samchain/econo-pairs-v1 huggingface dataset:
Charlie Bean – the Bank’s Deputy Governor – likened the various factors contributing to the financial crisis to a murder in an Agatha Christie novel in which everyone had a hand in it. 5 But a central character in almost any telling of the financial crisis story are the huge capital flows associated with the imbalances between surplus and deficit countries. These capital flows affected the price of financial assets and distorted the incentives of borrowers and creditors. These global imbalances remain and are forecast to get bigger. 6 Macroprudential policy should mean that the tensions associated with these imbalances manifest themselves in different ways, in particular in ways that are less damaging to the stability of the banking system. But it does not address the underlying problem. Solving global imbalances requires international coordination and we are still missing the instruments that will truly deliver that. Second, it is unlikely, at least as currently conceived, that macroprudential policy will be designed to prevent equity-financed bubbles. These types of bubbles have a long and colourful history: from the 18th century South Sea bubble, the 19th century railway mania to the more recent 20th century dotcom bubble. Importantly, equity-financed bubbles are not associated with credit cycles and increased banking exposures and so are unlikely to threaten financial stability, which is the focus of macroprudential policy. 7 Moreover, because the effects of these types of bubbles are not amplified by financial instability, they typically have a smaller impact on output.

But the extent to which continuing constraints on the supply of bank credit are likely to impede the recovery is less clear. On the one hand, banks still face significant challenges, especially in terms of the ease and cost at which they can refinance maturing funding. This is undoubtedly affecting the ability of some small firms to borrow at affordable rates. On the other hand, many companies started this recovery with increased levels of savings and so are in a position to finance increased investment if and when they wish to. And we have seen “creditless” recoveries in the past. For example, the corporate sector in aggregate repaid bank lending in each of the first three years of the 1990s recovery. I’m hopeful – but by no means certain – that strains within the banking system will exert increasingly less drag on the economy going forward. But what of the tailwinds that are pushing against these factors and ensuring that the burgeoning recovery continues? The most significant factor is the highly accommodative stance of monetary policy. As you know, Bank Rate remains at 0.5% and the stock of asset purchases – quantitative easing –  1  This is an annual survey conducted for the Bank by NMG Financial Services Consulting. This year’s survey was conducted between 24 and 30 September 2010 and covered almost 2000 households. Some results from this year’s survey featured in the November 2010 Inflation Report (pages 22–23).
Furthermore, recent studies  BIS Review 154/2009  3  indicate that wage indexation is a major factor amplifying the transmission of oil shocks to the prices of non-energy products. 2 Considerable welfare gains could be achieved, therefore, if agreement were reached by the social partners to gradually phase out COLA and replace it with a productivity-linked wage mechanism negotiated at enterprise level. … higher productivity … Competitiveness is not only about keeping costs down. It is also about higher productive efficiency and increasing the value added content of exports. Encouraging progress in this direction has been made, especially since Malta joined the EU. One need only mention the expanding pharmaceuticals and aircraft maintenance sectors, as well as the steadily increasing surplus in the services component of the current account, which has remained quite resilient during the recent turmoil. We cannot, however, rest on our laurels for the record shows that overall labour productivity has declined from more than 90 per cent of the euro area average in 2000 to 79 per cent last year. A key consideration here is the extent to which resources are allocated to capital formation rather than consumed. Between 2000 and 2008 the share of gross fixed capital formation averaged 19 per cent of GDP in Malta, compared with 21 per cent in the euro area. In 2008 the share fell to 15 per cent for Malta. There is clearly scope for improvement.

As a result of this elastic provision of a riskfree investment opportunity, overnight secured and unsecured rates were only modestly affected by these large flows, and overnight markets continued to move as intended following changes in the FOMC’s target for the federal funds rate. That said, the runoff in prime fund assets did leave an imprint on term unsecured rates, although some of this has retraced recently as markets have adapted. I will return to this later. Third, for some time now we have been keenly focused on the impact on the structure of money markets that ensues from higher balance sheet costs for financial institutions.15 When I refer to balance sheet costs, I mean costs that are primarily related to the size, but not the composition, of a financial institution’s balance sheets. One example of such a cost is the leverage ratio, which is a requirement that a bank has, at minimum, capital of certain percentage of its overall assets.16  4 / 13  BIS central bankers' speeches  The leverage ratio was introduced as a simple non-risk-based backstop to the risk-based capital requirements and sets an amount of required capital that depends exclusively on the size of the balance sheet, plus off-balance sheet exposures for the largest U.S. banks, and does not depend on the composition of the balance sheet or the risk of those exposures.
This is especially true for liquidity tranches of reserve portfolios where safety and accessibility are critical for the execution of core central banking functions, including FX reserve management, FX intervention, time-sensitive official payments, macro-prudential policy, lender of last resort responsibilities, and other central bank operations that may require the use of foreign assets and currencies. As stewards of national wealth in their capacity as managers of official foreign reserves, central banks seek to minimize custodial risk in the safekeeping of their foreign reserves.13 By using a central bank custodian, the risk of loss stemming from insolvency, negligence, or unauthorized disclosure is either removed or significantly reduced. Central banks do not pose counterparty risk and reserve managers’ use of fellow central bank account services reduces the risk of disclosure of central banks’ trading strategies. Relatedly, the confidentiality of holdings and activities in central bank accounts supports the execution of sensitive operations that may require utmost discretion to avoid setting off market panics or privileging one set of market participants over another. Finally, central banks’ use of a fellow central bank’s account services allows them to settle in central bank money, with attendant benefits from the standpoint of smooth and reliable settlement.

So as much as the account openings themselves, today we commemorate the symbolism, principles, and values they represent. Today’s event commemorates the start of the Federal Reserve’s international operations and involvement in the international arena. It honors the Federal Reserve’s past and ongoing support for the principle of the major central banks to provide safe, confidential, and reliable account services in their currencies to the global central banking community in support of financial stability and other central banking mandates. And it acknowledges the value of cooperation among the world’s central banks and the role that these initial operational ties played in paving the way for broader and deeper cooperation among central banks. In doing so, we also recognize the individuals past and present who have played a role, often behind the scenes, in managing the Federal Reserve’s dollar account operations for the global official sector. The early years: war, ambition, and cooperation The story of the early years of the Federal Reserve’s dollar accounts for foreign central banks is one of war, ambition, and cooperation. It is no coincidence that the first agreement was signed less than a month after the United States entered the First World War on April 6, 1917.
However, we should go one step further and look at the social values and preferences that influence the behaviour of economic agents who interact with, and are affected by, the economic institutions referred to earlier. After all, the various reforms envisaged in the Lisbon agenda will fail to produce tangible results if they run counter to what many Europeans perceive to be quintessentially European values, preferences and attitudes. As outlined in the simple conceptual framework introduced earlier, economic performance and the functioning of markets can be directly influenced by values and deeply held beliefs – such as self-realisation, fulfilment in life and other post-materialist values; the relative importance of work, achievement and success; freedom, competition and cooperation; tradition and religion; family and community; safety and protection, etc. A number of economists have argued that lower labour force participation rates and shorter working hours in Europe relative to the US may reflect a preference on the part of Europeans for more leisure time over additional income.4 In other words, that Europeans seem to place more value on extra leisure than having a few extra euros in their pockets, while Protestant work ethics and a more materialistic attitude to life drive Americans to work harder.

Thus, not every stage in the development of the crisis will be recapitulated, or every step and detail in its resolution. Nor have I tried to reflect every nuance in the public debate, in the reports from parliamentary commissions and in research papers on the subject3. The views I put forward are my own and have been deliberately sharpened to promote discussion. The most important characteristics of the resolution of the Norwegian crisis can be summarized as follows: •  The banks’ own collective guarantee funds handled the problems in the banking sector before the crisis became systemic. •  No blanket guarantee for the banks’ debts was provided by the government. •  No regulatory forebearance. •  No liquidity support to banks whose solvency was in doubt. •  A clear and transparent division of responsibility between the political authorities, the supervisory authority and the central bank was established early on. •  Government support was contingent on strict requirements being met, e.g. existing shareholders accepting a write-down to cover losses to the extent possible. •  No micro-management of the banks. •  Measures taken to prevent supported banks exploiting the situation vis-à-vis non-supported banks. •  No asset management companies or “bad banks”. I shall comment on each of these issues, but before doing this let me briefly mention the background for the crisis:  1  Source: Sandal (2004). 2  Source: Kane and Klingebiel (2002) and Norges Bank.
For example, the recovery has been much more sluggish in Syracuse and Utica, and Binghamton has yet to see any meaningful recovery. Despite Rochester’s relatively favorable economic performance in recent years, the region’s job base is actually slightly lower today than it was at the start of this century. While at first blush it may seem that such a statistic indicates a stagnant economy, that couldn’t be further from the truth. When you look deeper, you see an economy that has been very active and dynamic in a number of respects. While some parts of the economy have declined, other areas have grown to fill in the gaps. The most familiar part of this story is the swift and severe loss of the region’s manufacturing jobs. Ongoing technological change has increased worker productivity and has reduced the demand for many “middle-skill” workers, while globalization shifted many manufacturing jobs to other parts of the world. These forces have reduced manufacturing employment nationwide, but the effects on Rochester have been particularly potent. Between 2000 and 2010, the number of manufacturing jobs in Rochester declined by over 40 percent. That’s a huge loss to incur in just a single decade. Moreover, the loss was on top of the previous significant decline in manufacturing that the region experienced throughout the 1980s and 1990s. However, what’s impressive is that in the midst of this decline, Rochester’s manufacturing sector has been very dynamic.

As their employment began to decline, some workers left the area while others remained. Indeed the legacy of the “Big 3” lies not in what was lost, but in what remains in the skills and entrepreneurial spirit of the many talented people that are here today. Some of these talented people started their own companies, while others found different ways to contribute their unique talents to the local economy. As a result, Rochester continues to reinvent itself, and is now much more diverse, with an employment base that is no longer concentrated among a few large manufacturers. The top employers in the region, like the University of Rochester and Rochester Institute of  BIS central bankers’ speeches  1  Technology (RIT), Wegmans, the Rochester General Health System and Paychex, just to name a few, perform a variety of activities, from health care and education to consumer and business services. The process of reinvention and economic diversification, in part, allowed the region to better weather the storm of the Great Recession compared to past economic recessions. For Rochester, the downturn was both shorter and less severe in terms of job loss than for the nation as a whole – a situation quite different from what had occurred before. Though it still lags the nation, the Rochester area has continued to grow at a solid pace through the recovery. This is no small feat, and it certainly is not true for all of Upstate New York.
The initiatives include establishing the required financial institutions including, the Islamic banking institutions, takaful companies, the non-banking institutions and developing the Islamic money and capital markets. These respective components have recently been progressively liberalized in terms of allowing for the entry of new foreign players and in terms of increasing the potential for foreign participation in the domestic financial markets. In addition, both these domestic and foreign operations have been encouraged to tap on regional and international business opportunities. As a result, this has strengthened the crossborder financial inter-linkages, prompting greater international integration. To ensure the robust functioning of the system, these developments are supported by a strong regulatory and supervisory framework reinforced by the legal and Shariah framework and the payment and settlement systems. While the positive growth and developments in the Islamic financial system have brought about expanded opportunities, the financial liberalization and technological advancement have brought about increased competition and greater innovation in the development of products and services, operational processes and delivery channels. These developments have contributed to increasing the risk profile of the institutions. These new risks are generally more complex and have more profound systemic implications to the financial system. This has increased the need for strengthened risk  BIS Review 8/2006  1  management capabilities by the industry and for greater attention to this aspect by regulators and supervisors in promoting the stability and integrity of the financial system. Of importance is to ensure an understanding and awareness of the risks inherent in Islamic banking activities.

BIS central bankers’ speeches  5  cyclical nature, the elevated property prices and the evidence of high risk appetite translate for the Swiss economy into a state of high vulnerability requiring caution and the exercise of responsibility by all concerned. The activation of the CCB and the adoption of other prudential measures have to be seen in this perspective. References Borio, C. (2012): The financial cycle and macroeconomics: What have we learnt? BIS Working Paper No 395 Keynes, J. M. (1936): The General Theory of Employment, Interest and Money, London, Macmillan; Chapter 12 Minsky, H. P. (1982): Can “it” happen again?, Essays on instability and finance, New York 1982 Reinhart, C. and Rogoff, K. (2009): This time is different: Eight Centuries of Financial Folly, Princeton University Press Schularick M., and Taylor, A. (2012): Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008, American Economic Review, American Economic Association, Vol. 102(2), pp. 1029–61 Stiglitz, J. and Weiss, A. (1981): Credit Rationing in Markets with Imperfect Information, The American Economic Review, Vol. 71, No. 3, pp. 393–410. 6  BIS central bankers’ speeches  BIS central bankers’ speeches  7  8  BIS central bankers’ speeches  BIS central bankers’ speeches  9  10  BIS central bankers’ speeches
Spain has been one of the first European countries to have incorporated a balanced budget requirement into its constitution, with broad Parliamentary backing. A more recent example is labour-market reform. This is of great importance, because Spain had not taken such a significant step in this area since the 1984 reform. If the 1984 reform allowed Spain to create millions of jobs and to increase the welfare of Spaniards during upswings, the reform approved this year should put an end to a situation in which dismissal and an increase in unemployment are the only way of adjusting the economy. This reform leaves workers and employers free to agree to increase competitiveness by increasing productivity and/or adjusting wages, with the only obstacles or impediments being those laid down by law. It is sometimes said that all this has been done too late. Should labour-market reform have been carried out five years ago? It certainly should have. Or ten years ago in 2002, when we were enjoying the long upswing? It would certainly have been better for Spain. The same can be said about financial reform. Why were savings banks not reformed during the good times? Why were bank resolution schemes, such as the FROB, not drawn up ready to resolve the banking problems created by the upswing? These questions merely lead to gloominess and, moreover, ignore the fact that, not only in Spain, but almost worldwide, key reforms are introduced at the worst times.

More important still, however, is the need for the Banco de España’s autonomy in the area of supervision to continue to be respected and for governments to continue to resist the temptation to interfere in its supervisory decisions, while continuing to design legal instruments and to defend the proper use of public resources. The Banco de España must continue to maintain a dialogue with governments, not only advising them but also listening to them (since nobody has a monopoly on good ideas), although supervisory decisions must continue to be based, as up until now, solely on a professional basis. 6  BIS central bankers’ speeches  I have been emphasising today what has been done during these years of crisis by Spain (that is to say, everyone), because until our country has regained the trust of the rest of the world, the attention of investors will continue to be focused on what all relevant parties have done and are doing to correct the imbalances of the Spanish economy. In particular, they will be monitoring and assessing the extent of cooperative behaviour to overcome the crisis. I’m going to conclude with a few words on Europe, as I believe our membership of the European Union and of the Monetary Union is another good reason for viewing optimistically our possibilities of overcoming the crisis. Some measures need no further explanation, as they clearly show how Europe has helped us and continues to help us during this crisis.
Real gross domestic product (GDP) growth had slowed from 5 percent in the fourth quarter of 2009, to 3.7 percent in the first quarter of 2010 and to only 1.7 percent in the second quarter. Soft patches are common in expansions, but are difficult to distinguish from a more serious deterioration in an expansion. Examples of soft patches include the expansions of 1976 and 2002 (Chart 24). Foreign risks also appeared on the radar screen with growing concerns about debt sustainability in Greece, Ireland, Portugal and Spain. This can be seen in the sharp rise in the sovereign risk spreads for these countries (Chart 25). At the same time, core consumer price index (CPI) inflation, which is used as an indicator of where overall inflation is heading, was low and trending downward (Chart 26). Given the FOMC’s dual mandate to promote price stability and maximum sustainable growth, the risk of a double-dip recession in 2011 was a concern. In more normal times, the FOMC could respond to this risk by deciding to reduce the fed funds rate. However, with the fed funds rate essentially at zero, other options had to be considered. At their November meeting, the FOMC decided to restart its large-scale asset purchases by announcing an intention to purchase an additional $ billion in Treasury securities. Again, as with its earlier asset purchase program, the intent was to improve financial market conditions and thereby reduce the risk of the economy stalling.

Growth was also improving abroad, which increased the demand for our exports (Chart 16). In this chart, each business cycle is contrasted with real exports normalized to a value of one at the business cycle peak, which is dated as time zero on the chart. The chart shows the relative path of real exports during the contraction and recovery for each cycle. The recovery in exports for this cycle was quicker than for the prior recession in 2001. Firms reacted to the significant challenges presented by the recession by focusing on cost cutting and improved efficiencies. These efforts led to a rise in measured labor productivity (Chart 17). With labor compensation growth declining due to the weakness in the labor market, the higher labor productivity resulted in sharp declines in the costs of producing goods – unit labor costs. The decline in unit labor costs helped firms to restore their profitability. As demand conditions improved, firms on net began to increase their employment and hours worked by their staff (Chart 18). It is important to note that improvement in the demand for workers will not necessarily lead to a steady decline in the aggregate unemployment rate. During the recession, many unemployed workers withdrew from the labor force and stopped  2  BIS central bankers’ speeches  actively looking for employment. This can be seen by the decline in the labor force participation rate (Chart 19).