Daily Archives: August 3, 2010

Isn’t it a bit late for Ben Bernanke to suggest a preventative measure for the financial crisis? The Fed chair has recommended state-level sovereign wealth funds:

Building a rainy-day fund during good times may not be politically popular, but it can pay off during the bad times Read more

Perhaps to offset rumours of further easing, the Fed has announced further trial runs of a key tightening tool.

The New York Fed will test one of its main liquidity-draining tools by conducting a “series of small-scale, real-value reverse repurchase transactions” with primary dealers et al. This repeats and expands upon a similar set of tests announced in October and run in DecemberRead more

Temporary fiscal stimulus can work, but keep priming that pump and the effects wear off. This is the conclusion of research from the Bank of Portugal, investigating whether small euro-area economies are affected in the same way as large ones (conclusion: yes, they are).

Fiscal stimulus is important here, because the single currency limits the monetary options available to euro members. So, the conclusions:

The results reveal that permanent government expenditure increases should be avoided, as opposed to temporary stimulus. This outcome is identical to the one obtained in the literature for large economies.

Lags in the program implementation and limited credibility can however undermine the objectives of a temporary stimulus. In particular, in financial distress circumstances, under which the stimulus may trigger a hike in the country’s risk premium, the effectiveness of the stimulus might be negligible.

So maintaining credibility is extremely important: even the temporary stimulus may have limited or no effect if credibility is low, such as during financial distress. In this case, no action might be the best bet: Read more

Chris Giles

There were some very good presentations at the Monetary Policy Forum, organised by Fathom Consulting this morning, all of which highlighted what a difficult job the Bank of England’s Monetary Policy Committee has at the moment. Cogent arguments can be made both for loosening and tightening monetary policy.

Charles Goodhart, former Bank chief economist, MPC member and general guru, said that were he on the MPC now, he would wish he could do a Rip Van Winkle, go to sleep until 2012, and wake up once some of the uncertainty over the recovery is removed. Why? “Because the next year and a bit will be fairly horrific”.

The reason things look so difficult for monetary policy is that the outlook for the inflation-growth trade-off has worsened. When Fathom plug the latest data through their replica of the Bank of England’s main economic model they first find that the Bank seems to be seriously over-optimistic on growth as their chart shows.

Now, neither Fathom nor anyone else can accurately replicate the MPC forecasts because the published versions rest on judgments by the Committee members as much as the model’s outputs. But the argument put forward Read more

For over a year, Russian bankers have looked to the rouble bond market as their personal risk-free Vegas.

Too scared to lend directly to corporates, Russian banks have found they don’t have to – thanks to central bank stimulus measures that allow them to reap risk-free returns of 130 – 170 basis points on rouble paper, simply by borrowing money on the market and buying up central bank bonds.

While the system has functioned well for Russian corporates which have been able to issue $23.1bn in rouble debt this year thanks to falling borrowing costs, economists at Troika Dialog, the Moscow investment bank, warn the situation will soon take its toll on Russia’s financial system.

Russia’s broad monetary base has already grown 46 per cent year-on-year in the first six months of 2010, and the central bank has done nothing to help matters by expanding its bond offerings, they say.

The central bank’s “nice, risk-free” bond offerings give banks ample returns “for doing nothing but simply borrowing on the market [and] inflating [their] balance sheet”, they say. Banks will buy the central bank bonds but use them as collateral simply to borrow more on the market the next day. Read more

From ft.com. The writer is David Marsh, chairman of management consultancy SCCO International, and author “The Euro – The Politics of the New Global Currency”

For two years momentum has been building for a German — Axel Weber, the Bundesbank president — to become the next head of the European Central Bank when Frenchman Jean-Claude Trichet retires in the autumn of next year. The idea is a thoroughly bad one. It is time for Germany, the strongest country in the eurozone, to say it will not field its own candidate, and make way for a nominee from a smaller state. Read more