We read with interest your August 21 Bloomberg View that calls for “a thoughtful congressional discussion of the pros and cons of a more thorough audit” of the Federal Reserve. While we share your desire for effective congressional oversight of the Federal Reserve, we strongly disagree on the best way to do it...
Read MoreCommentary
Equities are the stars, they are the financial instruments in the headlines. But it is bonds that are the cast and crew. They do the day-to-day work behind the scenes. And, as with any tradable asset, the confidence that prices are fair and that you can sell what you buy is essential.
So, when knowledgeable people express concerns that regulatory changes are causing bond markets to malfunction (see, for example, here), it leads us to ask some tough questions. Are these markets somehow impaired? Is enhanced financial regulation to blame? Is this creating risks to the financial system as a whole...?
Read MoreBefore the financial crisis, tightening monetary policy was straightforward. The Federal Open Market Committee (FOMC) would announce a rise in the target for the federal funds rate in the overnight interbank lending market, and the open market desk would implement it with a small reduction in the quantity of reserves in the banking system.
Matters are no longer so simple. The unconventional policies designed first to avert a financial and economic collapse, and then to spur growth and employment, have left the banking system with reserves that are so abundant that it would be impossible to tighten policy in the conventional manner.
So, as the FOMC moves to "normalize" monetary policy after years of extraordinary accommodation, how, precisely, will the Fed tighten monetary policy? ...
Read MoreGreece faces a stark choice: stay in the euro and implement the policies demanded by its creditors or exit and re-introduce its own national currency. The dimensions of this decision go far beyond economics, affecting Greece’s political and cultural identity for generations. Yet, even in a narrow sense – determining which option will lead to the best economic outcome for Greeks – the decision is complex and fraught with uncertainty...
Read MoreTwenty years ago, a group of experts – the “Boskin Commission” – concluded that the U.S. consumer price index (CPI) systematically overstated inflation by 0.8 to 1.6 percentage points each year. Taking these findings to heart, the Bureau of Labor Statistics (BLS) got to work reducing this bias, so that by the mid-2000s, experts felt it had fallen by as much as half a percentage point.
We bring this up because there is a concern that as a consequence of the way in which we measure information technology (IT), health care, digital content and the like, the degree to which conventional indices overestimate inflation may have risen...
Read MoreIn 1945, a group of 43 nations led by the United States, then the world’s dominant economic power, created the International Bank for Reconstruction and Development (now part of the World Bank Group) and the International Monetary Fund – the “Bretton Woods institutions” – to promote reconstruction after World War II. However, the global economy has evolved much faster than the operations of either the Bretton Woods institutions or some of their regional siblings like the Asian Development Bank (ADB), the African Development Bank (AfDB), the Inter-American Development Bank (IDB), and the European Bank for Reconstruction and Development (EBRD).
What happens when official international financial institutions (IFIs) fail to respond to a changing environment? The same thing that happens to firms that stop innovating. New, more competitive institutions (firms) arise that compel them to change or – like dinosaurs – become extinct. We may be witnessing this process of creative destruction right now. Last month, a group of 57 founding nations led by China signed the articles of agreement to establish the Asian Infrastructure Investment Bank (AIIB) with an initial subscribed capital of $100 billion…
Interview with Axel Weber
Chairman of the Board of Directors, UBS Group AG; Member, Group of Thirty; former President, Deutsche Bundesbank; former member, Governing Council, European Central Bank; former German governor of the International Monetary Fund.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Chairman Weber: Not necessarily. Even though many of the instruments we now consider unconventional policy instruments were not part of the tool kit for a few decades, they were conventional instruments in the past. So I don’t think that the tool kit has changed that much. Central banks have recently just been less orthodox in the sense of setting aside the usual policy framework that was based on changing interest rates...
Read MoreEuro-area leaders announced yet another agreement with Greece this morning. However, the survival of the euro area has never been about the fate of Greece. Instead, it is whether the Europeans will implement the reforms necessary to keep the euro area together. If they do, the common currency will endure. If they don’t, then the euro may not survive the next big adverse shock...
Read MoreAsk a well-educated person which country boasts the largest equity market and you’ll usually get the right answer: the United States. Ask which country has the second largest market and you’re likely to get a range of answers: Japan? Britain? Germany?
The answer is China. In terms of annual trading volume, China's equity market has been #2 since 2009. Measured by total market capitalization, it has been #2 for seven of the past nine years....
Why should this matter now? First, because it highlights the extraordinary spread of market-based finance in a country led for more than 65 years by its communist party.... Second, because the growth in Chinese equity markets comes with sizable risks. Recent experience drives home this point....
Read MoreInterview with Gill Marcus
Former Governor, South African Reserve Bank; former Professor, Gordon Institute of Business Science; former Deputy Minister of Finance (South Africa); and former Chair, Absa Group.
Has the experience of the crisis changed your view of the central bank policy toolkit?
Governor Marcus: Prior to the global financial crisis, central bank toolkits had become whittled down to, with a few exceptions, the policy rate. At that time there were two widely accepted propositions: first, that monetary policy would become ineffective at the zero lower bound; and second, that monetary policy should not deal with financial stability issues. The general trend was for monetary policy to focus on inflation, with bank supervision either moving out of central banks or focused on microprudential issues. Although there were debates about whether or not asset price bubbles should be dealt with by monetary policy or central banks, the general view was that central banks could not recognize bubbles, and at best they could respond to inflationary impacts of asset price developments, and clean up afterwards in the event of the bubble bursting...
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