Category Archives: Economics

Aaa – aaa – PLUS! Gesundheit!

Rating agencies dominate the financial markets and the news these days. Standard & Poor’s recent downgrading of French, Spanish, Austrian (and other, but not German) government bonds from “AAA” to “AA+” caused waves in media and markets even before they were official. But maybe it is much ado about nothing. Bond yields didn’t go up in France and Spain, as markets have seemed to downplay the downgrade. Maybe common sense is ticking in? Because, what is it that these rating agencies can? They could rate junk financial instruments “AAA” before the financial crisis. Standard & Poor’s rated Lehman Brothers “A” in September 2008 (just before Lehman went bankrupt). This rating … Continue reading

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The Krugman Multiplier is too big

Paul Krugman is a very active blogger. Almost every time he writes a post on his New York Times blog, there are several comments made around the economic blogosphere. And sometimes Krugman will respond to a few of the comments made, and then it sets off further comments, and so on. It is a Krugman Blog Multiplier. I posit that it needs no formal empirical evidence to establish that it is way above 1. Way above. In this New Year’s post I’ll show a recent example, and argue why this multiplier is too high, and why one should not always “exploit” large multipliers. Probably one of the issues on which … Continue reading

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Structural Divergence in Europe: Death Foretold

One of my mantras is that doing economics is not about “being right,” but about getting wiser all the times. Note that the two things may not overlap. I, for example, would rather be wrong all of the time but know why I am being wrong instead of being right without having a clue as to why. So, I think it is a good mantra, and I will stick with it. Now, after the beginning of the current financial crisis and recession, more or less prominent economists lined up to tell the world that they were “right” as they had seen the crisis coming. Some actually had something to back … Continue reading

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At the Fed: What did come next?

September 22 the Federal Reserve initiated “Operation Twist” where they announced that they would start restructuring its debt by buying up long bonds with the proceedings from short bond sales, with the aim of lowering the long-term yields. As I mentioned in my post on that occasion, the Fed and Ben Bernanke had then exhausted the three main ways of conducting unconventional monetary policy as defined by Bernanke himself in a paper from 2004: I. Shaping Interest-Rate Expectations; II. Altering the Composition of the Central Bank’s Balance Sheet;  III. Expanding the Size of the Central Bank’s Balance Sheet. In case nothing new would happen to the American economy, the obvious … Continue reading

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Come on Baby, Let’s Do the Twist!

After yesterday’s press release by the Fed, many commentators started talking about “Operation Twist” even though no such thing is mentioned in the release. Accompanying the press release on the Federal Reserve site, was, however, a document containing the term in parenthesis. Some could immediately be confused or even scared by this. Would this be yet an addition to the endless series of acronyms that has emerged during the financial crisis? Troubled and Worthless Interest-bearing Securities Task-force? Luckily not. It just reflects a return to the old days. And “twist” actually means what it says: “twist.”  In 1961, the Kennedy administration and the Fed engaged in an operation of selling … Continue reading

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ECB too Strong for Stark

Officially, member of the ECB’s executive board Jürgen Stark has decided to quit his position prematurely for “personal reasons” (mentioned twice in the brief press release). This can, of course, cover a lot, but does not exclude what is on most people’s mind: He is quitting because he is in opposition to ECB’s actions on the European bond market. Like his fellow contryman, German Axel Weber, he has obviously not been pleased by the ECB’s slow but steadily increasing involvement in fiscal affairs. It is well known that decisions to purchase sovereign debt in the secondary market (which just about makes it constitutionally legal), have not been unanimous, and although … Continue reading

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ECB public debt purchases by numbers

I wrote last week about the ECB’s renewed purchases of public Euro debt (in particular Spanish and Italian). Now the actual numbers are out, and the confirm what market participants signaled: The ECB was not in for a small operation. The ECB purchased for around 22 billion Euros, thereby raising its stock of debt purchased under the Securities Markets Programme to 96 billion Euros. An unprecedented increase in the stock of almost 30 %. Today, the ECB will suck up the associated liquidity created (and will do so the next week, and the next . . . ). From a weekly perspective, the operation appeared successful as bond yields have … Continue reading

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Posted in Economics, Monetary policy | Tagged , , | 1 Comment

Commitment in action: Federal Reserve’s interest-rate “path”

It is a big shame that today’s FOMC meeting is one of those not to be followed by a press conference and a Q&A with Ben Bernanke. The policy decision is one of the more spectacular in recent times. Not because the Fed decided to keep the target for the Federal Funds Rate within the 0–0.25% range, where it has been since December 2008. The big news, however, is that the non-move is accompanied by an explicit commitment to keep it there for the next two years (if current conditions continue). This is very specific compared to previous talk about keeping rates low for “an extended period” (which has been … Continue reading

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