A first assessment by the Banque de France.
I started this blog in 2016. I wanted to publish short pieces while I was writing Bankers are people, too and build an audience for the book.
A lot has changed since then.
In the first years, I tried to post at least once a week about topics ranging from economic history to personal finance. Currently, I write almost exclusively about banks and monetary policy. I have lost interest in faits divers such as Gamestop, lumber, dogecoin… My style has also changed. I now mainly use this blog as my personal wikipedia. Well-polished articles don’t offer enough reward for the work it takes to write them.
Looking back, what should I have done differently?
- Use video instead of text
- Don’t waste time on ideologues
- More coverage of innovative1 topics such as blockchain and ESG
That said, I’m glad that I met new friends and found jobs thanks to this blog.
In their paper Against amnesia: re-imagining central banking, Benjamin Braun and Leah Downey describe the elite consensus on central banking as a ‘holy trinity’. This holy trinity consists of (1) an independent central bank that (2) sets the short term interest rate to (3) achieve stable prices1.
The fact that quantitative easing (QE) is still often called unconventional monetary policy speaks volumes for how deeply the holy trinity is ingrained in the minds of the community. However, more and more people are questioning this model of central banking2.
While almost nobody wants to ditch price stability, central bankers are taking on extra responsabilities based on local sensitivities. European central bankers (both at the ECB and the Bank of England) are making their institutions climate friendly. The Federal Reserve has had a dual mandate of price stability and full employment for a long time. The Reserve Bank of New Zealand will take house prices into account.
Although central banking post-holy trinity will have its own challenges, I, for one, welcome our central bank overlords.
The financial world isn’t flat. International firms tend to cluster in places where they are welcomed and where they find expertise. Here are some illustrations from my own financial transactions:
- I bought Etherium in order to buy a tweet. My euros went to the bank account of Light Technology Ltd in Switzerland
- I hired a designer on Fiverr (I’ll tell you why in the coming weeks). My payment went to Cyprus
- I receive the royalties from the European sales of Bankers are people, too from an Amazon account in Luxembourg
- Money laundering in the Democratic Republic of the Congo
- The era of central bank convergence is over
- How can the ECB unleash building renovations
- Policy comes first, economic theory follows (JW Mason on Biden’s American Rescue Plan)
- The Jersey Way
- CLOs in Dublin
- Primer on money-laundering (Bribe, Swindle or Steal podcast)
- Corruption in the U.S. 7th fleet (Bribe, Swindle or Steal podcast)
- Tommaso Valletti on how the EU anti-monopoly system works in practice (On the role of economic consultants arguing in favor of M&A: “They produce a glossy pamphlet with three nice pages: exactly what the judge needs, he can say ‘ah, here is a counter-argument, here is an anecdote to rebut this. So, nobody knows’.”; On the capabilities of the EU: “DG Comp has less than 1000 people for half a billion citizens.”)
- Marbella, united nations of drug traffickers
- Alessia del Vasto and Rachel Oliver on their campaigns to change central banking:
OCCRP published a series of articles on “OpenLux“. French newspaper Le Monde scraped a database with the ultimate beneficial owners (UBOs) of companies registered in Luxembourg.
To check the register yourself, go to the Luxembourg Business Registers website, click Portail LBR, click RBE, click Rechercher un dossier RBE. (I cannot provide a direct link, as the URL is time-sensitive and would show up as broken.)
The investigation did not find anything that shocks me. There is quite some research that shows Luxembourg is a popular location for holding companies (in addition to it being an investment fund center and a banking hub).
Something to keep in mind when reading such stories is that Luxembourg is quite transparent relative to its peers:
“According to EU regulations, member states were supposed to adopt publicly available beneficial ownership registers by January 10, 2020, but most have not done so. Luxembourg is one of only five member states to have implemented a register that is free and publicly accessible. The others are Bulgaria, Denmark, Latvia, and Slovenia.
Though other EU member states also have registers, seven have put up paywalls and 17 have not made theirs available to the public. The U.S. Corporate Transparency Act, which passed last month, calls for the United States to set up a UBO register as well, but it will be made available only to law enforcement.” (source)
During the past decade, American stocks have far outperformed shares in the rest of the world.
Much of this gap is due to Big Tech (Apple, Amazon, Microsoft, Google, Facebook). Without these five stocks, the chart of the S&P 500 looks more like the world index.
But even if we exclude Big Tech, America still outperforms Europe. It’s easy to see why. Take a look at the Euro Stoxx 50. That Eurozone index is dominated by financial and industrial companies and utilities. They have few opportunities for growth, low profit margins, and they face structural changes (negative interest rates, electric vehicles, renewable energy).
The U.S. on the other hand has plenty of innovative companies with huge total addressable markets (TAMs). They are often software-as-a-service (SaaS) firms, e.g. Adobe, Netflix, Salesforce, Square or Zoom. Others reinvent existing services, e.g. Carvana, Peloton, Teladoc, Uber, Wayfair or Zillow. Or they have world class products with a strong brand name, e.g. Nvidia or Tesla.
You can find such companies in other parts of the world, but they are rare. Examples include Adyen and ASML (Netherlands), Delivery Hero (Germany), LVMH (France), Shopify (Canada) and TSMC (Taiwan).
Who sold their bonds to the ECB?
Mainly non-resident investors, although there are national differences, as this graph by Marcello Minenna shows:
What did companies do with the money from the ECB?
Corporates used the attracted funds mostly to increase dividends, according to research by Karamfil Todorov.
Did QE ease financial conditions?
Can we trust central bank research on the effect of QE?
Central bank researchers face strong incentives to be positive on QE. Brian Fabo, Martina Jančoková, Elisabeth Kempf and Ľuboš Pástor found that “central bank papers report larger effects of QE on output and inﬂation. Central bankers are also more likely to report signiﬁcant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes.”
But what do green investments mean in practice?
A report by Common Wealth found that some climate-themed funds invest in oil & gas companies such as ExxonMobil. More broadly, the largest holdings of climate funds were Big Tech and finance. Adrienne Buller, the author of the study, writes “what do these ostensibly climate-focused funds really contribute to combatting the climate crisis, reducing emissions or driving a rapid transition to low carbon economic activities? There is nothing in the specific labelling or remit of these funds that would require them to invest in the green economy, in financial instruments design to drive the transition of business models to lower carbon activities, or other similar investments.” (emphasis mine)
There are plenty of metrics by which providers assess climate risk. Given different methodologies and the complexity of estimating climate risk, there is some divergence in the metrics. However, Chiara Colesanti Senni and Julia Anna Bingler do find that “metrics tend to converge for companies that are most and least exposed to climate risk”.
Data and tools for monitoring climate change and financial assets:
Organizations promoting green finance:
- 2 Degrees Investing Initiative (2DII)
- Climate Bonds Initiative
- KR Foundation
- Network for Greening the Financial System (NGFS)
- Pacte Finance-Climat
- Reclaim Finance
- UN Environment Programme Finance Initiative (UNEPFI)
- Net-Zero Banking Alliance (related to UNEPFI)
Organizations advocating broader economic change, including green finance: