Der Monetarismus ist zurück?

Gerald Braunberger und Norbert Häring diskutieren in zwei Artikeln die Rolle von monetären Aggregaten (also z.B. der Geldmenge). Norberts Eintrag finde ich soweit gelungen, auch wenn er stärker darauf hätte hinweisen sollen, dass es eigentlich wenig mit Monetarismus zu tun hat. Bei Gerald schimmert mir zudem immer wieder zu sehr durch, wie sehr er die makroökonomische Lehre der letzten Zeit verteufelt, was die Altmeister angeblich alles wussten und wie er die gute deutsche Tradition der Geldmengenaggregate zu retten versucht, auch wenn es dafür keine Basis gibt.

Worum geht es? Die Geldpolitik durch Inflationssteuerung (der sich implizit viele Zentralbanken verschrieben haben) hatte sich nicht nur der Geldmenge als Kontrollgröße entledigt, sondern auch dem Kreditwachstum keine Beachtung geschenkt. Sie hatte etwas versucht konsequentialistisches: was zählt ist makroökonomische Stabilität, wovon eine ausreichende Nachfrage und ein stabiles Preisniveau (wegen sticky wages) ein wichtiger Teil ist, und sollte es zu Finanzkrisen oder ähnlichem kommen, dann räumen wir eben geldpolitisch auf. So lange die Nachfrage und das Preisniveau stabil ist, ist alles andere zweitrangig.

Meine Sicht ist: Finanzkrisen sind sicherlich nicht wünschenswert, und die Geldpolitik und vor allem die Regulierung muss diesbezüglich verbessert werden. Aber man kann nicht etwas verteufeln, was nicht getestet wurde. Die wichtigsten Ideen bezüglich des Aufräumens nach einer Krise und dem Entrinnen aus der Liquiditätsfalle (z.B. level targeting) kamen schlicht nicht zur Anwendung. Ich frage mich, warum Kritiker wie Gerald das nicht zur Kenntnis nehmen und feststellen, dass auch Ben Bernanke die Rezepte, die er Japan einst empfahl, jetzt nicht zur Anwendung bringt.

Nun wird in der Makro viel Hirnschmalz darauf verwendet, den Finanzsektor zu integrieren und Indikatoren zu suchen (wie Kreditmengen, leverage, Fristentransformation, Brunnermeiers CoVaR etc.), die auf eine Gefahr für die Finanzstabilität hindeuten und daher von der Geldpolitik eventuell mit einbezogen werden sollten, auch wenn nach meinem Verständnis die meisten eher auf Änderungen in der Regulierung hinauswollen. Das sind alles interessante und wichtige Fragen. Nur: was hat das mit Monetarismus zu tun?

In meinen Augen nicht viel. Der Monetarismus war, nach dem eklatanten Scheitern des Keynesianismus, eine Rückbesinnung auf die Essenz von gesamtwirtschaftlicher Nachfrage und Inflation, warum auch Rezessionen immer und überall ein monetäres Phänomen sind (um Friedman mal etwas freier zu interpretieren, wie Nick Rowe es tut), und wie Inflation wieder verankert werden kann. Die Geldmenge war ein (nicht sonderlich guter) Versuch, ein Maß zu finden, mit dem man den Wirtschaftskreislauf in dieser Hinsicht stabilisieren und Fehler wie 1930 ff. verhindern kann. Friedman ist selbst später davon abgerückt.

Das neue Denken bezüglich Finanzmarktstabilität und Kreditmengen kommt aus einer ganz anderen Ecke. Hier geht es darum, anhand von sinnvollen Aggregaten (zu denen die Geldmenge für sich genommen nicht zählt) oder anhand von was auch immer das Risiko einer Finanzkrise zu erkennen. Zum Beispiel, ob Kreditmengen einen hohen leverage bei Banken ermöglichen und ähnlichem. Das hat wohl mehr mit Minsky und anderen zu tun, als mit Monetarismus (wegen mir braucht es ohnehin keine Labels). Geralds etwas verzweifelt anmutende Versuche, die Geldmenge zu retten und die Zweisäulenstrategie der EZB zu loben, ändern daran nichts. Hätte Gerald dem von ihm interviewten Shin etwas besser zugehört, wüsste er das auch (emphasis mine):

Es besteht eine oberflächliche Ähnlichkeit der Analysen und daraus folgenden Empfehlungen. Aber die Monetaristen und die Bundesbank wollten über die Steuerung der Geldmenge die Inflationsrate beeinflussen. Das ist nicht mein Ansatz. Mein Anliegen ist die Bewahrung der Finanzstabilität.

Linkempfehlung, Demographie-Blog Edition

Egghat – einer der Blogger, die in meinen Augen am eindeutigsten eine Art public good bereitstellen, weil sie sich auch akribisch mit der Aufbereitung von Fakten beschäftigen – hat sich zu der These „Geringverdiener sterben früher“ ein paar Gedanken gemacht, u.a. mit Hilfe des Demographie-Blogs. Schaut mal rein!

Presents for economists and other nerds

The same prodedure as every year… Too little time, but urgent need for good presents. As a little help, I made a short list of potential presents for economists and other nerds that you might not have thought about.

  • Logicomix – For all those who missed the #1 New York Times bestseller, this graphic novel about mathematics, logic and the philosopher Bertrand Russell is a, if not the, perfect present.
  • Moneyball – For all those European people who just saw the movie and wonder: what the hell is a „walk“? The book provides more detail and is an interesting and fun read throughout.
  • Mathematical Art – The Swiss artist Eugen Jost became famous in Germany for designing mathematical calenders (the descriptions are in German, though).  But he has wonderful paintings on offer as well (click on „Bilder“). In case you are tired of buying books.
  • Nachteule – You don’t have to drive a Porsche to enjoy German engineering. This tiny reading light helps you read the latest research in bed without annoying your (sleeping) partner.
  • Measuring the world – Finally, another book. But rarely has a description of two very German scientists (Carl Friedrich Gauß and Alexander von Humboldt) been more fun to read. Daniel Kehlmanns bestselling book (from 2006 ) is available in many different languages these days, including Spanish, French, Italian, Greek and Chinese.

Feel free to add to the list in the comments or on your own blog!

Why we need the European Central Bank as Lender and Owner of Last Resort

A guest post by Arash Molavi Vasséi

This post summarizes a short policy note in which I argue that the only feasible as well as incentive-compatible solution to the current sovereign debt crisis in the Eurozone involves the European Central Bank (ECB)

  • as a Lender of Last Resort to the Eurozone’s core countries like France, Austria, Finland, and The Netherlands, and
  • as the Owner of Last Resort to the European banking system, thereby setting the stage for haircuts on the debt of potentially insolvent peripheral Member States like Greece, Italy, Spain, and Portugal.

The arguments for a credible commitment of the ECB to an unlimited swap line, promising to swap central bank liabilities for sovereign bonds with the aim to reduce liquidity premia, are well-known. So I won’t repeat them here. I will rather focus on the second part of my argument, on the ECB as an Owner of Last Resort. As far as I am aware of, the idea is new. I guess the idea is fundamentally flawed in a way that I cannot see. To cite Kantoos: “do poke holes into this proposal, as I am really interested in whether it could work”. Note, however, that I am full aware that the implementation of the idea is neither politically feasible, not is it legal (see the conclusion). My arguments are just concerned with economic admissibility.

The ECB as Owner of Last Resort

There are few economist who would deny that a haircut on sovereign debt is an incentive-compatible solution; the extremely serious downside is the risk of a breakdown of the European banking sector and global contagion.

But it seems possible to contain the risk of bankruptcy and contagion. In a first step, the European Banking Authority (EBA) should come up with serious stress tests, that is, with projections free of any political considerations, predicting the impact of realistic haircuts on peripheral sovereign debt as well as the impact of a Europe-wide recession on each Systemically Important Financial Institution (SIFI) in Europe. The most recent stress test may give a picture of the minimum level of recapitalization needs (114.7 billion overall; I expect a multiple). Next, the ECB should step in as the Owner of Last Resort and recapitalize each such SIFI according to the EBA’s projections. In contrast to its role as Lender of Last Resort, the ECB would swap central bank liabilities for preferred stocks, i.e., senior equity securities that carry no voting rights and, thus, prohibits the ECB from getting involved in the SIFI’s business models.

There are clear advantages of the ECB engaging as the Owner of Last Resort:

1. The most important reason why the ECB should engage in the recapitalization of the European banking sector is the same as usual: it can create unlimited amounts of central bank liabilities and, thus, unlimited amounts of premium-quality capital. The ECB as an Owner of Last Resort thereby avoids the vicious circle that any other realistic recapitaliization scheme would trigger: if Member States like France and Germany are supposed to finance heavy haircuts on peripheral sovereign debt, their own solvency could be endangered, respectively; this would suggest even higher default probabilities and potentially higher haircuts on sovereign debt. In turn, Member States would have to get involved in a second recapitalization-scheme, which would endanger their solvency and credit ratings even further; the feedback loop would continue until the entire Eurozone eventually collapses.

The same is true for any other limited fund like the EFSF, which is eventually backed by France and Germany (IMF-financed recapitalization would in addition endanger U.S. ratings; neither the Obama administration, nor the Republican presidential candidates show any interest in increasing IMF-funds; also China refuses to support the EFSF). By contrast, the ECB cannot become insolvent. That such a situation is considered in its constitutions is only due to the fact that it is designed by lawyers, obviously unaware of the basics of central banking: what makes a central bank so special is that the unit of account in a at system is defined in terms of its liabilities, and that its liabilities are used to redeem contracts. The monopoly producer of the means of final settlement just cannot get bankrupt, for bankruptcy happens if you lack the means to settle your obligations. Unconstrained by its constitution, any central bank can shield its equity capital against losses. All it needs to do is some creative accounting: it could invent an asset class, call them “claims to Europe’s future”, and neutralize any risk to its balance sheet.

2. The approach is incentive-compatible: it rescues banks, but punishes their owners. Given the increased quantity of SIFI-stocks, the share of profits generated by such financial entities that could be distributed to the private sector diminishes. In short, recapitalization is a blow to the return on capital invested, reducing the value of each stock in circulation as well as the value of newly issued stocks. This is why banks hate it, and why they negotiate insufficient haircuts. Thus, recapitalization by the ECB must be mandatory to avoid resistance by the SIFI’s managements – who are obliged by law to protect the interests of private shareholders.

3. The approach avoids deleveraging processes that otherwise will accompany the revision of the the EU’s Capital Requirement Directive (CRD IV), which implements Basel III (in fact, CRD IV goes beyond Basel III). By selling risky assets (like peripheral sovereign bonds) and cutting well-established credit lines to potentially profitable companies, banks increase their capital ratio, respectively, by reducing the denominator. By contrast, the ECB as Owner of Last Resort would increase the numerator, leaving no rationale to deleverage. This ensures that (1) bank lending to the so-called “real economy“ and (2) the transmission mechanisms of monetary policy remain intact.

4. Finally, and closely related to point 3, the ECB as Owner of Last Resort would back the possibility to implement significantly higher capital requirement over a horizon of ten to fifteen years. Research shows that high capital requirements are not detrimental to economic growth (Admati et al.). Instead, they ensure that systemically relevant institutions climb down the  “Efficient Frontier“ such that a lower return on capital invested is compensated by reduced risk.

Ask yourself: Of all possible investments possibilities, why should systemically relevant institutions be the hotbed of relatively less risk averse or even risk-loving investors? All it needs is that the ECB injects more capital than projected by the EBA such as to ensure capital ratios around twenty or even thirty percent. In the aftermath of the crisis, the ECB would sell its preferred stocks during a period of ten to fifteen years, while commercial banks are prohibited to buy back these papers.

Conclusions

Liquidity distress – also due to policy uncertainty – seems to be an appropriate explanation of the spreads on the debt of the Eurozone’s core (see the paper for more). To contain the crisis, the ECB should act as a Lender of Last Resort, that is, it should credibly commit itself to an unlimited swap line as described above. However, to resolve the crisis the ECB should also act as an Owner of Last Resort with respect to the European banking sector and, thereby, set the stage for haircuts on the debt of potentially insolvent peripheral members of the Eurozone.

Of course, there is little hope that Germany will ever support such unconventional measures. It already brought France and Italy into line: they all announced not to seek for ECB intervention to rescue the Eurozone from a deepening sovereign debt crisis. But the problems with my proposal root deeper: it seems not only politically infeasible, but is clearly illegal. As an adherent to the rule of Law, I feel highly uncomfortable with my own suggestions. Yet, I am not aware of an economically admissible solution to the sovereign debt crisis in the Eurozone that also conforms to law, including those measures am opposed to. Given that the current legal framework does not support any feasible solution, and given that we do not have the time to adjust the legal framework, we will break the law anyway. Actually, we broke it already.

So this may be the major lesson of the political project to impose a common currency on a non-optimal currency area: any attempt to implement a political vision in contradiction to economic regularities (some may say in contradiction to „economics laws“) is not only doomed to fail, but also undermines the fundamental ingredient to a free and prosperous society: the Rule of Law.

Decoding Euro-moralizations

Moralizations of the extreme form, Italian edition

There are some moral debates about the Euro going on in the international blogosphere with Tyler Cowen and Ryan Avent as the main participants, and Scott Sumner adding some interesting historical perspective.  In my view, Ryan and Tyler are not talking about the same thing, so let me offer a different take on the issue.

In discussions of the Euro crisis, all sides occasionally end up in a moralizing grey area, and this blogger is no exception (sorry for that). But I think we need to distinguish two different layers of moralizations.

The first is a sort of good/bad ideology, in which either A) the lazy, profligate Southeners get what they deserve and hard-working, prudent Germany is right to refrain from costly help, or B) the Southeners are the victims of an easy-to-fix debt run, but the selfish stability-fetishists in Germany rather hurt millions of Greeks and Italians than to embrace the obvious solution after they have so tremendously benefited from the Euro.

This sort of moralizing should be avoided by anyone who is interested in a serious discussion of the Euro crisis.

The second is the one Tyler is describing,

the kind of “system-wide” moral judgments that progressives offer up when they judge the institutions of Denmark to be superior to the institutions of Mexico, of course without ever judging the residing individuals per se.

He offers 11 examples of this kind of moralizing from a German perspective. The deeper reasons for such moralizing behaviour is, I think, a sense that something is going wrong in Europe without the ability to analyse it in economic terms, terms of game theory or political economics. Such moralizations are usually derived from principles, things you should or shouldn’t do, principles that were embedded in society for a reason: if you don’t have the ability to grasp the whole situation, it is best to stick with agreed-upon societal behaviours that served you well in the past. These may be principles of fairness, solidarity, responsibility, pragmatism, forgiveness, stability, loyalty, lawfulness and many more. Different societies put their emphasis on different subsets of these, and as Scott correctly notes: whether that choice is good or not is context-specific.

Although they are not very helpful, I would not dismiss this second kind of moralizations as easily as the one above. Sure, the distinction between the two is blurry, but there is some justified discomfort and scepticism expressed in such moralizations that actually have a serious representation in economic terms. I let Tyler describe part of it from a German perspective:

Do not think that Germany has merely to waive a magic wand, or incur a one-time cost, to set things right in the eurozone.  Any “set things right” action on Germany’s part is, one way or another, a form of doubling down.  If it fails it means a bigger eurozone implosion in the future than would happen now, including much higher costs for Germany.  The choice is not “German action vs. doom now,” it is “German action and some chance of even bigger doom later on vs. doom now.”  That’s a tough call.  The Germans understand that one better than do most of the bloggers I’ve been reading on the topic.

Moralizations of the extreme form, German edition

Of course, there are justified economic concerns behind opposite moralizations of this second kind as well. For instance, complains that Germany is unsolidarily forcing countries into depression. This moralizing statement just reflects three very important issues that tend to be ignored or dismissed much too easily in Germany:

  • Short term austerity makes things worse if there is no national central bank to pick up the slack. Almost any macroeconomic model tells us that, not to mention the empirics.
  • Deflation – if resulting from a decline in aggregate demand – is an economic catastrophe. The Germans should know that better than any other country in the world, but surprisingly most don’t. Insisting on low inflation at a time of massive economic adjustments in a currency union is inflicting enormous suffering on the periphery.
  • Central banks need to be an aggressive lender of last resort to banks to avoid a financial collapse. That is not an unorthodox Anglo-American money-printing idea. It is one of the main reasons why central banks were founded in the first place. A lender of last resort to sovereigns is a more complex issue in a currency union without a unified fiscal policy, as almost any proponent would admit.

Contrary to Ryan, I think it is useful to deal with moralizations of the second type head-on and try to explain to both sides what the economics behind these moralizations are and discuss whether they are justified or not. I find that it works well with family and friends in Germany.

But the worst thing we can do as bloggers is to get into the grey area around both kinds of moralizations ourselves – if only by playing a simplistic blame game. We should know better, and we are capable of expressing what we mean in economic terms. But the issue is subtle, and I have my doubts whether all those in this grey area realize what they are doing, on both sides of the debate. A short, but not exhaustive, checklist:

  • if you are blaming [insert country] exclusively, for instance, it is very likely that you are moralizing. An example: the Eurozone brinkmanship consists of more than one player, hot capital inflows are difficult to manage for any country, as Germany may learn in the years to come etc.
  • if you indulge in negative stereotypes, you are obviously doing it: lazy [insert countrymen], imperialistic [insert, well, Germany], … Note to non-Germans: suggestive uses of words like Reich, Anschluss, Grossdeutschmark carry a moralization and sound offensive to most Germans. They are (without exception!) unnecessary to analyse current events.
  • if you criticize the other side of moralizing, you often come close to moralizing yourself, if only by offering a counter-moralization of your own. That is dangerous territory, not every reader may understand that you were just trying to prove a point. Or weren’t you?
  • if you point out moral obligations (on both sides!), if only in suggestive sentences or headlines, you come close to moralizing, and need to be very careful. Example: „[insert core country] gained so much, and therefore…“ or „The [insert Southern countrymen] were having a party for years, and have to …“.

I probably need to read my own checklist in the future before I publish a Euro crisis post… All in all, I think it is a good thing that Tyler brought it up.

PS: Tyler has a new reply to some critics. Do read that, too.

Die Kultur der VWL

Ein schöner Auszug zum Wochenende:

Economists essentially have a sophisticated lack of understanding of economics, especially macroeconomics. I know it sounds ridiculous. But the reason why I tell people they should study economics is not so they’ll know something at the end—because I don’t think we know much—but because we’re good at thinking. Economics teaches you to think things through. What you see a lot of times in economics is disdain for other’s lack of thinking. You have to think about the ramifications of policies in the short run, the medium run, and the long run. Economists think they’re good at doing that, but they’re good at doing that in the sense that they can write down a model that will help them think about it—not in terms of empirically knowing what the answers are. And we have gotten so enamored of thinking things through that the fact that we don’t know anything needs to bother us more. So, yes, it’s true that the average guy on the street doesn’t understand economics, and it’s also true that we don’t understand economics. We just have a more sophisticated lack of understanding than the guy on the street.

Der ganze Essay ist hier.

HT: Tyler Cowen

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