Lorenzo Bini-Smaghi of the ECB is interviewed by Arthur Beesley in today’s Irish Times; it provides a very interesting account of the concerns of the ECB during Summer/Autumn 2009. You can read it here.
Month: January 2011
The FT is reporting that the Christine Lagarde is the latest high-level official to offer tentative support for bond purchases by the EFSF as a central element in the reform of liquidity support measures.
Christine Lagarde, French finance minister, said France was ready to discuss allowing the eurozone’s €440bn ($588bn) bail-out fund to start buying bonds of struggling European economies amid signs of consensus that it would become the primary new tool for tackling Europe’s ongoing debt crisis.
How significant a development would this be? The first thing to note is that ECB bond purchases have failed to bring market yields to affordable levels. While probably helping to a degree, the ECB’s secondary-market purchases have lacked commitment and provide no real certainty to investors on how high yields could rise. Secondary market purchases by the EFSF are unlikely to be much more effective unless operated at a very different scale.
In principle, however, official primary-market bond purchases could provide guaranteed funding at some maximum interest rate. This maximum rate could be set high enough to create strong incentives to rely on market funding. I would presume that the total amount of funding would be capped and the programme would have a time limit. But because they involve purchases of ordinary bonds, concern about the seniority of official creditors should be lessened. Overall, the existence of such an official buyer of last resort should give market investors reasonable confidence that governments would be able to roll over their borrowing as bonds mature over a significant time period. The proposal has the potential to provide support to a country facing difficult market conditions without crowding out longer-term private investors from the market; such crowding out appears to be a major shortcoming of current support measures.
Of course, the devil is in the detail, and there is little concrete yet about how such bond purchases would actually operate. It is also unclear whether these new facilities would be available to countries already in support programmes. But it is an interesting development.
The Climate Change Response Bill was debated in the Seanad yesterday. You can read the various interventions here.
Minister Cuffe is not very clear on the 2020 target, but seems to argue that the climate bill does not go beyond the current EU obligations. He offers two arguments. Second, Ireland will overcomply on its ETS obligations, and this will count towards Ireland’s non-ETS obligations. This is an accounting gimmick. Ireland would export its excess ETS permits to offset undercompliance elsewhere in Europe; emissions would not fall. Note that Ireland will just about meet its ETS targets according to the EER2010.
Third, Minister Cuffe seems to use the EU accounting method for land use emissions in 2020, and the UN accounting method for 2008. The increase in the carbon sink is much smaller than the Minister suggests if one uses the same method for both years.
Senator Glynn of Fianna Fail states that “[t]he Bill does not impose any legal obligations on Government to achieve the emissions targets set in the Bill and it allows for these targets to be changed.” That’s a remarkable position.
IBEC has published its analysis of the climate bill, including an estimate of the costs. That cost estimate is exceedingly optimistic for the following reasons:
- IBEC assumes that emissions from land use are accounted for according to the yet-to-be-enacted EU rules.
- IBEC takes the EPA’s with-additional-measures scenario as its starting point. That scenario is rich in wishful thinking, and IBEC does not count the costs of the “additional measures”.
- IBEC’s numbers are based on an engineering model. Such models are notorious for underestimating the costs of emission reduction.
- IBEC assumes that the marginal cost of -30% by 2030 is the same as the marginal cost of -30% by 2020. This would be true if the capital stock has an average life time of one year.
- The cost estimate assumes that the emission reduction burden is shared optimally between ETS and non-ETS. As I’ve argued before, the extra burden would fall on the non-ETS.
- The model covers emissions from energy only. The IBEC estimate therefore omits the costs of reducing non-energy emissions (methane from cattle).
Even so, IBEC reckons that the cost will run to €400 million per year. I do not know what the cost would be, but it would certainly be much higher than that.
Eurointelligence has a couple of pieces on the eurozone crisis this week: the one by Philippe Legrain I linked to yesterday, and this piece by Barry Eichengreen.
And here is a newish blog dedicated to the crisis, produced by the Economist Intelligence Unit.
Bright undergraduates tend to enjoy courses in the history of economic thought — I know I did — but the field is in an even more parlous state than economic history when it comes to the hiring decisions of economics departments. After all, why spend time studying the mistaken theories of the past, when you can study the superior theories that have replaced them?
(OK, perhaps that argument doesn’t seem quite so compelling now as it did a few years ago.)
So I was interested to see David Warsh’s report from the AEA meetings which quoted James Heckman, no less, as making the argument for history of thought courses in Economics PhD programmes. It follows the launching of a blog which promises to “engage current financial news and policy debates from the standpoint of the classics of monetary theory.”
And Brad makes the pitch in characteristically understated fashion here.