China has been an outlier by ignoring Basel — may have other effects later

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China has been an outlier by ignoring Basel — may have other effects later
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PANEL 4: RETHINKING THE MONETARY TRANSMISSION MECHANISM

Moderator: George Selgin – Director, Center for Monetary and Financial Alternatives, Cato Institute

Jerry L. Jordan – Former President, Federal Reserve Bank of Cleveland

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Steve Hanke – Professor of Applied Economics, Johns Hopkins University

Walker F. Todd – Trustee, American Institute for Economic Research

Selgin introduces the topic arguing how difficult it is to analyze things today

Jordan (get his paper)

Rules vs discretion — what are useful targets or indicators?

Buying/selling Treasuries; Fed funds targeting

Large balance sheets — no need for excess reserves.  Large foreign banks buy deposits of FHLBs — positive fed funds rate.

Borrowing from the banking system — IOR, reverse repos.

Monetary base — currency plus reserves.  Was close to accurate at the beginning, but not so now.  When rates go up, it is a form of fiscal stimulus.

Monetary base has grown

Basel III massive cause for reserves.  Foreign banks have been reducing activity in the US.

Hanke Wrong things expected: hyperinflation, GDP growth, net private investment would soar, etc.

Money matters, and it dominates over fiscal policy

Money is a superior measure to interest rates

Divisia measures are superior — opportunity cost of converting a monetary asset into cash.

Center for Financial Stability takes care of Divisia measures.

Three measures: State money, Bank money and Nonbank private money.

State — M1 Currency, M4 T-bills

Nonbank private money — M2 Retail money funds, M3 Overnight & term repos, Institutional money funds, M4 commercial paper

Bank money — M1 Traveler’s Checks, M2 Non-interest bearing deposits. Savings Deposits, MM Dep accts, Small time deposits, M3 Large time deposits

Bank regulation has led to tight money, amid loose monetary policy w/QE.

Notes Kashkari’s recent proposal  — would kill private money

Todd — have standard models failed?

Graph of Fed’s balance sheet — Assets, then shows money velocity/multiplier.

Government spending is up.  QE not working, yet being adopted elsewhere.  Suggests Jerry Jordan’s solution may work.

Swiss National Bank asked why the Fed is paying interest on excess reserves?  Who knows?

With no velocity and no money multiplier how does monetary policy affect GDP.

Central bank liquidity swaps are negligible now, though it was high as high as ~$600B.  Should be limits on the Fed’s ability to enter into liquidity swaps.

Fed credited $558 Billion to US Treasury for a “security” at some point in the crisis. (??)

Suggests segmenting the Fed’s lending operations.  Should be able to review any entity that would receive emergency funds.

Q1 Venezuelan guy — Can we trust the helicopter pilots?  How to loosen bank regulations?

Hanke: Regulation important when it changes a lot.  Not usually considered at monetary policy, but it is.  Private money has shrunk since the crisis.  Ultratight regulation plus loose policy — means relatively tight policy.  Forget Basel IV and roll back Basel III.

Q2 Student at Southern Methodist University: When have central banks done it right?

Hanke: China has been an outlier by ignoring Basel — may have other effects later.

Jordan: New Zealand often viewed as a successful Central Bank.  Maybe Australia, Switzerland…

Q3 Joseph Marshall — How can things work well if we discourage savings?

Jordan: Savings glut = Investment glut (ex post).  Lower rates often drive savers to save more to get to a target.  Half-plus of US currency is held outside of the US.  Investment spending 10-11% of GDP.  Bailouts further consumption in bubble areas.

Q4 Gerry O’Driscoll — Todd: Blip in Treasury account balance may be drawdown in reserves.  Promise to keep balance sheet constant until an exit is desired.

Jordan: Debt ceiling — large cash balance going into a debt ceiling period could be it.

Closing

Expresses gratitude to the speakers and Jim Dorn.  Incident of some Russians printing their own currency.  Top down central planning does not work, and threatens our liberties.

Now the Russians have a cryptocurrency…

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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