A warning for central bankers around the world from Masaaki Shirakawa, governor of the Bank of Japan: their bold interventions to help crisis-hit economies risk undermining the vital trust of the public.
In a speech just delivered in Frankfurt, Mr Shirakawa did not single out any central bank in particular – and made many references to the exceptional policy steps the Bank of Japan has taken. But his comments could be seen as applicable also to the US Federal Reserve, the European Central Bank and the Bank of England.
So far, emergency measures such as asset purchase schemes have ”been relatively effective,” Mr Shirakawa said. But he went on: Read more
The arguments in the speech and research paper that Ben Bernanke presented in Paris today will be fairly familiar if you’ve come across the influential 2009 AER paper by Ricardo Caballero and Arvind Krishnamurthy (indeed Mr Bernanke cites it specifically).
The basic point is that large capital inflows into the US in 2003-2007 were mainly in search of safe assets: and the US financial system responded by manufacturing them in the form of AAA-rated CDOs and similar moneytraps. Read more
Rates must rise in Norway, and “not too slow[ly]” either. This from the head of Norway’s Financial Supervisory Authority, Bjoern Skogstad Aamo. Reuters news wire quotes his concern on bubbles, housing in particular. Household debt levels, as well as house prices, are “historically high”.
“It is important to reduce the risk of new crises through a gradual, and not too slow, normalisation of interest rates, through limits on bank housing loans, strict standards on banks’ equity and continued active supervision of property markets,” he said. Read more
Minutes just out show that South Korea’s last rate rise decision was unanimous as central bankers worried about inflation gathering pace. The country is rumoured to be buying dollars to weaken the won, which reached a two-month high yesterday.
Upward pressure on the won came courtesy of “offshore players”, the WSJ reports. Could these be the same foreigners Chile has blamed for its appreciating peso? The country’s finance minister said openly yesterday that the Fed’s $600bn stimulus programme was strengthening the peso, as he welcomed central bank intervention to try to weaken it.
China has openly and repeatedly made the same accusation, warning of QE2-fuelled asset bubbles. Thailand is rumoured to be intervening to weaken the baht, and Venezuela and Viet Nam have both recently devalued their currencies. Read more
The European Central Bank’s monthly bulletin, just released, has a retro feel about it. I’ve flipped through its 99 pages (saving the statistical annexe for later) but failed to find any reference to the crisis hitting the eurozone’s periphery, apart from a few factual points on bond spreads.
There were certainly plenty of questions it could have addressed. For instance, what exactly is the current aim of its government bond purchase programme? Launched in May, at the height of the eurozone crisis, the programme had an initial “shock and awe” function, along with the political actions taken then.
Now it seems neither one thing nor the other – it is not a large-scale asset purchase scheme like QEII, nor has the programme been formally ended (as Axel Weber, Bundesbank president, would prefer). Officially, the programme is about restoring the functioning of markets, but what does that mean right now? Read more
Sheila Bair, chair of the Federal Deposit Insurance Corporation, gained much respect and notoriety in Washington for her warnings about - and handling of - the subprime mortgage crisis.
And so it is somewhat unnerving to see her offer remarks today warning about the potential for a bond bubble that could do significant damage to the US financial system if banks do not prepare for higher interest rates down the road. Especially in a context of possible additional quantitative easing by the Federal Reserve, which could easily push treasury yields even lower than they are now.
“The consensus is that this low-rate environment will persist for some time into the future,” said Ms Bair. “But what will happen when interest rates inevitably rise, and how disruptive will that process be? “ Read more
The bond markets might be overdoing it a bit at the moment, Guy Quaden has acknowledged. Asked whether bondholders were wrong to fear deflation, the ECB governing council member told Belgian business dailies L’Echo and De Tijd:
“You cannot rule out that the bond markets are overdoing it at the moment… But deflation is as unlikely as strong inflation. Central banks will do anything to avoid deflation. They do not tolerate high inflation.“
Asked why the ECB had decided to extend to Q4 its offer of unlimited short-term credit to banks, Mr Quaden said that the money market was often more nervous toward the end of the year, and that certain longer-term refinancing operations were due to expire in the period. He underlined, however, the temporary nature of the help: “The banking industry,” he said, “cannot depend forever on the exceptional credit of the ECB.”
On the subject of fiscal austerity, he said neither he nor Jean-Claude Trichet would argue for brutal and immediate austerity, except in Greece. Read more
Central banks are debating whether they should extend their remit to spot asset price bubbles – but research from the Bank for International Settlements has just found that the ageing population will depress, if not reverse, price rises in future.
“In English speaking countries it seems that baby boomer purchases drove up house prices in the past, while their sales will drive real house prices down in the future,” writes author Előd Takáts. The US has apparently enjoyed an 80 basis point per annum (bppa) boost to date, but is facing a negative impact of 80bppa in future. Read more
What’s causing the foreclosure crisis? Is it the correction in home prices across the US from bubble-induced highs or is it, as many claim, a result of lax lending standards and predatory subprime loans?
The distinction isn’t just splitting hairs. Governors of the Federal Reserve and other policy makers have put quite a bit of effort into blaming failures of mortgage regulation (rather than market failures) for the crisis. But are no-income McMansion moms really the ones feeding the foreclosures? Or are otherwise credit-worthy homebuyers defaulting as they realise they owe hundreds of thousands more than their home is worth? After all – I can afford to pay back a loan of $500, but if I’ve used it to buy a tulip bulb that’s now worth $1.50, I might just decide to cut my losses and give it to the bank to garden.
Crunching the numbers leads to some interesting, if inconclusive, results. Read more
If we are indeed facing a double dip downturn, James Bullard’s comments today on the strength of the global recovery will be long remembered.
Apparently unconcerned that the Fed (after missing the US housing bubble) would have lost credibility in its ‘no bubble!’ declarations, the St Louis Fed president said today:
While I am sympathetic to the possibility of ‘bubble’ phenomena in macroeconomics generally speaking, I do not think that we should interpret China in this light at the current juncture.