My proposal is therefore the adoption of a target path for the level of NGDP that monetary policy can use as a guide to efficiently achieving either the dual mandate, or the inflation target if we are stuck with that. NGDP would not replace the ultimate objectives of monetary policy, and policymakers would not be obliged to try and hit that reference path come what may, but this path for NGDP would become their starting point for judging policy, and if policy did not move in the way indicated by that path they would have to explain why.

His proposal and his logic for getting there are things I all agree with.  Note for New Zealanders – we still have a positive cash rate and a flexible inflation target, so we wouldn’t need to adopt it as an intermediate target right now.  But it is a good issue to think about in case we ever get there

Spiegel Online leads with an update to its news story on Monday, according to which the interest rate threshold is likely to be top secret. The story said that a majority of central banks have rejected the idea of transparent interest rate caps.

The what … they will cap interest rates at an unknown level.  So they have no way of anchoring expectations?  So if this is an issue of “illiquidity” rather than “insolvency”, the benefit from announcing a target and not having to actually intervene just doesn’t take place.

I’m sorry but everytime the ECB does something that makes it look like a real central bank it contradicts it with something … well weird.

The justification is that they don’t want it to be “a one-way bet” … but if they introduce a target, and its credible, and the failure is one of illiquidity, the ECB takes on NO RISK – it just leads to a price change.  The losses/gains are between private sector traders, not the ECB.

So are they worried about their credibility, or do they think the banking system is actually insolvent?  Or is this just weirdness?

The lack of deflation around the world in the face of these “banking panics” was seen as an indicator that we were not facing the same sort of crisis, and that as a result there is no real role for central banks.  Now, in terms of direct monetary policy is may be the case, depending on our view regarding what is going on and how institutional settings are different from the Great Depression.  However, the idea that a banking panic would lead to deflation directly holds no weight.  From Essays on the Great Depression by Bernanke we have this result:

Banking panics had no effect on wholesale prices.  This … result is important, becuase it suggest that the observed effects of panics on output and other real variables are operating largely through nonmonetary channels.

The two large crises we have faced in recent years WERE NOT failures on monetary policy, and monetary policy models were not appropriate for trying to understand them.  They provided an example of a failure of the second function of a central bank – the lender of last resort function.  A lender of last resort is supposed to be sufficient to avoid these banking panics, and it was (and in the case of Europe is) the failure to appropriately take on this role that has led to these crises.

And the fact that deflation didn’t appear, but output fell sharply, is consistent with this explanation of the crisis.  And consistent with the mainstream economist worldview regarding policy.  That is nice.

The suggestion that there is now a clear consensus for a plan that will essentially make the ECB a lender of last resort for the European financial system will help to knock the “financial crisis” element of what is going at the moment on its head.

If the ECB commits to limiting bond yields on government debt in the Eurozone, and backs that commitment with a statment saying it will do “unlimited purchases of bonds” we will finally have a conclusion to the bitter uncertainty that the European debt crisis has created for the world more generally.  As a result, Europe will continue to struggle, but the rest of the world can move forward.

Another thing that will become clear is the nature of the crisis – are peripheral governments facing a crisis of liquidity, or are they insolvent?  If it is liquidity, the ECB’s commitment will be enough to solve the problem – they won’t even need to actually buy many bonds!  If these countries are insolvent then the ECB is taking on a bunch of bad debt – a cost that will have to be faced by someone eventually.

If the ECB does come out full hog, we are going to see a significant improvement in the outlook for the global and New Zealand economies – albeit from the current incredibly negative outlook that most people currently have.

a growing cartel of owners believe the Premier League should adopt the American franchise model to end financial fears linked to the massive cost of dropping out of the elite

…

Obviously, if I was an American owner and I owned a football club, or I was an Indian owner, I might be thinking I would like to see no promotion or relegation. My investment is going to be safer and my shares are going to go up in value

Relegation results in a massive drop in revenues so I can see an argument that owners will be more willing to invest in the clubs if they know that they will not be regulated. Basically, getting rid of relegation would give more certainty on the firms future cashflows. Interestingly, the Premier League already gives “parachute” payments to relegated clubs to help compensate for this.

The other side of this argument, voiced quite passionately by Sir Alex Ferguson, is that this would “kill English football”. For once, I’m inclined to agree with red nose. The Premier league would be so much more boring without relegation. Given the gulf between the top 6 or so teams and the rest of the 20 team league, the majority of the games would become relatively meaningless. Similarly, the Championship (England’s second division) would become pretty boring too. Given the big prize of promotion would disappear, who would actually care who wins the 2nd division??

Now you are probably wondering where the economics is, this is an economics blog after all. If the league is less exciting due to getting rid of the relegation system then fewer people will watch games on TV, go to games etc.. which means the league will suffer financially. My hypothesis is that supporters of the big teams would be still be just as interested, but supporters of the teams at the mid to bottom end would be less interested and that the Championship would die.

So there is a trade-off here. It’s possible that by giving owners more certainty through a “franchise model” the entire Premier League would become more even as owners would be willing to plow more money into their teams, this may make the league more exciting and make more people watch. But there would be a countervailing effect of potentially less revenue available to teams as fewer people bother tuning in (which is particular important with UEFA’s financial fair play rules coming).

They need to default, leave the Euro zone so that they can have their own currency (and the huge corresponding real wage cut).  Surely it is obvious that the politicians, and the people, don’t have the will to actually sort out their problems.

I want to know what the protesters want.  How do the tax collectors think that not collecting tax is going to help Greece pay its bills?  With the level of corruption and tax evasion in Greece prior to the crisis, it appears that their “social contract” was never really adhered too.

I will give them one point though – they may think the distribution of the burden is “not fair”.  However, not collecting tax on current policies (not the new austerity ones) appears to be an overstep – and a signal that people are just generally unwilling to pay their bills.  Pro-tip:  If you elect a government who is going to spend lots of money, its your money they’re spending – you will have to pay for it at some point.  Contrary to popular belief government doesn’t pull goods and services out of thin air.

If Greece had a dollar for each time they were blamed for the global financial crisis, they’d be able to pay their bills

I think this is worth keeping in mind.  Although, if they could pay their bills there wouldn’t be a crisis.  Then they wouldn’t be blamed for it.  Then they wouldn’t be able to pay their bills.  So I’m not sure we really have a stable equilibrium here.

Note: Another work colleague notes that if they were blamed enough to pay down the stock of debt, then we have a stable outcome.  My presumption was that we were saying they received enough to just pay back interest, not principal.  As a result, the total flow of funds from people willing to give Greece a dollar is very important here.

Now markets are hellishly volatile at the moment.  I think that this is due to the world waiting on an announcement from Europe which will tell us exactly who is going to lose out from the ultimate Greek default.  However, it probably also has something to do with Dan Carter getting injured – damn.

The ECB announced that its going to accept some things as collateral – but dump others.  Leaving markets confused about what the hell was going on, and what it means for sovereign debt purchases.

The US followed this up by saying that they would buy a smaller amount of long-term debt than forecast, sell short-term debt, and flatten the yield curve.  They say it will be stimulatory because NK models say so – however, a flat yield curve is a bit dodgy, given that it’s formed by expectations of either weak growth or weak inflation in the future.  In essence NK models say “get the long-run real interest rate down as much as possible” which you do by increasing inflation expectations, not nominal rates – so markets collapsed after that.

US government decided to get involved by refusing to extend the debt limit AGAIN, if they can’t make up by Sep 30 the US will default.

Then the European commission decided that it was a good time to say they were going to introduce a financial transactions tax – just when financial markets are panicking – and for good measure they said they hadn’t figured out what level it would be at, or what would be taxed yet, just to add to uncertainty.

While all this is happening Italy and Greece have continued to say they’ll get their fiscal situation in order – but they keep delaying introducing actual policies.  Given Greece is effectively insolvent, the dithering by them, other European governments, and the ECB, makes it unclear who holds the liability the entire European financial system is at a stand still.  Given the exposure of Australian banks to this, we have seen funding costs rise considerably (luckily no-one in NZ is actually borrowing anything).

With Europe having fluffed around while the crisis has been in full swing over the past 2 months, purchases from China have pulled back, seeing activity there slow as well.  A slowdown in China will have the impact of lowering our export prices.

Party.

This mix of awesome factors has seen the cost of insuring against default in Australian banks increase to within a whisker of their Lehman Brother peaks.  It has seen uncertainty measures push at new highs.

Unlike the Lehman Brother’s collapse there is no reason for these indicators to be high solely based on the financial fundamentals – the debt burden, and who holds what, is known.  However, while policy makers were trying to improve outcomes during the crisis in 2008, they seem more interested in trying to cause a crisis this time around.

Is Europe’s motto, during times of uncertainty add more uncertainty?  This is ridiculous.

If we have another financial crisis here, the blame mainly falls on the politicial systems in Europe (and to a lesser extent the US).  When everything I try to say to people regarding the outlook for the economy is conditional on politicians being sane, its hard to really believe that what I’m saying is damned right.

FYI, I’m against a Tobin tax.  At some point this deserves a fuller post, I have a couple of little guys sitting around here and here and here  though.

Scott Sumner hints at this, and its an issue we’ve discussed here before.  Although it is true that “not all countries can depreciate their currencies at once” they can devalue their currency relative to goods – they can create inflation.  If there are risks of deflation, or inflation expectations are below the central banks target, such intervention could be justified.

Now, when writing about the Swiss event I wasn’t quite as confident.  This was due to the fact that the Swiss actually went out and set a value on the currency – rather than just loosening policy.

I can understand why they did it, they felt there was an asset price bubble in their exchange rate – and they wanted to provide a lower focal point that traders could shift too (since expectations were driving the currency … note the increase in risk associated with intervention is also important).  But if everyone sets “targets” there is the risk that we get an exchange rate regime where this rate doesn’t respond to changing economic fundamentals – and given that economic fundamentals change constantly, this is a concern.