Keynes-Hayek Smackdown

Here's a new video from Russ Roberts explaining the differences between the ideas of J.M. Keynes and F.A. Hayek... in a manner the kids can understand.

Paul Samuelson on The U.S. Dollar

I came across this post from Paul Samuelson, a name known to all economist and economics students from his textbook and contributions to economic theory. His view is that, even with the optimism of the Federal Reserve, the current economic crisis may be nothing compared to the what happens when the Asian nations turn pessimistic against the U.S. dollar:

Up until now, China has been willing to hold her recycled resources in the form of lowest-yield U.S. Treasury bills. That's still good news. But almost certainly it cannot and will not last.

Some day -- maybe even soon -- China will turn pessimistic on the U.S. dollar.

That means lethal troubles for the future U.S. economy.

When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared. China, Japan and Korea now hold dollars not because they think dollars will stay safe.

Bank of Canada Statistics

In some work I was doing this morning, I thought the Bank of Canada had some interesting statistics. I'm particularly interested in the numbers regarding expectations:

1. 20% of firms expect price increases of 1-3% over the next six months.
2. 22% of firms expect inflation over the next six months to exceed 2%.

Robert Engel on Volatility

Robert Engel has a new article in the Financial Times on volatility in financial markets. The crux is on what determines volatility and what we can expect in the current crisis:

Volatility is not yet back to normal primarily because macroeconomic uncertainty is not yet resolved. When the end of the recession becomes more predictable and the recovery is in sight without excessive inflation fears, then volatility should finally return to its normal level just below 20 per cent.

Unconventional Monetary Policy

The Bank of Canada posted a speech by John Murray (deputy governor) on the need for unconventional monetary policy during the current economic crisis. Three instruments he highlights are the following:

1. Conditional statements about the future path of policy rates. The first mechanism is a conditional commitment regarding the future path of the policy interest rate. In normal times, this type of interest rate guidance is usually kept to a minimum or expressed in very general terms. In extraordinary times – such as we now face – it may be necessary to be more explicit and make a clear conditional commitment to keep the target overnight rate low for an extended period. Using this approach, central banks can influence interest rates well out the yield curve, because long-term rates are largely a reflection of expected future short rates. While it may not be possible to lower the overnight rate any further, expectations at longer maturities can still be shaped by conditionally committing to keep the overnight rate low.

For this mechanism to work, the conditional commitment must be credible, and inflation expectations must remain well anchored. Canada's positive experience over the past 18 years with an inflation targeting framework is especially helpful in this regard. Inflation targeting has reduced the risk of deflationary expectations, permitted aggressive policy action in response to the current crisis, and will no doubt make it easier to exit from any unconventional policies that are introduced.

2. Quantitative Easing. The second unconventional mechanism is quantitative easing. It is sometimes referred to pejoratively, and mistakenly, as "printing money." Quantitative easing occurs whenever a central bank purchases private or public sector securities by expanding its reserve base. These purchases directly affect the yields of the securities that are bought, putting downward pressure on their interest rates and upward pressure on their prices. They also inject additional central bank reserves into the financial system, which deposit-taking institutions can use to generate additional loans.

All quantitative easing is, by definition, "unsterilized." Although this is correctly viewed as unconventional, it closely resembles the way monetary policy is described in most undergraduate textbooks, and is broadly similar to how it was conducted in the heyday of monetarism.

3. Credit Easing. Credit easing is the third mechanism, and is a term reserved exclusively for central bank purchases of private sector assets in segments of the market where dislocations and credit constraints appear to be most severe. It is designed to ease credit conditions by stimulating more active trade in certain assets and through a process of portfolio substitution.

Sterilized purchases of private sector assets can be effected either by selling existing assets on the central bank's balance sheet – essentially swapping "good" assets for "bad" – or by creating additional central bank reserves and then sterilizing, or mopping up, the extra reserves by selling new government securities. Credit easing can also be combined with quantitative easing, in which case the purchase of private assets will remain unsterilized and the reserve base will expand.

I find the first one particularly interesting. It implies the Bank's commitments to future interest rates, thereby reducing much of the speculation we observe around, for example, U.S. Federal Reserve announcements.

Pay Day Loans in Alberta

In the book Why the Poor Pay More, Gregory Squires discusses how predatory lending occurs via pawnshops and payday loans. Now, it looks like Alberta will begin putting controls on the fees and interest rates that payday lenders charge ("Alberta trgets payday lenders," Calgary Herald, May 18, 2009).

In some cases these lenders charge as much as 60% (once fees and interests are calculated and included into the short-term nature of the loan). While these services are of value to those who use them (many low income people can't access more familiar types of credit), the high rates of interest charged by these lenders impose significant costs on these individuals.

Canadain Versus U.S. Banking Systems

Canadian banks have weathered the current economic crisis much better than their U.S. counterparts. Nick Rowe has suggests the following:

But it doesn’t seem to be as simple as “Canadian banks are more tightly-regulated”.

1. We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn’t matter if a local housing market goes bust).

2. We don’t have Glass-Steagal. The investment banks joined the retail banks some years ago.

3. We don’t have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.

4. (Except in Alberta), mortgages are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

I wouldn’t describe those differences as “Canada is more regulated”.

But we do have higher capital requirements. And mortgages over 80% must be insured (mostly by the government-owned CMHC).

For more information, see the direct blog post here and the discussion here.

Economics Photo of the Week (March 2)

John Maynard Keynes & Henry Morgenthau in 1944 at the monetary conference that spawned the idea of the World Bank.

Washington Mutual

Here's ago, my wife and set up our first joint bank account with Washington Mutual in Sacramento California. Now that bank is on the verge of failure and federal take-over in the states. This would be (in nominal terms at least) the larges bank failure in U.S. history and will have effects across the entire economy.

We still have $209.34 in our account. I hope it's safe.