Now, Willem Buiter can occasionally drive me mad. Sometimes he makes me laugh far far more than any Dutch banking expert has a right to, such as when he talks about the muscalar technique of American central bankers:
The cancellation of the Merrill Lynch acquisition would have meant the immediate insolvency of Merrill Lynch. To prevent this, the Treasury Secretary, Hank Paulson and the Fed Chairman, Ben Bernanke, jointly and severally took Ken Lewis into the basement and beat him with a rubber hose until he promised not to invoke the MAC clause.
And his clarification of why he writes his blog is brilliant.
Yesterday he produced one of those postings that make you want to cut out or underline half of the bits in it. First, as I said yesterday, why the GDP figures are mad:
The difference between data and information has been underlined emphatically by the release on Friday, October 23rd, of the UK GDP data for the third quarter of 2009. [Forecasters had predicted 0.2%] What came out was -0.4%. Shock horror! Never mind that anyone providing point forecasts of anything without also offering at least some information about of the rest of the probability distribution of future outcomes (variance, skewness, kurtosis, single-peakedness etc) is either a fool, a knave (or both) or caters to an audience consisting of bears of very little brain.
He explains neatly how the UK crisis has two parents, a domestic one and a global one. Then onto the classic Augustinian issue of the day:
It would not be sensible, unless the markets lose confidence in the ability of the UK authorities to restore fiscal-financial sustainability – to front-load the necessary tax increases and public spending cuts. What should be front-loaded is the credible commitment to a somewhat deferred fiscal tightening. The reason is that the credible commitment/announcement today of future fiscal tightening is expansionary today . . . (but) . . . When the fiscal tightening measures whose anticipation provides a boost to aggregate demand today are actually implemented, demand will fall, of course. It is only the anticipation of future fiscal tightening that is expansionary. The actual implementation of fiscal tightening is contractionary when it occurs.
And on why the Tories are announcing too quickly:
The Tories are untried and untested. They did the right thing pointing out the inevitability of major fiscal pain; their apparent desire to start the fiscal tightening immediately and thus not to take full advantage of the announcement effects of future fiscal tightening may have been motivated by a recognition that they start out without a track record, without a reputation and therefore without any credibility capital to spend. A hung government might have some fiscal credibility if Vince Cable were the chancellor, but I am not holding my breath.
He then – very wisely – recommends finding the fiscal cuts that have less demand impact, like cutting future pension entitlements, and preannouncing future VAT rises. And the Mansion Tax?
VInce Cable proposed a tax on expensive residential housing. The fact that he forgot to consult his party before making his proposal does not detract from its merits. Better even than a tax on property would be a land tax
And even better . . .
I would focus the education cuts on higher education, at the same time setting the universities free to charge what the market will bear. Scholarships and student loans would have to take care of the unacceptable distributional consequences of market-driven fee structures.
Finally, on QE:
Bank Rate still stands at 0.50 percent? Why not zero (or even some slightly negative number)? The technical arguments against a zero or slightly negative Bank Rate are unconvincing, not to say pathetic . . . The Asset Purchase Facility of the Bank of England, which has been in operation since the beginning of 2009 has been wasted on purchases of government securities (QE). It was wasted, because there were no anomalies in the market for government debt that made it desirable for the central bank to absorb large quantities of public debt.
The other excellent piece is Adam Posen’s first speech from his new role on the MPC. His attack on ‘mechanical monetarism’ seems brilliant to me:
Remember, monetarism was tried as a guide to monetary policy in the UK and in the US in the 1980s. In both economies, as well as elsewhere around the world, the relationship between narrow money (which central banks can control) and broad money (which central banks cannot) was not dependable for setting policy, and the relationship between growth in either monetary aggregate and inflation was even more dubious . . . Despite hundreds of person-years of economists’ time with the latest econometric techniques available, sponsored by institutions with monetarist leanings, no more robust relationships between monetary aggregates and outcomes we actually care about in prices and output have been found.
But all this points to even more confusion as to how QE really works. Like David Miles, Posen thinks that QE works in odd ways, not just the ‘pumping money into the economy’ way . Asset prices up. Finance better for big companies. But is this distorting?
Finally, Duncan has analyses Osborne’s plan to force banks to pay bonuses as equity. Duncan doesn’t like it much – because it dilutes the government’s stake. I sort of like it. The government loses out when the banks pay out bonuses as cash, too – when compared with the alternative world of the banks just keeping the cash on their balance sheet and being stronger. Sure: but doesn’t the equity-pay solution force other investors (the market) to come up with cash to fund the banks when the employees finally sell their bonus-shares and buy the Ferarri? So it does lead to stronger banks . . . Duncan is right that you don’t get money for nothing, though.
Need some more thought, have no time: I’m due to speak before Civitas in an hour, on A Balancing Act. Gulp.