Mon, 25 Aug 2008

Buiter on the central banks

Willem Buiter’s paper at the Jackson Hole Symposium castigating the major central banks of the world (and the Federal Reserve in particular) is worth reading in full (144 pages) even if one disagrees with what he has to say. I am surprised that as of today, I still cannot find the symposium papers at the web site of the Kansas Fed which organized the symposium, but the paper is available in the public section of the website of the Wall Street Journal.

Some people have been mis-characterizing the paper as dogmatically opposing central bank interventions on moral hazard grounds. That is not the impression that I got by reading the paper. The paper does accept that the central bank has to intervene in times of crises, but Buiter does oppose the particular forms that this intervention has taken.

Below are some interesting quotes from the paper:

• A case can even be made for taking the setting of the official policy rate out of the central bank completely ... the central bank is the only agency that can manage liquidity. It will also have to implement the official policy rate decision ... But it does not have to make the official policy rate decision. The knowledge, skills and personal qualities for setting the official policy rate would seem to be sufficiently different from those required for effective liquidity management, that assigning both tasks to the same body or housing them in the same institution is not at all self-evident. ... In the UK, the Governor of the Bank of England could be a member, or even the chair of the MPC, but need not be either. (p 36)
• The deviations between the official policy rate and the overnight interbank rate that we observe for the Fed, the ECB and the Bank of England are the result of bizarre operating procedures – the vain pursuit by the central bank of the pipe dream of setting the price (the official policy rate) while imposing certain restrictions on the quantity (the reserves of the banking system and/or the amount of overnight liquidity provided) ... Ideally, there would be a 24/7 fixed rate tender at the official policy rate during a maintenance period, and a 24/7 unlimited deposit facility at the official policy rate. (p 37-8)
• Libor now is the rate at which banks won’t engage in unsecured lending to each other. (p 25)
• ... those engaged in applied statistics should not leave their ears and eyes at home. Specifically, it pays to get up from the keyboard and monitor occasionally to open the window and look out to see whether a structural break might be in the works that is not foreshadowed in any of the sample data at the statistician’s disposal. (p 64-5)
• The UK ... a Net International Investment Position of around minus 27 percent of GDP in 2007 ... a primary deficit of almost five percent of GDP. ... both external assets and external liabilities are close to 500 percent of GDP. The characterisation of the UK as a hedge fund is only a mild exaggeration. (p 68)
• The decision to discontinue publication of the M3 series also smacks of intellectual hubris; effectively, the Fed is saying: we don’t find these data useful. Therefore you shall not have them free of charge any longer. (p 80)
• If we add together the statements by the world’s central bank heads (from the industrial countries, from the commodity-importing emerging markets and from the commodity exporting emerging markets) on the origins of their countries’ inflation during the past couple of years, we must conclude that interplanetary trade is now a fact: the world is importing inflation from somewhere else. (p 82)
• On August 17, 2007, there were no US financial institutions for whom the difference between able to borrow at the discount rate at 5.75 percent rather than at 6.25 percent represented the difference between survival and insolvency; neither would it make a material difference to banks considering retrenchment in their lending activity to the real economy or to other financial institutions. This reduction in the discount window penalty margin was of interest only to institutions already willing and able to borrow there (because they had the kind of collateral normally expected at the discount window). It was an infra-marginal subsidy to such banks – a straight transfer to their shareholders from the US tax payers. (p 97)
• Both the 1998 LTCM and the January 21/22, 2008 episodes suggest that the Fed has been co-opted by Wall Street - that the Fed has effectively internalised the objectives, concerns, world view and fears of the financial community. This socialisation into a partial and often highly distorted perception of reality is unhealthy and dangerous. It can be called cognitive regulatory capture (or cognitive state capture), because it is not achieved by special interests buying, blackmailing or bribing their way towards control of the legislature, the executive, the legislature or some important regulator or agency, like the Fed, but instead through those in charge of the relevant state entity internalising, as if by osmosis, the objectives, interests and perception of reality of the vested interest they are meant to regulate and supervise in the public interest. (p 101-2)

Posted at 16:00 on Mon, 25 Aug 2008     0 comments     permanent link

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