The Financial Services Authority (the main UK financial regulator and supervisor) announced on Friday 13 June 2008, that as of Friday 20 June 2008, short-sellers will have to disclose short positions in stocks undergoing rights issues, if these short positions amount to more than 0.25 per cent of the total shares outstanding. This new disclosure requirement for short sellers is much more stringent than the 3 per cent disclosure level that applies to long positions.

The FSA justifies this measure on the grounds that under current market conditions (post-August 9, 2007) short selling can be especially disruptive and damaging:“In current market conditions, there is increased potential for market abuse through short selling during rights issues. As a result, there has been severe volatility in the shares of companies conducting rights issues. This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market. It can be particularly prejudicial to the interests of small investors. The problem is compounded by the length of time taken to complete rights issues.”

Quite so. But this leaves a number of questions unanswered. (more…)

On June 11, I went to a presentation at the London headquarters of BP of the BP Statistical Review of World Energy, June 2008, by Tony Hayward, Group Chief Executive of BP and Christof Rühl, the Chief Economist. Nice presentations, good documents, until the Chief Executive extolled the unique virtues of Cap & Trade and the Chief Economist jumped in by asserting that Cap & Trade was, unlike the taxation of carbon emissions, an efficient way to deal with the environmental externalities of greenhouse gas emissions. This assertion deserves a one-word label: baloney.

Cap & Trade is an efficient way to deal with the environmental externalities of greenhouse gas emissions because it is equivalent to a tax on greenhouse gas emissions. (more…)

The UK Treasury is considering the creation of something I shall refer to as an FSC (for Financial Stability Committee/Council) to advise/assist/overrule the Governor of the Bank of England and the other four executive members of the Bank of England’s Monetary Policy Committee (MPC) who currently deal with and decide on financial stability matters.

This could be a good idea or a bad idea, depending on how it is implemented. (more…)

“The first casualty of war is truth,” said US Senator Hiram Johnson. Truth is also the first victim of political partisanship. Not surprising, really, as the true believers in any political cause view their campaigns as wars. The second and third victims of political partisanship are, respectively, one’s sense of humour and the ability to write in proper English.

Those who doubt the truth of these propositions are invited to take a look at some of the self-righteous nonsense, often expressed in bad English, that poured in in response to my blogs on Senators Obama (here & here)and Clinton (here).

In the latest kerfuffle, it was supporters of Senator Clinton who got their knickers twisted. The statement of mine that caused such apoplexy among the Clintonistas was the following: “Senator Clinton has lost. She deserved to lose. She ran an ugly campaign. Just one vignette. When asked (again) on the CBS show 60 Minutes whether she believes Obama is a Muslim (a ludicrous rumour spread by right-wing bloggers and media in the US), she replies: “No, no why would I - there’s nothing to base that on - as far as I know”. She said this with a strong emphasis on the last ‘I’.” (more…)

The ECB, through its President, Jean-Claude Trichet, is back in the game of pre-announcing future interest rate changes. I would have thought that the experience of August 2007 would have cured them of this urge for a bit longer. On August 2, President Trichet flagged a rate rise for September by using the ‘strong vigilance’ code words: “… strong vigilance is therefore of the essence to ensure that risks to price stability over the medium term do not materialise.” Then events, dear boy, events intervened in the form of the August 9 eruption of the financial crisis, and the pre-announced rate hike was hastily shelved.

The wordsmiths at the ECB appear to have been busy in the mean time coming up with a new collection of code words. Strong Vigilance is no longer with us, and neither is his weakling half-brother, Mere Vigilance. Instead the Governing Council is reported in the Introductory statement of June 5th to be “… in a state of heightened alertness…”. Taken at face value this means no more than that the majority of the members were awake during the meeting, because the President had removed the decaf. (more…)

Unless Chairman Bernanke’s recent statement about the US dollar signals either a greater willingness to raise rates (or not to lower them) than before, or a greater readiness to conduct foreign exchange market intervention to stop the US dollar from falling further, it was cheap talk.

I can see two plausible sets of circumstances that would permit a test of the cheap talk hypothesis. The first would be a sharp weakening of the external value of the US dollar (as measured by its effective or trade-weighted nominal exchange rate) not associated with an obvious further weakening of domestic activity. An increase in oil prices caused by a negative shock to oil supply would be a possible trigger for such a configuration of economic outcomes. (more…)

The case for the UK shedding sterling and adopting the euro has never been clearer.

From a conventional macroeconomic perspective (asymmetric shocks, cyclical convergence, the 39 tests or whatever), there is no reasonable argument for a small, highly open economy like Britain to retain monetary independence. The belief that an independent national monetary policy allows you greater greater scope for effective macroeconomic stabilisation is an example of the monetary fine-tuning fallacy. With a high degree of international financial integration, the exchange rate does not function as a buffer against asymmetric shocks, permitting a less costly adjustment of international relative costs and prices than would have been possible at an irrevocably fixed nominal exchange rate. Instead it becomes a source of extraneous, uncessessary noice and volatility and of at times persistent misalignment. (more…)

Seen in the 12th floor men’s room at the New York Fed, right above the urinals, the following sign:

Report All Leaks to

extension 5619

I was sorely tempted to report a recent leak to extension 5619. Somehow I refrained (visions of my mother, my wife and my daughter all shaking their heads). Pity.

On Thursday 29 May and Friday May 30, the New York Fed and Columbia Business School are organising a conference, at the New York Fed, on The Role of Money Markets. On the second day of the conference, I will be presenting a paper titled Lessons from the North Atlantic Financial Crisis. It is a much-revised and expanded version of an earlier paper of mine, Lessons from the 2007 Financial Crisis, which was published by the Centre for Economic Policy Research as CEPR Policy Insight No. 18 on December 19, 2008.

The new paper focuses extensively on the performance of the three most affected central banks: the Fed, the ECB and the Bank of England. It evaluates their performance using three criteria: (1) macroeconomic stability; (2) effectiveness in dealing with the immediate financial crisis; and (3) the impact of the pursuit of macroeconomic stability and putting out immediate financial stability fires on the likelihood and severity of future financial crises. I conclude that although the Fed did a reasonable job dealing with the immediate financial crisis, it did significantly worse than the other two central banks as regards macroeconomic stability and the prevention or mitigation of future financial crises. (more…)

The original Greenspan-Bernanke position that the regular monetary policy instrument, the official policy rate, should not be used to tackle asset booms/bubbles is sound. To the extent that asset booms have implications for the distribution of future outcomes for the macroeconomic stability objectives (price stability or price stability and economic growth), they will, of course, already have been allowed for under the existing approaches in the US, the Euro Area and the UK.

But the official policy rate should not be used to ‘lean against the wind’ of asset booms and bubbles beyond that, that is, in their own right. It would overburden the official policy rate and, since going after an asset boom/bubble with the official policy rate is like going after a rogue elephant with a pea shooter, Mundell’s principle of effective market classification suggests that the official policy rate not be targeted at asset booms/bubbles in their own right. (more…)