Negative rates: a massive transfer from savers to bank shareholders and governments with little impact on economic growth. (Post in response to Miles Kimball)

This post explores the consequences of deeply negative interest rates set by the ECB, as proposed by professor Miles Kimball. It’s a shorter version of my previous post, plus an estimation of the economic stimulus of the proposal. Continue reading “Negative rates: a massive transfer from savers to bank shareholders and governments with little impact on economic growth. (Post in response to Miles Kimball)”

Carrot or stick? The Lonergan-Kimball debate

Update 1, 12/12/2017: Prof. Kimball replied on Twitter. I have added his remarks just before the discussion section.

Update 2, 12/12/2017: See my follow-up post with more details on the distributional and stimulative effects of deeply negative ECB rates.

Central banks around the developed world have been struggling to meet their inflation targets. Economists are divided on what the Fed, the ECB or the Bank of Japan should do.

Massive amounts of quantitative easing have proven to be ineffective at boosting inflation. Some economists have proposed that central banks raise inflation expectations.

At the 5th Bruegel – Graduate School of Economics, Kobe University conference1, Eric Lonergan and professor Miles Kimball advocated their preferred solutions: helicopter money and deep negative interest rates, respectively. Continue reading “Carrot or stick? The Lonergan-Kimball debate”

Two publication cultures: economics versus physics

In a recent blog post, professor Roger Farmer comments on the publishing process in economics. He writes that economic journal publishing is “a process that is highly centralised around five leading journals. These are the American Economic Review, the Quarterly Journal of Economics, the Review of Economic Studies, Econometrica and the Journal of Political Economy. For a young newly appointed lecturer, publishing a paper in one of these top five journals is a pre-requisite for promotion in a leading economic department […]” Continue reading “Two publication cultures: economics versus physics”

Bankers are people, too

My book is published!

Do you think banking is too hard for you? Are you convinced that all bankers are crooks? Would you like to follow the financial news, but you always get stuck on terms like derivatives, cryptocurrency or quantitative easing?

Then I have some good news. Continue reading “Bankers are people, too”

Should central banks have an Independent Evaluation Office?

Should the European Central Bank (ECB) have an independent evaluation office (IEO)? Benjamin Braun recently asked this question on Twitter.

My first reaction was: probably not, because the ECB already evaluates its past performance. However, after more thought, I have changed my mind. This post examines some recent failures of central banks; how an IEO could improve monetary policy going forward1; and what it would take for the IEO to be an effective department rather than a paper tiger. Continue reading “Should central banks have an Independent Evaluation Office?”

My favorite finance and economics podcasts

Podcasts – radio shows you can download – are a great medium when you’re driving, in the gym, or cooking dinner.

Here is my current top four podcasts that deal with money and economics in general. For each series, I’ve picked one episode that I enjoyed a lot. Continue reading “My favorite finance and economics podcasts”

Problems with Christopher Balding’s analysis of Chinese banks and currency

Professor Christopher Balding has published a blog post with his views on the link between the China’s banking system and its currency: Can China Address Bank Problems without Having Currency Problems?

He believes that “it is much more likely that if there are systemic banking issues that currency problems will also arise.”

It is laudable that Prof. Balding summarizes his arguments. By being explicit about the assumptions, readers don’t just have to trust his opinion. Instead they can follow the logic and evaluate the strong and weaker points themselves.

The goal of this post is to counter some of the points listed by Balding to support his conclusion. Continue reading “Problems with Christopher Balding’s analysis of Chinese banks and currency”

Stop calling banking ‘monetary intermediation’

Banks create money. To be more precise, when a bank grants a loan, it simultaneously creates a deposit. Bank deposits are functionally equivalent to cash.

The insight that bank lending creates money is a direct result of basic accounting, and has been explained many times. See for example the Bank of England, Positive Money, this blog, and most recently the Bundesbank (h/t Benjamin Braun) and Norges Bank (h/t Frank van Lerven).

A while ago, Daniela Gabor pointed out that economists have know this for a long time (see the replies to her tweet for even earlier references):

I wouldn’t be surprised if the Renaissance bankers who understood double-entry bookkeeping were well aware of the fact that they were creating money.

So how is it possible that some famous economists still don’t know that banks really do create money? Why do they insist that banks lend out savings?

Economics education apparantly fails to pass on some elementary knowledge to students.

It doesn’t help that the activities of banks are often described as ‘monetary intermediation’. Intermediation implies that bankers are the middle men between borrowers and savers.

Monetary intermediation is even an official term in the statistical classification of economic activities in Europe:

The English description of NACE code 64.1 is ‘monetary intermediation’. Source

However, there exists a much better description for banks. In Dutch, the formal description of banks is “geldscheppende financiële instellingen”, which literally means “money-creating financial institutions”:

The Dutch description of NACE code 64.1 means ‘money-creating financial institutions’. Source

As far as I can tell, Dutch is the only European language in which banks are described as active money creators1. All other languages use ‘monetary intermediation’.

Maybe everybody should take a cue from Dutch and start saying ‘money creating institutions’ from now on, so we don’t have this debate a hundred years from now 😛

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I explain how banks create money in Bankers are people, too. After you’ve read my book, you’ll know more about banking than many PhD economists!

Why do Germans remember the Weimar hyperinflation?

David Beckworth recently interviewed1 (podcast) professor Jesús Fernández-Villaverde. Among other things, they discussed the hyperinflation in the Weimar Republic, i.e. Germany after World War I. The economists ponder why a hyperinflation that occurred in 1923 has had such a large impact on German economists and central bankers, even to this day. After all, the NSDAP rose to power in the 1933, at a time of mass unemployment and austerity. This was almost a decade after the hyperinflation ended.

The professors get to the hyperinflation at 8:20 into the conversation. Fernández-Villaverde tells the story of how inflation got out of hand when French and Belgian troops occupied the Ruhr2. The Weimar government encouraged workers to resist the military occupation. Strikers were paid with money freshly printed by the Reichsbank, the German central bank. The combination of no real economic production with an increasing amount of Papiermarks tanked the purchasing power of the currency. The hyperinflation began. Continue reading “Why do Germans remember the Weimar hyperinflation?”

Central bank liabilities and profits

Central banks (CentBs) have drastically expanded their balance sheets in the wake of the global financial crisis. The Federal Reserve (Fed) and the European Central Bank (ECB) followed the example of the Bank of Japan (BOJ) by buying trillions of dollars and euros worth of long-term bonds, a policy known as quantitative easing (QE).

The CentBs make these purchases by “base money”, i.e. cash and reserves1. Neglecting legal restrictions, CentBs can create base money at will.

There is a lot of controversy among economists about QE and its consequences for the balance sheets of central banks.

This post discusses the question of whether or not base money should be considered a liability of the central bank. After that issue is understood, we can clarify when the CentB can book a profit and how this affects government finances.

One of the stated goals of QE is to raise inflation. Some worry that once this happens, rising interest rates will cause massive losses to the central bank, resulting in unspecified “bad things”. I argue that these fears are unjustified. Continue reading “Central bank liabilities and profits”