Olivier cleanly poses some questions which in his view are likely to be the focus of policy-world debate for the next few years. Looking for policy-oriented thesis topics? It's a one-stop shop.
Whether these should be the questions is another matter. (Mostly no, in my view.)
As a blogger, I can't resist a few pithy answers. But please note, I'm mostly having fun, and the questions and essay are much more serious.
Financial regulation
... Where do we stand? Are some dimensions of systemic risk easier to measure (e.g., leverage in the banking sector vs. interconnectedness of banks and non-banks or risks outside the banking sector)? How should we assess the experience with stress-tests? And have we made enough progress in reducing systemic risk since the crisis, e.g., with Dodd-Frank, the Vickers commission, the Financial Stability Board, etc?
Answer: "Systemic risk" is barely defined. The idea that regulators will, this time, really really, understand risks taken by the big banks, see trouble ahead, and stop the banks from failing, is a triumph of hope over repeated experience.
The only progress -- and it's big -- is the slow realization that banks can and should issue lots more equity.
Answer: "Systemic risk" is barely defined. The idea that regulators will, this time, really really, understand risks taken by the big banks, see trouble ahead, and stop the banks from failing, is a triumph of hope over repeated experience.
The only progress -- and it's big -- is the slow realization that banks can and should issue lots more equity.
Macro Prudential Policies
... Do we have or can we develop tools to deal with the different types of risk, from high housing prices, to insufficient capital in some financial institutions, to sudden drops in liquidity in some financial markets?
Using these tools ...raises political economy issues. In a housing boom, increasing the loan to value ratio may be politically difficult. Questions: Given these issues, when should we use macro prudential tools, or should we use tougher, non contingent financial regulation? To be concrete, should we aim for variable capital ratios and decide when to adjust them, or just give up on the variable part, and aim for high but constant capital ratios?
Answer: The hubris that the Davos set will be able to figure out just the right amount of capital, and then fine-tune that month-to-month and bank-to-bank is astounding. "Political economy concerns" is putting it mildly. The IMF's "bubble" or "imbalance" is the local Congressman's boom, and he or she will be hopping mad if the Fed restricts credit to his district or pet industry in favor of another.
The fact that our regulators are still talking about liquidity betrays a fundamental confusion of individual vs. systemic risks. Liquidity is the plan, "if we lose money we'll sell assets." To who? Regulators demanding liquidity to plan for a financial crisis is like the FAA making sure everyone on the plane has enough money to buy a parachute in case of engine failure.
Answer: The hubris that the Davos set will be able to figure out just the right amount of capital, and then fine-tune that month-to-month and bank-to-bank is astounding. "Political economy concerns" is putting it mildly. The IMF's "bubble" or "imbalance" is the local Congressman's boom, and he or she will be hopping mad if the Fed restricts credit to his district or pet industry in favor of another.
The fact that our regulators are still talking about liquidity betrays a fundamental confusion of individual vs. systemic risks. Liquidity is the plan, "if we lose money we'll sell assets." To who? Regulators demanding liquidity to plan for a financial crisis is like the FAA making sure everyone on the plane has enough money to buy a parachute in case of engine failure.
Finally, it is clear that both financial regulation and macro prudential tools are likely to lead financial actors to adjust and explore ways of getting around them. Questions: In this game of cat and mouse, can the macro prudential regulators hope to win? Or will regulation and tools become increasingly complex and possibly counterproductive?
That's easy. No and Yes. Actually I'm being too pessimistic. Regulatory capture works both ways. An easy forecast: Stress-testers at the Fed will be getting lucrative salary offers to move to the private sector and help pass stress tests. Which they will increasingly do.
That's easy. No and Yes. Actually I'm being too pessimistic. Regulatory capture works both ways. An easy forecast: Stress-testers at the Fed will be getting lucrative salary offers to move to the private sector and help pass stress tests. Which they will increasingly do.
Monetary Policy
... Questions: Under the highly realistic assumption that financial regulation and macroprudential tools do not fully take care of financial stability, [Highly realistic indeed! You just answered the first set of questions as I did!] should monetary policy take financial stability into account? And if so, how? Can the interest rate or other monetary policy tools reduce financial risk? How should macro prudential tools and monetary policy be coordinated? Should they both be under the responsibility of the central bank?
Let's remember that the crash of 1929 was, at least in the standard history, sparked by the Fed trying to restrain what they saw as the bubble in the stock market.
If this is the case, and central banks have tools which can have effects on very specific sectors of the economy, can they retain full independence?
No. In a democracy, independence comes with limited authority. The financial central planner cannot and will not long stay independent.
If this is the case, and central banks have tools which can have effects on very specific sectors of the economy, can they retain full independence?
No. In a democracy, independence comes with limited authority. The financial central planner cannot and will not long stay independent.
The zero ... lower bound on the interest rate set by central banks was thought to be a theoretical curiosum, unlikely to happen, and, in any case, easy to combat if reached. If reached, central banks could, through announcements of future monetary policy, increase expected inflation and achieve large negative interest rates. We have learned that this was simply wishful thinking. The zero lower bound could be reached, inflation expectations are not easy to manipulate, and it may take a very long time to exit.
Three cheers. Wow, Olivier, who wrote one of the most influential calls for announcements of higher inflation targets, looks at the data and calls it "wishful thinking." Bravo.
.. Quantitative Easing,... Questions: ...should central banks eventually return to the traditional mode of intervening at the short end of the market, or should they continue to buy and sell longer maturity sovereign or corporate bonds? Should the balance sheets of central banks return to their pre-crisis size, or remain permanently larger? If the central bank intervenes along the yield curve, how should monetary policy and debt management by the Treasury be combined?
Three cheers. Wow, Olivier, who wrote one of the most influential calls for announcements of higher inflation targets, looks at the data and calls it "wishful thinking." Bravo.
.. Quantitative Easing,... Questions: ...should central banks eventually return to the traditional mode of intervening at the short end of the market, or should they continue to buy and sell longer maturity sovereign or corporate bonds? Should the balance sheets of central banks return to their pre-crisis size, or remain permanently larger? If the central bank intervenes along the yield curve, how should monetary policy and debt management by the Treasury be combined?
Large balance sheet, interest-paying reserves, open to everyone. Some crisis interventions reveal very desirable permanent states of affairs. Stop fooling around with direct intervention in long-term debt, mortgage-backed security markets, and don't follow other central banks to buying and selling stocks, foreign exchange, etc.
Fiscal Policy
Fiscal Policy
... Questions: What is a dangerous level of debt? That which markets doubt you can repay. Seriously, if you're growing fast with a good long run plan for containing expenditures and raising revenue without ruinous taxation, a lot. If not, a lot less. ... What do we know about confidence effects? You mean statements by officials that "engender confidence?" Go back to the Romans, burn incense at the Temple of Jupiter. More seriously, we've learned that speaking loudly with no stick doesn't work. ...Should the old idea of the fiscal golden rule, the separation of a current and of a capital account, be resurrected? Separating two sides of an accounting identity sounds like an interesting golden rule. I think it would be golden to separate the current account and capital account I run down at the apple store -- they give me stuff, I don't have to give them money. Olivier surely has something more sophisticated in mind, and I'm revealing I'm a rube at this policy-speak coded language.
Most observers agree that the fiscal stimulus early in the crisis was instrumental in limiting the decrease in output. I'm glad he said "most" not "all"....
Capital inflows, exchange rate management and capital controls
The crisis has reinforced the notion that international capital flows can be very volatile, with emerging markets being particularly vulnerable. Back to previous comment. Capital can try to flow, but unless goods flow in the other direction, all it does is to lower prices. Unless you can pass a rule to get rid of accounting identities. See above. Policy makers have responded with a panoply of tools, from capital controls A polite word for expropriation to macro prudential measures aimed at shaping flows, What a lovely little policy-ese phrase and FX intervention. .... And what does the experience since the crisis say about the optimal opening of the capital account, even in the long run? Translated to English, back to the de-globalized protectionist world. If capital can't flow, neither can goods.
The International Monetary and Financial System
.... Questions: ... Should we reexamine the rules of the game for exchange rates? How can we improve on the process of sovereign debt restructuring?
As Olivier's essay moves on, and gradually reverts to the obfuscatory Orwellian prose of the international policy world, I get more and more animated. I mean just who is this "we?" Who is going to tell you you're not allowed to buy euros for your vacation this summer ("capital controls"), tell your bank not to give you a loan ("macro-produential policy"), decide how many billions to siphon from your pocket to the owners of large banks ("recapitalization" "process of sovereign debt restructuring"), not allowed to expand your business in a new country ("macro prudential measures aimed at shaping flows") and so forth? When there even is a "we," unlike most sentences with no subjects, like "the optimal opening of the capital account."
What should be the role of international forums such as the G20?
Aha, now I get it.
As Olivier's essay moves on, and gradually reverts to the obfuscatory Orwellian prose of the international policy world, I get more and more animated. I mean just who is this "we?" Who is going to tell you you're not allowed to buy euros for your vacation this summer ("capital controls"), tell your bank not to give you a loan ("macro-produential policy"), decide how many billions to siphon from your pocket to the owners of large banks ("recapitalization" "process of sovereign debt restructuring"), not allowed to expand your business in a new country ("macro prudential measures aimed at shaping flows") and so forth? When there even is a "we," unlike most sentences with no subjects, like "the optimal opening of the capital account."
What should be the role of international forums such as the G20?
Aha, now I get it.
No comments:
Post a Comment