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Daily Archives: December 9, 2009
The Mexican president has named finance minister Agustín Carstens as the next central bank governor. Ernesto Cordero, who until this week headed Sedesol, the country’s social development ministry, will take over from Mr Carstens. Insiders say that the move also allowed Mr Calderón to install another confidante in a key ministry – an emerging pattern not lost on political analysts – in the form of Mr Cordero.
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Extended periods of low interest rates increase the amount of risk banks take. Monetary policy may influence banks’ perceptions of – and attitudes towards – risk in at least two ways: (1) directly, through the search for higher yields, especially where return targets are nominal; and (2) indirectly, through the impact of interest rates on valuations, incomes and cash flows, which can in turn modify how banks measure risk.
So monetary policy is not fully neutral from a financial stability perspective. It is important that monetary authorities learn how to factor in the effect of their policies on risk-taking, and that prudential authorities be especially vigilant during periods of unusually low interest rates, particularly if they are accompanied by other signs of risk-taking, such as rapid credit and asset price increases.
Yes, rising. The composition of lending in China is changing significantly (see chart). Although net lending fell in Q3 and in October, that was driven by a sharp reduction in short-term loans. Medium- and long-term loans, which arguably provide greater support for investment and for the real economy, continued to grow at a brisk pace during Q3:
Safe haven flows that favoured the dollar have been reversing. Carry trades always defy measurement, but such positions, with the dollar as a funding currency, are thought to be increasing, putting upward pressure on higher-yielding currencies. And with asset prices rising, the hedging US dollar holdings by European and Australian institutional investors also weighs on the dollar.
Both output volatility and depth of recession experienced in the OECD were negatively correlated to trade openness and exposure to terms-of-trade shocks. They also exhibited strong negative correlations with inflation volatility. The latter suggests that, to the extent that monetary policy succeeded in stabilising inflation, it also played a key role in explaining differences in output volatility – both between countries, and over time.
Alistair Darling’s task in the pre-Budget report was to improve the credibility of Britain’s deficit reduction plans for the public, the markets and for those running monetary policy. I am convinced this report will fail on all counts.
“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence.” – Paul Volcker, former chairman of the Fed
Last night Axel Weber, Bundesbank president, showed mastery of the art of central banking at a dinner hosted for Frankfurt’s business journalists. That is a polite way of saying that he was charming, happy to discuss issues at length – but circumspect.
On Greece’s rating downgrades, Mr Weber pointed out the urgency of Athens exerting greater fiscal discipline. But despite lots of questions - highlighting growing German concern about Greece - he was not explicit on whether the ECB would ever actually exclude Greek assets from its liquidity-providing operations (which would be a risk if the ECB returned to pre-crisis minimum rating standards after 2010).