Interesting

Posted by Tim Worstall

http://www.forbes.com/sites/timworstall/2015/03/06/interesting-question-are-there-actually-enough-bonds-for-the-ecbs-qe/

http://blogs.forbes.com/timworstall/?p=16967

If we look at the total universe of government bonds in the eurozone then of course there’s enough bonds for the European Central Bank to do the quantitative easing which they announced the details of yesterday. They’re launching €1.1 trillion of that QE and the profligate governments of Europe most definitely have that much debt out there: and rather more in fact. However, the ECB has hedged its program around with several restrictions. And it’s not entirely obvious that there’s enough qualifying debt for them to be able to actually complete the program as planned. Perhaps the biggest difficulty is in German Bunds (the equivalent of Treasuries in the US, Gilts in the UK) but that’s not the only one that we might want to ponder over.

The difficulty is those very rules that the ECB has put around the purchases.

OK, as background, of course it’s good that they are starting QE. As a matter of public policy we now know (from the examples of the Fed and BoE, if no one else) that unconventional monetary policy really does help at the zero lower bound. So as a basic point we’re really only wondering why it has taken the ECB six years to start this obvious and beneficial policy (don’t wonder too much. The answer is that good economics was stymied by bad politics).

OK, that’s good so far. However, there’s still a massive fear of “mutualising” the debt. That is, that the taxpayers of one eurozone country might end up on the hook for the losses that come about if some other eurozone country defaults on its bonds. Or even the losses that come from price changes. So 80% of the purchases are going to be by the local branch of the ECB (Bundesbank for Germany, Bank of France for France and so on) and the credit and price risks remain on the books of those local branches. Further, that 80% of purchases is only going to be in the local bonds of those national branches. So, the Bank of France buys French debt, the Bundesbank German and so on. Only the other 20% is spread out across the zone as a whole and done by the ECB centrally (and Greece ain’t in the program, not until the deal gets signed off in a few months).

And then there’s this:

The rate on securities from Spanish two-year notes to Belgian 30-year bonds dropped to all-time lows after ECB President Mario Draghi said Thursday the euro-area’s national central banks will start buying the bonds of their home markets from March 9. Germany’s two-year debt underperformed its peers after the ECB said it wouldn’t include securities with yields below its minus 0.2 percent deposit rate.

Hmm. If we have a look at Germany’s debt then we see that the rate on short term paper is well below that 0.2% rate. So that can’t be included. 10 year Bunds are just above that rate but how long will that last? And 30 year bunds, well, there’s also something of a problem there:

EMU bond yields are already at unprecedented lows, with two-year rates below zero in seven countries. German, Austrian, Dutch and Finnish yields are negative even at five-year maturities. There is a chronic shortage of assets to buy as budget deficits keeping falling.

http://www.forbes.com/sites/timworstall/2015/03/06/interesting-question-are-there-actually-enough-bonds-for-the-ecbs-qe/

http://blogs.forbes.com/timworstall/?p=16967

Posted by Tim Worstall

http://www.forbes.com/sites/timworstall/2015/03/06/yet-another-financial-rigging-scandal-in-the-city-of-london/

http://blogs.forbes.com/timworstall/?p=16964

They’re certainly coming thick and fast, aren’t they, accusations and findings of rate and market rigging in the financial markets? We’ve had foreign exchange, precious metals, at least two rigging scandals about Libor and here comes the next one. An investigation into whether the banks rigged the liquidity auctions back at the heart of the financial crisis itself.

The basic thought is that the banks weren’t paying enough in interest costs for the emergency liquidity they were getting from the Bank of England. This happened because they were colluding over the prices they offered to pay for that very liquidity. All of which, if true, looks at the very least to be most ungrateful. Here’s the State willing to bail you out (and the banks would have gone under without this liquidity) and you’re going to cheat said State over the price you pay for the help?

It does have to be said though that this is the beginning: nothing has been proven as yet. And it’s also going to be very interesting indeed to see the end result. Was this like one instance of the Libor rigging, something we might largely approve of, or is it going to be like the other Libor rigging incident in which case people should probably be going to jail?

Here’s the basic announcement:

The Serious Fraud Office’s investigation into the Bank of England’s crisis-era liquidity auctions is believed to relate to a £180bn funding scheme that was ended by the BoE in 2010.

The SFO confirmed on Wednesday night that it had launched an investigation after the Bank handed it the results of an inquiry launched in the summer and conducted by City barrister Lord Grabiner

The fraud office said the investigation concerned “liquidity auctions during the financial crisis in 2007 and 2008”.

Here’s a bit more detail:

The process was simple: the Bank would telephone banks, asking them to say what rate of interest they were willing to pay. Those who offered the highest were deemed to have the greatest need for funding, and thus would receive the loans. To ensure fair prices, each bank was contacted individually. If someone attempted to get funding on the cheap, they would miss out.

Or so the theory goes. Of course, if banks were sharing their bids with each other, this wouldn’t be the case. Theoretically, it would have been possible to lowball the auction, allowing banks to access liquidity cheaper than they should have, at the expense of the Bank.

Let’s just take a spin around the Libor riggings first. There’s two different stories there. The first is that certain banks, certain teams within banks, rigged the markets so as to produce a profit for their own trading books. This is horrible, illegal, and is being dealt with harshly, as it should be. But there’s the second Libor rigging scandal as well. To understand this consider what Libor is. It’s the rate at which a bank says it can borrow on the market. It’s not the rate at which the bank says it would lend, nor is it a record of actual loans taking place (and nor does anyone have to lend or borrow at the stated rates).

OK, also consider what happened in the depth of that crisis. The interbank market for loans entirely dried up. And Libor is the London Interbank Bid Offer Rate. That is, Libor was measuring, in the depths of that crisis, the rates in a market that effectively didn’t exist: the rates at which London banks would lend to each other when no London bank was willing to lend to another one. The actual Libor rate there was therefore something like infinity. And no one at all would have been happy if the banks had been filing Libor rates of infinity. That really, really, would not have been helpful at that time.

http://www.forbes.com/sites/timworstall/2015/03/06/yet-another-financial-rigging-scandal-in-the-city-of-london/

http://blogs.forbes.com/timworstall/?p=16964

Posted by Tim Worstall

http://www.forbes.com/sites/timworstall/2015/03/06/india-makes-a-sensible-move-on-food-subsidies-trialing-cash-instead-of-goods-in-kind/

http://blogs.forbes.com/timworstall/?p=16960

This looks like a very sensible move by India, to trial a change in the way that food subsidies are provided in that country. Currently there’s something of a nightmare system whereby the government buys up grains and pulses at set rates, then distributes them through special warehouses and shops to the poor. This covers as much as 67% of the population (there is a very large hinterland of absolute poverty in India) and it works about as well as you would expect a government subsidised physical food distribution program of this size to work. That is, not all that well. The waste and rot, to say nothing of the corruption, within the scheme is a byword.

So, India is going to trial replacing that physical food distribution with the distribution instead of cash. That cash can then be used to purchase food in the normal private markets. It all sounds like an excellent idea:

Government will launch direct cash transfer of food subsidy to beneficiaries in Chandigarh and Puducherry on pilot basis. While stating that the ministry is keen to do this to stop leakage of PDS grain, food minister Ram Vilas Paswan reiterated they have “outrightly” rejected the PM-appointed committee’s recommendation to reduce food security coverage from 67% to 40%.

The panel on restructuring of Food Corporation of India (FCI) in its report submitted to PM had recommended these measures besides others. The ministry has proposed the two Union Territories for direct cash transfer since these are urban areas and the will be better monitoring.

Of course, there’s a number of questions about the idea of running this out nationally:

On direct cash transfer, Paswan said, “This suggestion is good for curbing leakages in PDS. We are in support of this on principle but there are 3-4 problems.”

“If we transfer cash, beneficiary can buy foodgrains from open market. Then what will happen to our procurement operation and what will we do with procured foodgrains and our storage facilities. We need to seriously think about this before implementing it on larger scale,” he said.

All very C. Northcote Parkinson there: when did a bureaucracy not complain about the idea that change might leave it with nothing to do?

There’s been a very interesting recent book on exactly this subject. This has in fact been trialed on a smaller (and largely private) scale just recently. And the results seem to be very impressive. There’s a very definite improvement in efficiency: more of the aid actually gets to the intended recipients of said aid. Which, given that the intended recipients are the poorest of the poor is a very good idea indeed.

However, there’s always an argument against substituting cash for goods and benefits in kind. Which is that the recipients may not spend that cash on what they’re “supposed” to spend it upon. It’s this which means that food aid in the United States is in food stamps, not simple cash for example. People are worried that instead of the aid feeding (say) poor children some parents might just take that cash off and spend it on (say) booze.

However, the response to this is that the recipients obviously prefer to have the cash and the choice. This is why, when we do hear about people selling food stamps for cash they sell at a discount. Because people value the cash more than the food stamps. It’s thus an increase in wealth in general to proffer that cash rather than the more limited food stamps and or food itself. We the taxpayers are paying out the same amount, the recipients value the cash more than the goods in kind, thus we’re all, collectively, richer.

So the earlier experiments found with the substitution of cash for the food rations in India. The recipients valued being able to save some of the money, having a choice as to what food to buy and where and so on. Even if the handout was the same in absolute terms, having it in cash made the recipients richer than having it in kind.

As a matter of public policy then it would seem sensible to convert all such welfare schemes that deliver goods and services in kind into simple cash transfers. That would cost us, the taxpayers, the same amount of money as presently but would increase the value of the transfers to those poor. We all become richer. It’s worth noting that near all of the welfare states of Europe do it this way (with the exception of education in most and health care in many). This just is the more efficient manner to organise these things.

http://www.forbes.com/sites/timworstall/2015/03/06/india-makes-a-sensible-move-on-food-subsidies-trialing-cash-instead-of-goods-in-kind/

http://blogs.forbes.com/timworstall/?p=16960

Posted by Tim Worstall

http://www.forbes.com/sites/timworstall/2015/03/06/misleading-gender-pay-gap-statistics-for-international-womens-day/

http://blogs.forbes.com/timworstall/?p=16955

That there is a difference between pay for men and pay for women is true. And it’s also true that we’d like to work out why this is happening. Only once we know what is happening and why can we then try to make policy decisions over what we might do about it. It’s thus really rather important that we have the correct numbers over what is happening. That is, we have to be looking at the correct statistics so that we can analyse what is going on. That simply has to be our starting point and without that we’re entirely lost as to what policy should or even might be.

Sadly, we don’t in fact get the right statistics on this. In the US it’s a commonplace that “women earn 77 cents for each $ that men do” and that’s true as a matter of gross income. But we need to know how much of that is because of choices that people make over working hours, what job they do, the flexibility they might prefer over pay and so on, and then see what’s left which might be the result of direct discrimination (what economists refer to as “taste discrimination”). Differences that come from individual choices, well, we might, if we’re going to be very autocratic about it, be something we want to change by forcing people to make different decisions. That part, whatever it is, of the gender pay gap that comes from that direct discrimination we would obviously like to destroy.

Thus the importance of the correct statistics as our starting point. We all want to reduce inequality that comes from prejudice: so, how much of the inequality does come from prejudice? At which point we face the uncomfortable truth that we’re not being presented with the correct statistics on this subject.

In the run up to International Women’s Day (March 8th) we have the gender pay gap statistics from Eurostat (for the EU) and from the International Labor Organisation (really, a part of the United Nations). And they’re both making the same mistake, one that the UK Statistics Authority has called highly misleading. This really does not help us in trying to understand what is going on nor what we might want to do about it.

The problem is that both organisations are comparing gross incomes of men and women without taking account of those different choices that are made about employment terms and conditions.

Here’s one report on the Eurostat release:

The UK has the sixth-largest pay gap between men and women in the European Union, statistics agency Eurostat has revealed

Women earned an average of 16.4pc less than men in the European Union in 2013, with the gap even greater in many northern countries.

At 29.9pc, the biggest salary gap was in Estonia, followed by Austria at 23pc, the Czech Republic at 22.1pc and Germany at 21.6pc.

http://www.forbes.com/sites/timworstall/2015/03/06/misleading-gender-pay-gap-statistics-for-international-womens-day/

http://blogs.forbes.com/timworstall/?p=16955