I’m trying something new. I’ve started making videos about banking, monetary policy and sustainable finance.
I’m still trying to figure out the best format. But I already like the ability to use graphs and pictures. Compared to blogging, video is less nuanced. For example, you can’t link to all sources. But maybe that’s an advantage.
Here’s the first one, let me know what you think!
Background literature:
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?
Yes. Karamfil Todorov found that the ECB’s Corporate Sector Purchase Programme (CSPP) “increased prices and liquidity of bonds eligible to be purchased substantially”1.
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.”
How can the European Central Bank (ECB) support a sustainable recovery? In a report for Positive Money Europe and Sustainable Finance Lab, Jens van ‘t Klooster and Rens van Tilburg propose that the ECB starts a Green TLTRO program.
Green TLTRO is a refinancing program for commercial banks. Banks can fund their green loans with longer term (several years) deposits from the European Central Bank (ECB). Green loans are bank loans that comply with the EU’s Green Taxonomy.
The figure below shows the balance sheet of a commercial bank with conventional (left) and green (right) TLTRO. Under TLTRO-III, the ECB funds 50% of a bank’s eligible assets. Under green TLTRO, the ECB funding is only available for green bank loans.
The interest rate on the Green TLTRO is determined by the volume of green bank loans. More green loans result in a lower interest rate on the funding from the ECB. With negative interest rates, banks have to pay back less to the ECB than they borrowed. This provides a strong incentive to banks to increase their lending to green projects, and to pass on the low rates to borrowers.
Is Green TLTRO a pie in the sky proposal? Only if you’re not keeping up with the times.
TLTROs are a well-established monetary policy tool. The ECB is currently doing TLTRO-III.
In a recent speech, ECB Executive Board Member Isabel Schnabel pointed out that climate change is a market failure. She said that collective action, including by the ECB, should correct this market failure and accelerate the transition towards a carbon-neutral economy.
Asked about the Green TLTRO report by MEP Bas Eickhout, ECB President Lagarde said that “climate change has to be part and parcel of our strategy review. Not because it is a secondary objective, but because of its impact on price stability, because of its significant impact on risk assessment and risk management. And the Green TLTRO, as you called it, is a matter that is of interest and that we will look at.”
What volume of green loans should the ECB target during the first 3 years? How low should the interest rate on Green TLTRO be? Should the eligible bank assets include loans to households for house purchases, a category that is currently exluded from TLTRO?
In a webinar on 12 October 2020, Jens van ‘t Klooster discusses the Green TLTRO proposal with Isabel Vansteenkiste (ECB) and Frederik Ducrozet (Pictet).
Update 2020/10/18: this is the video
Full disclosure: I have done consulting work for this report.
Some interesting articles I came across recently:
Yemen has two governments (civil war), one currency, and two monetary systems.
IT project management horror story at German Apobank (in German).
Overview of the Eurosystem response to the pandemic.
What central banks have done to help the economy survive Covid-19
Historical lessons from large increases in government debt
Euro area economic expansions are like Tolkien’s Elves: they don’t die of old age. The most recent one was murdered by corona.
(On a sidenote: I’ve been critical about the lack of blogging at the ECB. But it turns out that the Banque de France’s Eco Notepad is an excellent blog, as the four articles above show!)
All of the World’s Money and Markets in One Visualization
How may clicks to open a bank account? (Built for Mars on the user experience of retail banking)
The Economic Foundations of Industrial Policy: an amazing longread (very long!) on productivity, explaining why rich nations are rich
Ancient history: “In 2003, refinancing via LTROs amounts to 45 bln Euro which is about 20% of overall liquidity provided by the ECB.” (On June 18, 2020, banks borrowed 1.31 trillion euro from the ECB via TLTRO!)
The German Federal Constitutional Court (Bundesverfassungsgericht) made a decision concerning the ECB’s QE program2.
This article explains how the ECB can defend itself.
But I want to play devil’s advocate, and defend the German judges.
Despite buying thousands of billions of euros worth of bonds, the ECB has undershot its inflation target for years. The Court has a point that buying vast amounts of sovereign debt doesn’t seem proportional to this disappointing outcome.
In fact, the ECB could achieve its primary objective of price stability with a much smaller balance sheet. For example by dual interest rates. Or by helicopter money.
Second, the Court could prohibit the Bundesbank from participating in QE. But buying German bonds was not needed for monetary policy anyway! It was a political decision to buy bonds proportional to the national capital key in the ECB.
Finally, the decision of the Court should force European politicians to fix this mess. Maybe the ECB should have a dual mandate like the Fed has, so inflation and employment carry the same weight in monetary policy decisions. Or they could change the structure of the Eurosystem. Do we still need 19 national central banks when we have the ECB? Sounds like a make-work scheme to me…
No speeches. No press conferences. This is how central banks should communicate:
Who should pay for the corona crisis in the EU?
Philipp Heimberger discusses the possibility of a European recovery fund, funded by a common debt instrument.
On the Macro Musings podcast, Ashoka Mody says3 countries like Italy need fiscal transfers from other member states.
But fiscal burden sharing is a toxic idea, as Dutch finance minister Wopke Hoekstra demonstrated.
Italy is 135% of GDP. Spain and France are 100% of GDP, so three of the big Eurozone countries are not going to be able to do fiscal stimulus of 5, 7, 10% of GDP, which is basically what is going to be needed for this crisis. We’re going to need enormous amount of fiscal stimulus. Maybe Germany will do that. In the US, with this two trillion, they’re already at about 9% of GDP, and I expect that it will go up even more, for a number of reasons, but Italy cannot do anything close to that, or Spain cannot do anything close to that.
Ashoka Mody
Clearly, the problem is not the level of debt. The U.S. has a higher debt to GDP ratio than France and Spain.
The problem is the refusal of the ECB to close the sovereign spreads. As I write this, the German 10 year bond yield is -0.461. The Italian 10 year bond yield is 2.182.
Every country should do whatever it takes to save its economy. Bail out businesses, pay unemployment benefits.
The expenditures can be funded by bonds. The ECB should keep the spreads low. That means buying whatever it takes.
Secondly, the ECB is once again neglecting its primary objective. Oil prices and unemployment point to low nominal aggregate demand. Without income support to households, it’s unclear how the ECB can achieve its inflation target.
So the ECB needs to do helicopter money drops, as suggested by Eric Lonergan, Frances Coppola, Positive Money Europe, and me.
But what does the ECB do? The Governing Council has never even discussed helicopter money, let alone planned to implement it!
This is not just incompetence, this is financial terrorism.