Typography

Tyler Cowen posts again on the theory that banks are using the ECB's new and broader facilities for arbitrage by buying risky sovereign debt, thereby driving interest rates down. There is another explanation for the fall in rates, see my comment below: The new ECB collateral rules dramatically increase the quantity of assets that banks can submit to the ECB in order to get ECB clearing balances. Bank loans are now allowed, so are lower quality ABS. This means that it is less likely that the national governments will have to guarantee local bank debt. This was a real problem in Greece and Ireland, for instance, for the local banks had run out of assets to submit to the ECB. Instead, banks were creating debts amongst each other and having the government guarantee these debts, before submitting them to the ECB as collateral. Since private non-marketable debt can now be submitted to the ECB, governments will no longer be required to covertly bail out their banks by guaranteeing intra-

Have commented on a few blogs that bring up the meme of collateral shortages. Commodity money: It's back! (and it sucks) at Macromania Is the Fed our savior in financial regulation? at Marginal Revolution Why the Global Shortage of Safe Assets Matters at Macro and Other Market Musings The idea of a scarcity of shortage of safe assets is nonsensical to me. I just don't think this can be a real issue. If the quantity of "safe assets" somehow collapses, then the prices of remaining "safe assets" will rise to meet the market's demand for safe collateral and stores of value. You can't have shortages in financial markets. Do you think you can? and The idea that there can be a shortage of good collateralizable financial assets sounds fishy to me. Prices for those assets will simply rise until their price is sufficient to meet the demand for good collateral. The same with an excess demand for money - prices will simply fall to meet that demand.

More on the phenomenon of negative gold lease rates at Gold Chat. The points are similar to here .

David Glasner comments on a recent Deutsche Bank report in Deutsche Bank Gets It, Why Can’t Mrs. Merkel? . I point out in my comment that the chart mislabels the dates upon which the various countries left the gold standard. Also, what about Holland, Poland, and Switzerland? I suspect they would show data entirely different from France, though they left the gold standard (or devalued) in the same month.

Tyler Cowen has another post on the ECB financing sovereign governments via loans... It is finally being recognized that the eurozone made a major policy breakthrough : My thoughts: I don’t think the key here is arbitrage and government monetary financing. It’s about a slow bank run that has been enveloping Southern Europe for a few years now. The mechanism which governs intra-Euro payments requires Greek/Italian etc banks to “solve” for the bank run by submitting collateral to their national central bank in return for settlement balances. Much of this is done overnight or on a weekly basis. By establishing 3 year operations, the ECB is telling the banks and the rest of the world that they will continue to meet the demands of anyone running on the Southern European banks for the next 3 years. That sort of commitment to the system might be large enough to stop the bank run. It’s similiar to how, in the old days, banks suffering bank runs would often bring out all their cash and gold fro

FT Alphaville commented on gold lease rates in Make your own (collateralised) gold standard . My comment pointed to the fact that much of the conversation on negative lease rates is not considering the fact that storage costs are rising. These rising costs encourage gold owners to lend gold out temporarily so they save themselves the hassle of footing a hefty storage bill, and they may be so eager to avoid this bill that they are willing to pay others a fee to take on the burden. Thus negative interest rates. Relavent links: See Negative Lease Rates at Gold Chat

FT Alphaville updates the offshore yuan story. See Chinese CNH – YOURS! . There seems to have been a turnaround in the offshore market's blistering growth and the yuan's appreciation. Relevant Links: Offshore renminbi – an updated primer from HSBC NDF discount reflects tighter yuan liquidity from Credit Agricole Yuan's Rise Is Out of Steam from WSJ Hong Kong Yuan Deposits Drop for 1st Time Since October ’09 from Bloomberg

heteconomist.com has a post on MMT's openness and political neutrality. See A Clarification on Political Openness . Heteconomist: "I prefer to see MMT as an open framework (basically an understanding of the monetary system and national accounting) within which – or out of which – various policy approaches could be developed and pursued." Reply: I’m no expert, but I decompose the monetary component of MMT into chartalism and endogenous money. These ideas are so old… you can go back centuries to find the origins of chartalism in Locke and Berkeley (money as a ticket, agreement, or sign). Endogenous money’s roots traces to the banking school of the 19th century. MMT doesn’t own these individual ideas… they are diffused into the general body of economics. There are no intrinsic reasons why the ideas of Locke, Berkeley, and the banking school need be associated with a particular political slant. The chartalist version of Locke/Berkeley’s token theory of money surely appeals to

Two comments on The Money View. One on Perry Mehrling's The IMF and the Collateral Crunch and the other on Daniel H. Neilson's Is there an ECB? Neilson links to the erroneous Tornell/Westerman piece. My comments on this are in a previous post . In short, Karl Whelan's Worse than Sinn clarifies the issue. Sterilization by the Bundesbank is not happening.  Merhling and me discuss the nature of the transactions conducted between borrowing NCBs and the lending ECB. Perry, I can't find any explicit reference to whether intra-Eurosystem credits are collateralized or not. But I still think not. Collateral is posted by a borrower to a lender to protect the lender should the borrower default. Then the lender can collect the collateral instead. But ECB losses are dealt with in a specific way. See bottom of http://www.ecb.int/ecb/orga/capital/html/index.en.html In short, if the ECB suffers a loss on a loan to an NCB then that loss is allocated to all NCBs according to the ECB&#

Interesting post on Marginal Revolution, What is the difference between LOLR to banks and LOLR to governments? Cowen: “Is this transfer of the subsidy to the sovereign a bug or a feature of the plan? Perhaps this is how the EU/ECB, viewed for a moment as a consolidated entity, will circumvent EU law to finance troubled governments. Is it possible that by changing collateral requirements they can alter the flow of funds to governments in a discretionary, ever-changing, and relatively non-politicized fashion? Does this satisfy the “too complicated for people to complain about” provision?” Reply: Good post. It is probably a feature, not a bug, and it is surely “too complicated for people to complain about,” at least for now. This isn’t a new thing, though. The ECB has been lightening up collateral requirements for a few years now, presumably in part to finance weak governments through the back door. Remember when the ECB broke its rules and began accepting BBBminus-rated collateral? Relev

I entered the fray at a couple of MMT blogs. There was some interesting discussion concerning consolidation of the Treasury and central bank, and how MMT portrays/misportrays the actual institutional details of modern central banking in order to make their message easier. Between Depression and Hyperinflation at Winterspeak. From the comments: technical details on MMT at Winterspeak. The General and the Specific in MMT at heteconomist.com Even with the BoE, the old way by which it could lend directly to government - via its "ways and means" advance/overdraft facility - has been effectively neutered. That facility was frozen in 1997 and has since been almost completely repaid. The upshot is that MMT can't look to the BoE as an example of its idealized "consolidation", and it can't give policy recommendations as if these institutional rigidities didn't exist. Relevant link: The Treasury-Fed Accord: A New Narrative Account by Hetzel and Leach

Commented on David Glasner's Once Again The Stock Market Shows its Love for Inflation : The only problem here is the one that we talked about in a previous post (Unpleasant Fisherian Arithmetic) concerning the liquidity premium that assets carry. The reason for the rising TIPS spread could be (though not necessarily must be) that the liquidity premium on treasuries is shrinking relative to that of TIPS, and therefore TIPS are rising in price relative to Treasuries. This makes it hard to pass judgment on the hypothetical rate of return on capital.  Anyways, you have already commented on this problem in your paper: “One possible cause of distortion in the yield on TIPS bonds and in the TIPS spread during the autumn 2008 financial crisis is that the yield on conventional Treasuries was depressed because of a liquidity premium. Even though the ex ante real interest rate was likely negative, because TIPS bonds were perceived as much less liquid than conventional Treasuries, TIPS bonds c

Commented at Macromania on "On Bagehot's Penalty Rate" .  I think you have captured an inconsistency in the Bagehot principle. If the guiding rule is to lend at a penalty rate, then during a liquidity crisis how can the central bank ever fulfill its duty as lender of last resort? The rate that the market requires will rise but the penalty rate will rise even more, such that the central bank effectively prices itself out of the market. After all, if you can transact with the market at x%, why transact at x+1% with the LOLR? Some liquidity provider that is.  At the same time, I'm sure we can all agree that the job of a LOLR is to provide liquidity, not set market prices.  I think the problem here is that we haven't learnt how to properly understand and measure liquidity, and therefore can't price it and provide adequate liquidity insurance policies. Central banks certainly aren't great at it. Because their tools are so blunt, as an unfortunate by-product of

Commented at FT Alphaville on How Germany is paying for the Eurozone crisis anyway : There are some good bits in the VOXeu article, although I have a few quibbles. "“that the Bundesbank will soon exhaust the stock of securities that it can sell to fund further loans to the Eurosystem.”" The Bundesbank doesn’t need to fund its loan to the ECB by selling off assets. Effectively, German banks are deserting the PIIGS banks in droves. Reserves are flowing from the accounts of PIIGS banks at their domestic PIIGS NCBs to the German reserve accounts at the Bundesbank . Thus the Bundesbank’s reserve accounts (a liability to its domestic banking system) are rising even as its credit to the ECB (an asset on its balance sheet) rises. This is more or less automatic. So in order to balance a rapidly increasing credit item to the ECB, the Bundesbank doesn’t need a declining quantity of assets to act as the balancing mechanism; increasing reserves held at the Bundesbank will do the trick. Th