Mechanisms for Financial Markets

↓/↓↓/↓↓↓ Money Markets and the Implementation of Monetary Policy

• The Old Lady’s Untruthful Accounts: Another Fine Mess
  The BoE ‘adjusted’ its 2009 accounts to hide the loans to HBOS and RBS.

• On Quantitative Easing
  Quantitative easing, or unconventional monetary policy, has multiple objectives, several of which could be done better, or could be done by the finance ministry.

• The Bank of England: a step closer towards its own monetary policy, and Short-term ‘draining’ operations and the nature of reserves
  The Bank’s decision to remunerate reserves heralds a deep change in the Bank’s understanding of the nature and purpose of the implementation of monetary policy.

• The Implementation of Monetary Policy: The Next Attempt
  Letter to Paul Tucker, in response to a Bank of England consultation, explaining that the model underpinning central banks’ implementation of monetary policy is broken.

• Letter to the FT: Libor is both high and low (“Some confusion over Libor levels”)
  Not everything is the fault of the British Bankers’ Association.

• Letter to the FT: Libor suggestion doubly mistaken
  Replacing BBA Libor rules with those of Euribor wouldn’t fix the problems with the fixings.

• The possible stigmatisation of UK Treasury Bills
  A comment on the BoE’s Special Liquidity Scheme.

• Implementing Monetary Policy
  Paper presented at LSE FMG conference on 30 January 2008.

• Article in Central Banking: The pretend market for money
  Why do central banks implement monetary policy in such a needlessly complicated manner?

• The BoE’s implentation of monetary policy: dangerous false signals and confused collateral
  Addendum to earlier article in Central Banking.

↑/↓/↓↓ Government Debt

• 22^nd January 2060: two errors, one traditional, one new
  The UK DMO has announced the sale of a new gilt maturing 22^nd January 2060. There are two errors in this choice of maturity date: one traditional, one new.

• On the Punishment of Lonely Bidders
  The uncovered gilt auction on 25^th March 2009 emphasises the importance of the DMO using an auction mechanism that does not punish lonely bidders.

• Methods for Distributing Gilts: A Reply, and also a presentation of the reply given at the DMO on Friday 6^th February 2009
  The UK DMO asked whether there are other methods, or improved methods, by which gilts could be distributed. This reply argues for improving the auction mechanism, and for selling short-dated calls on long-dated gilts.

• Bund Auctions: A better mechanism, and Auktionen von Bundesanleihen: Ein besserer Mechanismus
  Several of the Deutsche Finanzagentur’s auctions have been uncovered. A better auction mechanism would cure the problem, as described in the letter to the Deutsche Finanzagentur, and, in German, in the letter to members of the German Bundestag’s Budget Committee.

• Gilt Asset Swaps: DMO Should Profit, Who pays wins: a reply to Mark Capleton, and Gilt Asset Swaps: Stheeman’s Reply
  Rather than selling long gilts at swaps+40bp, the UK Debt Management Office should sell short-dated gilts, and pay fixed on the forward-starting swap. The Royal Bank of Scotland then published its own recommendation, slightly different, to which the second essay replies; Robert Stheeman, Chief Executive of the DMO, then commented, to which the third essay replies.

• US Treasury Bonds: fewer and larger
  A letter sent to the US Senate Committee On Finance in August 2007.

• On The Plotting of Yields
  When plotting yields, the best x axis to use is ‘true’ tenure, being Macaulay-Weil convexity divided by Macaulay-Weil duration.

• A Better Auction Mechanism, And Why Governments Should Sell Futures Rather Than Debt
  The mechanism by which governments sell debt at auction imposes unnecessary risks on primary dealers, who charge for these risks by bidding less. A better mechanism would break an auction into a series of auctionettes, thus increasing the authorities’ revenue. Further, selling a specially designed futures contract would reduce dealers’ balance sheet usage, again increasing revenue, and would also permit the authorities to match cash inflows with cash outflows.

• Bonds: too many; too small
  Governments should improve the liquidity of existing securities by re-opening them, rather than create new securities.

• Letter to the FT: Three ways the US Treasury could repair the bonds market
  Following press reports of the US authorities’ attempts to deter mischief in the US Treasury repo market, a letter summarising what the Treasury ought to do was sent to and published by the Financial Times.

• Some elementary thoughts on the maturity at which a government should borrow
  Soverign governments should issue long-dated debt, as doing so stabilises the macro economy, provides information to the issuer about demand for assets, and provides benchmarks for private-sector issuers. The situation is more complicated for EMU-zone governments.

• Reply to UK DMO’s consultation about a new design of index-linked gilt
  A reply to the consultation paper, published by the UK’s Debt Management Office on Friday 7^th September 2001, that asked “whether to adopt a new design for new issues of index-linked gilts”.

• Reply to UK DMO’s consultation about an ultra-long gilt
  In December 2004 the UK Debt Management Office asked whether it should issue a new ultra-long gilt, perhaps of 50 years maturity, and perhaps amortising. This reply argues that it should issue very long-dated, but not amortisers.

• Official Intervention In The ‘Specials’: the original suggestion; response to the DMO’s consultative document; and commentary on the DMO’s decision
  Individual government debt securities are sometimes subject to a ‘squeeze’, in which the security becomes very expensive to borrow. This can be caused by one or some market participants gaining control of most of one security, allowing these participants to extract a ‘monopoly rent’ from others. In August 1996 this author suggested a non-discretionary repo-switch mechanism that would enhance the efficiency of government debt markets by deterring would-be squeezers. In September 1999 the UK’s Debt Management Office consulted about a similar mechanism, announcing the results of that consultation in February 2000.

• The Dutch Sequential Auction
  In February 1999 the Dutch State Treasury Agency consulted Primary Dealers about an auction mechanism, the Dutch Sequential Auction, which seems to have been inspired by the ‘auctionette’ mechanism. The following summarises that suggested mechanism, and the objections to it raised in a letter sent by the author on 25^th February 1999.

• Switch Auctionettes
  The UK Debt Management Office is planning switch auctions, in some form, to convert old illiquid non-benchmarks into larger more liquid benchmarks. These switch auctions would be more efficient (allowing a larger proportion of the source stock to be switched at more favourable terms) if the switch auctions were to be broken into a number of switch auctionettes, as described herein.

• A new design of bond future
  The current design of bond future resembles an agricultural contract. A better design would prevent squeezes, and thus allow a bond future to better represent its underlyings.

• The 30-year Mbono: recommendations
  Reply to the Mexican Ministry of Finance and Public Credit’s questionnaire about a new 30-year Mbono.

↑↑/↑/↓ The Euro, and Foreign Exchange

• A Market-Based Exchange Rate Mechanism
  Governments should reduce volatility in the foreign-exchange markets by committing themselves to frequent and regular auctions of short-dated physically-delivered FX options. Sale of an appropriately designed exotic option would further smooth the stabilisation.

• Round EMU Conversion Rates
  The currencies of the first wave of EMU entrants entered EMU at inconveniently non-round conversion rates. This need not be the case for subsequent entrants, who should prefer conversion rates which are round, and which have round inverses.

• The end of EMU: legal ramifications, and Romano Prodi’s amazing interview with The Spectator
  EMU isn’t necessarily permanent, but the demise of the former national currencies (Deutschmarks, Dutch guilders, French francs, etc) is permanent. However, if a country that left EMU wanted to make difficulties for those that remained, it could do so.

• The end of EMU: How Germany Might Leave
  A loophole in the Maastricht Treaty allows a eurozone country to create a new central bank that controls the monetary policy of a new currency, all without being in breach of the Maastricht Treaty.

• The end of EMU: How the Germans could leave
  If the people of a eurozone country want a new currency, and the government doesn’t provide, then the private sector can, and doing so would be highly profitable.

↑↑↑/↑↑/↑ Also

• Pre-cooked wind-down plans: every unhappy bank might be unpredictably unhappy in its own way
  Pre-cooked wind-down plans have merits, but may well not survive contact with actual insolvency.

• Financial Stability Reviews
  A reverse-date-ordered list of central-bank published financial stability reviews, complete(ish) up to end-2005. Please would a central bank take on the job of maintaining this list?