been raving on as if Britain were a diminishing speck of land mired in poverty and beseiged on all sides by fanatical murderers, for years and years, during which time the Conservatives have averaged 33%. It must mean that the UK electorate are actually capable of reading quite phenomenal bile and hatred with perfect equanimity, without turning extreme. Cue fatuous comment about us not turning to Fascism in the 1930's. But perhaps Britain is more moderate than a depressing surf of the tabloid commentariat would suggest.
Monday, May 5, 2008
Deleted posts
I tried twice to try to put on electronic paper my disquiet at recent events in politics, and ended up with nothing much worth recording. It all mashes together my own personal position, the somewhat ambiguous Lib Dem results and some quite clear difficulties with discerning a clear position in Liberalism that I can relate to. If it exists, I am fortunate enough that it can be found at CF; the stuff I read in Lib Dem news and the Liberator swerves between quite hard-headed recognition of the inevitable trade-offs necessary to policy making and a wishy-washy pressure group anti-capitalist politics that adds up to nothing much.
The great luxury of being in one of the extreme wings of political thought is the avoidance of any need to strike difficult balances. At the LSE you could find it in the dominant left-wing anti-markets rhetoric that is somehow easier to spout if you've never worked at all; and anything that seemed to oppose this could be acceptable. The right-wing side, on the other hand, can be found all over the online broadsheet commentariat (Heffer, Littlejohn, anyone from the Telegraph) and the raving commenters below. I suspect that any discomfort I currently feel is simply symptomatic of being a moderate, and is moreover common across all parties; I imagine how the left of the Tory party winces at the anti-immigration line is rather similar to how the Right of the Lib dems wince when some blowhard starts fulminating against consumerism.
This is worthless rambling; what was deleted was far more so. Ramble over.
The great luxury of being in one of the extreme wings of political thought is the avoidance of any need to strike difficult balances. At the LSE you could find it in the dominant left-wing anti-markets rhetoric that is somehow easier to spout if you've never worked at all; and anything that seemed to oppose this could be acceptable. The right-wing side, on the other hand, can be found all over the online broadsheet commentariat (Heffer, Littlejohn, anyone from the Telegraph) and the raving commenters below. I suspect that any discomfort I currently feel is simply symptomatic of being a moderate, and is moreover common across all parties; I imagine how the left of the Tory party winces at the anti-immigration line is rather similar to how the Right of the Lib dems wince when some blowhard starts fulminating against consumerism.
This is worthless rambling; what was deleted was far more so. Ramble over.
A few random notes
I earned a quick escape to the cafe this morning after heaving my toddler and Schauzer round Wandsworth Park for an hour. The FT.
Relevant to the "middle class is suffering" bit: here is something on the German middle class. It is defined objectively (rather than the opinion polling asking "who do you think you are") as 70-150% of median income, and it is projected to shrink - the so-called 'hollowing out".
Larry Summers' view on globalisation and its victims struck me as correct in the liberal line; not standing in the way of forces that ultimately benefit the world, but recognising how they produce winners and losers (I tend to distinguish Tories from Liberals in how the former are more disingenuous in seeing the rich/winners in general as having deserved it, the latter with the more nuanced views that see the injustices and path dependencies).
I liked this in particular:
There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens with promises that they can avoid paying taxes altogether on large parts of their fortunes. It might be inevitable that globalisation leads to some increases in inequality; it is not necessary that it also compromise the possibility of progressive taxation.
Labour's very immobility in relation to capital requires differential treatment.
I also enjoyed Paul Collier's contribution to Martin Wolf's thread on food prices. Collier is very hard-headed in the Bottom Billion, and here blames an addiction to small peasant farming amongst aid-givers as part of the problem (if I remember rightly). I can recall from Global History how massive plantations were not an effective way of ensuring that prosperity reached throughout an economy and enabled the wider demand and investment that leads to sustainable development. But perhaps those writers were not analysing a period of scarcity.
Relevant to the "middle class is suffering" bit: here is something on the German middle class. It is defined objectively (rather than the opinion polling asking "who do you think you are") as 70-150% of median income, and it is projected to shrink - the so-called 'hollowing out".
Larry Summers' view on globalisation and its victims struck me as correct in the liberal line; not standing in the way of forces that ultimately benefit the world, but recognising how they produce winners and losers (I tend to distinguish Tories from Liberals in how the former are more disingenuous in seeing the rich/winners in general as having deserved it, the latter with the more nuanced views that see the injustices and path dependencies).
I liked this in particular:
There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens with promises that they can avoid paying taxes altogether on large parts of their fortunes. It might be inevitable that globalisation leads to some increases in inequality; it is not necessary that it also compromise the possibility of progressive taxation.
Labour's very immobility in relation to capital requires differential treatment.
I also enjoyed Paul Collier's contribution to Martin Wolf's thread on food prices. Collier is very hard-headed in the Bottom Billion, and here blames an addiction to small peasant farming amongst aid-givers as part of the problem (if I remember rightly). I can recall from Global History how massive plantations were not an effective way of ensuring that prosperity reached throughout an economy and enabled the wider demand and investment that leads to sustainable development. But perhaps those writers were not analysing a period of scarcity.
Sunday, May 4, 2008
Roy Jenkins Biog
I owe Simon Griffiths a great deal. The Senior Researcher from the Social Market Foundation was responsible for the daringly open-minded act of considering my application for the internship this last winter, an experience that ended up being almost unremittingly positive (barring the labeling of post boxes). It left me with levels of self-confidence I normally only get after an exam result or gambling win, which I will need to draw upon for a while if I am to get anywhere.
As a parting gift Simon bought me a copy of Roy Jenkins' autobiography. His PhD was in the acceptance of market forces by the Labour movement, so such crossover characters must have been right up his street. I thoroughly enjoyed the book, barring the bits where the personalities of late 70's EU commissioners are dissected in venemous detail, and it has provided useful insight into how politics works, or at least did. To do it and the subject more generally full justice I ought to cross-reference it to other key autobiographies, in particular of those whom RJ with little disguise regards as the wreckers, over-promoted or wrong-headed characters of the era (David Owen's personality was seen as political fact of dismal significance to the future of 3rd party politics; Wilson as someone with scarcely a principle or longer term idea than himself; Tony Benn and Michael Foot as almost lunatic; Dennis Healey the might-have-been. Thatcher is intruiging, but is unlikely - as someone who actually made it - to have symmetric reflections on Jenkins himself).
The lifestyle of serious politicans, with the endless invitations to speak, the midnight and beyond clause negotiations, the critical decisions (in his case, budget cuts and prisoner-treatment were the most vital), the travel, was well illustrated. I don't have the option, but even if I did I am not sure I could make that much personal sacrifice.
Otherwise, it made me very curious to read some of his actual political output, given how close he might have been to becoming a proper right-Labour prime minister. Paul Lindford has made me more curious here.
He otherwise makes a telling point about how fine speeches don't win elections. See Paul Lindford's top 10 speeches for further evidence at the top.
Thanks Simon.
As a parting gift Simon bought me a copy of Roy Jenkins' autobiography. His PhD was in the acceptance of market forces by the Labour movement, so such crossover characters must have been right up his street. I thoroughly enjoyed the book, barring the bits where the personalities of late 70's EU commissioners are dissected in venemous detail, and it has provided useful insight into how politics works, or at least did. To do it and the subject more generally full justice I ought to cross-reference it to other key autobiographies, in particular of those whom RJ with little disguise regards as the wreckers, over-promoted or wrong-headed characters of the era (David Owen's personality was seen as political fact of dismal significance to the future of 3rd party politics; Wilson as someone with scarcely a principle or longer term idea than himself; Tony Benn and Michael Foot as almost lunatic; Dennis Healey the might-have-been. Thatcher is intruiging, but is unlikely - as someone who actually made it - to have symmetric reflections on Jenkins himself).
The lifestyle of serious politicans, with the endless invitations to speak, the midnight and beyond clause negotiations, the critical decisions (in his case, budget cuts and prisoner-treatment were the most vital), the travel, was well illustrated. I don't have the option, but even if I did I am not sure I could make that much personal sacrifice.
Otherwise, it made me very curious to read some of his actual political output, given how close he might have been to becoming a proper right-Labour prime minister. Paul Lindford has made me more curious here.
He otherwise makes a telling point about how fine speeches don't win elections. See Paul Lindford's top 10 speeches for further evidence at the top.
Thanks Simon.
Counting them
Countering my dismal 6am tendency to see the worst in things, and multiply various doubts about my own direction, and that of the scarcely-understood political grouping that I find myself part of (posts perhaps to follow), I think it worth while jotting down my recollections of this lovely weekend that I am so lucky to have enjoyed just now.
Saturday was about Battersea park with Chewie gamboling away to greet dogs, the other four of us munching a picnic beneath some blossomy canopy. Battersea Park has everything: an adventure playground that suits Matilda's rather constrained risk-seeking perfectly, ice-cream vans, cherry trees and their blossoms, ambling dog-walkers, organised and improvise football. You can believe the spin of the London village when its like this, and when your miniature Schauzer forces you to exchange greetings with a dozen amiable strangers. In the afternoon, we ventured to the Roehampton to swim in the outdoor pool for the first time this year, the water warm enough but the cooling air enough to make you keep your shoulders dipped under as much as possible. Matilda has leapt on from the querelous trembling infant of a year ago, and now jumps in at the deep end and semi-flounders her way to the side, as comfortable under the water as above.
I wasted the early part of the evening trying to jot my thoughts down about the mediocre political results and their mystifying blue tide (what Tory voters have against a decade of low unemployment, massive wealth transfers to property owners, lower crime in general and cheaper Eastern European labour, I will never really get. Short memories of what 1995 was actually like, I suspect). Then later we got stressed to the last two episodes of 24.
Sunday (4th May) was what really got me in elegaic mood. The garden has been strenuously updated by several man-months of Africaner labour to suit the needs of spoilt girl toddlers, and it all seemed to pay off today. After a 6 mile jog down by the river (8:20 per mile to keep my HR down at 150; I feel like a cumbersone elk on the uphills), we camped in the garden all morning. Girls bounced on the trampoline, scootered or rode or trundled around the decking, dipped into the water-rill to fetch water for washing things, tapped tennis balls, clambered over carefully placed logs, and clamoured for a picnic. We went in at 12 to chop carrots and sweet potato for a soup, where C joined us after spending the morning marking. More of the same in the afternoon, enlivened by Chewie yelping around when trying to pass what eventually revealed itself to be half-shit, half-compacted-tinfoil. We sat down to a pot of hot chocolate, and ended the day eating roast chicken all together. (Florence: begged or threatened for each mouthful. Matilda: picking the food up like an artist scooping a blob of paint off a palette, grinning and passing extravagent praise on the gravy).
I am really very lucky. I may have a very confusing, pointless or alienating next 20 years, and end them largely insignificant in anyone's scheme of things: that seems to be the fate of most. But if I am sensible I will spend most of my years wishing I was in 2008 enjoying such a heavenly weekend with my family.
Saturday was about Battersea park with Chewie gamboling away to greet dogs, the other four of us munching a picnic beneath some blossomy canopy. Battersea Park has everything: an adventure playground that suits Matilda's rather constrained risk-seeking perfectly, ice-cream vans, cherry trees and their blossoms, ambling dog-walkers, organised and improvise football. You can believe the spin of the London village when its like this, and when your miniature Schauzer forces you to exchange greetings with a dozen amiable strangers. In the afternoon, we ventured to the Roehampton to swim in the outdoor pool for the first time this year, the water warm enough but the cooling air enough to make you keep your shoulders dipped under as much as possible. Matilda has leapt on from the querelous trembling infant of a year ago, and now jumps in at the deep end and semi-flounders her way to the side, as comfortable under the water as above.
I wasted the early part of the evening trying to jot my thoughts down about the mediocre political results and their mystifying blue tide (what Tory voters have against a decade of low unemployment, massive wealth transfers to property owners, lower crime in general and cheaper Eastern European labour, I will never really get. Short memories of what 1995 was actually like, I suspect). Then later we got stressed to the last two episodes of 24.
Sunday (4th May) was what really got me in elegaic mood. The garden has been strenuously updated by several man-months of Africaner labour to suit the needs of spoilt girl toddlers, and it all seemed to pay off today. After a 6 mile jog down by the river (8:20 per mile to keep my HR down at 150; I feel like a cumbersone elk on the uphills), we camped in the garden all morning. Girls bounced on the trampoline, scootered or rode or trundled around the decking, dipped into the water-rill to fetch water for washing things, tapped tennis balls, clambered over carefully placed logs, and clamoured for a picnic. We went in at 12 to chop carrots and sweet potato for a soup, where C joined us after spending the morning marking. More of the same in the afternoon, enlivened by Chewie yelping around when trying to pass what eventually revealed itself to be half-shit, half-compacted-tinfoil. We sat down to a pot of hot chocolate, and ended the day eating roast chicken all together. (Florence: begged or threatened for each mouthful. Matilda: picking the food up like an artist scooping a blob of paint off a palette, grinning and passing extravagent praise on the gravy).
I am really very lucky. I may have a very confusing, pointless or alienating next 20 years, and end them largely insignificant in anyone's scheme of things: that seems to be the fate of most. But if I am sensible I will spend most of my years wishing I was in 2008 enjoying such a heavenly weekend with my family.
Sunday, April 27, 2008
Crisis what crisis etc etc
The view that is in no party's interests to propound: See it here. The FT's analysis surprised me all the same - household gearing is far better than in 1988-9, so a larger fall is needed for a big negative equity crisis. Gloomy commentators who want to believe the current world is mad and look back on a sensible period 20 years before provide more fuel to the adage that there are few historians as shoddy as the romantic conservative.
I personally think the other big story of the year so far -the breakneck inflation in essential commodities, possibly ending a trend that has been fairly solid for decades - is going to have a bigger long-term impact than the momentary disruption of financial markets. In the Economist web edition, this story is worth reading on that subject. There are few winners.
Though if the credit crunch continues to see massive spreads in LIBOR, this article blaming it on money-market aversion to lending to banks, and the academic papers it sources, will be worth looking back on. Philip Stephens a couple of weeks ago also asked if the excitement is getting to the financial markets commentators. Munchau today takes a different view.
I really enjoyed Bagehot this week, being reminded of the excellence of its prose which is not matched regularly elsewhere. I like the economy of the writing, its ability to put across several points in quite taut sentences. For example:
As with voters, so with Mr Brown's cooling romance with his own MPs. Part of the explanation is that parliamentary rebellion, rather like adultery, is habit-forming: at first it feels impossible, then transgressive and finally mundane. There is also, inevitably, a swelling cadre of alienated MPs—has-been ex-ministers and never-going-to-be-and-know-it backbenchers—for whom infidelity seems costless. As Mr Brown's poll ratings wane, self-interest (ie, keeping their seats) actively motivates some MPs to distance themselves from him.
I could go on, but (a) I am bored with this and knackered after a six-mile jog and another full weekend of childcare* in a three-quarters house and (b) somewhat depressed by the idea that my horizons are set by the Economist and FT Weekend edition. Oh, and Roy Jenkins' "Life at the Centre" which is hardly a laugh a minute, though interesting; the last chapter, having him describing in detail his preferences for different EU Commissioners of the 70's, could have been missed.
*following her earlier attempts at self-destruction through the ingestion of large coins and spraying bleach spray into her endlessly-experimenting gob, Florence took a more straightforward approach today by heading into the road for a laugh. Caroline almost gave birth on the spot, except the baby was quivering within her, still in shock at the mighty kick that F had dealt it in the swimming pool. F fortunately has reserves of charm to get her out of all the trouble.
I personally think the other big story of the year so far -the breakneck inflation in essential commodities, possibly ending a trend that has been fairly solid for decades - is going to have a bigger long-term impact than the momentary disruption of financial markets. In the Economist web edition, this story is worth reading on that subject. There are few winners.
Though if the credit crunch continues to see massive spreads in LIBOR, this article blaming it on money-market aversion to lending to banks, and the academic papers it sources, will be worth looking back on. Philip Stephens a couple of weeks ago also asked if the excitement is getting to the financial markets commentators. Munchau today takes a different view.
I really enjoyed Bagehot this week, being reminded of the excellence of its prose which is not matched regularly elsewhere. I like the economy of the writing, its ability to put across several points in quite taut sentences. For example:
As with voters, so with Mr Brown's cooling romance with his own MPs. Part of the explanation is that parliamentary rebellion, rather like adultery, is habit-forming: at first it feels impossible, then transgressive and finally mundane. There is also, inevitably, a swelling cadre of alienated MPs—has-been ex-ministers and never-going-to-be-and-know-it backbenchers—for whom infidelity seems costless. As Mr Brown's poll ratings wane, self-interest (ie, keeping their seats) actively motivates some MPs to distance themselves from him.
I could go on, but (a) I am bored with this and knackered after a six-mile jog and another full weekend of childcare* in a three-quarters house and (b) somewhat depressed by the idea that my horizons are set by the Economist and FT Weekend edition. Oh, and Roy Jenkins' "Life at the Centre" which is hardly a laugh a minute, though interesting; the last chapter, having him describing in detail his preferences for different EU Commissioners of the 70's, could have been missed.
*following her earlier attempts at self-destruction through the ingestion of large coins and spraying bleach spray into her endlessly-experimenting gob, Florence took a more straightforward approach today by heading into the road for a laugh. Caroline almost gave birth on the spot, except the baby was quivering within her, still in shock at the mighty kick that F had dealt it in the swimming pool. F fortunately has reserves of charm to get her out of all the trouble.
Sunday, April 20, 2008
Bank of England Speech - Charles Bean
Morphing into Mr Bean is not so bad if it is this one, his speech is here. I found it on David Smith's blog (see blogroll). Some quotes:
At root, the problem is one of a lack of trust in a context of incomplete information about the scale and distribution of the likely losses associated with mortgages, other loans and derivative products. As the experience of Japan during its ‘lost decade’ attests, a return to normality in the banking sector requires both credible revelation of those losses, as well as injections of fresh capital.
But the MPC targets CPI inflation, not house prices. It is therefore the impact on demand – and thus on inflationary pressure – that matters to us. Some commentators look at the historically strong correlation between house price inflation and consumption growth (Chart 5) and conclude that if house prices fell significantly, then that would also generate a sharp slowing in consumer spending. But it is not clear that this need be so. Lower house prices do not make us collectively worse off. They merely redistribute wealth from home owners who expect to trade down to those not yet on the housing ladder or who are still moving up it. So any decline in the value of the housing stock should not have much net effect on spending through the so-called ‘wealth effect’.
Discussing the question of how globalisation affected the UK, he points out the well-known fact of the lower prices, increased opportunities for businessmen to choose international factors of production, in particular labour, and so forth, but then:
But this beneficial tailwind from globalisation has gradually turned into a headwind. The biggest gains from the integration of the emerging market economies into the global trading system probably came early on as the most obvious opportunities to outsource and offshore were seized. Moreover, one would expect that as these economies develop, so their real labour costs will gradually catch up with those in the advanced economies, eliminating the original gains from trade.
At root, the problem is one of a lack of trust in a context of incomplete information about the scale and distribution of the likely losses associated with mortgages, other loans and derivative products. As the experience of Japan during its ‘lost decade’ attests, a return to normality in the banking sector requires both credible revelation of those losses, as well as injections of fresh capital.
But the MPC targets CPI inflation, not house prices. It is therefore the impact on demand – and thus on inflationary pressure – that matters to us. Some commentators look at the historically strong correlation between house price inflation and consumption growth (Chart 5) and conclude that if house prices fell significantly, then that would also generate a sharp slowing in consumer spending. But it is not clear that this need be so. Lower house prices do not make us collectively worse off. They merely redistribute wealth from home owners who expect to trade down to those not yet on the housing ladder or who are still moving up it. So any decline in the value of the housing stock should not have much net effect on spending through the so-called ‘wealth effect’.
Discussing the question of how globalisation affected the UK, he points out the well-known fact of the lower prices, increased opportunities for businessmen to choose international factors of production, in particular labour, and so forth, but then:
But this beneficial tailwind from globalisation has gradually turned into a headwind. The biggest gains from the integration of the emerging market economies into the global trading system probably came early on as the most obvious opportunities to outsource and offshore were seized. Moreover, one would expect that as these economies develop, so their real labour costs will gradually catch up with those in the advanced economies, eliminating the original gains from trade.
Thursday, April 17, 2008
More with less blather
This on the dollar, whether intervention works. Note to self: brush up on FX understanding, because getting a feel for it in the fixed-rate regime of Bretton woods via the Jenkins memoirs is no substitute.
This which I think was originally found on Brad deLong. A good explanation of how monetary policy is a blunt instrument:
While officials were able to inject liquidity into the
financial system, they had no way to insure that the
funds got to the institutions that needed it most.
Realizing the failings of their traditional tools, Fed officials
innovated creating a new lending procedures in the
form of the Term Auction Facility and the Primary
Dealer Credit Facility, as well as changed their securities
lending program creating the Term Securities Lending
Facility.
The article contains a literal explanation of how the Fed operates, which I find very useful. In fact, the whole article is extremely handy on central bank operations.
Bernanke's speech at Jackson Hole on housing matters is full of useful references. Summarizes it pretty well here:
As you know, the financial stress has not been confined to mortgage markets. The markets for asset-backed commercial paper and for lower-rated unsecured commercial paper market also have suffered from pronounced declines in investor demand, and the associated flight to quality has contributed to surges in the demand for short-dated Treasury bills, pushing T-bill rates down sharply on some days. Swings in stock prices have been sharp, with implied price volatilities rising to about twice the levels seen in the spring. Credit spreads for a range of financial instruments have widened, notably for lower-rated corporate credits. Diminished demand for loans and bonds to finance highly leveraged transactions has increased some banks' concerns that they may have to bring significant quantities of these instruments onto their balance sheets. These banks, as well as those that have committed to serve as back-up facilities to commercial paper programs, have become more protective of their liquidity and balance-sheet capacity.
Some insight on the question of why the fear is so much greater than the subprime losses:
Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans. In part, these wider losses likely reflect concerns that weakness in U.S. housing will restrain overall economic growth. But other factors are also at work. Investor uncertainty has increased significantly, as the difficulty of evaluating the risks of structured products that can be opaque or have complex payoffs has become more evident. Also, as in many episodes of financial stress, uncertainty about possible forced sales by leveraged participants and a higher cost of risk capital seem to have made investors hesitant to take advantage of possible buying opportunities. More generally, investors may have become less willing to assume risk.
Also interesting on the subject of how Regulation Q - limits on deposit rates - causes monetary policy to have an exaggerated effect, as higher rates caused money to leave deposit-taking institutions for elsewhere, and limited their ability to lend.
This is a useful insight:
High inflation was also ultimately reflected in high nominal long-term rates on new mortgages, which had the effect of "front loading" the real payments made by holders of long-term, fixed-rate mortgages. This front-loading reduced affordability and further limited the extension of mortgage credit, thereby restraining construction activity.
This explains why money illusion can still help a housing boom along - it changes timings.
He discusses how innovations have decoupled housing and construction from the economic cycle. But other effects have come in: home equity is now much more liquid.
BDL draws attention to the positive feedback effect of marking to market.
This which I think was originally found on Brad deLong. A good explanation of how monetary policy is a blunt instrument:
While officials were able to inject liquidity into the
financial system, they had no way to insure that the
funds got to the institutions that needed it most.
Realizing the failings of their traditional tools, Fed officials
innovated creating a new lending procedures in the
form of the Term Auction Facility and the Primary
Dealer Credit Facility, as well as changed their securities
lending program creating the Term Securities Lending
Facility.
The article contains a literal explanation of how the Fed operates, which I find very useful. In fact, the whole article is extremely handy on central bank operations.
Bernanke's speech at Jackson Hole on housing matters is full of useful references. Summarizes it pretty well here:
As you know, the financial stress has not been confined to mortgage markets. The markets for asset-backed commercial paper and for lower-rated unsecured commercial paper market also have suffered from pronounced declines in investor demand, and the associated flight to quality has contributed to surges in the demand for short-dated Treasury bills, pushing T-bill rates down sharply on some days. Swings in stock prices have been sharp, with implied price volatilities rising to about twice the levels seen in the spring. Credit spreads for a range of financial instruments have widened, notably for lower-rated corporate credits. Diminished demand for loans and bonds to finance highly leveraged transactions has increased some banks' concerns that they may have to bring significant quantities of these instruments onto their balance sheets. These banks, as well as those that have committed to serve as back-up facilities to commercial paper programs, have become more protective of their liquidity and balance-sheet capacity.
Some insight on the question of why the fear is so much greater than the subprime losses:
Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans. In part, these wider losses likely reflect concerns that weakness in U.S. housing will restrain overall economic growth. But other factors are also at work. Investor uncertainty has increased significantly, as the difficulty of evaluating the risks of structured products that can be opaque or have complex payoffs has become more evident. Also, as in many episodes of financial stress, uncertainty about possible forced sales by leveraged participants and a higher cost of risk capital seem to have made investors hesitant to take advantage of possible buying opportunities. More generally, investors may have become less willing to assume risk.
Also interesting on the subject of how Regulation Q - limits on deposit rates - causes monetary policy to have an exaggerated effect, as higher rates caused money to leave deposit-taking institutions for elsewhere, and limited their ability to lend.
This is a useful insight:
High inflation was also ultimately reflected in high nominal long-term rates on new mortgages, which had the effect of "front loading" the real payments made by holders of long-term, fixed-rate mortgages. This front-loading reduced affordability and further limited the extension of mortgage credit, thereby restraining construction activity.
This explains why money illusion can still help a housing boom along - it changes timings.
He discusses how innovations have decoupled housing and construction from the economic cycle. But other effects have come in: home equity is now much more liquid.
BDL draws attention to the positive feedback effect of marking to market.
Wednesday, April 16, 2008
Stuff on Financial Contagion
As a financial nerd, I don't think I find anything more interesting than the way small losses (subprime) lead to larger, systemic problems (the credit crunch). It is one of the dozen or so strong arguments against pure libertarianism, the notion that things left alone settle into stable, meritocratic and just patterns*. Financial systems, left alone, produce all sorts of weird results, often when individual incentives are perfectly rational. State regulation of some kind or other is necessary. Private sector regulation leads to all sorts of problems; a great insight into this can be found reading Bagehot's Lombard Street, for example: the Bank of England, at that point a private, profit-needing entity, also had the hugely social function of holding the country's backstop of gold, and this created all sorts of dilemmas that WB discusses with great insight.
Anyway, the piece that started me off on this post was first found, I suspect, in the FT. It is this short number from a pair of economists publishing under the Banque de France, and is about the way small losses spiral into bigger systemic problems, Liquidity and financial contagion. The paper is useful in how it highlights the evolving models of banking crisis through time; from "one bank topples another and so on" to "market instruments falling in value causing capital requirement rules to cause further selling" . In other words, banking cap requirements make demand curves slope UP.
It then leads me onto an interesting speech with useful exhibits from the Fed of New York, "May you live in Interesting Times". Look in particular at the defaults on residential mortgages in the US: British figures are clearly nowhere near this.
However, worth quoting the point of this:
even if subprime delinquency rates keep climbing to unprecedented levels, it seems likely that total losses will be roughly in a range of $100-200 billion. Although this is a lot of money, it pales next to the $58 trillion of net worth of U.S. households or the $16 trillion market capitalization of the U.S. equity market. To put these losses in perspective, a 1 percent gain or loss in the U.S. stock market—which often occurs on a daily basis—is about the same order of magnitude of the likely subprime mortgage losses that will be gradually realized over the next few years.
The article/speech pulls no punches in terms of analysing the crisis in its full complexity and granularity - a useful future reference.
From there, to a Bernanke Speech in Jackson Hole last year. Bernanke's interest ought to be double, as a scholar of serious repute as well.
The US has economists in a different league from ours - recently reading Knowledge and The Wealth of Nations by David Warsh, on the essential topic of Increasing Returns in Economic Growth (another reason just letting things alone does not work), really emphasised this for me. I will try to read everything by Brad deLong, and this piece on Adverse Selection in mortgage markets is an example of the thought he can provoke. It is nice when they don't assume you can't do basic maths.
The FSF's piece on making things more robus is good (here) as another introduction to the whole affair.
Finally, for here, the 10 recommendations from arch-Bear Roubini for how to fix finance are as good a robust intro to this mess as I have found, I think**. The fact of these shadow-banks not being fully regulated (because no High Street depositors), but needing it because of the systemic risks, is an important one. Also pointing out how banks did have 'skin in the game'; after all, they are wearing some big losses. And reducing the pro-cyclicality of capital requirements, and a real criticism of mark-to-market accounting, while recognising the discipline it brings. Plus how standardization brings liquidity (look at the British Financial Revolution of the C18)
My challenge is going to be to bring this into a political context. Are there specifically right- or left-wing answers? Are some more meaningfully liberal than others?
*OK, I know this is not the definition of libertarianism. But this belief and the accompanying view that government interference necessarily makes things worse is a strong part of the political view
** Apart from this of course
Anyway, the piece that started me off on this post was first found, I suspect, in the FT. It is this short number from a pair of economists publishing under the Banque de France, and is about the way small losses spiral into bigger systemic problems, Liquidity and financial contagion. The paper is useful in how it highlights the evolving models of banking crisis through time; from "one bank topples another and so on" to "market instruments falling in value causing capital requirement rules to cause further selling" . In other words, banking cap requirements make demand curves slope UP.
It then leads me onto an interesting speech with useful exhibits from the Fed of New York, "May you live in Interesting Times". Look in particular at the defaults on residential mortgages in the US: British figures are clearly nowhere near this.
However, worth quoting the point of this:even if subprime delinquency rates keep climbing to unprecedented levels, it seems likely that total losses will be roughly in a range of $100-200 billion. Although this is a lot of money, it pales next to the $58 trillion of net worth of U.S. households or the $16 trillion market capitalization of the U.S. equity market. To put these losses in perspective, a 1 percent gain or loss in the U.S. stock market—which often occurs on a daily basis—is about the same order of magnitude of the likely subprime mortgage losses that will be gradually realized over the next few years.
The article/speech pulls no punches in terms of analysing the crisis in its full complexity and granularity - a useful future reference.
From there, to a Bernanke Speech in Jackson Hole last year. Bernanke's interest ought to be double, as a scholar of serious repute as well.
The US has economists in a different league from ours - recently reading Knowledge and The Wealth of Nations by David Warsh, on the essential topic of Increasing Returns in Economic Growth (another reason just letting things alone does not work), really emphasised this for me. I will try to read everything by Brad deLong, and this piece on Adverse Selection in mortgage markets is an example of the thought he can provoke. It is nice when they don't assume you can't do basic maths.
The FSF's piece on making things more robus is good (here) as another introduction to the whole affair.
Finally, for here, the 10 recommendations from arch-Bear Roubini for how to fix finance are as good a robust intro to this mess as I have found, I think**. The fact of these shadow-banks not being fully regulated (because no High Street depositors), but needing it because of the systemic risks, is an important one. Also pointing out how banks did have 'skin in the game'; after all, they are wearing some big losses. And reducing the pro-cyclicality of capital requirements, and a real criticism of mark-to-market accounting, while recognising the discipline it brings. Plus how standardization brings liquidity (look at the British Financial Revolution of the C18)
My challenge is going to be to bring this into a political context. Are there specifically right- or left-wing answers? Are some more meaningfully liberal than others?
*OK, I know this is not the definition of libertarianism. But this belief and the accompanying view that government interference necessarily makes things worse is a strong part of the political view
** Apart from this of course
Friday, April 11, 2008
On the other hand, I could get a life
I mean, for **** sake I spent 10 days reading SMF's stuff in preparation for an internship. This is my last real holiday before Child No. 3 arrives and real pressured work.
Writing is thinking, so the theory goes . . .
One of the more pleasurable jobs at the SMF was writing the Media Monitor, in which the 5 major broadsheets were scanned for references to significant terms like "public service reform" and "housing". Well, pleasurable up to a point: I have always experienced great disagreements with left- and right-wing extremes, but the manner of the latter is almost unbearable, and it was only through having an outlet in my sarky media monitor commentary that I could possibly stomach reading the likes of Heffer, Randall and Damian Reece.
But I did find that writing helped thinking. For the next 8 days I am trying to prepare myself for CentreForum. Just reading the FT and jotting down ways of startling the world with fresh insights is not enough. Maybe if I am forced to write a little each day I will stay in shape. I also have a cumbersome list of articles I think may be useful to me in the new post, where sophisticated understanding of the credit crunch is a sine qua non. So, I hope to keep tab of some of them here. No doubt I will forget to immediately.
But let us start with this article in the Economist's View. If you stop short of the comments you find a reasonable discussion of a really central issue: the degree to which regulation was a cause in the credit crunch. It passes through a fair amount of Galbraith to get there, which is no bad thing, and references important economists. In the FT not long ago, another writer suggested that an international perspective was needed for regulatory solutions to the credit crunch. Sounds sensible: regulatory arbitrage makes this perspective compelling. However, the very different paths being followed in Europe, Asia and America suggest it is not a straightforward case.
This could get boring.
Mega Bear Roubini is worth keeping an eye on for his painful predictions of utter doom. Here is a brief piece on the shape of the future recession. The other issue I thought worth bringing up is the replacement of the dollar as the world's reserve currency. Naturally, the Daily Star of Lebanon is the place to discuss this.
But I did find that writing helped thinking. For the next 8 days I am trying to prepare myself for CentreForum. Just reading the FT and jotting down ways of startling the world with fresh insights is not enough. Maybe if I am forced to write a little each day I will stay in shape. I also have a cumbersome list of articles I think may be useful to me in the new post, where sophisticated understanding of the credit crunch is a sine qua non. So, I hope to keep tab of some of them here. No doubt I will forget to immediately.
But let us start with this article in the Economist's View. If you stop short of the comments you find a reasonable discussion of a really central issue: the degree to which regulation was a cause in the credit crunch. It passes through a fair amount of Galbraith to get there, which is no bad thing, and references important economists. In the FT not long ago, another writer suggested that an international perspective was needed for regulatory solutions to the credit crunch. Sounds sensible: regulatory arbitrage makes this perspective compelling. However, the very different paths being followed in Europe, Asia and America suggest it is not a straightforward case.
This could get boring.
Mega Bear Roubini is worth keeping an eye on for his painful predictions of utter doom. Here is a brief piece on the shape of the future recession. The other issue I thought worth bringing up is the replacement of the dollar as the world's reserve currency. Naturally, the Daily Star of Lebanon is the place to discuss this.
Tuesday, April 8, 2008
Whispered update in an empty room
I have not written this thing in a few months. I'm not ashamed of that - the world of regular bloggers is either populated by solitary diarists, narcissistic wannabe media-commentators ("Today I have chosen to commentate upon . . .") and a very small number of actual academic stars (Tyler Cowen, Brad DeLong, Paul Krugman, the FT writers) whose every thought are actually worth listening to. Otherwise, blogging reveals the truth that it is much harder and more time-consuming arguing with the stupid - just establishing common ground amongst all the outrage and abuse takes a few hundred words.
Anyway. I have spent 12 weeks as the oldest intern at a centre-left think-tank, Social Market Foundation, which time has gone brilliantly for me, (even though much of it was spent sitting at slower computers than this one, on government or newspaper websites - in fact, this forces you to think a bit). It gave me a superb flavour of the world public policy, which will come in very useful in my new life in a slightly higher role at a Liberal think-tank. It also introduced me to some splendid, bright and connected people, and caused me to learn a surprising lot about road pricing, the housing supply question, carbon efficiency, the tendency of the Telegraph to employ utter morons, and other vital public issues.
The impressions would take pages, and hours which I don't have, but I can try to jot some things down before the kids come hammering on my office door:
- I am good for this life. Sorry, me me me, but that was the point of the internship. I can research, write, argue and present as well as I need to - some of the senior researchers clearly thought I could eventually do their job. I loved writing the shorter pieces to a deadline, such as on Road Pricing: a solution postponed, or even the seemingly dull AngloFlexicurity. In the end, the office often commissioned me for 700 word pieces on this or that to a deadline. I liked it. I could see it leading in 4 or 5 obvious directions.
- it is a small world. Everyone seems to know everyone else. There are a small number of intellectual MP's (David Willets the patron saint), approachable ministers (e.g. the Millibands, James Purnell), journalists and outward facing academics who make up the policy-making community, and knowing them is a big part of the game*. For example, Alison Wolf attended the OfB conference, spoke very convincingly on education: then I noticed she had been doing stuff for the SMF as well, and everyone in fact
- Advantages of incumbency part 1. Think tanks are hugely outgunned by government, and this is a serious political fact. The few hundred who labour on tiny salaries in thinktankworld are massively outnumbered by the civil servants in just one department. Both sides produce large volumes of paper, but only one of them seemed to me to be subject to real pressures, in terms of needing to make what people want. I read a few Government reports that might have taken hundreds of man-days to produce, were full of pro-Government spin, and could quite happily not have existed.
- Advantages of incumbency part 2. Connections matter, and those to the government above all - in thinktankworld, having a Minister come and speak guarantees attendance, makes sponsorship more likely, makes journalistic coverage happen, and the virtuous circle continues. Opposition can have this effect too, particularly if seen as possible Government. Being the third party again stinks - doesn't matter how bright Danny Alexander is, he won't draw the crowds.
- . . . Disadvantages of incumbency but of course Governments have to do something, and can then be blamed for it (see Northern Rock), whereas Oppositions can just do the blaming without suggesting anything useful for 6 months (see Northern Rock). So things even out - but in an odd way, with Governments encouraged to publish endlessly and behave frenetically (am thinking of how many <£30m initiatives this government has published as a research topic) and Oppositions just encouraged to be vague and negative.
There could be loads more. But I would rather save thoughts for my new role, than send them spilling into the blogosphere with all the other vitriolic, shrill chit-chat. The Internet is a wonderful thing, sure, but I like the barriers to entry that delineate areas of real quality, particularly having crossed a couple. Don't expect much here. It would be a bad sign if there was! Though I might use it to keep track of interesting articles.
*it was also obvious from the Options for Britain II conference where everyone seemed to know everyone else.
Anyway. I have spent 12 weeks as the oldest intern at a centre-left think-tank, Social Market Foundation, which time has gone brilliantly for me, (even though much of it was spent sitting at slower computers than this one, on government or newspaper websites - in fact, this forces you to think a bit). It gave me a superb flavour of the world public policy, which will come in very useful in my new life in a slightly higher role at a Liberal think-tank. It also introduced me to some splendid, bright and connected people, and caused me to learn a surprising lot about road pricing, the housing supply question, carbon efficiency, the tendency of the Telegraph to employ utter morons, and other vital public issues.
The impressions would take pages, and hours which I don't have, but I can try to jot some things down before the kids come hammering on my office door:
- I am good for this life. Sorry, me me me, but that was the point of the internship. I can research, write, argue and present as well as I need to - some of the senior researchers clearly thought I could eventually do their job. I loved writing the shorter pieces to a deadline, such as on Road Pricing: a solution postponed, or even the seemingly dull AngloFlexicurity. In the end, the office often commissioned me for 700 word pieces on this or that to a deadline. I liked it. I could see it leading in 4 or 5 obvious directions.
- it is a small world. Everyone seems to know everyone else. There are a small number of intellectual MP's (David Willets the patron saint), approachable ministers (e.g. the Millibands, James Purnell), journalists and outward facing academics who make up the policy-making community, and knowing them is a big part of the game*. For example, Alison Wolf attended the OfB conference, spoke very convincingly on education: then I noticed she had been doing stuff for the SMF as well, and everyone in fact
- Advantages of incumbency part 1. Think tanks are hugely outgunned by government, and this is a serious political fact. The few hundred who labour on tiny salaries in thinktankworld are massively outnumbered by the civil servants in just one department. Both sides produce large volumes of paper, but only one of them seemed to me to be subject to real pressures, in terms of needing to make what people want. I read a few Government reports that might have taken hundreds of man-days to produce, were full of pro-Government spin, and could quite happily not have existed.
- Advantages of incumbency part 2. Connections matter, and those to the government above all - in thinktankworld, having a Minister come and speak guarantees attendance, makes sponsorship more likely, makes journalistic coverage happen, and the virtuous circle continues. Opposition can have this effect too, particularly if seen as possible Government. Being the third party again stinks - doesn't matter how bright Danny Alexander is, he won't draw the crowds.
- . . . Disadvantages of incumbency but of course Governments have to do something, and can then be blamed for it (see Northern Rock), whereas Oppositions can just do the blaming without suggesting anything useful for 6 months (see Northern Rock). So things even out - but in an odd way, with Governments encouraged to publish endlessly and behave frenetically (am thinking of how many <£30m initiatives this government has published as a research topic) and Oppositions just encouraged to be vague and negative.
There could be loads more. But I would rather save thoughts for my new role, than send them spilling into the blogosphere with all the other vitriolic, shrill chit-chat. The Internet is a wonderful thing, sure, but I like the barriers to entry that delineate areas of real quality, particularly having crossed a couple. Don't expect much here. It would be a bad sign if there was! Though I might use it to keep track of interesting articles.
*it was also obvious from the Options for Britain II conference where everyone seemed to know everyone else.
Wednesday, January 2, 2008
Liberalism as Optimism
Another reflection that continually re-occurs to me as I read is how the general liberal view, in particular through history, has been the more optimistic one. On big questions like universal suffrage, Catholic emancipation, Home rule for the Irish, opening borders, liberalising trade, being more humane in the justice system, there seems to be a tug between fear and hope. Perhaps when people were making the case against hanging burglars or forgers, or for giving votes to women, there were dissenting voices arguing how this 'progress' was all well and good, but collapse of the social fabric/revolution/takeover by Foreigners would inevitably follow. Brave politicians may have lost their careers or damaged their parties taking the other view.
This is not a straight anti-Tory point; Margaret Thatcher is perhaps the clearest example of similar bravery but against traditional Leftish institutions. Neither can one conclude that change has always been right and stasis wrong. It is easy in hindsight to applaud the correct steps towards modernity, jeer at the traditionalists, and forget entirely the context and the lives crushed or disordered in the transition. I suppose the most I can say is that the status quo has an inbuilt advantage - people hurt by change form special interests, like the angry Tory farmers of the 1840's, and their political power is more concentrated than the beneficiaries, like the millions enjoying cheaper bread. Hence political courage is needed more on the side of progress and reform.
This is not a straight anti-Tory point; Margaret Thatcher is perhaps the clearest example of similar bravery but against traditional Leftish institutions. Neither can one conclude that change has always been right and stasis wrong. It is easy in hindsight to applaud the correct steps towards modernity, jeer at the traditionalists, and forget entirely the context and the lives crushed or disordered in the transition. I suppose the most I can say is that the status quo has an inbuilt advantage - people hurt by change form special interests, like the angry Tory farmers of the 1840's, and their political power is more concentrated than the beneficiaries, like the millions enjoying cheaper bread. Hence political courage is needed more on the side of progress and reform.
Reflections on Peel
I greatly enjoyed Robert Peel by Douglas Hurd, and in fact found it extremely instructive, not least the Acknowledgments, which provide a solid example of what one has to do in order to write such a book. It also made it clear how important Peel was to the development of British politics in general, and the British state itself, through his key reforms. The economic historian in me latches onto the repeal of the Corn Laws and the powerful thrust he gave to Free Trade itself, in the teeth of opposition from his traditional Protectionist Tory supporters, who had often campaigned on precisely the opposite platform. But other major contrasts with the present era are more interesting.
The first that comes to mind is the typical attitude shown by British statesmen towards being in power. In brief, one finds more reluctance than naked ambition at this time - examples of politicians energetically shrugging off the opportunity to form a Ministry in the face of overwhelming organisational difficulties, and the general impossibility of forming permanent coalitions. Through the whole of the 1830's Peel worked on a long-term strategy, refusing the idea of holding the Premiership if it did not come with a genuine working majority in Parliament, and a cohesive team in the Cabinet. During his time, and epitomized by his publication of the Tamworth Manifesto, one sees the embryonic formation of the modern British Party Political system - although, with crushing irony, his own attempt at making a cohesive Conservative Party immediately floundered on his stance on Free Trade, where he effectively chose what was right for the Country over what was right for the Party, and split it in passing the repeal of the Corn Laws. But for him it would have seemed deeply dishonourable to hold onto power when both the Country and the Party were against him. Hence, upon reading the final chapters, one cannot help reflecting how Hurd's last boss, John Major, was utterly different -spinning out a deeply unpopular ministry to its very bitter end in 1997, in a manner that probably suited neither the country nor the conservatives. Very different times.
The other reflection that springs to mind is the basic integrity that imbues a man who nevertheless changes his mind on enormous matters - the non-Ultra conservative, who realises that change is inevitable, manages it, rather than screeching hysterically about the End of the World that change represents. On Catholic Emancipation, Reform and Free Trade he recognised ultimately that his earlier view were wrong, and that his instincts to conserve what is best in Britain would nevertheless be best served by a managed programme of change. At some point in the next century, Sterling will be abandoned. I wonder if it will be a similarly bloodied, stubborn and strong Conservative that manages it?
The first that comes to mind is the typical attitude shown by British statesmen towards being in power. In brief, one finds more reluctance than naked ambition at this time - examples of politicians energetically shrugging off the opportunity to form a Ministry in the face of overwhelming organisational difficulties, and the general impossibility of forming permanent coalitions. Through the whole of the 1830's Peel worked on a long-term strategy, refusing the idea of holding the Premiership if it did not come with a genuine working majority in Parliament, and a cohesive team in the Cabinet. During his time, and epitomized by his publication of the Tamworth Manifesto, one sees the embryonic formation of the modern British Party Political system - although, with crushing irony, his own attempt at making a cohesive Conservative Party immediately floundered on his stance on Free Trade, where he effectively chose what was right for the Country over what was right for the Party, and split it in passing the repeal of the Corn Laws. But for him it would have seemed deeply dishonourable to hold onto power when both the Country and the Party were against him. Hence, upon reading the final chapters, one cannot help reflecting how Hurd's last boss, John Major, was utterly different -spinning out a deeply unpopular ministry to its very bitter end in 1997, in a manner that probably suited neither the country nor the conservatives. Very different times.
The other reflection that springs to mind is the basic integrity that imbues a man who nevertheless changes his mind on enormous matters - the non-Ultra conservative, who realises that change is inevitable, manages it, rather than screeching hysterically about the End of the World that change represents. On Catholic Emancipation, Reform and Free Trade he recognised ultimately that his earlier view were wrong, and that his instincts to conserve what is best in Britain would nevertheless be best served by a managed programme of change. At some point in the next century, Sterling will be abandoned. I wonder if it will be a similarly bloodied, stubborn and strong Conservative that manages it?
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