From China / Central Banking East and West since the Crisis…

I had the pleasure of presenting “Central Banking East and West since the Crisis,” at a discussion hosted by the Shanghai Development Research Foundation (SDRF) and Friedrich Ebert Stiftung.

Key takeaways include:

  • Much has changed in China and central banking in the last decade.
  • Most analysis of central bank balance sheets fails to incorporate the impact of the People’s Bank of China (PBOC) on the provision of global liquidity. This is a critical error – especially as the Chinese yuan (CNY) moves toward reserve currency status.
  • The Federal Reserve, PBOC, Bank of Japan, and Bank of England were early providers of global liquidity in the aftermath of the crisis. Yet, after 2011, central bank liquidity created distortions.
  • Extraordinary monetary policies were far from costless.
  • Analysis of speculative activity in futures markets after large injections of central bank liquidity reveals that:
    1. Speculative activity skyrockets.
    2. Net speculative long positions increase and push valuations upward.
    3. The volatility of investor positioning or investor switching behavior also increases.
  • Removal of excess central bank liquidity remains one of the most formidable challenges for markets today.

For slides accompanying the presentation: www.CenterforFinancialStability.org/speeches/ShanghaiDRF_101518.pdf

On a parenthetical note, after over two decades of travel to China, this was one of my most extraordinary visits.

CFS Financial Crisis Timeline

As the 10-year anniversary of the global financial crisis approaches, assessment of key events before, during, and since is essential for understanding varying dimensions of the crisis.

The CFS Financial Timeline, created and managed by senior fellow Yubo Wang, seamlessly links financial markets, financial institutions, and public policies. It:

  • Covers more than 1,100 international events from early 2007 to the present.
  • Provides an actively maintained, free, and easy-to-use resource to help track developments in markets, the financial system, and forces that impact financial stability.
  • Curates essential inputs on a real time basis from established public sources.

Since 2010, the Timeline has become an integral part of the work done by scholars, students, government officials, and market analysts. View the Timeline.

We hope you find it of use and interest.

Fed Balance Sheet Since 1914

Kurt Schuler (CFS senior fellow in financial history) and students of Steve Hanke (CFS special counselor) converted the Fed’s weekly balance sheet from its beginning into spreadsheet form.

The data should prove useful for anyone concerned with the quantitative study of monetary policy in the United States over the last 100+ years.

Our joint Johns Hopkins / CFS working paper, “The Federal Reserve System’s Weekly Balance Sheet since 1914,” is available here.

Accompanying Spreadsheets

Similarly, Bank of England’s Ryland Thomas informs of an improved balance sheet dataset for the Bank and new paper “The Bank of England as lender of last resort: new historical evidence from daily transactional data.”

Fed Weekly Balance Sheet since 1914 Now Available

With several current or former undergraduate students of CFS Special Counselor Steve Hanke, I have converted the Fed’s weekly balance sheet from its beginning into spreadsheet form. The data should prove useful for anyone concerned with the quantitative study of monetary policy in the United States over the last 100+ years. Our working paper, “The Federal Reserve System’s Weekly Balance Sheet since 1914,” is available here.

The working paper is based on three earlier papers that I have previously written about; all are available at the link above:

“Insights from the Federal Reserve’s Weekly Balance Sheet, 1914-1941” by Justin Chen and Andrew Gibson,” January 2017 (post)

“Insights from the Federal Reserve’s Weekly Balance Sheet, 1942-1975” by Cecilia Bao and Emma Paine, May 2018 (post)

“Insights from the Federal Reserve’s Weekly Balance Sheet, 1976-2017” by Nicholas Fries, July 2018 (post)

The Fed’s Weekly Balance Sheet since 1976

Students of CFS Special Counselor Steve Hanke have previously written two papers digitizing the weekly balance sheet of the Federal Reserve System from 1914-1941 and 1942-1975 and analyzing developments in the Fed’s balance sheet. I wrote about them in previous posts. Now a third paper completes the data and the analysis by bringing the story up to the present. The author is Nicholas Fries and the paper is called “Insights from the Federal Reserve’s Weekly Balance Sheet, 1976-2017.”

The most recent paper is no. 114 (currently the latest paper) in this working paper series that Hanke edits. The earlier papers were nos. 70 and 104 in the series. The data files can be viewed from links under the paper.

The Fed has made digitized weekly data of its weekly balance sheet available since 1996, but not earlier, and from 1996-2002 the data were only previously available as individual files on the Fed’s Web site, not in a spreadsheet. From 2002 downloadable spreadsheet data are available. Besides appreciating the service Fries has done making the data available, readers will appreciate his balance sheet analysis, which is simple and to the point.

One more paper is left in the series on the Fed’s balance sheet. I will post about it within the next month.

The Fed’s Balance Sheet, 1942-1975

Two students of CFS Special Counselor Steve Hanke have digitized the Federal Reserve System’s weekly balance sheet from 1942 to 1975, accompanying the data with some basic analysis of how assets and liabilities changed over the period. Particularly noteworthy is the behavior of the Fed’s gold reserves, since the period includes the establishment, operation, and end of the Bretton Woods version of the international gold standard.

Two of Hanke’s previous students digitized the balance sheet from its start in 1914 to 1941. The recent digitization, by Cecilia Bao and Emma Paine, is part of their working paper, “Insights from the Federal Reserve’s Weekly Balance Sheet, 1941-1975,” no. 104 in the Studies in Applied Economics series that Hanke edits. The earlier paper, which I blogged about in a previous post, is no. 73 in the series. Both papers and their accompanying spreadsheet workbooks can be accessed from this page. A third paper to be released later this summer will bring the data and analysis up to the present. I read and commented on drafts of all three papers.

Paul Tucker interview on central banking and “Unelected Power”…

The Center for Financial Stability (CFS) thanks Sir Paul Tucker – Former Deputy Governor, Bank of England and Chair, Systemic Risk Council, and Harvard Fellow – for “Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State.”  “Unelected Power” is broad and deep.  It is a joy to read – with priceless quotes and footnotes.

We are grateful to Paul for sitting down with CFS to discuss:

– Governance and central banking,
– A “Money – Credit Constitution” with emphasis on “inside” and “outside” money,
– Division between fiscal and monetary activities,
– Examples of central banking excellence,
– Prospect for normalizing monetary policy,
– Regulatory policy – ten years after the crisis,
– Surprises and motivation for writing “Unelected Power.”

The following are excerpts from the conversation.
http://centerforfinancialstability.org/research/Tucker_Unelected_Power.pdf

FRB Announces Chair and Deputy Chair Appointments for Federal Reserve Banks

The Board of Governors of the Federal Reserve System (“FRB”) appointed chairs and deputy chairs of all Federal Reserve Banks for 2018.

Each Reserve Bank has a nine-member board of directors, three of whom are appointed by the FRB. For each bank, one appointee is designated as the chair, and one appointee is designated as the deputy chair. The following is a list showing the chair and deputy chair for each Bank:

  • New York: Sara Horowitz (Chair), Denise Scott (Deputy Chair);
  • Boston: Gary L. Gottlieb (Chair), Phillip L. Clay (Deputy Chair);
  • Philadelphia: Brian McNeill (Chair), Phoebe Haddon (Deputy Chair);
  • Cleveland: Dawne S. Hickton (Chair), Dwight E. Smith (Deputy Chair);
  • Richmond: Margaret G. Lewis (Chair), Kathy J. Warden (Deputy Chair);
  • Atlanta: Michael J. Jackson (Chair), Myron A. Gray (Deputy Chair);
  • Chicago: Anne R. Pramaggiore (Chair), E. Scott Santi (Deputy Chair);
  • St. Louis: Kathleen M. Mazzarella (Chair), Suzanne Sitherwood (Deputy Chair);
  • Minneapolis: Kendall J. Powell (Chair), Harry D. Melander (Deputy Chair);
  • Kansas City: Rose M. Washington (Chair), Steve Maestas (Deputy Chair);
  • Dallas: Matthew K. Rose (Chair), Greg L. Armstrong (Deputy Chair); and
  • San Francisco: Alexander M. Mehran (Chair), Barry M. Meyer (Deputy Chair).

Global Markets into 2018

The Center for Financial Stability (CFS) hosted a small private workshop for leaders in finance to delve into issues that will shape the future of asset values and investment management on December 6.

CFS Special Counselor Jack Malvey set the stage with an essay “Toward the Mid-21 st Century Global Financial System” –
www.CenterforFinancialStability.org/research/MalveyGlobal_Dec_2017.pdf

Workshop topics included:

– Geopolitics and Big Picture Challenges through 2020 – AI, cyber, etc;
– Global Macro, Quantitative Tightening, and Financial Stability;
– Financial Industry Transitions – Active versus Passive Management, etc; and
– Opportunities and Risks (a selection follows).

OPPORTUNITIES

– Buy cash today – the rate of return will be extraordinarily high.
– Central banks will more actively incorporate financial stability into actions and mandates.
– Emerging markets will outperform.
– The Fed desires to move further away from the zero lower bound.
– NPLs in China are overstated / bank earnings mitigate and neutralize risks.
– Global macro investment opportunities via uneven tightening.

RISKS

– I will buy cash – but tomorrow.
– Bitcoin correction.
– Limited attractive equity names based on valuation / similar to Tokyo in 1989.
– Geopolitical tensions will increase with North Korea, China, Russia, and Saudi Arabia.
– Inflation surprise / data may be misread.
– Artificial intelligence channeled for ill.

Best wishes into the Holiday Season and 2018!

President Trump Nominates New Fed Chair

President Donald J. Trump nominated Jerome H. Powell to be the next Chair of the Federal Reserve System. Pending Senate confirmation, Mr. Powell – a current member of the Board of Governors of the Federal Reserve System (“FRB”) – will replace current Chair Janet Yellen when her term expires in February 2018. Mr. Powell vowed to use his position to pursue the FRB goal of “stable prices and maximum employment.”

Mr. Powell has been an FRB Governor since 2012. He also served as Assistant Secretary and Undersecretary of the Treasury under President George H.W. Bush, and was a visiting scholar at the Bipartisan Policy Center in Washington, D.C.

Chair Yellen has served in her position since February 2014.