forward guidance

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pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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The idea of forward guidance is to find practical ways to make the promise of inflation more concrete and easier to understand, and perhaps therefore more credible. Crudely put, forward guidance has the central bank telling markets, “We might not be able to lower interest rates now because of the zero bound, but we promise not to raise them later until our output and inflation projections become substantially stronger. Even then we won’t raise them as fast as we usually would.” Ideally, this reassurance is accompanied by concrete guideposts. This type of forward guidance is sometimes referred to as data-dependent forward guidance, because it basically aims to specify a reaction function to the data. There is also calendar-based forward guidance, where the central bank says, “We promise not to raise policy rates for at least 6 months” or, as in 2015, many Fed officials insisted, “Rates will begin rising away from the zero bound before the end of this year,” as in fact they did in December 2015.35 The main practical problem with both types of forward guidance is that it is hard for the central bank to credibly make promises in a world where there is regular turnover of policy board members, not to mention of the politicians who ultimately oversee central banks.

Most central bankers would use QE again if there were no other options, but they would prefer to find more effective, clear-cut, and transparent instruments to use in the future. FORWARD GUIDANCE In addition to quantitative easing, some mention must be made of forward guidance, a term advanced by Columbia economics professor and central banking guru Michael Woodford. The basic idea is one we have already discussed earlier in this chapter: if the central bank cannot reduce the nominal interest rate at the zero bound, it can try to lower real interest rates by manipulating inflation expectations.34 The problem is that such policies are not necessarily credible if they involve allowing future inflation to drift above target, especially if the public believes that central banks have a strong aversion to inflation. The idea of forward guidance is to find practical ways to make the promise of inflation more concrete and easier to understand, and perhaps therefore more credible.

Besides, there has been a lot of pushback from some quarters, with Japanese central bankers getting grief even for setting interest rates at a barely negative level of –0.1%. So far, though, it is pretty tame compared to what Paul Volcker faced. Some have argued that the zero bound hasn’t really turned out to be all that important, because central banks have found pretty good ways to get around it, using unconventional tools such as “forward guidance” and “quantitative easing.” The first involves telling investors that the monetary authorities intend to elevate inflation in the future, even if they cannot do it now. When it works, forward guidance succeeds in bringing down the real interest rate, even if the nominal interest rate is stuck at zero, since of course the real interest rate is the nominal interest rate minus the expected rate of inflation. A second idea is quantitative easing (QE). We discuss QE in much greater detail later in this chapter, but essentially it involves using short-term central bank debt to buy long-term assets, such as government debt, thereby bringing long-term government interest rates down.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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The criteria on which the Fed might change its mind were unclear, and so the impact of forward guidance was muted. A debate raged within the Fed about whether forward guidance should be converted from an ever-changing series of dates to a set of hard numeric goals that were more easily observed. This debate was captured in historic and analytic detail in a paper presented by Michael Woodford of Columbia University at the Fed’s Jackson Hole Symposium at the end of August 2012. While Woodford’s argument is nuanced, it boils down to one word—commitment. His point was that forward guidance is far more effective in changing behavior today if that guidance is clear and framed in such a way that the central bank will not repudiate the guidance in the future: A . . . reason why forward guidance may be needed . . . is in order to facilitate commitment on the part of the central bank. . . .

Of course, it is also true that the 2008 liquidity crisis was itself the product of earlier Fed policy blunders starting in 2002. While the Fed is focused on the intended effects of its policies, it seems to have little regard for the unintended ones. ■ The Asymmetric Market In the Fed’s view, the most important part of its program to mitigate fear in markets is communications policy, also called “forward guidance,” through which the Fed seeks to amplify easing’s impact by promising it will continue for sustained periods of time, or until certain unemployment and inflation targets are reached. The policy debate over forward guidance as an adjunct to market manipulation is a continuation of one of the most long-standing areas of intellectual inquiry in modern economics. This inquiry involves imperfect information or information asymmetry: a situation in which one party has superior information to another that induces suboptimal behavior by both parties.

After 2008, Bernanke’s Fed would increase the cost of waiting by offering investors zero return on cash, and it would reduce the cost of moving ahead by offering forward guidance on policy. By increasing the costs of waiting and reducing the costs of moving ahead, Bernanke would tip the scales in favor of immediate investment and help the economy grow through the jobs and incomes that go with such investment. Bernanke would be the master planner who pushes capitalists back into the investment game. He showed his hand when he wrote, “It would not be difficult to recast our example of the . . . economy in an equilibrium business cycle mold. As given, the economy . . . is best thought of as being run by a central planner.” Bernanke’s logic is deeply flawed because it supposes that the agency that reduces uncertainty does not also add to uncertainty by its conduct. When the Fed offers forward guidance on interest rates, how certain can investors be that it will not change its mind?


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

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They make us more vulnerable to the buildup of distortions in financial markets that can only be unwound with some drama.” “Bankers are willing to take on more risk than I have heard them admit to in recent years,” added Governor Mark Olson, who was himself a former banker. Vice Chairman Roger Ferguson pushed the argument further, linking the financial exuberance with the Fed’s forward guidance about future interest rates. “Perhaps we are anchoring the yield curve more than we’d like,” he suggested. “The fixed-income markets in particular are not in fact doing the appropriate job of pricing risks.” He was suggesting that the Fed’s forward guidance had made life too predictable, lulling speculators into complacency. “We need in some sense to remove the anchor that we have placed on those markets,” he concluded. Greenspan also sounded worried. “It sounds as though we’re back in the late ’90s or perhaps early 2000,” he said, recalling the extremes of the tech bubble.

And the shattering of these delusions could be scary to behold, potentially swamping the Fed’s ability to clean up afterward. Perhaps not surprisingly, traders in the markets sensed these risks more viscerally than monetary experts. Although he had laid out the problem with forward guidance, Timothy Geithner stopped short of demanding a tougher monetary policy. He had been at the Fed for just over a year, and like everybody there, he deferred to Greenspan’s record of success over almost two decades. Besides, as Geithner himself conceded, there were risks in being tough: even if the Fed’s forward guidance lulled traders into taking too much risk, it seemed perverse to address the problem of a potential future shock by shocking markets preemptively.60 As a result, nobody around Greenspan really challenged his thinking; and at successive FOMC meetings through the rest of the year, Greenspan persisted serenely with his “measured” strategy.

“The markets will do our work for us until we come and sit at this table and formalize it.” In these circumstances, the Fed’s goal was to “continue to convey to the marketplace where our priorities are.” Forward guidance would ensure “as little reaction to our post-meeting statement as possible.”61 In the space of eighteen months, Greenspan had fretted that Wall Street was “reaching for yield,” anticipating that “untoward things” might happen. He had objected to an explicit inflation target, musing that a future FOMC might come to regard asset prices as “a relevant consideration.” He had listened to colleagues’ concerns about the risks in forward guidance, and had come close to embracing their anxiety by diagnosing a “conundrum.” And yet despite the chairman’s depth of understanding, Fed policy remained unchanged. Greenspan was the man who knew.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

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Because their “analysis does suggest that the unconventional monetary policies, including QE and forward guidance, create hazards by encouraging certain types of risk-taking that are likely to reverse at some point.”5 Similar worries have also been expressed by the BIS, and not just on unusually low interest rates and exceptional large-scale balance sheet operations by central banks. In a March 2014 paper in the BIS Quarterly Review, Andrew Filardo and Boris Hofmann warned that “if financial markets become narrowly focused on certain aspects of a central bank’s forward guidance, a broader interpretation or recalibration of the guidance could lead to disruptive market reactions.”6 Reacting that month to a change in forward guidance, Narayana Kocherlakota, president of the Minnesota Federal Reserve, lamented publicly that such an approach could not only damage the central bank’s credibility but also contribute to undermining the economic recovery.7 These are also issues that former Fed governor Jeremy Stein took up several times, most pointedly in his powerful May 2014 speech to the Money Marketeers Club of New York University.

El-Erian, “Big Money vs Bernanke: Who’s Right About the Economy,” Atlantic, July 3, 2013, http://www.theatlantic.com/business/archive/2013/07/big-money-vs-bernanke-whos-right-about-the-economy/277548/. 5. Joshua Zumbrun, “Fed Hears Warning That Tightening Policy May Spark Market Tumult,” Bloomberg News, February 28, 2014, http://www.bloom berg.com/news/2014-02-28/fed-hears-warning-that-tightening-policy-may-spark-market-tumult.html. 6. Andrew Filardo and Boris Hofmann, “Forward Guidance at the Zero Lower Bound,” BIS Quarterly Review, March 2014, Bank for International Settlements, http://www.bis.org/publ/qtrpdf/r_qt1403f.htm. 7. Robin Harding, “Federal Reserve Dissenter Kocherlakota Attacks New Guidance,” Financial Times, March 21, 2014, http://www.ft.com/intl/cms/s/0/1607d9b8-b105-11e3-bbd4-00144feab7de.html. 8. Mohamed A. El-Erian, “Here’s Why Jeremy Stein’s Departure from the Federal Reserve Matters,” Business Insider, April 5, 2014, http://www.business insider.com/why-jeremy-steins-departure-is-important-2014-4. 9.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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The net worth of the 400 richest people in America went up by 11 percent, from $1.53 trillion to $1.7 trillion. forward guidance A policy in which central banks say in advance what they are going to do, as a way of introducing greater levels of confidence into the market. This might not sound like a big deal, but central banks, perhaps because they’re acutely aware how many things aren’t under their control, highly prize the few things that are—so the act of binding themselves in advance to a particular course of action upsets them. However, the unprecedented recent years of crazy-low interest rates and kooky new policies such as QE have made the markets very anxious about what happens when there’s a change in direction; this in turn has led to a demand for something resembling forward guidance. In effect, the markets are asking for a bit of notice before the banks turn off the money hose.

In effect, the markets are asking for a bit of notice before the banks turn off the money hose. So both the Federal Reserve and the Bank of England have started to adopt a policy of forward guidance, and have both immediately run into the main problem with it. This is that markets know a central bank will in the event of difficulties always do what it feels needs to be done, and this fact will always trump whatever guidance has been given in advance. Forward guidance therefore ends up being a bit like that thing where children make their parents promise to do something, and the parents promise that they will, and then add, “unless we change our minds, forget, or can’t be bothered.” Frankfurt Often used as an metonym for several different things: the European Central Bank, which is based there; the German view of economic issues (“Frankfurt thinks that . . .”); and the more general economic interest of the euro area, especially as opposed to the interests of the City of London.


pages: 327 words: 90,542

The Age of Stagnation by Satyajit Das

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In February 2015, Yellen abandoned “patient,” simultaneously warning that this did not mean the Fed would be impatient. Forward guidance from the other side of the Atlantic confirmed John Maynard Keynes's fear that “confusion of thought and feeling leads to confusion of speech.”23 On July 4, 2013, European Central Bank president Mario Draghi announced that “key European Central Bank rates [will] remain at present or lower levels for an extended period of time.” On July 5, 2013, the governor of the Bank of Finland, Erkki Liikanen, stated: “Everything depends on the development of the economy.” On July 6, 2013, European Central Bank board member Benoît Cœuré observed: “[forward guidance is] a change in communication but not in monetary policy strategy.” On July 8, 2013, Draghi provided clarification: “We'll have to see what the market reaction has been, is, and will be to this statement.”

He warned of a loss of trust, arguing that “when confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.”20 Facing intractable problems and unpalatable choices after the GFC, politicians abnegated economic leadership. Unelected and largely unaccountable central bankers were left with the responsibility but not the power to deal with an increasingly difficult situation, a position described by the satirical British TV show Yes, Prime Minister's Sir Humphrey Appleby as “the prerogative of the eunuch throughout the ages.”21 With their limited and ineffective policy options, central bankers resorted to “forward guidance”—a tautology, as any guidance must be about future events. They would henceforth communicate commitments on future interest rates, liquidity provision, or QE over a medium- to long-term horizon. The US Fed committed to keeping rates low until the unemployment rate fell below 6 percent. In early 2014, it changed the unemployment target to a non-binding indicator. In May 2014, the employment goal was changed to cover the “disadvantaged,” including the long-term unemployed and workers forced to work part-time.

The president now thought the program demonstrated his personal credibility and that of the European Central Bank. In March 2015, even before the program had actually commenced, Draghi pronounced it a complete success. The increase in length and complexity of central bank statements has paralleled the rise in the size of their balance sheets. With fiscal policy constrained and monetary policy losing potency, forward guidance drew attention to the lack of options. The increasingly shrill utterances of central bankers sounded like the Wizard of Oz claiming superior, supernatural powers. But as in the film, the central bankers were revealing themselves as old men hidden behind drapes, pulling frantically at the levers to maintain an illusion. Leaked transcripts of interviews with former US Treasury secretary Tim Geithner, not intended for publication, revealed that Mario Draghi had no actual plan, making it up as he went along.24 Financial repression is increasingly accompanied by political repression.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

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Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee’s decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.” Yet another convoluted FOMC statement that made little sense. All three dissenters—Plosser, Kocherlakota, and Fisher—would soon be gone from the Fed. CHAPTER 22 Culture Shock If it were possible to take interest rates into negative territory, I would be voting for that. —JANET YELLEN, FEBRUARY 2010 After flinging my baited hook into Grand Lake Stream, I plopped down in the canoe and tried not to tip over my fishing buddy, Charles Plosser.

In February 1994, Greenspan issued the first postmeeting statement after the FOMC raised the fed funds rate, the first tightening since 1989. The statement was spare: ninety-nine words in four sentences. For the next five years, the FOMC released a statement only if a change was made. In May 1999, responding to pressure for further transparency, the Fed pivoted and decided to release a statement after each FOMC meeting, regardless of action, to specify the target level of the fed funds rate, and to provide “forward guidance” regarding the balance of risks. But the biggest change was the decision to release lightly edited but otherwise—at least theoretically—complete transcripts of every meeting, with a delay of five years. In some ways transparency backfired. Previously, the FOMC meetings had been unscripted exchanges. But when members of the FOMC started receiving preliminary drafts of transcripts, they discovered that they were not necessarily eloquent orators.

“QE puts beer goggles”: FRBD: Richard Fisher, “Beer Goggles, Monetary Camels, the Eye of the Needle, and the First Law of Holes” (speech, National Association of Corporate Directors, Dallas, Texas, January 14, 2014), www.dallasfed.org/news/speeches/fisher/2014/fs140114.cfm. “The gas tank is full”: Binyamin Appelbaum, “Q&A: An Advocate for a Quicker Taper,” New York Times, January 27, 2014, economix.blogs.nytimes.com/2014/01/27/qa-an-advocate-for-a-quicker-taper/. “You can’t go from Wild Turkey to cold turkey”: FRBD: Richard Fisher, “Comments on Tailored Regulation and Forward Guidance (With Reference to Dr. Seuss, Strother Martin in Cool Hand Luke and Other Serious Economists)” (speech, Louisiana Bankers Association, New Orleans, Louisiana, May 9, 2014), www.dallasfed.org/assets/documents/news/speeches/fisher/2014/fs140509.pdf. Even during her swearing-in: FRB: Janet Yellen, “Remarks at the Ceremonial Swearing-In,” March 5, 2014, www.federalreserve.gov/newsevents/speech/yellen20140305a.htm.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

But the publication of transcripts of meetings can inhibit free and open discussion, and the style of meetings of the Federal Open Market Committee has undoubtedly changed since such transcripts were first disclosed in 1994; prepared formal statements are read out, while the important private discussions take place at earlier, often bilateral, meetings.26 In any policy setting, there has to be room for private conversations. There are limits to the desirable degree of transparency. It is also important for central banks to be honest about what they do not know. A case in point was the recent, and rather short-lived, experiment in ‘forward guidance’ adopted by the Federal Reserve and the Bank of England in 2013. Both central banks wanted to provide more information about the likely future path of official interest rates. In the first instance, this was a laudable attempt to reduce uncertainty about how they might respond to developments in the economy. But it soon became an attempt to predict the future path of interest rates. They were not the first to be tempted down this path.

It is that monetary policy runs into diminishing returns; although continually falling real interest rates encourage households to bring forward spending from the future to the present, there comes a point when they are reluctant to sacrifice more and more future spending to increase current spending. I shall return to this quandary in Chapter 9. Now that official interest rates are virtually at zero, an even more extreme version of forward guidance has been proposed by some economists as a way of stimulating the economy.32 The idea is that central banks should promise to allow inflation to go above their normal target at some point in the medium term so that real interest rates – nominal rates less expected inflation – can fall to more negative levels, so stimulating spending. This is a counsel of despair and is literally incredible.

Willetts, David (2010), The Pinch: How the Baby Boomers Took Their Children’s Future – And How They Can Give it Back, Atlantic Books, London. Wolf, Martin (2010), ‘The Challenge of Halting the Financial Doomsday Machine’, Financial Times, 20 April 2010. —— (2014), The Shifts and the Shocks, Penguin, London. Woodford, Michael (2003), Interest and Prices, Princeton University Press, Princeton, New Jersey. —— (2013), ‘Forward Guidance by Inflation-Targeting Central Banks’, mimeo, Columbia University. Woollcott, Alexander (1934), While Rome Burns, Viking Press, New York. Yermack, David (2013), ‘Is Bitcoin a Real Currency?’, National Bureau of Economic Research Working Paper 19747, Cambridge, Massachusetts. Zweig, Stefan (1943) The World of Yesterday, Viking Press, New York. ACKNOWLEDGEMENTS My biggest debt of gratitude is to the team with which I worked in the Bank of England for twenty-two years.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

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3D printing, balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

I’d like to see other parts of the government play their roles.’36 It may not have been the ideal tool, but it had become the only option. Fiscal headwinds were on the horizon, and there was growing pressure on the Fed to do more. Columbia University’s Michael Woodford led the charge with his presentation at Jackson Hole in August 2012.37 Woodford gained notoriety for insisting that ‘forward guidance’, rather than a renewed round of quantitative easing, was the way to gain traction at the zero lower bound (ZLB). On 13 September 2012, the Fed went all-in, announcing the open-ended bond-buying programme known as QE3, along with ‘forward guidance’ to reassure market participants that the Fed was likely to keep the federal funds interest rate near zero at least through 2015.38 The Fed continued its elevated bond-buying programme for more than a year before it began tapering its purchases by $10 billion per month in December 2013.

Despite the warnings, an intransigent Congress allowed sequestration to take effect the following month. Yet growth picked up, accelerating from an annual rate of 2 per cent in 2012 to 2.6 per cent in 2013. How could that be? Were the fiscal headwinds exaggerated? Was this proof that austerity worked? Had Bernanke been too pessimistic about the relative efficacy of monetary policy? Did doubling down with QE3 and forward guidance at the end of 2012 not only prevent a slowdown but also so juice the economy that growth actually accelerated in 2013? Scholars will undoubtedly debate these questions for a while yet. At present, economic opinion appears to be coalescing around the following narrative. First, experience demonstrates that monetary policy can counteract fiscal tightening, even at the ZLB, provided it is carried out by a sufficiently credible and committed central bank.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

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3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

Better still, policymakers ought to tackle excessive private debts directly and force banks to write them down. In August 2013, the new governor of the Bank of England, Mark Carney, who had the good fortune to leave his job running Canada’s central bank just as that country’s housing bubble appears to be bursting, called time on QE and tried a new trick designed to give monetary policy more traction: “forward guidance”.436 He sought to reassure markets, businesses and the general public that he would not raise interest rates until the unemployment rate had fallen to 7 per cent – so long as this did not threaten to destabilise inflation or the financial system.437 But although Carney had been lionised by Osborne – who hailed him as “the outstanding central banker of his generation”, something his peers might dispute – markets were not impressed by his announcement.438 Far from falling after he spoke, longer-term interest rates rose substantially.

Banks have also tightened their official lending criteria, swinging from recklessness to stinginess. 431 International Monetary Fund, United Kingdom 2013 Article IV Consultation, July 2013, Figure A4.14 432 International Monetary Fund, United Kingdom 2013 Article IV Consultation, July 2013. Footnote 9, page 16 433 The Funding for Lending scheme was launched in August 2012 and subsequently extended to January 2015. 434 In April 2013, the terms were made more generous for banks that lent more and sooner to smaller businesses. 435 http://www.hsbcnet.com/gbm/global-insights/insights/2013/stephen-king-pain-killers-might-work-but-economies-need-antibiotics.html 436 Forward guidance involves signalling what future interest rates are likely to be. But as Erik Nielsen, the chief economist of Unicredit, has pointed out, if a commitment to keep interest rates low is too weak and full of escape clauses, it is likely to have little effect on markets’ expectations. On the other hand, a firm commitment to keep interest rates low come what may risks undermining a central bank’s credibility, because if it is successful and stimulates the economy, the central bank will subsequently be torn between leaving rates low and risk inflation taking off or breaking its promise and losing credibility.


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The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

First, one obviously needs to use the most effective policies available. The busts that follow prolonged credit booms are both very costly and very hard to remedy.7 One reason for this is that with interest rates at or close to the zero bound, the effectiveness of monetary policy is constrained, though not zero. Prolonged periods of ultra-low interest rates, together with quantitative easing and ‘forward guidance’ – indications of low policy rates far into the future – have brought only a modest recovery. Thus, as of early 2014, neither the US nor the UK had achieved rates of growth higher than before the crisis. The recovery had, accordingly, not even begun to close the proportional gap between actual output and the pre-crisis trend. Second, as Simon Wren-Lewis of Oxford University notes, the impact of unconventional monetary policy is quite hard to calibrate.8 Nobody doubts that a monetary policy capable of generating adequate growth of nominal demand exists.

Third, by persisting with strongly supportive fiscal policies until the recovery was well entrenched, the pressure on monetary policy would have been reduced. This could have brought the benefit of not relying so much on a policy that amounts to manipulating asset prices and encouraging further borrowing. The risks of such an expansionary monetary policy, even if effective, are real. Furthermore, while not as unmanageable as some critics allege, exit from unconventional monetary policy, including massively expanded balance sheets and forward guidance, is sure to create bumps along the road. With a more expansionary fiscal policy, monetary policy could have been less extreme than it was. For all these reasons, the decision to tighten fiscal policy after 2010 was almost certainly premature and unwise. It would have been better to rely more on fiscal policy and less on monetary policy. Of course, by 2014, this debate had largely become an historic one.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population, zero-sum game

The new governor of the Bank of England, Mark Carney, dabbled in versions of policies such as this in his previous job in Canada. ‘Open-mouth operations’ involve using communications to guide down expectations of future interest rises. ‘Forward guidance’ is the innovation of the moment, involving the managing-down of expectation using speeches and press statements. The hope would be that a company would be more likely to take out a loan for more equipment, or a homebuyer a mortgage, if there exists confidence on low rates over a period of years. Both Mr Carney and the ECB president Draghi deployed forms of ‘forward guidance’ in July 2013. The end result is lower interest rates for longer. The guidance can be supplemented with a conditional threshold too. For example, unemployment would have to dip below 6 per cent before interest rates were to rise.


pages: 317 words: 100,414

Superforecasting: The Art and Science of Prediction by Philip Tetlock, Dan Gardner

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Affordable Care Act / Obamacare, Any sufficiently advanced technology is indistinguishable from magic, availability heuristic, Black Swan, butterfly effect, cloud computing, cuban missile crisis, Daniel Kahneman / Amos Tversky, desegregation, drone strike, Edward Lorenz: Chaos theory, forward guidance, Freestyle chess, fundamental attribution error, germ theory of disease, hindsight bias, index fund, Jane Jacobs, Jeff Bezos, Kenneth Arrow, Mikhail Gorbachev, Mohammed Bouazizi, Nash equilibrium, Nate Silver, obamacare, pattern recognition, performance metric, Pierre-Simon Laplace, place-making, placebo effect, prediction markets, quantitative easing, random walk, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Silicon Valley, Skype, statistical model, stem cell, Steve Ballmer, Steve Jobs, Steven Pinker, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Watson beat the top human players on Jeopardy!

The Federal Reserve appears thus to have concluded that, although the public may clamor for the truth, it is not ready for the truth. Try to imagine the mild-mannered Ben Bernanke channeling Jack Nicholson’s rage from the film A Few Good Men: “You can’t handle the truth.” In this view, we just aren’t mature enough to handle the numbers. So we must continue to decode statements like this from Janet Yellen in February 2015: “It is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings.” See James Stewart, “Wondering What the Fed’s Statements Mean? Be Patient,” New York Times, March 13, 2015, C1. The implications for the IC are clear. Even if the IC eventually went as far as the Fed toward quantifying assessments of uncertainty in its internal deliberations, the IC should stick with sphinxlike external messaging. 13.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

The monetary model favoured in the era of financialisation has been very different from the doctrines of the gold standard, and involves rigorous adherence to a pre-announced target. The chosen target changes according to the fashion of the time. In the 1980s money supply growth was the preferred indicator, then inflation-targeting came into vogue. The scale of indebtedness that emerged in the global financial crisis led many to favour commitment to a path of debt reduction. At the time of writing, forward guidance – a supposedly binding conditional declaration of future intentions – is coming to the end of its brief moment in the sun. These strategies of commitment to declared goals have intellectual and ideological attractions. The political right applauds the abandonment of discretion, or at least the appearance of such abandonment, which supposedly secures economic stability with minimal political intervention.


pages: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

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1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, charter city, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital map, diversification, Doha Development Round, edge city, Edward Snowden, Elon Musk, energy security, ethereum blockchain, European colonialism, eurozone crisis, failed state, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, global supply chain, global value chain, global village, Google Earth, Hernando de Soto, high net worth, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, labour market flexibility, labour mobility, LNG terminal, low cost carrier, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, mittelstand, Monroe Doctrine, mutually assured destruction, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Plutocrats, plutocrats, post-oil, post-Panamax, private military company, purchasing power parity, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, TaskRabbit, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, transaction costs, UNCLOS, uranium enrichment, urban planning, urban sprawl, WikiLeaks, young professional, zero day

Both have claimed to affirm bedrock American values yet with little clarity over what operational principles and policies to pursue. Obama’s 2015 National Security Strategy was more a meditation on the past than a vision for the future—more talk than action. A grand strategy premised more on containing than shaping Russia, Iran, and China smacks more of futility than vision, while the minimalism of habitually uttering the need for “restraint” provides no forward guidance. America’s top diplomats have forgotten that standing on the shoulders of giants doesn’t make one a giant. They have instead been little more than celebrity firemen and firewomen, leaving little dent on the international arena other than the weight of their self-congratulatory autobiographies. So far this century, America’s leaders have scarcely nudged history, let alone shaped it. America needs a strategy for what it wants to do with the rest of this century.