First up Nippon's Fiscal Cliff:
And this one might prove more precipitous than its famous US cousin.
From the FT’s Ben McLannahan:
In an echo of worries in the US over the $600bn of spending cuts and tax increases due to take effect in January – the so-called fiscal cliff – Japanese politicians are at loggerheads over a bill that would allow the government to borrow the Y38.3tn ($479bn) it needs to finance this year’s deficit.
In return for support of the bill in an extraordinary parliamentary session beginning on Monday, opposition parties are demanding that Prime Minister Yoshihiko Noda fulfil his pledge to call a general election. So far, Mr Noda has refused to set a date, fearing that his Democratic party of Japan – adrift in the polls – will be bounced from office.
And:Failure to pass the bill by the end of November, when the parliamentary session ends, could result in “a very disastrous situation”, said Ikuko Shirota, deputy director of the market finance division at the Ministry of Finance.On the upside, the government says it has enough cash to last until the end of November without passage of the controversial bill...MORE
Scheduled bond auctions would be scrapped for the first time in decades, she said, and the government – the world’s most indebted, with gross borrowings and guarantees of Y1,021tn at the end of June – would effectively run out of money.
“Cancelling” QE debt
There’s something we’ve never quite got about this debate on “cancelling” all the government bonds acquired by central banks under quantitative easing, either for helicopter money or for debt relief.
Now the Governor of the Bank of England has weighed in:Finally, what looks to be 4000 words on:
It is peculiar, to say the least, that some of the same people who believe that the Governor of the Bank is too powerful also believe that he should stand on the steps of Threadneedle Street distributing £50 notes – a policy which you will appreciate is rather hard to reverse…
Giving money either to the government or to households directly, or indeed cancelling our holding of gilts, means that the Bank of England has no assets to sell when the time comes to tighten monetary policy. And when Bank Rate eventually starts to return to a more normal level, as one day it will, the Bank would then have no income, in the form of coupon payments on gilts, to cover the payments of interest on reserves at the Bank of England that we had created. The Bank would become insolvent unless it created even more money to finance those interest payments, and that would lead ultimately to uncontrolled inflation....MUCH MORE
“Misunderstanding Financial Crises”, a Q&A with Gary Gorton
Read enough books and economics papers about the recent US financial crisis, and at some point you might notice something odd.Wow.
Most of them are about the factors that made the crisis and subsequent recession so profound and enduring — excess leverage, deregulation, lax lending standards, the rise of securitisation, blindness of the rating agencies, fraudulent bankers — but very few of them are about what actually started the crisis.
Gary Gorton’s work is different. His 2009 book, “Slapped by the Invisible Hand”, argued that although these factors were all present, they were also somewhat beside the point. The financial crisis started the way all systemic financial crises start: as a bank run. The only difference was that this bank run took place in the shadow banking system, and the creditors who started the run weren’t depositors of retail banks, but the counterparties of investment banks in repo and commercial paper markets.
More to the point, he has long argued that market economies are inherently vulnerable to such runs. And to begin thinking of why the recent crisis happened at all and how to prevent another, it is at least as important to address the question of why the US didn’t have a crisis between 1934 and 2007. And to answer that, you need to know something about how the country’s banking system evolved in the century leading up to 1934.
In his new book, “Misunderstanding Financial Crises: Why We Don’t See Them Coming”, Gorton frames the recent crisis in the context of this longer history. And he also tackles some of the more complicated epistemological problems of modern-day economics (and in particular, macroeconomic models).
Along the way, he arrives at some provocative conclusions — including a few that would probably make a lot of regulators, economists, and especially the more severe critics of the banks and bankers a little uncomfortable.
Gorton agreed to have an email back-and-forth with FT Alphaville about the book, and beneath we reproduce the transcript.
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[FT Alphaville:] You make the case that systemic financial crises all share a common structural cause: they begin as runs on short-term bank debt. Before the Quiet Period of 1934-2007, this meant depositors asking that their demand deposits be converted to currency or specie. In the recent crisis, it was the repo counterparties of banks raising haircuts and pulling funding in the shadow banking system. But whether in the regulated or shadow banking system, the one element common to all bank runs is that creditors begin to have doubts about the collateral backing their short-term debt. Explain why and how this happens.
[Gary Gorton:] The output of banks is money, in the form of short-term debt which is used to store value or used as a transaction medium. Such money is backed by a portfolio of bank loans in the case of demand deposits, or by collateral in the form of a specific bond in the case of repo....MUCH MORE
