Monthly Archives: December 2008

A monopoly is a bad thing.  It invites abuse of the power it controls.   Sometimes it is not the worst thing that could happen.  Anarchy or the ‘state of nature’, can be worse.   I don’t know whether Thomas Hobbes was right for all time and places in asserting that man is not by nature a social animal and that society could not exist except by the power of the state – the wielder of the monopoly of legitimate coercive power.

There may have been some bucolic, idyllic communities  that dispensed with the institution of the state, where the fundamental rights of people (life, health, liberty) and  property rights could be enforced effectively by individual action or through acts of spontaneous cooperation without external, third-party enforcement.  But once we get to communities exceeding a dozen or at most a gross of people, an institution endowed with the monopoly on the  legitimate use of force against its own citizens appears to have evolved, to have been created or to have been imposed everywhere.

The Pope ruined my Christmas.

What is it about the Judeo-Christian-Islamic religious tradition that leads so many of its most prominent spokespersons to make hateful, bigoted, life-diminishing and personal security-endangering statements when it comes to human sexuality? Perhaps there was something inherent in the environment and culture of the Fertile Crescent, and of the Middle East in general, that predisposed the religions it brought forth to declare anathema anything other than abstinence and heterosexual behaviour (the latter only in a setting of monogamy or polygyny, not polyandry, of course).  Even so, one would have hoped that the civilising influence of Greek and Hellenistic culture would have filtered most of the sexual bigotry out of the European religious mainstream, and out of its offshoots in the former European colonies.

Apparently not.  The current Pope, Benedict XVI is right at home in the abhorrent main-stream Christian tradition of sexual intolerance.  In his address Christmas greetings to the members of the Roman Curia and Prelature (December 22, 2008)’ (available thus far only in German and Italian from the Vatican website), the Pope makes a number of extremist, bigoted and intolerant statements about homosexuality and transsexuality.

Automobile producers all over the world are in dire straits. Sales and production are plummeting.  Unsold inventories are building up on dealers’ lots.  Christmas is coming too soon for many workers whose normal end-of-year break has been extended by days or even weeks.  Losses are rising fast.  Bankruptcy is looming for quite a few household names.  What, if anything, should governments do?

The US government has just announced a $17.4 bn loan to the three American automobile producers GM, Chrysler and Ford, $13.4 bn up front, with the rest coming in February 2009 – on Obama’s watch. The loan is short-term, until the end of March, 2009.  The bulk of the money, if not all of it, is likely to be drawn by the two basket cases – GM and Chrysler.

The Fed has joined the Bank of Japan at the (near) zero lower bound on the overnight risk-free nominal interest rate; the Federal Funds target rate is set between zero and 25 basis points. The rather strange vagueness of the new target – a 25 basis points range rather than a point target – is unnecessary.  It is the product of the inexplicable inability of central banks everywhere (US, UK, Euro Area)  to fix the overnight rate at any level (including zero) by accepting deposits (reserves) at that rate in any amount at any time and to lend (against appropriate collateral) at that rate in any amount at any time.

Being willing to buy or sell any amount at a price is the definition of setting a price.  Central bankers want to both set the price (overnight interest rate) and keep some control over the quantity (reserves held by banks with the central banks and/or the stock of secured overnight lending).  Except for a fluke, they will be frustrated.  The overnight rate will, quite unnecessarily, depart from the official policy rate (the Federal Reserve’s Federal Funds target rate, the Bank of England’s Bank Rate, the ECB’s Main refinancing operations Fixed rate).  It’s an unnecessary slight operational blemish – a minor badge of operational incompetence.

But this minor deficiency in the genetic code of central bankers and central bank officials charged with setting the overnight rate should not obscure the fact that the Fed’s decision to head straight for the zero lower bound on short nominal interest rates was the right thing.  At worst it will not help much to bring down the cost of private borrowing and increase its availability.  But it won’t hurt.

The Fed and the Bank of Japan will soon have company on the floor.  The Bank of England should get Bank Rate to zero late winter or early spring and even the ECB, the ultimate gradualist procrastinator, will get there before the middle of 2009.

The German federal minister of finance, Peer Steinbrueck, does not like anything that increases government deficits.  He does not like them, Sam-I-Am.  I believe he is wrong – very wrong and dangerously wrong. In the interest of Anglo-German harmony and ever-closer cooperation, I have written this post.

It explains that there are bad deficits and good deficits.  Or, in the words of Ecclesiastes: “To every thing there is a season, and a time to every purpose under the heaven:” a time to cut taxes and a time to raise taxes, a time to borrow and a time to refrain from borrowing.

Today is a time, even Ecclesiastes would agree, made for increased government borrowing, provided a few key conditions are satisfied.

A short post for once!  I propose the following taxonomy for measures the central bank may take, other than changing the official policy rate (the short risk-free nominal interest rate), changing reserve requirements or changing the exchange rate (where this is an instrument of monetary policy).

Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase it is monetary liabilities (base money), holding constant the composition of its assets.  Asset composition can be defined as the proportional shares of the different financial instruments held by the central bank in the total value of its assets. An almost equivalent definition would be that quantitative easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities that holds constant the (average) liquidity and riskiness of its asset portfolio.

Qualitative easing is a shift in the composition of the assets of the central bank towards less liquid and riskier assets, holding constant the size of the balance sheet (and the official policy rate and the rest of the list of usual suspects).  The less liquid and more risky assets can be private securities as well as sovereign or sovereign-guaranteed instruments.  All forms of risk, including credit risk (default risk) are included.

The Fed is engaged in aggressive quantitative and qualitative easing.  The Bank of England is engaged in reluctant quantitative and qualitative easing.  The ECB has done less quantitative easing (proportionally) than the Bank of England or the Fed, but has engaged in quite a bit of qualitative easing – not by buying risky and illiquid private securities outright, but by accepting them as collateral in repos and at the discount window (its marginal lending facility).

Before this crisis is over, the two largest European central banks will engage in both quantitative and qualitative easing on a much larger scale.

This post will start with a report on a prima-facie parochial issue: whether to record student attendance at classes and seminars in British universities.  It ends with an issue that ought to be of general concern, in the UK and elsewhere: the hammering of yet another nail into freedom’s coffin in the UK, as the state requires universities and those that work in them to act as informers for the immigration authorities.

Good economics serves efficiency and fairness.  Good politics serves the survival of the incumbent government.  Sometimes all these considerations point in the same direction.  Sometimes they don’t.  Yesterday, in the UK, they did not.

The UK government yesterday announced that they were introducing retroactive mortgage payment insurance protection free of charge to qualifying residential mortgage borrowers; the cost of the insurance to be born, in as yet unknown proportions, between the tax payer and the mortgage lenders.

This policy is a typical example of ‘insider protection’ at the expense of outsiders and newcomers.  Rent control is another example of the same phenomenon.  ‘Employment protection’, aka as ‘protection of the jobs of those who have jobs at the expense of those without jobs and looking for jobs’ is another prominent example, especially popular in some continental European countries.

The details of the UK programme for a partial mortgage interest holiday, for up to 2 years, for households where there is a major loss of income (due, say, to a family member losing his or her job)  are unclear.  It may apply only to mortgages below £400,000.00.  You may not be eligible if you have savings in excess of £16,000.00 – a nice example of how a policy proposal in one policy area – reducing repossessions of homes, and the fear of repossession of homes – creates perverse incentives in another – inducing households to save more during the high-earning years of the household life-cycle.  The Chancellor of the Exchequer, Alistair Darling, may not be a manic micro-tinkerer like his predecessor, Gordon Brown, whose left hand had no idea of the (unintended) incentive effects of what his right hand was doing, but he can create Brownian distortions and disincentives with the best of them.

Why is this temporary mortgage interest holiday a bad idea?

The (formerly) advanced industrial countries are all in or headed for the liquidity trap ‘lite’.  This is the situation where the short-term risk-free nominal interest rate cannot fall any further.  A ‘heavy’ or ‘deep’ liquidity trap occurs when nominal risk-free rates at all maturities are at their lower bound(s).

A liquidity trap ‘lite’ may occur even when short-term rates are above zero.  It will certainly occur when the short-term nominal interest rate falls to zero.  Unless the monetary authorities are willing and able to tax currency holdings, the zero nominal interest rate rate on bank notes sets a floor for all short-term nominal interest rates.  I have not seen too many central bankers perusing the works of Silvio Gesell, so for the time being, I will treat a zero short risk-free nominal interest rate as the effective floor for the risk-free nominal interest rate.

If zero is the floor, there is no reason not to go there immediately.  The recession in the US, the UK, the Eurozone, Japan and the rest of Europe is, with probability verging on certainty, going to be so deep and so prolonged, that the zero lower bound will be reached even by the most anal-retentive gradualist central bank before the middle of 2009.  So why not get it over with in December 2008 and possibly do some good in the mean time?  The required cuts in the official policy rate would be trivial in Japan (30 basis points) and in the US (100 basis points – assuming the 35 basis points penalty on bank reserves is abolished).  For the UK, a mere 300 basis points cut and for the Euro Area a 325 basis points cut would anchor the official policy rate at the floor (again assuming the 25, respectively 50, basis points reserve penalties of the Bank of England and the ECB are eliminated).

Stigma is routinely trotted out by assorted monetary authorities as a reason for not revealing the identities of banks or other entities that borrow from the central bank at the discount window or at any of the myriad other lending facilities created since the onset of the crisis.  Most recently, the Chairman of the Fed, Ben Bernanke, has used the fear of stigma as an argument for not providing Bloomberg News with information about the identities of the banks that have accessed the Fed’s ever-expanding family of liquidity and lending facilities (see my previous post on this).

The argument is that to reveal that a bank has chosen to use (or been compelled to use) the lending facilities of the central bank, would cause this bank to be perceived as less creditworthy than before (and than it would have been if its use of central bank facilities had not been revealed).  As a result, the bank becomes a less attractive counterparty in private financial transactions.  It becomes more costly and more difficult, perhaps impossible, for that bank to fund itself privately.  Using the loan facilities of the central bank could therefore, paradoxically, lead to the funding situation of the bank being worse than it would have been had it not borrowed from the central bank.

Before I deconstruct the logical structure of this argument, let me make two general points.

First, empirical support for the stigma hypothesis is sadly lacking. 

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website