LIBOR to end in 2021

Libor Funeral Set for 2021 as FCA Abandons Scandal-Tarred Rate

By

Suzi Ring

27 luglio 2017, 10:00 CEST 27 luglio 2017, 14:30 CEST

https://www.bloomberg.com/news/articles/2017-07-27/libor-to-end-in-2021-as-fca-says-bank-benchmark-is-untenable-j5m5fepe 

• Bank lending no longer ‘sufficiently active’ to sustain Libor
• FCA’s Bailey says decision not linked to past manipulation

Andrew Bailey, chief executive officer at Financial Conduct Authority, explains the decision to end Libor in 2021 in favor of a more-reliable system. He speaks with Bloomberg's Francine Lacqua on 'Bloomberg Surveillance.' (Source: Bloomberg)

Libor, the nearly 50-year-old global borrowing benchmark that became a byword for corruption, is headed for the trash heap of history.
The U.K. Financial Conduct Authority will phase out the key interest-rate indicator by the end of 2021 after it became clear there wasn’t enough meaningful data to sustain the benchmark that underpins more than $350 trillion in securities, Andrew Bailey, the head of the regulator, said in a speech Thursday at Bloomberg’s London office.
The end of the London interbank offered rate, or Libor, is welcome on many levels for regulators. It was tied to some of the banking industry’s biggest scandals, leading to about $9 billion in fines and the conviction of several bankers for manipulating the rate. Relying on the opinions of industry insiders to set the daily estimates based on interbank lending -- some in markets that saw fewer than 20 transactions annually -- was unacceptable, Bailey said.
"Libor is trying to do too many things: it’s trying to be a measure of bank risk and it’s trying to substitute for interest-rate risk markets where really it would be better to use a risk-free rate," said Bailey in an interview with Bloomberg News before the speech. "It’s had to come to a conclusion."

Bailey said setting a firm schedule will help banks and finance companies manage the transition from Libor, which is behind securities including student loans and mortgages.
Read more: What Is Libor and Why It Will Soon Be History
The benchmark is the average rate a group of 20 banks estimate they’d be able to borrow funds from each other in five different currencies across seven time periods, submitted by a panel of lenders every morning. Its administration was overhauled in the wake of the scandal, with Intercontinental Exchange Inc. taking over from the then-named British Bankers’ Association with the aim of making the rate more transaction-based.
But the 58-year-old Bailey said the market supporting Libor -- where banks provide each other with unsecured lending -- was no longer "sufficiently active" to determine a reliable rate and alternatives must be found. For one currency and lending period there were only 15 transactions in 2016, he said.

Read more: QuickTake: Broken Benchmarks

Serious Question

"The absence of active underlying markets raises a serious question about the sustainability of the Libor benchmarks," said Bailey, who is widely seen as a candidate to be the next governor of the Bank of England. "If an active market does not exist, how can even the best run benchmark measure it?"
The search for a new benchmark may lead to tighter swap markets, lower rates and richer attorneys as contracts need to be rewritten and adjusted to remove Libor.
“The impact of this decision from the FCA is to put uncertainty into all Libor-based swap rates,” said Peter Chatwell, head of European Rates Strategy at Mizuho International Plc in London. “The market will need guidance as to what a replacement could be and this will lead to increased volatility and possibly reduced liquidity in the near term.”
The FCA only started regulating Libor in 2013, the same year legislation was passed making it a criminal offense to take any misleading action in relation to financial benchmarks.
Read more: Why Replacing Libor Isn’t Easy
The FCA chief said the regulator has spent a lot of time persuading banks to continue submitting rates, something the agency has the power to enforce, but the lack of liquidity makes this impossible to maintain and leaves it open to manipulation.
However, he told Bloomberg Thursday the proposed change didn’t excuse the abuse of the benchmark that has seen five former bankers jailed in the U.K. and a number of others convicted in the U.S.
"The issues that we’re dealing with today do not in any sense excuse or mitigate what went on," Bailey said. "Those who say that this demonstrates that what went on in the past is somehow understandable because the system was broken, I’m afraid that is not an argument that this justifies at all."
The FCA has spoken to the panel banks over recent months about ending the use of Libor and how much time it would take to wind-down, Bailey said. While it would be tough, most said it could be done in four or five years, and the FCA has asked banks to continue submitting rates until the end of 2021.

Push from Authorities

Bailey said he could see a situation where there is more than one benchmark, with some including bank credit risk while others exclude that data. While discussions with banks and other users of Libor are at early stages, he said it may take a “push” from authorities to move the process forward at times.
“We’ve had no conversations about using capital tools,” Bailey said in response to questions after his speech. “But you can take it for granted that if we don’t see the progress that we need to see to hit this time scale, then in the broader sense there will be a ‘push’ from authorities.”
The development comes as a number of groups have been considering alternatives to Libor.

Bank of England Governor Mark Carney said earlier this month that Libor is no longer suitable. The central bank said in April that a swaps-industry working group had proposed replacing Libor in contracts with the Sterling Overnight Index Average, or Sonia, a near risk-free alternative derivatives reference rate that reflects bank and building societies’ overnight funding rates in the sterling unsecured market.
The bank had no further comment when contacted on Thursday.
Concerns have mounted in the euro area over Euribor, the benchmark interest rate for $180 trillion a year of intra-bank lending, as banks pull out of rate-setting panels in the wake of the Libor-rigging scandal. The European Central Bank acknowledges the shortcomings of the mechanism but wants the financial industry to take the lead in finding a solution.
In June, a U.S. government body, the Alternative Reference Rates Committee, recommended replacing Libor with a new, broad Treasuries repo rate, linked to the cost of borrowing cash secured against U.S. government debt.
Switzerland is replacing its own key swaps rate, TOIS, with a new benchmark on Dec. 29.
Asked whether this transition away from Libor should have happened earlier, Bailey said it would have been hard to predict five years ago that the world would still be in an environment of quantitative easing and low interest rates.
"I’m not criticizing the reforms, they were done with good intent and with a view that the market would return," Bailey told Bloomberg. "We are where we are."
— With assistance by Jill Ward, Paul Gordon, and Luca Morreale

#Business News

July 28, 2017 / 4:08 PM / 7 hours ago

EU explores account freezes to prevent runs at failing banks

Francesco Guarascio

https://www.reuters.com/article/us-eu-banks-deposits-idUSKBN1AD1RS?il=0

European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany July 20, 2017.Ralph Orlowski

 

BRUSSELS (Reuters) - European Union states are considering measures which would allow them to temporarily stop people withdrawing money from their accounts to prevent bank runs, an EU document reviewed by Reuters revealed.

The move is aimed at helping rescue lenders that are deemed failing or likely to fail, but critics say it could hit confidence and might even hasten withdrawals at the first rumors of a bank being in trouble.

The proposal, which has been in the works since the beginning of this year, comes less than two months after a run on deposits at Banco Popular contributed to the collapse of the Spanish lender.

It also come amid a bitter wrangle among European countries over how to deal with troubled banks, roughly a decade after a financial crash that required the European Central Bank to print billions of euros to prevent a prolonged economic slump.

Giving supervisors the power to temporarily block bank accounts at ailing lenders is "a feasible option," a paper prepared by the Estonian presidency of the EU said, acknowledging that member states were divided on the issue.

EU countries which already allow a moratorium on bank payouts in insolvency procedures at national level, like Germany, support the measure, officials said.

"The desire is to prevent a bank run, so that when a bank is in a critical situation it is not pushed over the edge," a person familiar with German government's thinking said.

To cover for savers' immediate financial needs, the Estonian paper, dated July 10, recommended the introduction of a mechanism that could allow depositors to withdraw "at least a limited amount of funds."

Banks, though, say it would discourage saving.

"We strongly believe that this would incentivize depositors to run from a bank at an early stage," Charlie Bannister of the Association for Financial Markets in Europe (AFME), a banking lobby group, said.

The Estonian proposal was discussed by EU envoys on July 13 but no decision was made, an EU official said. Discussions were due to continue in September. Approval of EU lawmakers would be required for any final decision.

Insured Deposits

The plan, if agreed, would contrast with legislative proposals made by the European Commission in November that aimed to strengthen supervisors' powers to suspend withdrawals, but excluded from the moratorium insured depositors, which under EU rules are those below 100,000 euros ($117,000).

Under the plan discussed by EU states, pay-outs could be suspended for five working days and the block could be extended to a maximum of 20 days in exceptional circumstances, the Estonian document said.

Existing EU rules allow a two-day suspension of some payouts by failing banks, but the moratorium does not include deposits.

The Commission, which declined to comment on the discussion, had previously excluded insured deposits from the scope of the moratorium tool fearing it "may have a negative impact on market confidence," according to a press release published in November.

Many states supported a suspension of payouts only during the so-called resolution of a failing bank - the process which imposes losses on lenders' investors and possibly also uninsured depositors, while preserving the continuity of the banking activities, the document said.

Most countries opposed bolder plans for an early moratorium.

Additional reporting by John O'Donnell in Frankfurt; Editing by Richard Balmforth and Alexander Smith

Is a crisis looming for central banks?

Bank of Italy Feels People Shouldn’t Create Their Own Currencies

Posted on 2:00 pm July 18, 2017 Author JP BuntinxCategories Bitcoin, Bitcoin News

http://www.newsbtc.com/2017/07/18/bank-italy-feels-people-shouldnt-create-currencies/

Contrary to what people may assume, scriptural Euros are accepted as a form of payment.

Over the past few years, we have seen multiple new cryptocurrencies emerge. The vast majority of these coins have no inherent value whatsoever. In fact, one could argue the developers of such currencies have made quite a bit of money from their projects. The Bank of Italy now warns the public about not issuing their own currencies moving forward. Quite an intriguing development, considering the local banks are struggling to find money.

Anyone in the world can issue their own currency these days. That is, assuming they want to issue a cryptocurrency or an Ethereum-based token. There is very little coding knowledge required these days as well. A lot of cryptocurrencies simply copy features from other coins to keep things “fresh”. Moreover, the code for currencies such as Bitcoin and Litecoin is fully open-sourced. This means anyone can copy it, make some minor changes, and issue their own currency. That doesn’t mean anyone will use it or pay money for it, though.

Bank of Italy Doesn’t Want Consumers to Create Value

The Bank of Italy is particularly concerned about this trend. While creating cryptocurrencies is just one potential threat, central banks have bigger things to worry about. Scriptural euros are being issued by citizens as we speak. This method allows any European citizen to autonomously create Euros through their own accounting records. It is virtually the same as what banks are doing, but without printing additional currency. This “created” money can effectively be used to relieve existing debts.

Contrary to what people may assume, scriptural Euros are accepted as a form of payment. Facebook seemingly accepts this currency for advertisement payments. That is quite unusual, as citizens aren’t supported to create a new currency. Then again, there is nothing preventing them from doing so. The Bank of Italy is quite concerned for obvious reasons. If people can create their own money and it is accepted by merchants, banks have no added value. So far, it appears Italian citizens have created over 1 billion scriptural Euros since October of 2016.
Regardless of how people feel about scriptural Euros, the Bank of Italy issued a warning. Creating new currencies out of thin air is a grave concern. Scriptural euros should not be dismissed as a fad either. While there is a lot of misconception regarding these scriptural coins, they are a legitimate form of payment if enough people accept it. Scriptwriting is, in theory, only allowed to authorized parties. Then again, Italy shows it can be done, which sets a rather intriguing precedent.

Published by

JP Buntinx

JP is working hard to bring more credibility to the Bitcoin and blockchain news industry. Outside of being Europe Editor at Newsbtc, JP is also an active writer for the website, and does not shy away from letting his opinion be heard. View all posts by JP Buntinx

Amelia Tomasicchio

JUL 25, 2017 

Banca D’Italia Vs. Scriptural Euros: Prelude Against Bitcoin?

https://cointelegraph.com/news/banca-ditalia-vs-scriptural-euros-prelude-against-bitcoin

A few days ago Banca d’Italia - Italian Central Bank - published a press release about the creation of the so-called scriptural euros.

Banca d’Italia explained it received a few documents by its customers that attest the autonomous creation of scriptural euros and the use of these amount of money for paying debts or providing payment transactions or issuing credit certificates from the Bank of Italy itself.
This communication comes after fake news that the network has spread about the conviction that European citizens can create currency to pay their debts by sending a simple document from a certified electronic mail to their creditors. The currency created with this process is called scriptural euros.

Banks actually used this kind of accounting currency just before the Euro adoption. At that time, banks were authorized to open accounts in euros and to transact with the currency even if it was not yet in the pockets of Union citizens.

Banca d’Italia explains:

“Taking these initiatives, even in limited numbers, combined with the presence on the web of references to the economic theory of which they are applied, makes it necessary to publish some clarifications in order to avoid dangerous misunderstandings.”

The theory of the autonomous creation of scriptural currency, drawing from the conception of collective property of coins, comes to affirm the possibility for every single citizen to create their own autonomously "scriptural" coins through the accounting records of the amount corresponding to the sum due.

Some advocates of these ideas, active on the web, provide specific modules to be used for the creation of "scriptural euros" and for the communication of the alleged payment to be addressed to creditors and to the Bank of Italy.
So, through this document, Banca d’Italia wants to warn citizens against the creation of this kind of euros, a process that can be only done by banks and financial banks and not by private individuals.

Scriptural euros and Bitcoin

The real concern behind this Banca d’Italia’s document is the possible implication related to digital currencies.
Because the document quoted that only banks have the power to issue money, the danger that this warning may also be applied to cryptocurrencies ​​is not to be underestimated:

“It should be remembered that the provision of payment services through scriptwriting is an activity allowed by law only to authorized persons, such as banks, money institutions and payment institutions.”

That said, we have to remember that Agenzia delle Entrate - the Italian governmental agency that enforces the financial code of Italy - released a few documents related to the legality of Bitcoin, comparing it to a foreign currency, so probably we don’t have to worry about the Bank of Italia’s recent statement.

Debate on money creation at the ECB

“Money from nothing” – my newspaper article translated into English

German daily newspaper Die tageszeitung published my article on money creation last weekend (here). This is the translation from German into English (also available as a pdf):
(Translation of http://www.taz.de/!5422477/ by Dirk Ehnts, author)
https://econoblog101.wordpress.com/2017/07/07/money-from-nothing-my-newspaper-article-translated-into-english/

Debate on money creation at the ECB

Money is created from nothing

The consequences are shocking. The mainstream view of economics is wrong – says German central bank Deutsche Bundesbank. This is a revolution.
Modern capitalism is impossible without money. We do not exchange goods against goods, but we buy goods with money. The interesting question for economics is hence: where is money coming from? The Bundesbank has now delivered an answer that is revolutionary: money is created from nothing – by booking processes inside banks. This may sound abstract at first, but the consequences are far-reaching. The Bundesbank says that the mainstream theory in academic economics is wrong. Millions of students at universities learn a fairy tale.
This fairy tale is spread by, for instance, Gregory Mankiw, whose textbook „Macroeconomics“ has sold millions of copies and is widely used at German universities. For Mankiw, banks are just middlemen, called intermediaries: they allegedly get money from savers that they then pass on to other customers.
This idea might sound reasonable, but has little to do with reality. Banks do not need savers to extend loans. They are not intermediaries, but create money by themselves. The Bundesbank says that unequivocally. The prose is a bit awkward, nevertheless it is worthwhile to read the main passage: „If a bank extends a loan, she books the credit to the customer connected to the loan as his deposit […] This refutes a widely held erroneous view in which the bank acts as an intermediary in the moment of lending, in which loans can only be funded by deposits that the bank has received from customers before.“ Harvard professor Gregory Mankiw with his theory of intermediation, so says Bundesbank, subscribes to „a widely held erroneous view“.

New money is born

Words like credit or deposit sound complicated, but one can imagine money creation like a scoreboard in a football stadium: first goals are scored, then the scoreboard is adjusted accordingly.
This is how banks, work, too: first, the bank signs a loan contract – and then the money is added to the client’s account. The money did not exist before, it is created through the extension of a loan.
Let us assume, that a customer applies for a loan of a thousand euros to buy a used car. Then the bank tops up his account. Done. New money is born. When the client repays the thousand euros – the money is gone again.
This insight has enormous consequences, because the Bundesbank says: the relationship between debts and savings is rather different from the view of the „Swabian housewife“. This figure of speech, which is generally known, thinks that saving is always good – and debs are to be avoided. The German language also suggests that loans are evil. The German word for debt – Schulden – instantly reminds one of the idea of moral sin – moralische Schuld. Who takes out loans is quickly regarded as disreputable.

 Two practical questions

As the Bundesbank has shown, loans are the driver of the economy. Without them we would have neither investment nor economic growth. Only when loans are taken out savings can be created. The world of the Swabian housewife is turned topsy-turvy: savings are accommodating items, seen from macroeconomic accounting.
Let’s stay with the banal example or a car purchase. When someone borrows a thousand euros to buy a used car – then money is created, which then is transferred to the seller, who now has additional savings of a thousand euros. These savings were created from nothing just like the loan. Or, in economese: The debt of one person are the financial wealth of another.
Two practical questions remain: If banks do not need savings to extend loans – why do we save at all? And why, at least in the past, high rate of interest were paid for savings deposits, if these are essentially superfluous?
To start with the savings: most Germans do know instinctively why they would like to save some money. They make provisions for the future. They save to buy a house, for old age or to finance their kids’ education. Firms also like to save. Profits only arise if income is higher than expenditure.

The Germans are saving

Households and firms hence save even when interest rates are low or zero. We can see this phenomenon now: Whereas many banks offer negative interest rates or raise account fees, the Germans continue undauntedly.
This leads us to the second question more urgently: why are there interest rates in the first place, if savings takes place anyway – and banks do not need those savings to extend loans?
The interest rate is a brake for credit creation and inflation. If money is created from nothing through the issuance of loans, then theoretically an infinity of money could be pumped out into the world. When people consume and invest without limited, at some point all factories and workers will be busy, and inflation starts to rise.
This is when central banks intervene: They raise the interest rate as soon as high inflation seems to occur. With interest rates rising, taking out more loans will not be attractive. Money creation is stopped for the time being.

What follows from this?

The Bundesbank has entered history books with her account of money creation – in Germany. Truth is, other central banks were quicker. The Bank of England wrote on her homepage in 2014 how money is created from nothing.
What follows from this politically? The Bundesbank remains silent on this issue. However, it is obvious that finance minister Schäuble’s „policy of a black zero“ – a balanced government budget – is just as wrong as the austerity policies of the Eurozone.
Recalling the Bundesbank’s presentation: Savings can only be created when loans are extended. Debt and wealth belong together. But this reality is ignored by most Germans and their finance minister. They rather trust their guts: They would absolutely like to save – but also reduce their public debt. That does not work. If Schäuble saves and avoids any creation of debt he prevents his citizens from building up new wealth.
It’s even worse in the Eurozone: The crisis countries are forced to slash their government spending and are supposed to not incur any new debts but pay off old ones. This also will not work.

Schäuble should start to borrow

Where do incomes come from which are needed to repay the debts? Who repays debts in matter of fact is saving. But savings can only exist if someone increases his debts.
Mainstream economists often mock this statement by claiming that it would be nonsense to fight a debt crisis with new debts. It may be paradox, but this is how the world of money works, as the Bundesbank has explained to us.
ECB president Mario Draghi, an experienced central banker, has understood much earlier than the Bundesbank that new public debts are needed. No speech, in which he does not call on the economically stronger Eurozone countries, mostly Germany, to engage in fiscal policy. What means is: Schäuble should finally take out new loans. There are enough investment projects worthy of financing. Everybody agrees that the internet is the economic future – yet powerful internet connections are lacking in many locations in Germany.
Also, there now is a brand-new investment project, which is mandatory: all university libraries need new textbooks on macroeconomics. Mankiw and the other mainstream economists have finally been paid off, since the Bundesbank spoke its mind.

A COMMENT BY 

DIRK EHNTS
works at the chair for macroeconomics at Technical University Chemnitz with a specialization on international economic relations. Routledge published his book „Modern Monetary Theory and European Macroeconomics“ in 2016.

The long read

How economics became a religion 

Its moral code promises salvation, its high priests uphold their orthodoxy. But perhaps too many of its doctrines are taken on faith.
By John Rapley

Tuesday 11 July 2017 06.00 BST Last modified on Monday 17 July 2017 11.03 BST

https://www.theguardian.com/news/2017/jul/11/how-economics-became-a-religion

 

Although England has an established church, few of us today pay it much mind. We follow an even more powerful religion, around which we have oriented our lives: economics. Think about it. Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle”. And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy.

Over time, successive economists slid into the role we had removed from the churchmen: giving us guidance on how to reach a promised land of material abundance and endless contentment. For a long time, they seemed to deliver on that promise, succeeding in a way few other religions had ever done, our incomes rising thousands of times over and delivering a cornucopia bursting with new inventions, cures and delights.

This was our heaven, and richly did we reward the economic priesthood, with status, wealth and power to shape our societies according to their vision. At the end of the 20th century, amid an economic boom that saw the western economies become richer than humanity had ever known, economics seemed to have conquered the globe. With nearly every country on the planet adhering to the same free-market playbook, and with university students flocking to do degrees in the subject, economics seemed to be attaining the goal that had eluded every other religious doctrine in history: converting the entire planet to its creed.
Yet if history teaches anything, it’s that whenever economists feel certain that they have found the holy grail of endless peace and prosperity, the end of the present regime is nigh. On the eve of the 1929 Wall Street crash, the American economist Irving Fisher advised people to go out and buy shares; in the 1960s, Keynesian economists said there would never be another recession because they had perfected the tools of demand management.

 

 

The 2008 crash was no different. Five years earlier, on 4 January 2003, the Nobel laureate Robert Lucas had delivered a triumphal presidential address to the American Economics Association. Reminding his colleagues that macroeconomics had been born in the depression precisely to try to prevent another such disaster ever recurring, he declared that he and his colleagues had reached their own end of history: “Macroeconomics in this original sense has succeeded,” he instructed the conclave. “Its central problem of depression prevention has been solved.”

No sooner do we persuade ourselves that the economic priesthood has finally broken the old curse than it comes back to haunt us all: pride always goes before a fall. Since the crash of 2008, most of us have watched our living standards decline. Meanwhile, the priesthood seemed to withdraw to the cloisters, bickering over who got it wrong. Not surprisingly, our faith in the “experts” has dissipated.

Hubris, never a particularly good thing, can be especially dangerous in economics, because its scholars don’t just observe the laws of nature; they help make them. If the government, guided by its priesthood, changes the incentive-structure of society to align with the assumption that people behave selfishly, for instance, then lo and behold, people will start to do just that. They are rewarded for doing so and penalised for doing otherwise. If you are educated to believe greed is good, then you will be more likely to live accordingly.

The hubris in economics came not from a moral failing among economists, but from a false conviction: the belief that theirs was a science. It neither is nor can be one, and has always operated more like a church. You just have to look at its history to realise that.

---

The American Economic Association, to which Robert Lucas gave his address, was created in 1885, just when economics was starting to define itself as a distinct discipline. At its first meeting, the association’s founders proposed a platform that declared: “The conflict of labour and capital has brought to the front a vast number of social problems whose solution is impossible without the united efforts of church, state and science.” It would be a long path from that beginning to the market evangelism of recent decades.

Yet even at that time, such social activism provoked controversy. One of the AEA’s founders, Henry Carter Adams, subsequently delivered an address at Cornell University in which he defended free speech for radicals and accused industrialists of stoking xenophobia to distract workers from their mistreatment. Unknown to him, the New York lumber king and Cornell benefactor Henry Sage was in the audience. As soon as the lecture was done, Sage stormed into the university president’s office and insisted: “This man must go; he is sapping the foundations of our society.” When Adams’s tenure was subsequently blocked, he agreed to moderate his views. Accordingly, the final draft of the AEA platform expunged the reference to laissez-faire economics as being “unsafe in politics and unsound in morals”.

‘Economics has always operated more like a church’ … Trinity Church seen from Wall Street. Photograph: Alamy Stock Photo

So was set a pattern that has persisted to this day. Powerful political interests – which historically have included not only rich industrialists, but electorates as well – helped to shape the canon of economics, which was then enforced by its scholarly community.

Once a principle is established as orthodox, its observance is enforced in much the same way that a religious doctrine maintains its integrity: by repressing or simply eschewing heresies. In Purity and Danger, the anthropologist Mary Douglas observed the way taboos functioned to help humans impose order on a seemingly disordered, chaotic world. The premises of conventional economics haven’t functioned all that differently. Robert Lucas once noted approvingly that by the late 20th century, economics had so effectively purged itself of Keynesianism that “the audience start(ed) to whisper and giggle to one another” when anyone expressed a Keynesian idea at a seminar. Such responses served to remind practitioners of the taboos of economics: a gentle nudge to a young academic that such shibboleths might not sound so good before a tenure committee. This preoccupation with order and coherence may be less a function of the method than of its practitioners. Studies of personality traits common to various disciplines have discovered that economics, like engineering, tends to attract people with an unusually strong preference for order, and a distaste for ambiguity.

The irony is that, in its determination to make itself a science that can reach hard and fast conclusions, economics has had to dispense with scientific method at times. For starters, it rests on a set of premises about the world not as it is, but as economists would like it to be. Just as any religious service includes a profession of faith, membership in the priesthood of economics entails certain core convictions about human nature. Among other things, most economists believe that we humans are self-interested, rational, essentially individualistic, and prefer more money to less. These articles of faith are taken as self-evident. Back in the 1930s, the great economist Lionel Robbins described his profession in a way that has stood ever since as a cardinal rule for millions of economists. The field’s basic premises came from “deduction from simple assumptions reflecting very elementary facts of general experience” and as such were “as universal as the laws of mathematics or mechanics, and as little capable of ‘suspension’”.

Deducing laws from premises deemed eternal and beyond question is a time-honoured method. For thousands of years, monks in medieval monasteries built a vast corpus of scholarship doing just that, using a method perfected by Thomas Aquinas known as scholasticism. However, this is not the method used by scientists, who tend to require assumptions to be tested empirically before a theory can be built out of them.

But, economists will maintain, this is precisely what they themselves do – what sets them apart from the monks is that they must still test their hypotheses against the evidence. Well, yes, but this statement is actually more problematic than many mainstream economists may realise. Physicists resolve their debates by looking at the data, upon which they by and large agree. The data used by economists, however, is much more disputed. When, for example, Robert Lucas insisted that Eugene Fama’s efficient-markets hypothesis – which maintains that since a free market collates all available information to traders, the prices it yields can never be wrong – held true despite “a flood of criticism”, he did so with as much conviction and supporting evidence as his fellow economist Robert Shiller had mustered in rejecting the hypothesis. When the Swedish central bank had to decide who would win the 2013 Nobel prize in economics, it was torn between Shiller’s claim that markets frequently got the price wrong and Fama’s insistence that markets always got the price right. Thus it opted to split the difference and gave both men the medal – a bit of Solomonic wisdom that would have elicited howls of laughter had it been a science prize. In economic theory, very often, you believe what you want to believe – and as with any act of faith, your choice of heads or tails will as likely reflect sentimental predisposition as scientific assessment.

It’s no mystery why the data used by economists and other social scientists so rarely throws up incontestable answers: it is human data. Unlike people, subatomic particles don’t lie on opinion surveys or change their minds about things. Mindful of that difference, at his own presidential address to the American Economic Association nearly a half-century ago, another Nobel laureate, Wassily Leontief, struck a modest tone. He reminded his audience that the data used by economists differed greatly from that used by physicists or biologists. For the latter, he cautioned, “the magnitude of most parameters is practically constant”, whereas the observations in economics were constantly changing. Data sets had to be regularly updated to remain useful. Some data was just simply bad. Collecting and analysing the data requires civil servants with a high degree of skill and a good deal of time, which less economically developed countries may not have in abundance. So, for example, in 2010 alone, Ghana’s government – which probably has one of the better data-gathering capacities in Africa – recalculated its economic output by 60%. Testing your hypothesis before and after that kind of revision would lead to entirely different results.

‘
The data used by economists rarely throws up incontestable answers’ … traders at the New York Stock Exchange in October 2008. Photograph: Spencer Platt/Getty Images

Leontief wanted economists to spend more time getting to know their data, and less time in mathematical modelling. However, as he ruefully admitted, the trend was already going in the opposite direction. Today, the economist who wanders into a village to get a deeper sense of what the data reveals is a rare creature. Once an economic model is ready to be tested, number-crunching ends up being done largely at computers plugged into large databases. It’s not a method that fully satisfies a sceptic. For, just as you can find a quotation in the Bible that will justify almost any behaviour, you can find human data to support almost any statement you want to make about the way the world works.

That’s why ideas in economics can go in and out of fashion. The progress of science is generally linear. As new research confirms or replaces existing theories, one generation builds upon the next. Economics, however, moves in cycles. A given doctrine can rise, fall and then later rise again. That’s because economists don’t confirm their theories in quite the same way physicists do, by just looking at the evidence. Instead, much as happens with preachers who gather a congregation, a school rises by building a following – among both politicians and the wider public.
For example, Milton Friedman was one of the most influential economists of the late 20th century. But he had been around for decades before he got much of a hearing. He might well have remained a marginal figure had it not been that politicians such as Margaret Thatcher and Ronald Reagan were sold on his belief in the virtue of a free market. They sold that idea to the public, got elected, then remade society according to those designs. An economist who gets a following gets a pulpit. Although scientists, in contrast, might appeal to public opinion to boost their careers or attract research funds, outside of pseudo-sciences, they don’t win support for their theories in this way.

However, if you think describing economics as a religion debunks it, you’re wrong. We need economics. It can be – it has been – a force for tremendous good. But only if we keep its purpose in mind, and always remember what it can and can’t do.

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The Irish have been known to describe their notionally Catholic land as one where a thin Christian veneer was painted over an ancient paganism. The same might be said of our own adherence to today’s neoliberal orthodoxy, which stresses individual liberty, limited government and the free market. Despite outward observance of a well-entrenched doctrine, we haven’t fully transformed into the economic animals we are meant to be. Like the Christian who attends church but doesn’t always keep the commandments, we behave as economic theory predicts only when it suits us. Contrary to the tenets of orthodox economists, contemporary research suggests that, rather than seeking always to maximise our personal gain, humans still remain reasonably altruistic and selfless. Nor is it clear that the endless accumulation of wealth always makes us happier. And when we do make decisions, especially those to do with matters of principle, we seem not to engage in the sort of rational “utility-maximizing” calculus that orthodox economic models take as a given. The truth is, in much of our daily life we don’t fit the model all that well.

Economists work best when they take the stories we have given them, and advise us on how we can help them to come true

For decades, neoliberal evangelists replied to such objections by saying it was incumbent on us all to adapt to the model, which was held to be immutable – one recalls Bill Clinton’s depiction of neoliberal globalisation, for instance, as a “force of nature”. And yet, in the wake of the 2008 financial crisis and the consequent recession, there has been a turn against globalisation across much of the west. More broadly, there has been a wide repudiation of the “experts”, most notably in the 2016 US election and Brexit referendum.

It would be tempting for anyone who belongs to the “expert” class, and to the priesthood of economics, to dismiss such behaviour as a clash between faith and facts, in which the facts are bound to win in the end. In truth, the clash was between two rival faiths – in effect, two distinct moral tales. So enamoured had the so-called experts become with their scientific authority that they blinded themselves to the fact that their own narrative of scientific progress was embedded in a moral tale. It happened to be a narrative that had a happy ending for those who told it, for it perpetuated the story of their own relatively comfortable position as the reward of life in a meritocratic society that blessed people for their skills and flexibility. That narrative made no room for the losers of this order, whose resentments were derided as being a reflection of their boorish and retrograde character – which is to say, their fundamental vice. The best this moral tale could offer everyone else was incremental adaptation to an order whose caste system had become calcified. For an audience yearning for a happy ending, this was bound to be a tale of woe.

The failure of this grand narrative is not, however, a reason for students of economics to dispense with narratives altogether. Narratives will remain an inescapable part of the human sciences for the simple reason that they are inescapable for humans. It’s funny that so few economists get this, because businesses do. As the Nobel laureates George Akerlof and Robert Shiller write in their recent book, Phishing for Phools, marketers use them all the time, weaving stories in the hopes that we will place ourselves in them and be persuaded to buy what they are selling. Akerlof and Shiller contend that the idea that free markets work perfectly, and the idea that big government is the cause of so many of our problems, are part of a story that is actually misleading people into adjusting their behaviour in order to fit the plot. They thus believe storytelling is a “new variable” for economics, since “the mental frames that underlie people’s decisions” are shaped by the stories they tell themselves.

Economists arguably do their best work when they take the stories we have given them, and advise us on how we can help them to come true. Such agnosticism demands a humility that was lacking in economic orthodoxy in recent years. Nevertheless, economists don’t have to abandon their traditions if they are to overcome the failings of a narrative that has been rejected. Rather they can look within their own history to find a method that avoids the evangelical certainty of orthodoxy.

In his 1971 presidential address to the American Economic Association, Wassily Leontief counselled against the dangers of self-satisfaction. He noted that although economics was starting to ride “the crest of intellectual respectability … an uneasy feeling about the present state of our discipline has been growing in some of us who have watched its unprecedented development over the last three decades”.

The cult of the expert – and how it collapsed

Noting that pure theory was making economics more remote from day-to-day reality, he said the problem lay in “the palpable inadequacy of the scientific means” of using mathematical approaches to address mundane concerns. So much time went into model-construction that the assumptions on which the models were based became an afterthought. “But,” he warned – a warning that the sub-prime boom’s fascination with mathematical models, and the bust’s subsequent revelation of their flaws, now reveals to have been prophetic – “it is precisely the empirical validity of these assumptions on which the usefulness of the entire exercise depends.”

Leontief thought that economics departments were increasingly hiring and promoting young economists who wanted to build pure models with little empirical relevance. Even when they did empirical analysis, Leontief said economists seldom took any interest in the meaning or value of their data. He thus called for economists to explore their assumptions and data by conducting social, demographic and anthropological work, and said economics needed to work more closely with other disciplines.

Leontief’s call for humility some 40 years ago stands as a reminder that the same religions that can speak up for human freedom and dignity when in opposition, can become obsessed with their rightness and the need to purge others of their wickedness once they attain power. When the church retains its distance from power, and a modest expectation about what it can achieve, it can stir our minds to envision new possibilities and even new worlds. Once economists apply this kind of sceptical scientific method to a human realm in which ultimate reality may never be fully discernible, they will probably find themselves retreating from dogmatism in their claims.

Paradoxically, therefore, as economics becomes more truly scientific, it will become less of a science. Acknowledging these limitations will free it to serve us once more.

Main image: Maxian/Getty/iStockphoto/Guardian Design
This is an edited extract from Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong by John Rapley, published by Simon & Schuster on 13 July at £20. To order a copy for £17, go to bookshop.theguardian.com or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min p&p of £1.99.
• Follow the Long Read on Twitter at @gdnlongread, or sign up to the long read weekly email here.
• This article was amended on 17 July 2017. An earlier version stated that Britain has an established church; in fact, England does, but Britain as a whole does not.

Bank Of Italy: Citizens Claim Right to Create Scriptural Euros

Bank of Italy Warns Against Creating Your Own Currency

Louis Cammarosano
https://smaulgld.com/bank-of-italy-warns-against-scriptural-euro/
And here:
http://www.zerohedge.com/news/2017-07-17/bank-italy-warns-citizens-against-creating-your-own-currency

Citizens Claim Right to Create Scriptural Euros.

Citizens conjure Euros out of thin air, just like banks.

 

Create Your Own Currency!

Because the top cryptocurrencies, Bitcoin and Ethereum are open source, any one can create their own cryptocurrencies. While the proliferation of cryptocurrencies has central banks concerened, another more insidious and perhaps greater threat to central banks’ monopoly on money creation is the issuance of scriptural euros by citizens.

What are Scriptural Euros?
Scriptural Euros are Euros issued by citizens under a “theory of the autonomous creation of scriptural currency” based on the idea of collective property of money that affirms the right of every citizen to autonomously create “scriptural” money (Euros) via their own accounting records. The theory of autonomous creation of scriptural currency holds that just as banks can conjure debt based money out of thin air, so can citizens. Money thus created by citizens can then be used to extinguish their own debts.

Apparently, citizen created euros have been accepted as payment. @marcosabait (Marco Saba) shared his experience on twitter whereby his scriptural Euros were accepted by Facebook as payment for advertising. This correspondence between @marcosabait and Facebook shows how @marcosabait created 25 Euros as payment to Facebook and Facebook accepted the citizen issued Euros as payment.
In the correspondence, @marcosabait informs Facebook Italy (in English) that banks AND citizens can create new Euro in electronic form and that he had just done so in the amount of 25 Euros and was submitting it as payment. He also referred Facebook to his Facebook page for more information on citizen created scriptural Euros.
Facebook responded in Italian by accepting @marcosabait payment of his self-created scriptural Euro, while noting his payment was being accepted this time, but such payments may not be honored in the future.
According to @marcosabait, Italian citizens have created more than 1 billion scriptural Euros since October 2016.

Starting October 2016 Italian citizens have created more than 1 billion scriptural Euro – all registered in the European Monetary Cadastre.

— Marco Saba (@marcosabait) July 16, 2017

Internet Urban Legend?
Citizens conjuring money out of thin air and having that money accepted as payment all seems like internet urban legend. Perhaps, in the example above, the Facebook employee didn’t want to argue over 25 Euro and was just humoring @marcosabait. Or maybe, the correspondence itself was spurious. Certainly, the claim that more than 1 billion scriptural Euro have been created seems far fetched and that any large sum of scriptural Euros being accepted as payment seemed even further afield. However…

The Bank of Italy Responds
Despite what might appear to be a ludicrous ploy to convince citizens they have the right to create their own Euros, the Bank of Italy is taking scriptual Euros seriously. Last month, the Bank of Italy issued a warning about the creation of scriptual Euros. Attached to the warning was a PDF that explained the Bank of Italy’s position on scriptual Euros.
The position paper is entitled “Scriptural Money Created by Citizens”. The paper notes that its purpose is to avoid “dangerous misunderstandings” involving scriptural Euros. The paper claims that only the Bank of Italy can issue the form of legal currency based on international and national legislation and that it is necessary for the Bank of Italy to have this power in order to guarantee overall confidence in currency and the stability of its value over time. The paper further notes that payment services through scriptwriting is an activity allowed by law only to authorized persons, such as banks, electronic money institutions and other payment institutions.
The paper concludes that “initiatives for the creation of a autonomous scriptural currency have no legal basis” and calls on citizens not to use such forms of currency.

The scriptural Euro issue may have more people asking questions about the creation of money out of thin air – if banks can do it, why can’t we?

CDC to FASB: Accounting for fiat money surrogates

CDC to FASB: Accounting for fiat money surrogates

More:

Financial Standards Board Considers Standards For Digital Currency Accounting

https://www.cryptocoinsnews.com/financial-standards-board-considers-establishing-standards-for-digital-currency-accounting/

Bitcoin Seeks Recognition From U.S. GAAP

https://tax.thomsonreuters.com/media-resources/news-media-resources/checkpoint-news/daily-newsstand/bitcoin-seeks-recognition-from-u-s-gaap/

The Virtual Euro: questions on design and governance of the monetary system

The Virtual Euro: questions on design and governance of the monetary system

Banks are stealing a sovereign right from the people: The money to the sovereign!

Wednesday, June 21, 2017

The money to the sovereign!

Original German text: http://www.dasliebegeld.ch/2017/06/das-geld-dem-souveran.html 

The full-money reform raises a fundamental question: Who is in a democracy responsible for the money and the rules by which the members of the democratic community can benefit?

The issue of funds, "the minting regalia", was a royal or sovereign right in times of monarchies. The king and emperors held substantial sovereign rights and the "money regiment" was one of them. In the transition of the sovereign power from the king to the population in democracy, the sovereign rights were entirely lost, all focus being on individual human rights and human rights; The collective rights ("sovereign rights") were ignored. This carelessness has led to the fact that the practice of generating money as a result of the electrification of payment transactions and credit bookings has migrated to the private commercial banks, which, paradoxically, have recently taken the right to print and issue banknotes and transferred them to central (public) banknotes. When electronic book money was used to pay cash (coins and banknotes) and was created exclusively by commercial banks (privatization of money-making), this privatization remained uncommented by the legislature, the state of the state remained in striking silence. It was striking because in the Constitutions, "the right to coin money" was an explicit prerogative of the state, following the king's money regalia in the Middle Ages. The fact that the issuance of cash, the primary function of which is the means of payment, constitutes a state sovereign right determined by constitutions; The issue of book money, the currently dominant currency, however, does not make sense. Apart from the fact that the privilege of private banks, which is happily created by a technological development, is to be protected - contrary to the clear historical tradition that the issuing of money is a) a sovereign sovereignty, and b) a sovereign right.

Conscious decision

At the very least, the right to make money and put it into circulation would have to be transferred to the private banks, with specific objectives and conditions, by means of a conscious legislative act. Just as the kings were able to transfer the right to minting to bishops or princes, and just as the US government has transferred "the right to coin money" to the Federal Reserve System. And such a decision, in the face of sovereign sovereignty, should be taken only by the sovereign. Neither has such a decision ever been made, either by a democratic sovereign, nor by his representation, nor does constitutions prescribe the issuance of money as sovereign sovereignty, but "only" as a sovereign sovereignty.

Both questions are linked: on the one hand, a clear decision is needed to transfer the right to make money to non-state actors - this has never happened. On the other hand, it is necessary to clarify the responsibility for such a decision: as clear as this was in the monarchy, this is unclear in democracy. In a "sovereign democracy," as the common-economic movement suggests, things are as clear as in a kingdom: the right to spending money is a sovereign right. Only this can be transferred to other bodies, whether for book money or cash, by legal decision by transferring this sovereign privilege to a non-sovereign authority. For example, to a government-independent "monetative" mandated directly by the Sovereign.

Today, everything is wrong and twisted: the private business banks have the right to the issue of book money, the prevailing means of payment, creeping appropriately. And the guardians of the state's sovereignty, governments and parliaments, are not allowed for this process. A clarification of who is responsible for the public good money - which should be of use to everyone - is decent and overdue. The "Gemeinwohl-Ökonomie-Bewegung" proposes that the principle questions on the monetary order in decentralized constitutional conventions should be discussed and coordinated in alternatives. A federal delegation or an EU convention could be constituted through a delegation procedure. It would deal with the most important issues of the monetary and financial regulation and put the sovereign to final vote. These questions could include who owns the sovereign right of the money, whether the central bank is public or private, how its bodies are constituted, whether commercial banks are public or profit-oriented, and loans forbidden. The result of the final votes would be clearly defined in the democratic constitutions, in the sense of sovereign democracy. Changeable at any time - through the sovereign.

Christian Felber is the initiator of the projects Bank für Gemeinwohl und Gemeinwohl-Ökonomie. His current book "Money. The new rules of play "deals with a democratic monetary order.

Digital Money: the central-bank balance-sheet issue

(Still the FT don't gets that CB liabilities are a fake...)

 

Fintech Helicopter money

Central bank digital currencies: the asset-side limitation

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4 hours ago

By: Izabella Kaminska

https://ftalphaville.ft.com/2017/07/03/2190842/central-bank-digital-currencies-the-asset-side-limitation/

In January 2014 this blogger (naively) pitched the case for official e-money: digital money issued by a central bank directly to the population.
The logic of the proposal at the time seemed obvious.
Official e-money would…

1. Allow the central bank to better control the money supply, making everything from negative rates and true (inflationary) helicopter drops to basic income possible.
2. Encourage transparency and traceability.
3. Reduce money laundering, tax evasion and all other socially destructive black market activities enabled by cash.
4. Create a potentially limitless source of safe asset value, at an interest rate that the central bank could control.
5. Restrict bank deposits (and interest rate-based returns) to the risk inclined, leading to the eventual shuttering of national deposit insurance schemes and the associated moral hazard.

Moreover, since the rate on “official” e-money would never be more than zero, the banking sector (including the shadow banking sector) could continue to compete with the central bank for deposits by offering more attractive interest rates, which reflected the real risk being taken by depositors in the private sector.
Put this way it all seemed so simple.
And yet, there was and remains a flaw in the logic.
We first dubbed this flaw the float management problem. But we now realise it might as well be described as the central-bank balance-sheet issue.
Digital money liabilities ultimately must be offset by corresponding assets if the monetary system is to remain liquid and stable. This is because liquid digital liabilities represent claims on the real economy, which must be accommodated for by stable and replenish-able value somewhere in the system. As it stands, the physical currency liabilities of a central bank are just a small tranche of a much larger liability structure — a framework sees the central bank essentially outsource the bulk of liability (and asset) creation to the private sector for good reason.
Issuing liabilities from a central point is not the challenge. The challenge is centrally managing all the corresponding liquid assets.
It is this constraint, rather than any technological one, which poses the biggest challenge to the mass issuance of digital central bank liabilities.
Thankfully, a message about this constraint is finally being communicated by central banking types.
Take as an example the latest post on the BoE’s Bank Underground blog from James Barker and David Bholat in the Bank’s Advanced Analytics, Research and Statistics Division and Ryland Thomas in the Bank’s Monetary Assessment and Strategy Division.
As they note:

Although there has been a lot of discussion about how central bank digital currency could radically change payment systems – and even the financial sector as a whole – the implication for the assets on central bank balance sheets could be just as critical.

The criticality relates to the fact that the central bank alone would be responsible for determining what assets to buy and it may not be as easy as just buying government bonds:

They may not want to hold more for fear of distorting bond markets, political worries about monetary financing, or simply because there are not enough government bonds in circulation.

The authors suggest what if instead of digital liabilities the central bank issued digital equity? These shares, they say, would be different from conventional shares in a listed company as they wouldn’t give voting rights on the activities of the central bank. An upside, they add, would be the use of equity to purchase private sector assets is that the central bank would be strengthening its capital base at a time when it’s taking more risk.
Except, this doesn’t really solve the discretionary issue of which private assets the cbank should be buying to support the stability of the economy as well as the value of its equity. How can we trust that it manages this job effectively? Should it buy corporation stock, private sector debt, or maybe crypto coins? Or would it be better to buy machinery and industrial equipment directly, so as to service the ongoing consumption needs of society on an ongoing basis? Or something else entirely? At what point would this sort of decision making turn the institution of the central bank into a quasi command economy?
The authors then suggest what if — in a nod to helicopter money — the cbank simply purchased perpetual zero-coupon government bonds issued specifically for the purpose of backing digital liabilities, de facto creating money for the government to either spend or distribute to people directly?
Again, the problem is not so easily solved. This would be tantamount to handing over private sector value to the government unconditionally.
While tax is already a type of unconditional (albeit necessary) transfer from the private sector to the public sector, we as a society at least have a democratic process to keep the weightings of the distributions in check. There are also limitations on how much the government can take unconditionally before disincentivising industry from producing (and replenishing spent value) altogether.
Facilitating the government’s open-ended consumption of resources without a corresponding requirement to maintain an asset of stable value to replenish that consumption, however, would lead only to value erosion through inflation and political instability in the long run.
The authors note the BIS has already argued compellingly against the view that a helicopter free-lunch is sustainable.
In the long run, the problem with centrally-issued digital currencies unfortunately remains the same: it’s an asset management issue and a political economy issue, not a technological one.

Related links:The time for official e-money is NOW! – FT Alphaville
Float management isn’t easy – FT Alphaville
Cbank digital currencies and the path to Gosbankification – FT Alphaville