Science with very few (if any) data
Doing statistical analysis on a sample of size 1 is either a very frustrating or a very liberating exercise. The academic discipline known as history falls into that category. Most applied social science, including applied economics, does too. Applied economists use means fair and foul to try to escape from the reality that economics is not a discipline where controlled experiments are possible. The situation that an economically relevant problem can be studied by means of a control group and a treatment group that are identical as regards all but one external or exogenous driver, whose influence can as a result be isolated, identified and measured, does not arise in practice.
Lord Turner, chairman of the UK’s Financial Services Authority, has set the cat among the financial pigeons by making highly critical comments about the City of London and financial intermediation in general. He recommended some drastic remedies, and suggested considering a global tax on financial transactions – a generalised Tobin tax. James Tobin proposed a tax on foreign exchange transactions to stabilise floating exchange rates and achieve greater national monetary policy autonomy in a world of increasing financial integration.
The Tobin tax was never implemented, which is just as well from the perspective of its declared objectives: it could have increased exchange rate instability and was unlikely materially to enhance national monetary policy autonomy. From a political perspective, it may be more surprising that it was never implemented. Even at a very low rate, the Tobin tax could have been a massive government revenue raiser. Distortionary taxes that raise large revenues, including transaction taxes on financial and real assets – such as the UK’s stamp duty on property – are, after all, a common feature of the political landscape.
What problem would a Tobin tax on financial transactions solve? Lord Turner asserts, in an interview with Prospect magazine, that the UK financial sector has grown too big; that some financial sector activity is worthless from a social perspective; that the sector is destabilising the British economy; and that new taxes may be required to curb excessive profits and pay in the sector. “If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit,” he says. Even if all these assertions are correct, they do not imply the need for a Tobin tax.
Continue reading “Forget Tobin tax: there is a better way to curb finance”
Saturday, August 1, my family will wing its way, DV, to Boston, MA. From there we will trek on to Martha’s Vineyard to spend the month of August doing nothing in particular. The combination of bad airport novels, adequate supplies of white wine (including, tell it not in Gath, vino verde) and the nearness of lots of family I don’t see enough of should enable me to recharge the nigh-depleted batteries. Safe and sheltered in the company of other effete liberals and pointy-headed intellectuals, I hope to have the time to finally write the bad book (tentatively titled ‘Oi Oikonomiks!’) I have promised my agent. This blog will fall silent (not before time, I can hear you mutter) until September.
The only blight on the landscape of this holiday is that, once again, a US presidential family has decided to vacation on Martha’s Vineyard during the month of August. From earlier visitations by the Clintons, I know that the arrival of the presidential hordes on the Vineyard represent a massive negative externality for all those who go there in pursuit of the same thing the president and his family seek: peace and quiet. Whether the local economy gets a temporary or lasting boost, I leave as a project for Econ 101.
The presidential party (or presidential court) that tags along on any presidential journey, let alone a temporary relocation involving the entire presidential nuclear family, looks and behaves like an occupying army. There are hundreds, if not thousands of persons charged with security, ranging from the secret service to the specially beefed-up state and local police forces. Communications experts, specialist medical personnel, myriad advisers and countless other presidential hangers-on cause the Vineyard to sink at least a foot deeper into the sea. The carbon footprint is bigger than that of the yeti. The press corps and assorted other media camp out all over the island, competing with the presidential staff for first place in the hot air emission stakes. Roads are blocked. Traditional rights-of-way are suspended. Beaches become inaccessible.
Central bank governors should serve one non-renewable term
Central bank governors should be appointed for one fixed, non-renewable term. The ECB got that one right. Members of the Board, including the President, serve for one, non-renewable eight-year term. The Bank of England’s arrangements are deficient in this regard. The governor is appointed for a five-year term but can be re-appointed as many times as the Chancellor of the Exchequer sees fit.
The Fed’s arrangements for appointments to the Board are also flawed. From the Fed’s website, Board appointments following the following set of rules: “The Board is composed of seven members, who are appointed by the President of the United States and confirmed by the U.S. Senate. The full term of a Board member is fourteen years, …. After serving a full term, a Board member may not be reappointed. …
The Chairman and the Vice Chairman of the Board are also appointed by the President and confirmed by the Senate. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board. The terms for these positions are four years.”
The chairman of the Federal Reserve Board can therefore at most serve three consecutive full terms as chairman, followed by one two-year term. This would exhaust the maximum 14 year stint on the Board. [Addition on 29th July 2009: a reader of this blog (yes, I still have some) writes: "If a Board member is initially appointed to fill the remaining term of a member who has departed early, he can then be reappointed for a full term. So, potentially, one could serve almost 28 years, and be chairman the whole time." ]
Why is the possibility of re-appointing the chairman of the Fed, and indeed the re-appointment of the governor of any central bank, a bad thing? Clearly, it undermines the appearance and possibly the substance of independence of the chairman. The incentive to suck up to/please the power(s) that can reappoint you may be difficult to resist. It is not necessarily the case that the actions and policies most likely to secure the re-appointment of the chairman are the actions and policies that are best from the perspective of the central bank’s mandate – price stability or macroeconomic stability, and financial stability.
In the current worldwide debate about greenhouse gas emissions, the political leaders of the new big polluters (NBPs, especially China and India) attempt to shift the burden of reducing the global flow of new carbon-dioxide-equivalent (CO2E) emissions to the old big polluters (OBPs, mainly Europe, North America and Japan) by claiming the moral high ground, based on two arguments: (1) we are poor, you are rich, and (2) it’s our turn now to pollute.
I will, in what follows, take as given the proposition that (1) global warming is a reality; (2) global warming is a bad thing and (3) that human-made CO2E emissions are a significant contributor to global warming. The science underlying these propositions is inevitably shaky – as has to be the case for any non-experimental science. Still I believe that, even if I don’t really know whether my grandchildren are more likely to swim down Oxford Street or to ice-skate down Oxford street, the cost of not doing something about man-made CO2E emissions if they are indeed as harmful as the Greenhouse Lobby argues is vastly greater than the cost of unnecessarily restricting CO2E emissions – an application of the precautionary principle, if you want.
The problem
Further expansionary monetary policy has become rather ineffective in the overdeveloped world because banks are capital-constrained rather than liquidity-constrained and because liquidity spreads in financial markets that bypass the banks have shrunk remarkably. Remaining spreads between sovereign debt instruments and assorted private securities of similar maturities can now be rationalised quite easily as reflecting just differential default risk. Until the banks get significantly more capital on their balance sheets, quantitative easing, credit easing and enhanced credit support are examples of pushing on a string.
The banks will take the liquidity offered and redeposit the bulk of it with the central bank again rather than lending it to the private sector or purchasing more risk financial instruments. Low official policy rates (and the expectation of the official policy rate being kept at a low level for a further significant period of time) will help recapitalise the banks. So will the quasi-fiscal subsidies most central banks have been channelling into the banking system through the favourable terms offered by the central banks to the private banks in their transactions, facilities etc., but such gradual recapitalisation through wide margins on low volumes of lending is slow and could lead to a re-run of Japan’s lost decade for much of the G7.
Further expansionary fiscal policy is likely to be ineffective in most of the G7 countries (possibly excepting Germany and Canada). This is, first, because households are short of capital and overly indebted and, second, because any further increase in short-term fiscal deficits is likely to undermine confidence in the sustainability of the fiscal-financial-monetary programme of the state.
Today’s guest blogger is Elena Panaritis, an expert in property rights, creating markets in illiquid real estate assets, and public sector management. She is also the author of Prosperity Unbound; Building Property Markets with Trust, which is definitely not one of those odious get-rich-quick-in-real-estate-without-capital-brains-or-effort books. Instead it is a get real book for social entrepreneurs about how to turn real estate possessions into socially productive, and indeed also privately profitable, capital.
This Crisis Demands Non-Traditional Solutions to Get to a Path of Quick Recovery
By Elena Panaritis
Two years after it began, there is now a coalescing of opinion about the causes of the U.S. financial crisis and what should be done to resolve it, yet there is a serious element missing both in the causation analysis as well as in the prescriptive solution. This crisis, which has infected the global economy so severely, is very much a non-traditional one that calls for a non-traditional solution. The impact in the United States so far has been worse than anything since the Great Depression: unemployment reached 9.5 percent in June, up from 7.8 percent in January, home prices were down 27% at the end of the first quarter from their 2006 peak, and 1.5 million homes were in foreclosure. After jumping by 30 percent in February, home foreclosure rates tapered off but are again on the rise. According to the New York Times, the loss in property value could total $500 billion.
A reader of this blog drew my attention to the informative Fed publication, the Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet . The most recent installment is that for July 2009. This provides a wealth of information (not enough, of course, but more than is provided by most other central banks) relating to the quality of the assets contained in the special purpose vehicles the central bank has created to house the often distressed assets it has acquired from or funded on behalf of a number of always distressed private counterparties. I will focus here on the three Maiden Lane vehicles created by the Fed to park some of the wonky assets it acquired from Bear Stearns (Maiden Lane (which I shall refer to as Maiden Lane I)) and from AIG (Maiden Lane II and III).
The Fed is in trouble. Obama administration proposals for enhancing the Fed’s supervisory and regulatory role and for assigning it new macro-prudential responsibilities and powers – effectively turning it into the nation’s systemic risk regulator - are meeting with strong and vocal opposition. The criticism is not just coming from the other agencies in the US financial sector regulatory and supervisory spaghetti bowl – agencies that would stand to lose power and influence or could be put out of business completely. The desire for stronger Congressional oversight of the Fed is no longer confined to a few libertarian fruitcakes, conspiracy theorists and old lefties. It is a mainstream view that the Fed has failed to foresee and prevent the crisis, that it has managed it ineffectively since it started, and that it has allowed itself to be used as a quasi-fiscal instrument of the US Treasury, by-passing Congressional control. Are any or all of these criticisms justified? Let’s ponder a few of them.
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.
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