Germany’s export-led economy and the consequences for its banks

In the thread below, Benjamin Braun explains Germany’s political economy. More specifically, he and Richard Deeg studied the interaction between the financial and non financial corporate (NFC) sectors.

Let me try to summarize the argument.

The German NFC sector has high profits (1) and runs a trade surplus (2).

(1) enables companies to finance their own investments. They don’t need to borrow money from banks.

(2) leads to an inflow of reserves and deposits at banks. As a result, German banks lend to foreign entities.

This seems a sensible story.

However, I don’t agree with the conclusion:

First of all, I highly doubt any policymakers really want to help German banks. If that were the case, the monstrosity of publicly owned, unprofitable banks would have been cleaned up by now.

But even if German politicians cared, it’s not clear that stronger unions or higher wages would be more than a drop in a bucket.

A higher demand for credit would have an immediate positive impact on German banks. And there is a lot of room for growth.

Home ownership in Germany is low compared to non-German speaking countries, as you can see in this picture from Eurostat.

Stimulating home ownership would boost the demand for mortgages.

More investment by the government, as called for by industry and labor unions, would also increase the domestic supply of assets for banks if it’s funded by bonds instead of taxes.

If Angela Merkel wants some more advice, she can leave a comment 🙂

Central banks will always be political

What do crypto enthousiasts have in common with defenders of independent central banks?

Based on the “Buy Bitcoin”-replies to ECB/Fed tweets, it seems the answer is “not much”.

However, that’s incorrect. Both groups think that their projects are apolitical.

Many central bankers view themselves as technocrats, divorced from politics.

But that’s a fantasy.

You see, anything a central bank does – even within its mandate – has political consequences.

Should monetary policy take into account climate change?

Should the central bank change interest rates or do QE to reach its inflation goal? Whatever option is chosen, monetary policy has distributional effects. For example, the German government has saved hundreds of billions in interest costs.

European non-financial corporations have benefited from low interest rates. Source

These two dilemmas illustrate that central banking is inherently political.

Therefore, economists should calculate the consequences of different monetary policy options. These scenarios will make the politics of the central bank’s actions explicit. For example, I estimated the effect of deeply negative interest rates (a proposal of Miles Kimball) on banks, governments, the ECB and the private sector.

Especially in the euro area, the ECB should take differences in asset mixes between countries into account.

Increased transparency will enable central bankers to defend monetary policy against criticism.

Update 26 January 2020: my arguments are obviously not new, see for example:

Actually, lobbyists are good

Lobbyists are often mistrusted. Special interest groups use them to influence politicians.

However, what’s the alternative? Policy makers cannot know everything. They need input from industry and non-profit groups. Through personal contacts with officials and by publishing articles, lobbyists can get new ideas on the agenda.

Take the responsibility of central banks in the green transition to phase out carbon-based fuels.

European Central Bank (ECB) board member Benoit Cœuré recently declared that the ECB should actively support the transition to a low carbon economy. Continue reading “Actually, lobbyists are good”

“legally”

In a recent episode of the Macro Musings podcast, David Beckworth talked to professor and author Laurence M. Ball about his new book The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster.

Starting around minute 45 of the podcast, they discuss the role of Henry Paulson, the Secretary of the Treasury. Professor Ball notes that “It was Paulson1 who was making the decisions. That’s a little bit odd, because legally, under the Federal Reserve Act, it was the Federal Reserve’s job to decide whether or not they made loans. The Treasury Secretary legally didn’t have any more role than the Secretary of Agriculture or the Governor of Maryland. But Henry Paulson just arrived at the New York Fed and started saying what was gonna happen and people did what he said”.

This doesn’t surprise me one bit. In times of crisis, you cannot avoid politics.

In ‘The next crisis’, the final chapter of Bankers are people, too, I wrote

“It remains to be seen how long regulations will keep risks in check. When a major (shadow) bank fails in spite of all the monitoring and supervision, the value of the institutional framework will become clear. Because of the importance of banking to the economy, I am sure that the highest officials
in government will be involved if a too big to fail bank is about to collapse, whether or not that is against the law.”

So much for legal constraints during a major crisis.

How Europe’s financial regulation is made

CRD IV, EMIR, MiFID, Solvency II… Financial risk managers in Europe deal with these regulations every day. But where do they come from?

In his brief article It’s hard to love the European Union when you see it up close, Owen Sanderson describes the EU’s legislative process. It’s not a pretty sight.

Highly recommended if you’re into risk management and/or politics!

Michael Lewis on the US Department of Energy (highly recommended!)

Michael Lewis, the author of The Big Short, has written a great article for Vanity Fair.

Why the scariest nuclear threat may be coming from inside the White House is a fascinating portrait of the Department of Energy.

If you’re interested in politics, management, innovation, nuclear weapons or environmental pollution, you should read the article now. Continue reading “Michael Lewis on the US Department of Energy (highly recommended!)”

What I like about America, finance edition

Or to be more precise, debate about the financial institutional framework edition.

How should banks be regulated? Ten years ago, this question would have only interested a few specialists. Discussions about bank supervision and the role of the central bank were way too boring for the general public1. Besides, bankers surely knew what they were doing?

The global financial crisis and its aftermath changed this complacent attitude. The existing rules did not prevent the worse financial crisis since the 1930s. Governments had to bail out banks at a moment’s notice. Politicians took drastic decisions during the panic of September 2008. While those actions were taken with little democratic oversight, national leaders2 were the only agents willing and able to stop the collapse.

The crisis spurred a thorough update of bank regulation. Both in the United States and in Europe, legislation was passed to make banks safer. Avoiding a repetition of ad-hoc bailouts became a priority. The U.S. got its Dodd-Frank Act. The European Union (EU) set up the European Banking Authority (EBA) and worked towards a banking union3. America and Europe implemented capital and liquidity standards based on the Basel III recommendations. Continue reading “What I like about America, finance edition”

So little time (reading list)

I have wanted to write a series on power in democracies ever since my How to win votes post from June 2016. Being elected is not enough (or necessary) to have real power. Policy need to be implemented. There can be opposition from civil servants and judges appointed by previous regimes1. The press can selectively report on what politicians are (not) doing.

Unfortunately, I haven’t found the time yet to write down my general ideas on power, as I have been too busy with my book on banking. But right now, the Trump administration is exposing the hidden assumptions many commentators have about democracy. This makes the Trump regime a great case study for anyone interested in real world politics, rather than the fantasy version2 many people desperately want to believe in.

If you’re bored with the (very annoying and unoriginal) “Waaah, Trump is a meanie” fluff you can read everywhere, here are some interesting articles:

On leadership and politics:

This is why authoritarian leaders use the Big Lie (by Xavier Marquez)

Why do rulers follow the rule of law? Thoughts on Trump, Erdogan, and history (by Jared Rubin)

On institutions and the “deep state”:

Egypt’s failed revolution (by Peter Hessler)

Former Obama Officials, Loyalists Waged Secret Campaign to Oust Flynn (by Adam Kredo)

Hail to the Pencil Pusher (by Mike Konczal)

On life in non-democratic countries:

Everyday authoritarianism is boring and tolerable (by Tom Pepinsky)

On censorship and ideas:

Raining Frogs (by Isaac Simpson)3

On trade:

What exactly does Mexico export to the US? (by J. W. Mason)

On culture:

Origins of political correctness, Lugenpresse found in panics (by Brett Stevens)

On Political Correctness (by William Deresiewicz)

James Burnham’s Managerial Elite (by Julius Krein)4

What is global history now? (by Jeremy Adelman)

A Hard Future for a Soft Science (by Bradford Tuckfield)

Liturgy of liberalism (by Adrian Vermeule)

Biological Leninism (by spandrell)

Clarifying the First Law (by Lawrence Auster)

The Warlock Hunt (by Claire Berlinksi)

One of Many Reasons Why There Are So Few Conservatives in Academia (by “The Independent Whig”)

God Save Women From Other Women (by Christopher DeGroot)

On big data and statistics:

Do You Trust Big Data? Try Googling the Holocaust (by Cathy O’Neil)

On psychology/convictions:

Why Facts Don’t Change Our Minds (by Elizabeth Kolbert)

Dopamine Puppets (by Scott Adams)

On sociology:

A Miscellany of Foundations and First Principles for the Study of Sociology (by “Dissenting Sociologist”)

On ethnic conflict:

The Lost World of West Philadelphia (by Devin Helton)

On monetary policy and central bank independence:

Why conservatives should fear a Trump Federal Reserve (by Peter Conti-Brown)

I’ll expand the list if I come across other good articles. Hat tip to pseudoerasmus and HappyAcres, who always share quality stuff.

Last update: January 30, 2018

From Moses to Trump: elites against the establishment

Elites cannot act against their own interests, right?

Donald Trump has been running a populist campaign against the establishment. To many of his critics, this is absurd.

Why should a billionaire care for the working class? How can a man whose shirts and ties are made in China be against trade deals? Is Trump credible when he calls for a wall at the US-Mexican border, knowing he hired Mexican workers himself?

Trump is so much part of the elite that his Democratic rival Hillary Clinton even attended his wedding to Melania.

It appears that Trump belongs to the establishment which benefits from the status quo. Why would anybody who is a ‘winner’ in the system want to change it?

These critics, however, miss two important points.

First of all, the critics assume that members of the elite are only motivated by their personal financial interests. This, however, denies human nature. People have strong feelings on what is just and right. Elites have the means to become champions for others they sympathize with. Continue reading “From Moses to Trump: elites against the establishment”