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Posts Tagged ‘Bank of England’

Should the allegations published by the BBC (on Panorama programme) last week be confirmed, this news brings very serious concerns for the credibility of the Bank of England (BoE) and also the trust of the general public in the banking sector. Ours is a fractional reserve monetary system with no ‘metallic anchor’, but purely based on trust and the record and effectiveness of the BoE and the rest of the banking sector. The alleged pressure of the government and the Bank of England to keep LIBOR (London Interbank Overnight Rate) artificially low back in the Autumn of 2008 (in an effort to send the message that banks and money markets were not that disrupted) erodes the sound functioning or markets and the formation of interest rates, which are key signals for households and companies in planning their decisions.

 

But why messing with LIBOR?! Central banks have plenty of monetary weaponry to tackle a liquidity crisis

Instead of interfering in the functioning of the interbank market (as alleged), should the Bank of England had wanted to prevent the contagion of a panic in the banking sector after the fall of Lehman Brothers in the Autumn of 2008, it could have done it much more promptly and effectively by being a more active (last resort) lender of the banking sector: i. e. by extending the maturity of the loans and increasing the amount of the loans given to the banks. Following Walter Bagehot´s seminal narrative of the way the Bank of England should step in if a liquidity crisis occurs, it should do so by (1) lending promptly as much as money as needed, (2) against collateral and (3) at a penalty rate (usually at a higher rate than the main policy rate). Before 2007, the Bank of England had been acting as the lender of last resort of the British banks very successfully for more than two hundred years, and there had not been major bank collapses in the UK; at least when compared with the record of other central banks. The application of this more active and timely lending of last resort policy at the time would have been a much more efficient, effective and indeed transparent way to prevent the banking crisis from escalating further; and also a more effective way to send the message to the public the Bank of England was actively responding to the crisis.

I was quoted in an article published by S&P Global Market Intelligence (Sohia Furber) about the allegations of the rigging of the LIBOR in 2008 (see more at http://www.mv-pt.org/latest-news).

 

Juan Castañeda

PS. You can read the piece published by S&P on the 12th of April at: http://www.snl.com/web/client?auth=inherit#news/article?id=40298030&cdid=A-40298030-11831

 

 

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On the 13th of March (IEA, London) I had the pleasure to participate in the launch of the new MSc in Money, Banking and Central Banking (University of Buckingham, with the collaboration of the Institute of International Monetary Research), starting in September 2017; and I did it with two of the professors who will be teaching in the MSc, indeed two excellent and very well-known experts in the field: Professors Geoffrey Wood and Tim Congdon. I have known them both for long and shared research projects and co-authored works in money and central banking; and it was a privilege for me to have the chance to  introduce the new MSc, as well as to engage in a fascinating dialogue with them on very topical and key questions in monetary economics in our days: amongst others, ‘How is money determined? And how does this affect the economy?’; ‘Is a fractional reserve banking system inherently fragile?’; ‘Does the size of central banks’ balance sheet matter?’; ‘If we opt for inflation targeting as a policy strategy, which should be the variable to measure and target inflation?’; ‘Why the obsession amongst economists and academics with interest rates, and the disregard of money?”; ‘Who is to blame for the Global Financial Crisis, banks or regulators?’; ‘Does tougher bank regulation result in saver banks?’; ‘Is the US Fed conducting Quantitative Tightening in the last few months?’.

You can find the video with the full event here; with the presentation of the MSc in Money, Banking and Central Banking up to minute 9:20 and the discussion on the topics mentioned above onwards.  Several lessons can be learned from our discussion, and however evident they may sound, academics and policy-makers should be reminded of them again and again:

  • Inflation and deflation are monetary phenomena over the medium and long term.
  • Central banks‘ main missions are to preserve the purchasing power of the currency and maintain financial stability; and thus they should have never disregarded the analysis of money growth and its impact on prices and nominal income in the years running up to the Global Financial Crisis.
  • A central bank acting as the lender of last resort of the banking sector does not mean rescuing every bank in trouble. Broke banks need to fail to preserve the stability of the banking system over the long term.
  • The analysis of both the composition and the changes in central banks’ balance sheets is key to assess monetary conditions in the economy and ultimately make policy prescriptions.
  • The analysis of the central banks’ decisions and operations cannot be done properly without the study of the relevant historical precedents: to learn monetary and central banking history is vital to understand current policies monetary questions.
  • Tighter bank regulation, such as Basel III new liquidity ratios and the much higher capital ratios announced in the midst of the Global Financial Crisis, resulted in a greater contraction in the amount of money, and so it had even greater deflationary effects and worsened the crisis.

These are indeed key lessons and principles to apply should we want to achieve both monetary and financial stability over the medium and long term.

I hope you enjoy the discussion as much as I did. As ever, comments and feedback will be most welcome.

Apply for the MSc here!

Juan Castaneda

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Within the launch event of the new MSc in Money, Banking and Central Banking (hosted by the Institute of Economic Affairs in London, 13th March, 12:00-14:00), I will be delighted to introduce two of the teaching staff of the programme, Professors Tim Congdon and Geoffrey Wood, who will be discussing the major topics covered in the programme: such as policies aimed at achieving price stability and financial stability, as well as the current debates on alternative central banks’ strategies and the effects of tighter bank regulation in a post-crisis era. A key question is to assess whether central banks should shrink their balance sheets and, if so, the strategy to do it so economic recovery is not harmed by a shortage in the amount of money. Ins this regard, the US Fed’s Quantitative Tightening policy in recent months will be discussed (see a more detailed analysis here: http://www.mv-pt.org/monthly-monetary-update) along with other alternatives.

This is a new MSc focused on how money is created in modern economies and on how changes in the amount of money affect prices (all prices, consumer and asset prices!) as well as income along the cycle. In addition emphasis is given to the functions, operations and monetary policy strategies of major central banks, so we can understand better the way monetary policy makers actually make a decision. Surprisingly enough, this very classical approach to money and central banking has become quite distinct and unique,  since monetary analysis has been labelled as ‘out-fashioned’ and has somehow been disregarded in the last two decades. The MSc is offered by the University of Buckingham and you can find more on the programme and how to apply here: https://www.buckingham.ac.uk/humanities/msc/money-banking .

Places for the launch event are still available. Should you want to attend RSVP to enquiries@mv-pt.org or call Gail Grimston on 01280 827524. For those who will not be able to make it we will be recording the presentation and the debate and upload it on the Institute of International Monetary Research‘s website (http://www.mv-pt.org/index).

All welcome!

Juan Castaneda

launch-msc-invite

 

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As announced last month on this blog, you can find now the video of the IIMR 2016 Public Lecture given by Charles Goodhart (Financial Markets Group, LSE) available on the Institute of International Monetary Research website: http://www.mv-pt.org/2016-lecture-and-conference

Professor Goodhart, indeed a distinguished academic figure in monetary economics in the UK and a former member of the Bank of England’s Monetary Policy Committee, criticised many features of monetary policy-making both before and after the sharp global downturn of 2008 and early 2009. He also underlined some of the most important flaws in current macroeconomic models:

(1) The use of macroeconomic models with no money, nor a banking sector.
(2) No analysis of the monetary transmission mechanisms via the banking or the wider financial sectors.
(3) The assumption that there is a direct correlation between changes in the monetary base and changes in the amount of money.

In my view those flaws are yet to be properly addressed and if we could just agree on those very simple points we would make a major progress in current monetary economics! And we will very much reduce monetary instability and thus minimise the risk another financial collapse.

Just a final note on the Institute of International Monetary Research. Its main purpose is to demonstrate and to bring public attention to the strong relationship between the quantity of money on the one hand, and the levels of national income and expenditure on the other. The Institute has been established in association with the university of Buckingham and is heavily involved in the analysis of banking systems, particularly their role in the creation of new money balances. You can subscribe to its newsletter and publications here: http://www.mv-pt.org/contactus

Juan Castañeda

PS. The text with the lecture will be available soon at the IIMR website.

 

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Did you know that central banks have not always been State-owned banks? The vast majority of them were in the hands of the public before the wave of nationalisations that took place right after the end of WWII. And the system did not work bad at all; the record of both price stability and financial stability before 1913 was certainly impressive. True, bank panics also occurred but the different response taken to such crises is the key to understand the pros of a monetary system fully in the hands of the public and market participants. And, a regards price stability, from approx. 1870 to 1913 most developed (and other less developed) economies ran the gold standard as the rule to determine the amount of money in the economy; a standard which very much tied the hands of central banks and governments as regards money creation. The outcome of the running of a system which preserved monetary stability for a 50 year-time period limited was (not surprisingly for any monetary economist!) was true price stability (by true, I mean that the price level in 1870 was roughly similar to that in 1913), and a growing and rather stable financial system on the whole.

Why was such a ‘miracle’ possible? There is no mystery nor secrecy about it at all! It was the establishment of the right institutions and policies to discipline both the Treasury and a highly independent (actually privately-owned!) central bank what explains such a favourable outcome. And, did you know something even more striking? Several central banks are traded in the market in our days in different ways: the Swiss National Bank, Belgium Central Bank, Reserve Bank of South Africa, Greece Central Bank and Bank of Japan. Historically speaking as I said above this is not an anomaly but the norm before the 1940s. Given the poor record of our monetary authorities since then and the miss-management of the recent financial crisis, why not extending private ownership even further and thus mitigate the threats of a politically-exposed (some will say ultimately ‘controlled’) central bank?

In an interview with Standard and Poor’s, ‘New way forward or outdated anomaly? The future of publicly traded central banks’ (S&P Global. Market Intelligence), I advocate for central banks to return to the public and the banking sector, in order to guarantee their independence from governments and thus be able to achieve a more sound and stable monetary system. You will find the arguments in favour of a more independent central banks, owned by market participants in many references. Here I will just mention two of them, one written by Tim Congdon (Chairman of the Institute of International Monetary Research), Central Banking in a Free Society (IEA), and the other by myself with Pedro Schwartz (Visiting Professor, University of Buckingham), Central banks; from politically dependent to market-independent institutions (Journal of Economic Affairs); both pieces written in the midst of the Global Financial Crisis (2008-09) and the observed mismanagement of the lender of last resort function of central banks.

Find below an extract from the interview with my arguments:

‘Those in favor of privately owned central banks say such institutions would be better equipped to preserve market stability and could help prevent future financial crises.

“If publicly traded or owned by the banking sector … the market incumbents will have a genuine interest in setting clear … rules for the central bank to maintain financial stability over the long term,” said Juan Castañeda, director of the Institute of International Monetary Research at the University of Buckingham in England.

In the event of another financial crisis, a central bank would be fully independent to intervene at a bank in need, and any injection of capital would come from the banking or private sector, Castañeda said. Situations like the nationalization of Northern Rock by the Bank of England at the outset of the global financial crisis could be averted were central banks not in public hands, he argued.

“Those are the things that you can avoid if your central bank is publicly traded,” he said, citing the late 19th century example of U.K.-based Barings Bank, which faced bankruptcy but was saved by a consortium of fellow lenders, helping to stave off a larger crisis.

Oversight of a central bank would belong to the bank’s shareholders, although national authorities would also have a say because of the bank’s management of monetary policy and financial stability.’

It is not surprising Tim Congdon and myself advocate for more independent central banks (privately-owned) as a way to protect them from political interference in the development of its functions. I do believe this would contribute to a more sound running of monetary policy and to less financial instability in the future. If publicly-traded or owned by the banking sector (following the US Fed model), market incumbents will have a genuine interest in setting clear mandates/rules for the central bank to maintain financial stability over the long term. Should another financial crisis occur in the future (that it will), the central bank will have free hands to intervene promptly and avoid the contagion of panic in the market (by the application of its lender of last resort function). And if any injections of capital were needed, it would be the banking sector (or the private sector as a whole) which would bail-in the bank in crisis and, most likely, taxpayers’ money will not be needed again.

Of course this alternative arrangement is fully compatible with the central bank be given statutory functions (such as an inflation target for example) and be subject to parliamentary oversee; so the Governor will have to answer not just to the Bank’s shareholders but to Parliament as well in relation to the running of monetary policy and financial stability (find further details on these arrangements in Congdon’s 2009 work mentioned above).

Juan Castañeda

PS. An excellent narrative of the flaws of the current system can be found in Milne and Wood (2008)’s  analysis of Northern Rock bank crisis in the UK.

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The Institute of International Monetary Research (IIMR, affiliated with the University of Buckingham) is holding an international conference on the assessment of Quantitative Easing (QE) in the US, UK, Eurozone and Japan on the 3rd of November (London). In the last few years a return to a more conventional set of monetary policies has been widely heralded, and in particular the return to a monetary policy rule focused on monetary stability and the stability of the overall economy over the long term (see the excellent conference organised by CATO and the Mercatus Centre  (George Mason University, US) on this very question just few weeks ago); but we believe the first priority at the moment is to analyse and clarify the impact of QE on financial markets and the broader economy. Amongst others, the following questions will be discussed: Has QE been instrumental in preventing another Great Depression? If QE is meant to boost asset prices, why has inflation generally been so low in recent years? Has QE increased inequality? Has QE been able to expand effectively broad money growth? Should QE programmes be extended at all? These are all vital questions we will address at the conference.

The conference is by invitation only and there are still (very few) places available, so please send an email to Gail Grimston at gail.grimston@buckingham.ac.uk should you wish to attend. It will be held on Thursday 3rd November 2016, in collaboration with Institute of Economic Affairs (IEA), at the IEA headquarters in London. You will be able to find a programme with all the topics and the speakers here  As you will see we are delighted to have an excellent panel of experts on this field from the US, continental Europe and the UK. There will be of course very well-known academics but also practitioners as well as central bank economists. In particular economists such as George Selgin (CATO), Kevin Dowd (Durham University), Christopher Neely (Federal Reserve Bank of St. Louis), Ryland Thomas (Bank of England) or Tim Congdon (IIMR, University of Buckingham) amongst many other very distinguished  economists will be giving a talk at the conference, which provides a unique opportunity to analyse in detail the effects and the effectiveness of QE in the most developed economies.

For your information you can also follow the conference live/streaming; please visit the IIMR website this week for further details on how to follow it remotely on the day. In addition the presentations (but not the discussion) will be filmed and published on our website later on. Drop us an email (enquiries@mv-pt.org) should you want to be updated on the Institute’s agenda and latest news.

Thank you,

Juan Castaneda

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Monetary economics is in shambles. More than eight years after the outbreak of the Global Financial Crisis  many things in our economies have changed indeed, particularly the range of operations in which central banks have embarked in the last few years; but the way mainstream academia and policy makers understand and approach monetary economics have not. The old policy rules which contributed so much to the building up of monetary instability and finally to a profound financial crisis have not really been questioned nor replaced yet by a consistent set of new policies (or better, a policy rule) committed to maintaining monetary stability over the medium and long term. Even worse, I have attended myself scientific meetings on this field in the last years and very rarely (if at all) ‘money’ or ‘monetary aggregates’ are even mentioned in (supposedly) specialised monetary talks and lectures. Instead we seem to be stuck in endless discussions on interest rates and how a 0.25 increase/decrease in the policy rate may affect consumption, investment and eventually output by the spending and credit channels; for the initiated in this subject this means we still use the late 1990s and early 2000s’ new Keynesian model (with no money) to analyse and prescribe monetary policies.

Well there are indeed notable exceptions to the mainstream, and I am very pleased to invite you all to the 2016 monetary Public Lecture of the Institute of International Monetary Research (IIMR), by professor Charles Goodhart. One of the main purposes of the Institute is to promote research into how developments in banking and finance affect the economy as a whole. The Institute’s wider aims are to enhance economic knowledge and understanding, and to seek price stability, steady economic growth and high employment. Particular attention is paid to the effect of changes in the quantity of money on inflation and deflation, and on boom and bust.

Banks and central banks play a central role in the sound functioning of modern monetary economies. The 2008-09 Global Financial Crisis has shown again how important it is to understand their functioning and operations, and the relationship between the quantity of money and the overall economy.

We have much pleasure in inviting you to join us at the Institute’s 2016 public lecture on Wednesday 2nd November (18:30 hrs.) by Professor Charles Goodhart (LSE): ‘What have we learned about money and banking during and since the Great Recession?’, at the Institute of Directors (116 Pall Mall, London).

You may want to visit our website to learn more about the Institute’s research agenda and our latest publications on our website (http://www.mv-pt.org/index). You may want to know the public lecture will be recorded and available on our site.

Thank you,

Juan C.

PS. Please confirm your attendance by e-mail to Gail Grimston at gail.grimston@buckingham.ac.uk

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