Those of you with time on your hands and a interest in spending some it it in a basement being beaten with a rubber hose, may want to take a look at my recent Centre for Economic Policy Research Policy Insight No. 24, “Can Central Banks Go Broke?”

In that paper, I ask whether it matters if a central bank suffers a large capital loss. Can the central bank become insolvent? How and by whom or by what institution should the central bank be recapitalised, if its capital were deemed insufficient? These are relevant questions not just in Zimbabwe and Tajikistan today, but wherever central banks have taken on or may be asked to take on large exposures to private credit risk. This includes the USA, the Euro Area, the UK, Iceland and many other advanced industrial countries. (more…)

What is inflation?

Inflation is rising just about everywhere. Why is this and what can be done about it?

To get some basic concepts clear: inflation is a sustained rise in the general price level. Both the words ’sustained’ and ‘general price level’ are imprecise and in need of operationalisation. By general price level I mean a broad, representative index of consumer prices. That excludes the (headline) CPI in the UK because, like the other EU harmonised price indices, it excludes housing costs (that is, the rental cost of housing services or the imputed rental paid by owner occupiers). This makes the CPI/HICP indices unrepresentative, unless either the relative price of housing services and the goods and services included in the CPI/HICP remains constant or UK/EU citizens live in cardboard boxes provided free of charge by the Salvation Army. It may come to that, but not yet. The UK’s RPI and RPIX indices would be more representative.

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The UK Chancellor of the Exchequer, Alistair Darling, is fighting the good fight on policy towards the EU’s agricultural sector. Effectively, he has called for the abolition of the Common Agricultural Policy, the EU’s Welfare State for Farmers - a costly, distortionary, inefficient and inequitable arrangement overdue for the scrap heap. (more…)

Slovakia have done it! They have got the nod both from the European Commission and, albeit reluctantly, from the European Central Bank. Following the confirmation of these recommendations by the European Council, Slovakia will join the Euro Area on January 1, 2009. The only question mark that hung over this application for Euro Area membership was Slovakia’s inflation performance. The European Commission was unambiguous on the issue in its Convergence Report 2008: “Slovakia fulfils the criterion on price stability.”

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In a recent Column for the Financial Times, Larry Summers has, once again, combined truth with half-truth and a fair measure of obfuscation, mixing of issues and blurring of key distinctions. What Larry says and writes matters, because he is an influential voice in the Democratic party on economic issues. Both candidates for the Democratic presidential nomination appear to have taken the King’s shilling and are about to set sail on the good ship Protectionism. For the sake of the US economy, its workers and the rest of us, they should think again. (more…)

The Bank of England’s semi-annual Financial Stability Report, whose 23^rd instalment was published a couple of days ago, lists as members of the Bank’s Financial Stability Board, John Gieve (Chair),Martin Andersson, Andrew Bailey, Charles Bean, Nigel Jenkinson, Mervyn King, Rachel Lomax and Paul Tucker. This listing of the membership of the Financial Stability Board raises a constitutional issue and a factual issue. (more…)

Mervyn King, Governor of the Bank of England, is correct in linking the reckless lending by banks and other financial institutions that, together with the matching reckless borrowing, lay at the roots of the current financial crisis, to remuneration structures that rewarded extreme risk taking on poorly designed financial products. The diagnosis is fine. What to do about it is less obvious. These remuneration packages did not fall to earth from the moon. They are the result of a distorted economic environment. The key distortions, unfortunately, cannot be remedied, because they have highly desirable consequences as well as the dysfunctional ones highlighted by the crisis. Let’s consider some of them: (more…)

Tim Young makes three interesting comments on my blog on the Bank of England’s Special Liquidity Scheme:

(1) The Treasury bills involved are of nine months original maturity, not one year.

(2) In the event that the borrower defaults, the public sector gets stuck with a loss if the value of the collateral is less than the value of the t-bill loan, even if the issuer of the securities posted as collateral does not default. Presumably this is much more probable than a simultaneous default, especially if the borrower is widely known to be a holder of such securities.

(3) US mortgages are not in general non-recourse. (more…)

The Olympic games have become a joke. A bad joke. It is time to put the event out of its misery. There was about a 1500 year gap between the last of the Olympic Games in Ancient Greece, and the first of the Games in the new Olympic era. Let’s have another 1500 years without Olympics. Then we can see again. There are three arguments that support this recommendation. (more…)

On my way to Gatwick Airport to participate in a conference in Riga (Latvia) on economic challenges faced by the Baltic countries, I noticed a sign post for the village of Pratts Bottom. It reminded me of why I love living in this country. I am sure I really could find Little Whinging in Surrey if I looked long enough.

This naturally brings us to the question as to whether the Bank of England subsidises the banks through its newly created Special Liquidity Scheme (SLS). The scheme is a swap of one-year maturity Treasury Bills for illiquid mortgage-backed securities, covered bonds (Pfandbriefe), and asset-backed securities backed by credit card receivables. Let’s refer to this collection of bank assets as MBS (for mortgage-backed securities). (more…)