permitted unrestricted access to the central bank's rediscount facilities.
If that seems like a stupid thing for the central bank to do, that's because it is.
But it's required for the neoclassical version of "perfect financial markets." Which is in turn a necessary assumption in the derivation of covered interest rate parity. Which is the arbitrage condition for floating exchange rate economies that says that the central bank can't control the long-run interest rate.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Once you've done that, you can do a variety of things - my favourites being to deny rediscount facilities to loans made against security in foreign or financial assets, but begin selling currency swaps into your own currency and acting as market maker for currency swaps out of your own currency between private firms and foreign central banks.
Obviously Germany could have easily defended the band, but the ERM neglected to include a mechanism to force the country facing upward pressure to adjust. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Because it put the BoE's limited hard currency reserves and credit up against the BoE's unlimited ability to print GB£. Now, whether the D-Mark peg was a good idea in the first place is a different matter. And it is not totally obvious that the BoE could have defended it even if it had denied rediscount facilities to speculative shorts. Since that would have done nothing to deter exit from long positions.
But printing the money that Mr. Soros used to attack the peg was unambiguously a dumb idea, even if allowing the peg to fail was smart.
I'd understood that the fundamental tension was the UK government pursuing easy money for their domestic policy agenda and the German government pursuing tight money in the aftermath of the integration of the east german mark. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
The trick here is that you get to run one central bank policy for speculators and another central bank policy for investors in physical capital. Because investors in physical capital have physical capital to put up as security. And speculators do not.
That may not have been sufficient to defend the GB£ peg. It is not generally possible to defend an exchange rate peg even if you take out the ability to naked short the currency. But nor is it generally impossible.
Practically, yes, that's what it means.
This also has two related advantages:
But I don't see how (3) above follows ~ indeed, the backing of all insured deposits at 100% would make liability management to free up reserves to back lending easier, since each dollar attracted from a higher reserve account at $0.x reserve requirement into an account with a lower $0.y reserve required frees up $0.(x-y) for a loan account, and if x=100, then that maximizes (x-y). I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
So the general strategy is for the central bank to abandon its core role of providing liquidity for the system in pursuit of a secondary role of regulating the direction into which that liquidity flows.
No, the point is that the proposed scheme provides precisely the same liquidity to all lawfully managed banking activity as the current one, while activities you don't like are denied liquidity. It's really just an extension of the idea that different loan classes should have different weights when computing core capital for regulatory purposes, except that doing a runaround on your equity requirements is easier than doing a runaround on your liquidity requirements.
But I don't see how (3) above follows ~ indeed, the backing of all insured deposits at 100% would make liability management to free up reserves to back lending easier, since each dollar attracted from a higher reserve account at $0.x reserve requirement into an account with a lower $0.y reserve required frees up $0.(x-y) for a loan account, and if x=100, then that maximizes (x-y).
If the bank can convince people to move their money from a checking account to an uninsured "investment" account, then they can lend the money to Mr. Soros so he can attack the GB£. But Mr. Soros can also just convince them to take the money out of their checking account and lend it to him over the counter. You can't foreclose on that option, unless you want to institute outright hard currency rationing and make buying foreign currency on the open market illegal.
Which you can do, but that's a considerably more far-reaching reform.
If the bank can convince people to move their money from a checking account to an uninsured "investment" account, then they can lend the money to Mr. Soros so he can attack the GB£.
But Mr. Soros can also just convince them to take the money out of their checking account and lend it to him over the counter.
You can't foreclose on that option, unless you want to institute outright hard currency rationing and make buying foreign currency on the open market illegal.
But of course, not allowed under the EU system, which is part of the halfway there, halfway not muddled economic sovereignty of the EU. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
If the bank can convince people to move their money from a checking account to an uninsured "investment" account, then they can lend the money to Mr. Soros so he can attack the GB£. Which is just an extension of existing liability management to line up with the new constraints imposed, which means that they can indeed lend the money to Mr. Soros so he can attack the pound.
That's an excellent argument for not allowing the same institution to manage checking and investment accounts, yes.
But really, if a bank can convince its depositors that foregoing depositor insurance in order to support an attack on the currency is an awesome idea...
... then maybe your currency is overvalued and you should not be defending the current exchange rate in the first place.
Unless, as I said, there is a return to 1950's details regulation of what interest rates can be offered on what kinds of accounts ~ that is clearly required if the aim is to tie the banks hands with respect to liability management. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Oh, and get the financial advisor disbarred from financial advisoring in any official capacity ever again.
It seems like what is supposed to be a progressive version of the mentarist fantasy that central banks can and should regulate the money supply. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
