samchain/econo-pairs-v1 huggingface dataset:
While I still doubt big banks can fail safely, they are far less likely to inflict collateral damage on depositors and the wider financial system. In all of these respects, the regulatory reform agenda of the past decade has been strikingly successful. And the benefits of this have already been felt. During the Covid crisis, the global banking system has lived up to the expectations set for them by Mark Carney at its start: they have been part of the solution, not the problem.25 That is far from saying, however, that the financial stability job is done. In a complex, adaptive web, it can never be done. So from a potentially long list, let me discuss two areas of unfinished business: lending to small and medium-sized enterprises (SMEs) and the future of payments. 23  Haldane (2020). Aikman et al (2018). 25 Giese and Haldane (2020) 24  15  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  15  In 1929, Hugh Macmillan led a Government Commission into lending to SMEs in the UK. It included in its ranks John Maynard Keynes and Ernest Bevin.26 It concluded that many UK SMEs were unable to access adequate finance, restraining growth and job creation. The “Macmillan Gaps” were born. In the period since, there are few signs these gaps have closed. Indeed, with the retreat by UK banks from business lending and many high-streets, there are reasons to think the Macmillan gaps may have widened.

The pace of recovery is significantly faster now than then, bouncing rather than edging back. More fundamentally, a slow exit risks putting central bank balance sheets on an unsustainable footing. 10  Minsky (1986). 8  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  8  Entering fast and large, and exiting slow and small, puts a ratchet into central bank balance sheets.11 With large or frequent enough future shocks, this strategy is not time-consistent: either the stock of Government assets to buy is exhausted or, more likely before that, debt-serving concerns begin to contaminate perceptions of the future monetary stance. The latter is what academics call fiscal dominance.12 An asymmetric QE response function nudges us towards that fiscal danger zone and adds to concerns about the erosion of monetary policy independence. Or that, at least, is the risk. It is these two points, taken together, that lead me to believe that this is the most dangerous moment inflation-targeting has so far faced. The answer is not to change the regime itself. Indeed, I can think of few poorer times to do so. In my view it does, however, call for immediate thought, and action, on unwinding the QE currently being provided, given the state of the economy and central banks’ balance sheets. The Bank’s on-going review into the process and sequencing of QE unwind is a welcome opportunity to do so. A dependency culture around cheap money has emerged over the past decade.
I do not intend to say much more about the unfolding situation other than that we are naturally following developments very carefully and, as always, are prepared to act to safeguard financial stability, should such action be necessary. Allow me, therefore, to return to the more general discussion I had originally intended to hold. However, before proceeding further, I would like to point out that the thoughts I present here are my own. My colleagues on the Executive Board do not necessarily analyse matters in completely the same manner as I do. I would also like to emphasise that my ambition is to illustrate different ideas in an intuitive manner, without attempting to propose any cut-anddried solutions. BIS Review 68/2010  1  Monetary policy has developed Let me start by looking back on how monetary policy has developed in Sweden and other countries over the last fifteen to twenty years. As I have already mentioned, we were one of the first central banks to introduce inflation targeting. When we started in 1993, our only forerunners were the central banks of New Zealand, Canada and the United Kingdom. Today, inflation targeting is applied in approximately twenty-five countries. 1 Furthermore, many other central banks have adopted essential elements of inflation targeting, such as setting price stability as the overriding goal, basing the policy on forward assessments and publishing regular reports to provide relatively comprehensive explanations of the reasoning used.

And many market participants were also expecting a correction at some point; but they generally felt they were well placed to handle it. In fact the severity and breadth of the downswing has surprised markets, commentators, and policymakers alike. In the light of subsequent developments, a number of commentators have concluded that the problem was simply a lack of attention and short memories. I don’t think it was quite as simple as that. I am with Mark Twain who said "History doesn't repeat itself, but it does rhyme." While the current crisis has some similarities to previous downswings – in the early 90s or of the 70s for example – there are some significant differences too. For example the last three recessions in the UK (in the 70s, 80s and early 90s) were preceded by sharp rises in consumption and activity and earnings to well above sustainable rates. As Chart 2 shows that was not true of the last few years when consumption, output and earnings all seemed unusually stable. Again in previous recessions, stress in the banking sector has tended to follow on from defaults and losses on domestic loans as interest rates rise and the economy slows down. But this time the downturn started in the banking sector – last summer when losses in the US property market not only led to losses in UK banks trading and treasury books but closed important sources of finance to them. The downturn in the housing market and then the wider economy followed.
Access to the Internet as a national and global market place lowers the barriers to market participation. Opportunities are provided not only for economies of scale both nationally and internationally but also for the diversification, even individualisation, of goods and services. Market forecasts by international IT consultants predict that retail Internet commerce will grow from twenty to thirty billion dollars this year to several hundred billion dollars. And even this is dwarfed by prospects for business-to-business commerce, which involves asking for tenders on the Internet and matching the potential suppliers for increased efficiency. In an optimistic forecast from the American investment bank Goldman Sachs, this form of Internet commerce is predicted to expand to more than a thousand billion dollars by 2003 and to contribute a quarter of a percentage point to annual GDP growth in the coming decade. The fact that clear signs of improved productivity did not appear until almost a decade after Solow’s observation can be attributed to computers and IT being what is commonly referred to as general purpose technology, in the sense that they interact with and modify many other processes and techniques. The economic impact of such innovations is liable to take a long time. Parallels have been drawn with another innovation with far-reaching consequences, namely electricity. Although electricity began to be used in the late nineteenth century, its impact on productivity did not show up in earnest until the 1920s.

For this and other reasons, the contribution from IT cannot be distinguished from other factors. 2. Implications for monetary policy  The implications that the new economy might be expected to have for monetary policy can be illustrated with the aid of a simplified notion of how the economy functions. In the long term, a country’s productive capacity is usually assumed to follow a comparatively stable trend. This trend rate of growth is determined by demographic factors, for example, together with, above all, the pace at which technical advances are made and incorporated in the production process. Thus, the fact that Sweden’s GDP per capita is now appreciably higher than in, say, the 1950s and even more so than a century ago is mainly explained both by our ability to develop new technologies and new modes of production and by the new technology that we have been able to import from elsewhere and introduce here. Monetary policy’s primary contribution is perceived today as being to ensure that the macroeconomic environment, mainly as regards inflation, is stable and predictable. A stable value of money and an efficient payment system are important preconditions for an efficient modern market economy. Monetary policy affects aggregate demand via interest rate adjustments. Policy is normally aimed at steering demand so that the economy remains as close as possible to its long-term growth trend, thereby avoiding unnecessary cyclical fluctuations. This also helps to keep the level of inflation stable. However, it is not only cyclical fluctuations around trend growth that influence inflation.
When demand subsequently waned as a result of a deterioration in household finances, at the same time as real interest rates rose and the supply of housing - both new and old - increased, prices fell again. Even substantial price movements can have natural explanations and do not have to be due to unrealistic expectations that are first raised and then dashed. Households have continued to borrow from banks and mortgage institutions throughout the economic decline, which is not the normal pattern of behaviour, but this is of course due to low interest rates. Their debt burden has grown and raised questions about whether we are heading back towards an  2  BIS Review 38/2003  imbalance that sooner or later will have to be corrected. However, I myself do not believe that household debt per se constitutes any immediate source of concern. Households' debt ratio, i.e. debt as a percentage of income, is just over 110 per cent. However, as a result of the historically low interest rates, it appears that households' debt-servicing costs will continue to be manageable. The interest ratio, i.e. households' debt-servicing costs in relation to disposable income, is today barely 5 per cent. The situation for Swedish households is therefore considerably more favourable than at the end of the 1980s and beginning of the 1990s.

In addition to the low level of housing construction, demand for housing has risen mainly in metropolitan areas due to the greater numbers moving to these regions during the latter part of the 1990s. It is not surprising that a relatively constant, low supply, as well as high demand, should have contributed to the substantial price rises. Thus, low interest rates, an increase in disposable income and a low supply of new housing, together with high demand, are the fundamental factors that I believe have driven the rate of price increases from the mid 1990s. They also suffice to show that current price rises should not be described as an expectations-driven “bubble”. The same analysis can be performed for several other countries experiencing similar developments in their housing market, in particular the US. So did we have a housing market bubble during the crisis years at the beginning of the 1990s? I don't really believe that we did, at least not in the sense that homes were being bought for the purpose of speculation with a view to being sold once prices had risen further. Yes, prices rose sharply, especially in metropolitan regions, but these were due to reasons of a fundamental nature. Households' willingness to pay increased in line with their income during the economic upswing, the deregulation of the credit market led to the removal of some financing obstacles, and the supply of housing was, in the short term, highly inflexible. This is enough to fuel a steep rise in prices.
Developments were marked by the financial crisis, which resulted in low wage agreements which were largely in line with the Riksbank’s forecasts. The crisis also meant that the commonest agreement period became two years instead of three years, as had been normal since 1995. The centrally-agreed wage increases were calculated to average 1.8 per cent per year in 2010 and 2011. However, the economic recovery was significantly stronger in 2010 than most people had expected. The growth in GDP was the highest in 40 years. The labour market also developed above expectations. Among other reasons, this was because the decline in employment was primarily concentrated on the manufacturing sector, which is less labour-intensive than many other sectors. Furthermore, the so-called crisis agreements in the manufacturing sector contributed towards dampening the decrease of employment. Due to the low agreed wage increases, the wage bargaining rounds in 2010 probably contributed to the strong development of the Swedish economy we experienced in 2010 and the start of 2011. According to our present assessment, the average increase of hourly wages in 2010 and 2011 has been 2.8 per cent per year, which is 0.5 percentage points per year more than we had estimated before the wage bargaining rounds. BIS central bankers’ speeches  3  But at the same time, the wage bargaining rounds in 2010 entailed a couple of problems for future developments. One such problem was that the dates for the expiry of the various agreements became more spread out than before.

The Riksbank’s assessment is that wage formation will continue to work well in the years ahead. I therefore look ahead to the approaching wage bargaining rounds with confidence. 8  BIS central bankers’ speeches  BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11  12  BIS central bankers’ speeches  BIS central bankers’ speeches  13  14  BIS central bankers’ speeches  BIS central bankers’ speeches  15
The banks will have to divest all control of non-financial activities, and remove all cross-shareholdings. This will help ensure that all transactions with nonfinancial entities remain at arms length, that the interests of the bank are not confused with the other interests of the controlling shareholder, and that management attention stays focussed on the increasingly complex business of banking. If this programme works, we hope a few Singapore banks will grow to become strong regional players. Of course, success cannot be guaranteed. If the local banks lose too much ground, some of our anchor players may end up marginalised, or being taken over. Still we have resolved to proceed, knowing that doing nothing would certainly lead us into more difficulty. The local banks are strengthening themselves to compete in an open domestic market, and internationally. We have encouraged them to merge and consolidate with one another, or at least to form alliances and consolidate some of their back-end operations, so as to derive economies of scale. But the industry trends may be such that even this is not enough for them to hold their own against the large global banks. After all, even Deutsche Bank was not too big to feel the need for a merger partner. Local banks which want to be more than niche players may then need to contemplate not just foreign acquisitions, but cross-border partnerships with partners as large as or larger than themselves. The smaller European countries are wrestling with the same issue.

It imposes only one restriction: non-residents may not borrow $ for activities unrelated to the Singapore economy, though they may buy and sell as much $ as they wish. This restriction on borrowing $ is to make it harder for non-residents to accumulate ammunition through borrowing for a speculative attack on the $ Despite the non-internationalisation policy, there is virtually complete capital mobility in Singapore. Empirical studies have shown that domestic $ interest rates are almost entirely determined by parity with offshore US Dollar interest rates, adjusted for future exchange rate expectations. In economist’s jargon, the “interest parity condition” holds. The role of hedge funds in the Asian crisis is controversial. There is evidence that the hedge funds were active in a number of the regional currencies before and during the crisis. Although some observers are convinced that hedge funds were the main culprits in bringing currencies down, the evidence is not conclusive. Nevertheless, we believe that our policy of non-internationalisation helped to protect the $ against excessive volatility during this unstable period. Of course the policy could not have been effective if Singapore’s economic fundamentals had not been sound, and if we had not had a floating exchange rate which could be managed flexibly in line with these fundamentals. We had an easier ride than Hong Kong, which also had a sound economy, but whose currency was, for good reasons, pegged to the US dollar.
It was becoming clear that the entire system was on the brink of collapse, and on 6 October 2008, the Icelandic Parliament passed emergency legislation with the objective of ensuring continued domestic banking operations. The following day, the Icelandic Financial Supervisory Authority (FME) intervened in the operations of Glitnir and Landsbanki. On October 8, following perfunctory exchanges between the UK Chancellor of the Exchequer and the Icelandic Minister of Finance, the UK government froze the assets of Icelandic banks in the UK and took over Singer & Friedlander, a British-licensed subsidiary of Kaupthing. The deposit part of Singer & Friedlander was transferred to ING. Later that day, a system-wide response of central banks and governments emerged, emphasising international coordination. Such efforts were too little and too late for the Icelandic banks, and on October 9, the FME intervened in Kaupthing Bank. The collapse of these three banks was quite large, not only relative to Iceland, but also on an absolute scale. According to Moody’s list of defaults during the period 1920–2008, 3 Kaupthing, at USD 20 bn, ranks 4th after Lehman, Worldcom and GMAC, with Glitnir close on its heels. The combined balance sheet of these failed banks was much larger than that of Worldcom, and only Lehman’s was bigger. And the effect was felt far and wide, as these banks were truly international. Kaupthing alone was active in 13 jurisdictions.

The savings banks will be financially restructured in the coming weeks. The causes Earlier in my remarks I told you how the banks failed. Does this also tell us why they failed? I think it does so only partly. The interplay between trust, liquidity and solvency is complicated  7  Central Bank of Iceland (2009). Financial Stability 2009. 26 October 2009 (pp. 18–19, 68–70). 8  Financial Stability 2009, 22–37. 9  IMF (2008). “Iceland: Request for Stand-By Arrangement – Staff Report”, IMF Country Report No. 08/362, November 2008. IMF (2009). “Iceland: Staff Report for First Review under Stand-By Arrangement and Request for Extension of the Arrangement, Waivers of Nonobservance of Performance Criteria, and Rephasing of Access”, IMF Country Report No. 09/306, October 2009. For further information about the IMF Stand-By Arrangment and the economic programme of the government, please refer to the web sites of the Central Bank of Iceland (http://www.sedlabanki.is/?pageid=186&dt_date=2009-01-01), the Prime Minister’s Office (http://eng.forsaetisraduneyti.is/), and the International Monetary Fund (http://www.imf.org/external/country/isl/index.htm). See also Central Bank of Iceland (2009). Financial Stability 2009. 26 October 2009 (pp. 71–75). 8  BIS Review 9/2010  when it comes to banks. Banks fail because they lose trust. That loss of trust might not be warranted, in which case the bank will face a liquidity problem. However, it might still fail if it is not supported by a credible lender of last resort, or if the liquidity problem lasts long enough. The line between liquidity and solvency can be a thin one.
Just why should the Riksbank be at all concerned with the debate about the new economy and the conditions for long-term growth? Monetary policy’s concern surely lies in influencing the development of aggregate demand in order to keep inflation in check. The reason is that fluctuations in the rate of inflation stem mainly from demand’s deviations from the trend rate of growth. The Riksbank therefore has to form an opinion about the economy’s potential growth rate. We also need to know how the growth trend changes over time. A dilemma here, however, is that the growth path cannot be observed directly. The fundamental factors behind an economy’s trend rate of growth include population changes, the capital stock, technology and the efficiency of resource utilisation. In the United States, recent innovations in telecommunications and computerisation have contributed to higher gains in productivity. The far-reaching effects that the new information technology is having on production and distribution processes have improved the conditions for growth. A period of high investment growth is needed if information technology is to generate tangible effects. The new investment transforms the capital stock; new technology replaces outmoded practices and the labour required for each unit of capital equipment decreases. Unprofitable units or firms are closed and new facilities are established. Productivity rises in the economy as a whole. High productivity growth makes it possible to maintain business profits and keep price increases down. The transformation process generates a positive spiral; the introduction of the new technology results in widespread rationalisation and greater efficiency.

Commodity prices have also begun to fall, which reduces inflationary pressures not just in Sweden but also abroad. If this development does not reverse, it will make things easier for the central banks, as they will have greater scope to meet the slowdown in economic activity with monetary policy actions. I would like to take the opportunity here to talk about what we can and can't achieve with monetary policy. No one wants the economy to fall into a deep decline or a lengthy recession like the one we experienced in the 1990s. However, Sweden has dearly-bought experiences from the 1970s and 1980s when we tried to use fiscal and monetary policy to stabilise fluctuations in economic activity. These experiences were part of the reason why the Riksbank became independent and the inflation target was established. 13  Special analysis "Negative Productivity Growth: Causes and Implications for the Period Ahead", The Swedish Economy, August 2008, National Institute of Economic Research. BIS Review 121/2008  5  The problem with rising commodity prices is a result of high demand that has arisen after the long growth period the world has just undergone. Perhaps this problem has been aggravated by the fact that many countries subsidise food and energy. Now we are in a situation where some adjustment is probably needed. A stimulative monetary policy that allows inflation expectations to soar would possibly help the economy out of the current growth slump in the short term.