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19-03-2013, 12:54 PM
Economic problems are always interesting since textbook theory never solve problems that arises in the real world. As we are, IMO, the mid term of a 10 year cycle that started at the peak of GFC in 2008, it is interesting to note what has been done so far. Without the super heroes of the world, many buddies here will continue to be left wondering where they could be brandishing their skills.
http://www.theaustralian.com.au/business...6598546747
Over buns in Basel, bankers save world
BY
AVID UREN, EconOMICS EDITOR From: The Australian March 16, 2013 12:00AM
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Reserve Bank governor Glenn Stevens says global markets face disruption when the US Federal Reserve starts to tighten policy. Picture: Kym Smith Source: The Australian
RESERVE Bank governor Glenn Stevens has been in the picturesque Swiss town of Basel this week, as have three of his four key deputies, all attending separate committee meetings at the Bank for International Settlements.
Senior managers of the Reserve Bank are regulars at the BIS, each travelling there on average once every two months to exchange views about the world economy, financial markets and regulation with their peers.
The heads of all the major world central banks attend in what is an extraordinarily intense exchange of views. Unlike the sterile meetings at the G20 where everyone reads from a prepared statement, the BIS debates are free flowing, with challenging input from the BIS executive. Nothing gets reported.
Although the BIS provides banking services including short-term credit for the world's central banks, its most important role is as a clearing house for central banking policy.
And, right now, the central banks are looking like the heroes of the incipient global economic recovery. It is thanks to the European Central Bank's Mario Draghi that the world was not confronted with a repeat of the Lehmans crisis early last year. Europe's banks were facing an acute credit squeeze as investors lost confidence in their solvency. Draghi came to their rescue, offering European banks as much three-year funding as they wanted.
His offer later in the year to "do what it takes" to ensure financial markets did not drive the most troubled European economies into default was successful in bringing down government bond yields for countries like Italy and Spain.
The forthright approach of Draghi has contrasted with the faltering progress of negotiations by Europe's political leaders.
In the US, Ben Bernanke's strategy of buying government bonds and mortgage-backed securities has lowered mortgage rates and contributed to a revival in the housing market.
It is a strategy that has also fuelled a recovery in risk markets, taking the Dow Jones Index to record highs and fuelling growth in sharemarkets worldwide. The hope is that, with shares surging, companies will be emboldened to invest.
The government of Barack Obama may be frozen in legislative gridlock, unable to get policies through a hostile congress, but Bernanke is getting things done.
Across the world, it has been the central banks that have been able to inject economic stimulus at a time when finance ministers have been torn by the conflicting demands of reining in budget deficits while supporting growth.
In Australia, while Wayne Swan has struggled with his promise to return the budget to surplus, the rate cuts delivered by Stevens have got house prices rising and retail sales starting to move again.
But, for all the dialogue between them and their apparent success, the world's central banks are heading off in startlingly different directions.
The consensus around inflation targeting, which dominated central banking in the lead-up to the financial crisis, is weakening. Australia's Reserve Bank is one of the remaining stalwarts.
The British government, which conducted an extraordinary raid to nab the governor of Canada's central bank, Mark Carney, to take over the Bank of England, is moving to target a combination of inflation and economic growth. This would enable the bank to cut rates when growth slumps even if inflation is high.
In practice, the Bank of England, which used to expound a rigid inflation target that would force rates higher the moment inflation exceeded 2 per cent, has been happy to leave rates at rock bottom levels while inflation climbs to 5 per cent. ages have only been rising at 1.5 per cent. Some economists fret that once unions start seeking catch-up rises, inflation will become entrenched.
The new government of Shinzo Abe in Japan has installed fresh management at the Bank of Japan, with explicit orders to get inflation up.
As well as encouraging people to spend rather than save, higher inflation reduces the real value of government's debts, which has led to speculation that the central banks would come under increasing political pressure to loosen their monetary control.
The new strategy in Japan has been successful in lowering the value of the yen, although this may be in anticipation that the BoJ will succeed in generating higher inflation. Should it fail, the yen may rise back to where it was.
The Bank of Switzerland is explicitly targeting its exchange rate, buying as much foreign exchange, including Australian dollars, as is needed to keep the Swiss franc's value to no more than €1.20.
The central bank cannot raise interest rates while the exchange rate is at that cap. With house prices soaring, it has asked the government to require banks to hold more capital to force them to slow their lending.
Across Asia, central banks are also making use of what are called "macro-prudential" measures - or direct regulatory intervention in the finance sector, to control credit flows while rates are low. The central bank in Hong Kong says it now has seven "macro-prudential" tools, or regulatory measures, to control its economy.
The Reserve Bank has resisted direct regulatory measures to control credit flows, although they have been advocated by the Bank of International Settlements.
The Reserve Bank believes it would introduce distortions in Australia's competitive financial market.
The biggest gamble remains that of Ben Bernanke, who has said the US Federal Reserve will continue buying $US85bn in government and mortgage backed bonds every month until the jobless rate falls to 6.5 per cent.
These injections of cash have left the US financial system awash with money. In the absence of demand from either corporate or home lending, banks are being forced to keep massive reserves on deposit with the central bank, where they earn no interest.
With shareholders unhappy, banks are lending to share investors. However, some central bankers worry that this is circular. The people who are selling shares put their money back into their bank, where it goes back to the Federal Reserve earning no interest. Economists refer to this as the "hot potato" effect - everyone wants to get rid of the zero-interest earning deposit. The implication is that the sharemarket could be pumped up like a bubble, with little reference to underlying company profitability.
A prominent US economist, David Rosenberg has calculated that there is an 87 per cent correlation between movements in the Dow Jones Index and the size of the US Federal Reserve's balance sheet.
There is the additional concern about how the US Federal Reserve will manage a recovery when it comes to selling its bonds and raising interest rates.
It may come under political pressure to go slow, which would raise the risk of inflation, or it may move too fast, leading markets to overreact and push market interest rates up rapidly.
Stevens told the recent parliamentary economics committee hearing that there was plenty of historical precedent for disruption to global markets when the US Fed starts to tighten policy.
The Fed has never had interest rates so low for so long, or had so much invested in bonds, which raises the risks.
"There are some people who feel that when this day comes it will be very, very disruptive, and we cannot be sure that it will not be, I would say. But the world is where it is, and that will have to be managed as best as it can be when the time comes," he said.
The world's central bankers will work out what to do over their coffee and pastries at Basel.
http://www.theaustralian.com.au/business...6598546747
Over buns in Basel, bankers save world
BY
AVID UREN, EconOMICS EDITOR From: The Australian March 16, 2013 12:00AMIncrease Text Size
Decrease Text Size
Reserve Bank governor Glenn Stevens says global markets face disruption when the US Federal Reserve starts to tighten policy. Picture: Kym Smith Source: The Australian
RESERVE Bank governor Glenn Stevens has been in the picturesque Swiss town of Basel this week, as have three of his four key deputies, all attending separate committee meetings at the Bank for International Settlements.
Senior managers of the Reserve Bank are regulars at the BIS, each travelling there on average once every two months to exchange views about the world economy, financial markets and regulation with their peers.
The heads of all the major world central banks attend in what is an extraordinarily intense exchange of views. Unlike the sterile meetings at the G20 where everyone reads from a prepared statement, the BIS debates are free flowing, with challenging input from the BIS executive. Nothing gets reported.
Although the BIS provides banking services including short-term credit for the world's central banks, its most important role is as a clearing house for central banking policy.
And, right now, the central banks are looking like the heroes of the incipient global economic recovery. It is thanks to the European Central Bank's Mario Draghi that the world was not confronted with a repeat of the Lehmans crisis early last year. Europe's banks were facing an acute credit squeeze as investors lost confidence in their solvency. Draghi came to their rescue, offering European banks as much three-year funding as they wanted.
His offer later in the year to "do what it takes" to ensure financial markets did not drive the most troubled European economies into default was successful in bringing down government bond yields for countries like Italy and Spain.
The forthright approach of Draghi has contrasted with the faltering progress of negotiations by Europe's political leaders.
In the US, Ben Bernanke's strategy of buying government bonds and mortgage-backed securities has lowered mortgage rates and contributed to a revival in the housing market.
It is a strategy that has also fuelled a recovery in risk markets, taking the Dow Jones Index to record highs and fuelling growth in sharemarkets worldwide. The hope is that, with shares surging, companies will be emboldened to invest.
The government of Barack Obama may be frozen in legislative gridlock, unable to get policies through a hostile congress, but Bernanke is getting things done.
Across the world, it has been the central banks that have been able to inject economic stimulus at a time when finance ministers have been torn by the conflicting demands of reining in budget deficits while supporting growth.
In Australia, while Wayne Swan has struggled with his promise to return the budget to surplus, the rate cuts delivered by Stevens have got house prices rising and retail sales starting to move again.
But, for all the dialogue between them and their apparent success, the world's central banks are heading off in startlingly different directions.
The consensus around inflation targeting, which dominated central banking in the lead-up to the financial crisis, is weakening. Australia's Reserve Bank is one of the remaining stalwarts.
The British government, which conducted an extraordinary raid to nab the governor of Canada's central bank, Mark Carney, to take over the Bank of England, is moving to target a combination of inflation and economic growth. This would enable the bank to cut rates when growth slumps even if inflation is high.
In practice, the Bank of England, which used to expound a rigid inflation target that would force rates higher the moment inflation exceeded 2 per cent, has been happy to leave rates at rock bottom levels while inflation climbs to 5 per cent. ages have only been rising at 1.5 per cent. Some economists fret that once unions start seeking catch-up rises, inflation will become entrenched.
The new government of Shinzo Abe in Japan has installed fresh management at the Bank of Japan, with explicit orders to get inflation up.
As well as encouraging people to spend rather than save, higher inflation reduces the real value of government's debts, which has led to speculation that the central banks would come under increasing political pressure to loosen their monetary control.
The new strategy in Japan has been successful in lowering the value of the yen, although this may be in anticipation that the BoJ will succeed in generating higher inflation. Should it fail, the yen may rise back to where it was.
The Bank of Switzerland is explicitly targeting its exchange rate, buying as much foreign exchange, including Australian dollars, as is needed to keep the Swiss franc's value to no more than €1.20.
The central bank cannot raise interest rates while the exchange rate is at that cap. With house prices soaring, it has asked the government to require banks to hold more capital to force them to slow their lending.
Across Asia, central banks are also making use of what are called "macro-prudential" measures - or direct regulatory intervention in the finance sector, to control credit flows while rates are low. The central bank in Hong Kong says it now has seven "macro-prudential" tools, or regulatory measures, to control its economy.
The Reserve Bank has resisted direct regulatory measures to control credit flows, although they have been advocated by the Bank of International Settlements.
The Reserve Bank believes it would introduce distortions in Australia's competitive financial market.
The biggest gamble remains that of Ben Bernanke, who has said the US Federal Reserve will continue buying $US85bn in government and mortgage backed bonds every month until the jobless rate falls to 6.5 per cent.
These injections of cash have left the US financial system awash with money. In the absence of demand from either corporate or home lending, banks are being forced to keep massive reserves on deposit with the central bank, where they earn no interest.
With shareholders unhappy, banks are lending to share investors. However, some central bankers worry that this is circular. The people who are selling shares put their money back into their bank, where it goes back to the Federal Reserve earning no interest. Economists refer to this as the "hot potato" effect - everyone wants to get rid of the zero-interest earning deposit. The implication is that the sharemarket could be pumped up like a bubble, with little reference to underlying company profitability.
A prominent US economist, David Rosenberg has calculated that there is an 87 per cent correlation between movements in the Dow Jones Index and the size of the US Federal Reserve's balance sheet.
There is the additional concern about how the US Federal Reserve will manage a recovery when it comes to selling its bonds and raising interest rates.
It may come under political pressure to go slow, which would raise the risk of inflation, or it may move too fast, leading markets to overreact and push market interest rates up rapidly.
Stevens told the recent parliamentary economics committee hearing that there was plenty of historical precedent for disruption to global markets when the US Fed starts to tighten policy.
The Fed has never had interest rates so low for so long, or had so much invested in bonds, which raises the risks.
"There are some people who feel that when this day comes it will be very, very disruptive, and we cannot be sure that it will not be, I would say. But the world is where it is, and that will have to be managed as best as it can be when the time comes," he said.
The world's central bankers will work out what to do over their coffee and pastries at Basel.