Jeff Franks, 29 January 2018
Jeff Franks began his talk with the good news that, since the crisis, all members of the EU have been experiencing some degree of economic growth. The first caveat, of course, is that this growth is in many cases a mere recovery to pre-crisis levels, but this news is certainly better than the alternative and shows that the EU is able to stabilize after a severe shock. A closer look at European growth shows us, however, that although all countries have experienced growth, the levels of growth between countries are diverging meaningfully. The concept of divergence, and its opposite, convergence is central to how Franks analyses the effectiveness of the European Union.
For Franks, there are four key types of convergence: nominal convergence, which measures variation in inflation levels and interest rates between EU states; structural convergence, which looks at variation in government regulation of the economy; real convergence, which measures income levels; and cyclical convergence, which measures not the current level of economic activity but the current stage an economy finds itself in, assuming a natural pattern of boom and bust. An ideal EU would see convergence by all these measures between all its component states.
Friday, 2 February 2018
Friday, 26 January 2018
Price and financial stability: rethinking financial markets
David Harrison, 22 Jan 2018
According to David Harrison, since the start of the Bretton-Woods system every few years an economic crisis of some sort occurs. He considers that under the current system these crises are inevitable, and can be compared to the occurrence of earthquakes in areas located on tectonic faults. Harrison attributes this catastrophic nature to the fact that the markets include two separate price systems.
The first is pricing based on current output of a given good or service. This is the real market. The second is the value placed on future asset flows, known as the financial market. One can understand the difference between these two markets by considering the expectations which drive price changes in each of them. In the real market, the output of a given asset is measured often and sales are made frequently so a given good or service’s price can gradually change with the reality of its output. In the financial market the value of a given investment can only be predicted, not measured. As a result of this, speculators are left guessing what the average other speculator expects a given stock to do and thereby feedback loops can result in grossly overvalued assets.
Tuesday, 23 January 2018
Friday, 24 November 2017
Ireland: The case for an adaptive approach to macromanagement
Gillian Edgeworth, 20 Nov 2017
Gillian Edgeworth of Wellington Management starts out with the story of how Ireland’s economy was able to converge with the rest of the EU in the period from the 1980s to the present. From 1990-2006 Ireland’s economy converged four times faster than did comparable emerging markets. It did this by taking advantage of the large increase in global trade which was seen during this period. With a corporate tax rate of only 12%, in this period Ireland became the base for many international corporations. Though this reliance on foreign cash flows allowed Ireland’s economy to grow, it also contributed greatly to Ireland’s vulnerability to the forces of the 2008 economic crisis.
The fact that Ireland had so much international economic involvement also meant that when it came time to handle its debt crisis, the Irish government had little say as the majority of the debt was owed to foreign creditors. Because Ireland is so heavily dependent on foreign cash flows experts worry that although it is currently successful it is particularly exposed to destabilizing changes in the international market.
Gillian Edgeworth of Wellington Management starts out with the story of how Ireland’s economy was able to converge with the rest of the EU in the period from the 1980s to the present. From 1990-2006 Ireland’s economy converged four times faster than did comparable emerging markets. It did this by taking advantage of the large increase in global trade which was seen during this period. With a corporate tax rate of only 12%, in this period Ireland became the base for many international corporations. Though this reliance on foreign cash flows allowed Ireland’s economy to grow, it also contributed greatly to Ireland’s vulnerability to the forces of the 2008 economic crisis.
The fact that Ireland had so much international economic involvement also meant that when it came time to handle its debt crisis, the Irish government had little say as the majority of the debt was owed to foreign creditors. Because Ireland is so heavily dependent on foreign cash flows experts worry that although it is currently successful it is particularly exposed to destabilizing changes in the international market.
Friday, 13 October 2017
Real estate and the great crisis: Lessons for macro-prudential policy
John Duca, 9 October 2017
John Duca, Deputy President of the Dallas Fed, spoke to PEFM in Balliol College on October 9 on macroprudential policy and the financial crisis. In his presentation Duca challenged the Rogov and Reinhart thesis that crises are caused by excessive build-ups of debt, arguing that crises are much more related to real estate booms and busts. These in turn were generated by massive relaxation of regulatory requirements in the period up to the crisis.
Duca argued that price trends in the US commercial and residential real estate markets are usually distinct, but unusually they were both booming in the run up to the crisis. He ascribed this to not only the well-known pervasiveness of low interest rates but, as importantly, the marked reduction in prudential requirements, as enforced through the risk-weighting on capital requirements, and the regulatory environment more generally. There was an underappreciation of the risks, particularly the tail risks, with no recognition of inter-connectedness. There was an illusion that mortgage-backed securities (MBS) were safe.
Until around 2000, the US financial system was regulated through a series of provisions largely enacted after the Great Depression. In 2000 it became possible to protect MBS through credit-default swaps; the market took when, under the Commodities Futures Modernization Act, derivatives contracts were to be honored before regular contracts in bankruptcy. As regards sub-prime mortgages, investors thought they were getting short term investment grade assets, when in fact they were getting junk. In 2004 capital requirements on banks were 8%, but risk-weights on bank holdings of MBS were slashed, so that the effective rate became just 1.6%. Issuances of MBS soared into the stratosphere.
John Duca, Deputy President of the Dallas Fed, spoke to PEFM in Balliol College on October 9 on macroprudential policy and the financial crisis. In his presentation Duca challenged the Rogov and Reinhart thesis that crises are caused by excessive build-ups of debt, arguing that crises are much more related to real estate booms and busts. These in turn were generated by massive relaxation of regulatory requirements in the period up to the crisis.
Duca argued that price trends in the US commercial and residential real estate markets are usually distinct, but unusually they were both booming in the run up to the crisis. He ascribed this to not only the well-known pervasiveness of low interest rates but, as importantly, the marked reduction in prudential requirements, as enforced through the risk-weighting on capital requirements, and the regulatory environment more generally. There was an underappreciation of the risks, particularly the tail risks, with no recognition of inter-connectedness. There was an illusion that mortgage-backed securities (MBS) were safe.
Until around 2000, the US financial system was regulated through a series of provisions largely enacted after the Great Depression. In 2000 it became possible to protect MBS through credit-default swaps; the market took when, under the Commodities Futures Modernization Act, derivatives contracts were to be honored before regular contracts in bankruptcy. As regards sub-prime mortgages, investors thought they were getting short term investment grade assets, when in fact they were getting junk. In 2004 capital requirements on banks were 8%, but risk-weights on bank holdings of MBS were slashed, so that the effective rate became just 1.6%. Issuances of MBS soared into the stratosphere.
Monday, 2 October 2017
Journal of Financial Regulation and Compliance: Policy responses to the Great Financial Crisis
Journal launch: Journal of Financial Regulation and Compliance: Policy responses to the Great Financial Crisis: edited by Charles Enoch (PEFM, St Antony’s, Oxford), Tom Huertas (Ernst and Young), David Llewellyn (Loughborough) and Maria Nieto (Bank of Spain)
On 29 September, 2017 PEFM hosted a conference to mark the launching of a double-number special edition of the Journal of Financial Regulation and Compliance (JFRC), looking at policy responses to the global financial crisis (GFC)—see programme attached. The event was co-sponsored by Ernst and Young and the JFRC, together with PEFM. Speakers were largely contributors to the special edition.
Tom Huertas, introducing the conference, noted that the volumes were divided into sections on firefighting, macro policy and micro responses. As to the first, the US and UK had provided solvency support. Through the G20 a comprehensive reform agenda was agreed at the Pittsburgh summit, and the Financial Stability Board (FSB) was enhanced as the overall coordinating body. As regards recovering the public costs incurred, in the US over $300 billion of restitution fees have been levied over the past five years.
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