Central banking has never looked more daunting
The line between fiscal and monetary policy is increasingly blurred
Charles Bean
The Bank of England's Mark Carney, the ECB's Mario Draghi and the Fed's Janet Yellen. Central banks will need to continue to set policy against the background of a low natural rate for some while yet © AFP
The Bank of England’s Monetary Policy Committee has just celebrated its 20th birthday. In its first decade, growth was steady and inflation close to target. We — along with our peers — thought we had this central banking business cracked. Nemesis arrived in the shape of the global financial crisis. Rates have been rock bottom ever since and central banks’ balance sheets have ballooned. Banking regulations are being tightened. And macro-prudential policy is still a work in progress. Central banking has never looked more daunting.
The past couple of decades have witnessed a remorseless fall in the real rate of interest consistent with macroeconomic equilibrium — the “natural” rate. The causes are still a matter of debate. Some point to higher savings, others to the impact of slow productivity growth on investment. Balance-sheet repair has surely been important, too.
While central banks can set any policy rate they want in the short run, if they are to achieve their objectives over the long term it must converge to the sum of the natural rate and their target inflation rate. Criticism from politicians that central banks’ policies are penalising savers and driving up asset prices misses the point: the decline in interest rates ultimately reflects forces that central bankers are powerless to change.
Does the current state of affairs represent a new normal? Some rebound in the natural rate may be in the offing. The global demographics are at a turning point, with a substantial fall in the share of the middle aged relative to the elderly in prospect. And the former are the big savers, while the latter typically run their savings down. Moreover, a pick-up in the demand for funds to invest may materialise as new technologies such as artificial intelligence and nanotechnology come to fruition.
But any resulting rise in the natural rate seems likely to happen gradually. Central banks will need to set policy against the background of a low natural rate for some while yet. That means more episodes when policy rates are near their lower bound. Further large-scale asset purchases may be needed.
Broadly speaking, the monetary arrangements introduced in 1997 have served us well. But two aspects are worthy of note. The distinction between monetary and fiscal policy has become increasingly blurred. And the distributional consequences of monetary policy have become increasingly contentious.
Monetary policy has fiscal consequences even in normal times, but issues are starker when large quantities of government bonds or private sector assets sit on the central bank’s balance sheet. Even small changes in the yield curve have significant consequences for the public finances. Fiscal considerations become more prominent if the central bank buys risky private credits. And purchasing equities is potentially even more contentious since it involves the acquisition of control rights.
For these reasons, the fiscal authorities need to own the fiscal consequences of the central bank’s asset purchase decisions. Happily, the BoE’s Asset Purchase Facility meets that requirement, with the Treasury holding the economic interest, even though the MPC decides the amount of assets to buy. Moreover, whenever the MPC wants to increase the stock of assets there is an exchange of letters with the chancellor.
Adding distributional concerns to the MPC’s objectives would be worrying. It is one thing for the MPC to use its “constrained discretion” to limit output volatility. It is quite another to refrain from cutting interest rates or undertaking asset purchases to protect one segment of society at the expense of another. That goes to the heart of politics; such decisions should not be delegated to technocrats.
If the government of the day is unhappy about the side effects of the monetary policies necessary to maintain macroeconomic stability, then it is better for them to take mitigating fiscal action. And, if a government is really set upon the need for a different monetary policy, it should do so directly and openly by invoking the monetary policy override clause.
The writer was deputy governor of the Bank of England, 2008-14. This article is based on this year’s Wincott Memorial Lecture
CENTRAL BANKING HAS NEVER LOOKED MORE DAUNTING / THE FINANCIAL TIMES COMMENT & ANALYSIS
You're Just Not Prepared For What's Coming
by: Chris Martenson
Any time they want. And hand it out for free in unlimited quantities to the banks. Who have their own mechanism (i.e., fractional reserve banking) for creating even more money out of thin air. Pretty slick, right?

THINK OF A NUMBER: EUROPE´S BANKS FACE A GLUT OF NEW RULES / THE ECONOMIST
Think of a number
Europe’s banks face a glut of new rules
Ten years after the financial crisis, the regulatory revolution continues
FOR those oddballs whose hearts sing at the thought of bank regulation, Europe is a pretty good place to be. No fewer than five lots of rules are about to come into force, are near completion or are due for overhaul. They will open up European banking to more competition, tighten rules on trading, dent reported profits and boost capital requirements. Although they should also make Europe’s financial system healthier, bankers—after a decade of ever-tightening regulation since the crisis of 2007-08—may be less enthused.
Start with the extra competition. On January 13th the European Union’s updated Payment Services Directive, PSD2, takes effect. It sets terms of engagement between banks, which have had a monopoly on customers’ account data and a tight grip on payments, and others—financial-technology companies and rival banks—that are already muscling in.
Payment providers allow people to pay merchants by direct transfer from their bank accounts.
Account aggregators pull together data from accounts at several banks, so that Europeans can see a broad view of their finances in one place—and maybe find better deals for insurance, mortgages and so forth.
The new entrants need not only their customers’ permission to take money and data from their accounts but also co-operation from their banks. They worry that banks won’t play fair. Banks, for their part, have fretted that opening up their systems may expose customers to fraud and themselves to lawsuits. On November 27th the European Commission adopted technical standards intended to balance competition and security. Although the directive applies from next month, the standards may not take effect until September 2019. Banks and their rivals will meanwhile have to rub along.
The standards demand that customers supply two out of three types of proof of identity before transactions are approved: something they know (a password or code); something they own (a card or a phone); and something they are (eg, a fingerprint). This approach is already common, though not universal, online.
To communicate with payment-services providers and account aggregators, banks have two options. They may allow them access through their online customer interfaces. Or they can build dedicated interfaces into which the newcomers can plug their applications. Almost all banks are expected to choose the latter. To guarantee fair play, they must have a fallback, in case the dedicated interface fails.
While retail banks grapple with PSD2, investment banks and asset managers have been bracing themselves for MiFID2, the refreshed Markets in Financial Instruments Directive, which takes effect on January 3rd. Intended to make financial markets more transparent—and thus, in theory, safer and more competitive—MiFID2 will restrict trading in securities on banks’ internal venues and force more derivatives hitherto traded “over the counter” onto centralised exchanges. It also obliges banks to charge clients separately for research, rather than bundle it in with other services. Some are swallowing the cost; some are cutting analysts.
One way or another, the other three changes are all about safety. From January banks in Europe (and many other places, but not America) must apply a new accounting standard, IFRS 9, obliging them to make provisions for expected loan losses, rather than wait until losses are incurred. That is likely to knock earnings next year. Most banks surveyed by the European Banking Authority, a supervisor, said they expected profits to become more volatile. The same could happen to lending.
Floor polished?
Next, it seems that the last big bit of Basel 3, a set of global capital standards revised after the financial crisis, may finally be complete. Officials had hoped for agreement a year ago, but haggling continued. The central-bank governors and supervisors who approve the standards are due to hold a press conference in Frankfurt on December 7th. Surely, they would not bother if they had nothing to say?
At issue have been the internal models big banks use to calculate risk-weighted assets (RWAs).
The lower the answer, the higher the ratio of equity to RWAs, a key gauge of capital strength, and the less equity banks need. To limit the discount from these models, Basel standard-setters proposed a floor for the ratio of banks’ RWA estimates to those yielded by a standard approach, at first between 60% and 90%. American negotiators, though their banks are little affected, favoured a high floor and Europeans a low one or none; the French were the most vocal. In October Bloomberg reported that negotiators were settling on a ratio of 72.5%.
Assuming the floor is agreed on, it will, like other Basel rules, be phased in over several years. The fifth and last change to Europe’s regulatory framework could take every bit as long. On December 6th the European Commission is due to propose a fortification of economic and monetary union. As part of that effort, in October it exhorted governments to complete the EU’s half-finished banking union.
Although the euro area now has—belatedly—a single supervisor, housed in the European Central Bank (ECB), and a single body to deal with insolvent banks, it still lacks a single deposit-insurance scheme, chiefly because German taxpayers do not want to be on the hook for the failings of lenders farther south. The commission hopes that the Germans can be won over, by introducing the scheme gradually and by tackling the bad loans that still burden banks in Italy and elsewhere. Both it and the ECB also want to be firmer on bad loans in future: the ECB has suggested that banks make full provision for unsecured duds after two years and secured ones after seven. The commission is also exploring the creation of new securities, backed by pools of sovereign debt from all euro-area countries, to weaken the link between European banks and national governments.
With all this to worry about—oh, and Brexit—Europe’s bankers may look enviously westward.
American banks and supervisors were faster to get their houses in order after the crisis, and under President Donald Trump the regulatory tide is turning. This week Jerome Powell, Mr Trump’s choice to lead the Federal Reserve, told senators that regulation was “tough enough”.
By now, Europe’s bankers know better than to expect much sympathy.
ECONOMY HAS ROOM TO GROW, HERE´S WHY / THE WALL STREET JOURNAL
Economy Has Room To Grow, Here’s Why
Recent reports overstate how fast the U.S. economy is growing, but strength overseas and the tax plan should give it a boost
By Justin Lahart
The evidence that the U.S. economy has been accelerating is thinner than the headlines shout.
But with the rest of the world economy improving and a possible tax-cut jolt coming soon, the good news is there is room for a pickup in growth.
In the years since the financial crisis, the U.S. economy has been in a deep rut: Growth averaged just 2.1% a year from the end of the recession to the first quarter of this year, making it the most tepid expansion on record. But lately GDP has perked up, growing at a 3.1% rate in the second quarter and 3.3% in the third. Put that together with steady hiring and an ebullient stock market, the economy looks very strong.
But much of the strength in GDP over the past two quarters wasn’t actually the result of stronger domestic demand. Instead, the growth was driven by a narrowing of the trade deficit and an increase in inventories, both of which will likely prove temporary. Absent trade and inventory swings, demand grew at an average rate of 2.4% over the past two quarters, matching the average pace over the previous four quarters.
DEMAND PICTURE
Change in gross domestic product at anual rate
Meanwhile, hiring, though strong, has been slowing since 2015. And the stock market’s rise has been driven not so much by U.S. economic growth as an increase in valuations and a pickup in profits from overseas. The S&P 500 trades at 18.4 expected earnings, compared with 16.8 times at the start of the year. And in the third quarter, earnings at companies in the S&P 500 with greater than half their sales abroad were up 13.4% from a year earlier, according to FactSet, compared with 2.3% for companies with less than half their sales abroad.
Overseas economies have been looking better all year. The surprise is that hardly any countries are struggling. Deutsche Bank economist Torsten Slok points out that the International Monetary Fund forecasts only six of 192 countries will register an economic contraction next year. That would be the fewest on record.
A WORLD OF CALM
Number of global economies contracting
The global economic environment counts as good news for the U.S. It should continue to bolster companies’ overseas profits, and it could push up U.S. growth. Similarly, the tax cut, if it passes, would increase companies’ profits and would provide a boost of around 0.3 percentage points to GDP growth next year, according to a preliminary analysis by Bank of America Merrill Lynch.
These effects mean U.S. growth should stay healthy but not accelerate too much from here.
With all of the optimism, it is worth watching just where the growth comes from.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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