MONEY TALKS, by IIMR

‘Money talks’ is a series of mini-videos the Institute of International Monetary Research (IIMR) will start to release every week on the 18th of June, Monday.

The name of the series says it all: experts in money and central banking will be covering key concepts to understand better monetary economics in less than two minutes long videos. Tim Congdon (Chairman of the IIMR) and Geoffrey Wood (IIMR Academic Advisory Council) along with myself and many others to come will be addressing the fundamentals in money and banking to be able to understand how our monetary systems work and which are the roles and functions of modern central banks.

The topics address include the following:

Episode 1: What is Money?

Episode 2: What is the Central Bank?

Episode 3: What is the Monetary Base?

Episode 4: What is the Money Multiplier?

Episode 5: What does Monetary Policy consist of?

Episode 6: What is Central Bank Independence?

Episode 7: The Central Bank as the Lender of Last Resort

Episode 8: Bail outs and Bank Failures

Episode 9: Basel Rules

Episode 10: What os ‘Narrow Banking’?

Episode 11: Fiat Money

Episode 12: What is a monetary policy rule?

Episode 13: What is Monetarism?

Episode 14: Monetary Policy Tasks

But of course, these are just the ones we are starting with. The list will be expanded in the next few weeks and the aim is to produce a library of mini-videos that could be a good reference to search for short definitions on money, banking and central banking.

If you are interested in this project, please subscribe to the IIMR YouTube channel (https://www.youtube.com/playlist?list=PLudZPVEs3S82iu2zb-QZfcK7pqnrHfPgO) to stay tuned.

As ever, comments and feedback most welcome!

 

Juan Castañeda

 

 

 

 

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Tighter bank regulation won’t stop boom and bust, but it will damage growth and prosperity

This is the title of an article written with my colleague, Tim Congdon (Institute of International Monetary Research and University of Buckingham), published in CityAM on 27/10/2017.

Our main point is that more regulation won’t make banks safer and is counterproductive. It is a sort of an instinctive reaction by politicians, policy-makers and regulators to respond to a crisis with more and tighter regulation, in an effort to tackle the ‘excesses’ in the market economy left of its own will. This is both very naive and irresponsible, as much as empirically and theoretically wrong. The recent announcement and approval of the Basell III tighter bank capital ratios is an example of it: this tougher set of regulations was announced and approved in the midst of a severe financial crisis (2008-2010), and resulted in banks shrinking their balance sheets even more; with the expected dramatic fall in money growth and nominal spending.

It is again a dire example of the running of the law of the unintended consequences of regulation; which would recommend the need to assess in advance the expected consequences of regulation, rather than quickly and desperately calling for more and tougher laws on banks and the rest of the financial system.

As we put it in the article:

‘Far too many people believe that “better” regulation is the answer to financial crises. But further regulation involves an expansion of the power of the state, and a loss of freedom for the financial system. Remember that Britain had no explicit official rules on bank capital until the 1980s, yet no British bank suffered a run on its deposits over the preceding century. Crucial to the success of British banking in the decades before the Northern Rock fiasco was the Bank of England’s willingness to lend to solvent banks if they were having difficulty funding their assets. Good central banking helped Britain’s commercial banks to run their businesses efficiently and profitably, and to the benefit of their customers.’

There was a time, not that far away, when regulation was not that prominent and financial markets flourished; and when a banking institution failed, that occasionally they did, there were solid policies and institutions willing to intervene in an decisively and orderly manner (the Bank of England had been an example of that, at least until the collapse of Norther rock in the recent crisis).‘

You will find the article in full here: http://www.cityam.com/274672/tighter-bank-regulation-wont-stop-boom-and-bust-but-damage.

Comments, even more if critical, most welcome!

Juan Castañeda

PS. We will be discussing these issues with the member of the Bank of England’ s Financial Policy Committee, Martin Taylor, in the IIMR Annual Public Lecture on the 7/10 in London: https://www.mv-pt.org/events/public-lecture-the-committee-of-public-safety-the-work-of-the-financial-policy-committee-by-m

 

 

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‘The new regulatory wisdom: good of bad?’

This is the title of the second research paper published by the Institute of International Monetary Research (IIMR), by Adam Ridley. This is a brief summary extracted from the paper, which is fully available at http://www.mv-pt.org/research-papers:

‘Output growth in the leading Western economies has been weaker since the Great Recession of 2008 and 2009 than at any time since the 1930s. According to the International Monetary Fund’s database, advanced economies’ gross domestic product was flat in 2008 and dropped by 3.4 per cent in 2009. Although 2010 enjoyed a rebound with 3.1 per cent growth, the next three years saw output advancing typically by a mere 1 ½ per cent a year. This was well beneath the pre-2008 trend.

In the leading Western nations the official response to the Great Recession has had a number of well-known and familiar common features, although policy has been far from stable or easy to predict. The elements of this response constitute what might be termed the “New Regulatory Wisdom” (NRW). How is to be defined? What has been its impact so far? And what will be its effects if it is maintained into the future?’

 

Video on changes in bank regulation during and after the Global Financial Crisis

You can also find a video below with further insights on this fundamental topic to understand the collapse in broad money growth in the midst of the Global Financial Crisis, and thus the aggravation of the crisis. The effects of tightening bank capital regulation are quite straight forward; in order to comply with higher capital to assets ratios, banks would have to sell their assets and thus reduce the amount of deposits (bank money) in the economy. This means a contraction in banks’ balance sheets and in turn a fall in deposits (broad money). The effects of such contractionary regulation is addressed in detail in Money in the Great Recession (Ed. Tim Congdon. 2017). In view of recent proposals to even increase capital ratios further the IIMR will hold a conference in this topic in november 2017 (more information with the programme and speakers to follow after the summer)

Comments welcome.

Juan Castañeda

 

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