Posts Tagged ‘Willem Buiter’

Buiter is bullish on the US dollar

Saturday, March 28th, 2015

FT blogger Izabella Kaminska reports that Willem Buiter, Citi’s chief economist, voiced the following opinion at a meeting this morning in London.

The dollar is the only global reserve currency worth the name. The euro is in intensive care still, the yen is too small, sterling nobody has heard of, and the renminbi is not ready for prime time yet. The dollar, strangely enough, with the US economically being somewhat well over its peak, the dollar is more dominant today than I remember in a long time.

Willhem Buiter, as reported by Izabella Kaminska, “Buiter on soggy global growth in 2015“, FT Alphaville blog, 27 March 2015 (unmetered link – free registration required).

Willem Buiter, who was born in the Netherlands in 1949, has dual United States and United Kingdom citizenship. In his long, distinguished career, he taught economics at Princeton, LSE, Bristol, Yale and Cambridge. Until December 2009, he wrote an FT blog entitled “Maverecon“. The blog is no longer active but remains open as an archive.

Keynes was wrong!

Monday, November 3rd, 2014

No reader responded, but I found, in today’s Financial Times, an intelligent argument debunking yesterday’s post “Keynes was right!“.

Does monetary policy become ineffective once interest rates reach zero? With negative interest rates, monetary policy can continue to work, regardless of how low interest rates go. Real negative rates are certainly possible, and often observed, when the rate of inflation is greater than the interest rate. But the relevant question is: Are negative nominal interest rates possible? Martin Sandbu, writing in the Financial Times, thinks so.

In liquidity trap models of the economy, the central bank is impotent. Although it can create money at will, this power no longer provides influence over interest rates or the ability to give the economy a boost.

The reason this is said to happen is a supposed “zero lower bound” on interest rates. Central banks stimulate spending and investment by increasing the money supply. With more liquidity in the economy than people want to hold, they try to buy profitable assets for their cash. This drives market interest rates down. But when nominal rates are (near) zero, investors can hold all the liquidity the central bank throws at them without missing out on returns elsewhere, so money printing loses its power to pull market rates further down – even if that is what the economy needs fully to employ its resources. ….

But it is wrong to think interest rates cannot fall below zero. The rate most immediately under central banks’ control – the deposit rate on reserves – can be made as negative as one wishes. There are technical questions involving incentives to hoard physical cash, but these are solvable. And with the rate on reserves sufficiently negative, the rate on other assets can be made negative as well. The only zero lower bound is one central banks impose on themselves. (Emphasis added.)

Martin Sandbu, “Central bankers are caught in their own trap“, Financial Times, 3 November 2014 (metered paywall).

Mr Sandbu is the economics editorial writer at the Financial Times. For details on how to prevent savers from hoarding cash to avoid negative interest charges, Mr Sandu links to a five-year-old blog post of Willem Buiter. Mr Buiter describes three ways a central bank can set negative, short-term interest rates without encouraging savers to hoard currency:

(1) Abolish currency

(2) Tax currency holdings

(3) De-couple the numéraire/unit of account from the currency/medium of exchange/means of payment by introducing a new currency (the rallod) and abolishing the dollar currency.  The dollar would remain the numéraire.  The authorities would set the exchange rate between the dollar and the rallod.  There would no longer be a zero lower bound on dollar nominal interest rates because there is no longer any dollar currency.


As regards proposal (1) – the abolition of government-issued currency – other private means of payment (cheques drawn on bank accounts, credit cards, debit cards, cash-on-a-chip and other forms of e-money) could perform most of the legitimate/legal transactions role of currency. ….

As regards proposal (2), taxing the holding of money balances, the key issue is, if the desired interest rate on currency is negative, to get the holder (bearer) to come forward to pay the interest due (the tax) to the central bank.  If currency notes have an issue date on them, as most do, it would be very easy to announce an expiry date for currency as legal tender.  The holder of the currency note would have to come forward to pay the interest due to the central bank before the expiry date.  The currency would be stamped or marked in some way, to show it is current on interest due. ….

Under none of the proposals would people switch into currency if the nominal rate of interest were negative.  Under proposal 1, there is no currency.  Under proposal 2, currency has a negative nominal interest rate; under proposal 3, rallod currency has a zero interest rate but is not a better store of value than negative interest dollar bonds because the dollar appreciates vis-a-vis the rallod.  There is no dollar currency. …. (Emphasis added.)

Banks could still make money – that depends not on the level of interest rates but on the spreads between their borrowing and lending rates.  If a bank borrows from the central bank at minus five percent and lends at minus two percent, it will make the same amount of profit on a loan of a give size as it would if it borrowed at 5 percent and lent at 8 percent.

How would people living off their savings manage with negative nominal interest rates?  First check what real interest rates are.  If deflation were strong enough, savers could still be making out like bandits, even with negative nominal rates.  If real rates are negative, you live by consuming your capital.  If that means poverty for some and creates social problems, go to the Treasury or the Ministry of Social Affairs.  Don’t bother the central bank.

Willem Buiter, “The Wonderful World of Negative Nominal Interest Rates, Again“, maverecon, 19 May 2009 (free access).

Willem Hendrik Buiter (born 1949, in The Netherlands) is a US economist who is currently the Chief Economist at Citigroup. His FT maverecon blog has been archived, though it is no longer active. Access to FT blogs (unlike op-eds and articles!) is unlimited, subject to free registration.

Who is right, Kaletsky or Sandbu (and Buiter)? All this is puzzling, but fascinating. I am a microeconomist, and confess that I never understood macroeconomics. As soon as I find the time, I will visit Nick Rowe’s posts at WCI to search for a clear explanation.

Buiter on the eurozone

Thursday, December 8th, 2011

Former LSE economist Willem Buiter is predicting dire consequences from breakup of the eurozone.

Consider the exit of a fiscally and competitively weak country, such as Greece – an event to which I assign a probability of about 20-25 per cent. …. Balance sheets would become unbalanced and widespread default, insolvency and bankruptcy would result. Greek output would collapse.

Greece would temporarily gain a competitive advantage from the sharp decline in the new Drachma’s value, but … [s]oaring wage and price inflation would restore the uncompetitive status quo. ….

Disorderly sovereign defaults and eurozone exits by all five periphery states – an event to which I attach a probability of no more than 5 per cent – would … trigger a global depression that would last for years, with GDP likely falling by more than 10 per cent and unemployment in the West reaching 20 per cent or more. Emerging markets would be dragged down too.

Exits by Germany and other fiscally and competitively strong countries could be even more disruptive. …. I consider this highly unlikely, with a probability of less than 3 per cent. …. Everyone, except lawyers specialising in the Lex Monetae, would become much poorer.

Even if a break-up of the eurozone does not destroy the EU completely and precipitate the kind of conflicts that disfigured the continent in the past, the case for keeping the show on the road seems rather robust.

Willem Buiter, “The terrible consequences of a eurozone collapse“, Financial Times, 8 December 2011.

Willem Buiter (1949-) was a member of the Bank of England’s Monetary Policy Committee from June 1997-May 2000. He joined the London School of Economics in September 2005, then left in November 2009 to take up a position as Chief Economist of Citigroup.

For the record, after the September 2008 collapse of Lehman Brothers, Buiter made a strong plea for the UK to adopt the euro:

The message of this paper is that the global financial crisis that started in August 2007 provides another powerful and sufficient argument for the United Kingdom to join the EMU and adopt the euro as soon as technically possible. This new financial stability argument for UK membership in the EMU is separate from and in addition to the conventional optimal currency arguments for joining, which have also become more persuasive in the past few years.

Willem Buiter, “Why the United Kingdom Should Join the Eurozone“, International Finance 11:3 (Winter 2008), pp. 269–282.

Readers might question whether Buiter’s current advice is any more useful than his advice three years ago to the UK was.

the overvalued euro

Tuesday, October 20th, 2009

The euro is soaring, and not only against the US dollar. LSE economist Willem Buiter explains that the euro’s overvaluation is a direct result of excessively tight monetary policy, so can be corrected with loose monetary policy.

The euro has become a currency on steroids.  Its relentless nominal and real appreciation since the end of 2000 was briefly interrupted in the second half of 2008, but resumed with a vengeance during 2009. ….

It is time for the ECB [European Central Bank] to demonstrate that, despite all the evidence of recent years, it does not pursue an asymmetric, deflationist monetary agenda, but that it takes a violation of its price stability mandate in a downward direction equally seriously as a deviation in an upward direction.   If the ECB persists in acting in a willfully asymmetric manner, its cherished independence will be taken from it.  The letter of the Treaty will provide no protection against popular anger and political opportunism.

Willem Buiter, “Time for the ECB to get serious about the overvalued euro”, Maverecon, 18 October 2009.

This is a very informative post, with three helpful charts. Financial Times blogs (I think!) are ungated, unlike regular columns published in the print edition. Willem Buiter is former chief economist (2000-2005) of the European Bank for Reconstruction and Development.

the sad state of macroeconomics

Thursday, September 10th, 2009

Travel and jet lag have conspired to prevent me from commenting in opportune fashion on Paul Krugman’s long essay that was published in last Sunday’s New York Times Magazine. There is nothing new here, but the essay is well-written, in classic Krugman style, so very accessible to non-economists. Krugman covers a lot of ground, from Adam Smith to Keynes, to the New Classical and the New Keynesian schools. Do read the entire essay if you haven’t done so already. Even Greg Mankiw recomends it.

[B]elief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.


[E]conomists who inveighed against the stimulus didn’t sound like scholars who had weighed Keynesian arguments and found them wanting. Rather, they sounded like people who had no idea what Keynesian economics was about, who were resurrecting pre-1930 fallacies in the belief that they were saying something new and profound.

Paul Krugman, “How Did Economists Get It So Wrong?”, New York Times Sunday Magazine, 6 September 2009.

On the same subject, Willem Buiter last March drafted for his maverecon blog an excellent post, one that has been overlooked by many. Here is one brief quote from a long essay:

In both the New Classical and New Keynesian approaches to monetary theory (and to aggregative macroeconomics in general), the strongest version of the efficient markets hypothesis (EMH) was maintained.  This is the hypothesis that asset prices aggregate and fully reflect all relevant fundamental information, and thus provide the proper signals for resource allocation.  Even during the seventies, eighties, nineties and noughties before 2007, the manifest failure of the EMH in many key asset markets was obvious to virtually all those whose cognitive abilities had not been warped by a modern Anglo-American Ph.D. education.   But most of the profession continued to swallow the EMH hook, line and sinker, although there were influential advocates of reason throughout, including James Tobin, Robert Shiller, George Akerlof, Hyman Minsky, Joseph Stiglitz and behaviourist approaches to finance.

Willem Buiter, “The unfortunate uselessness of most ’state of the art’ academic monetary economics“, Maverecon, 3 March 2009.

Princeton economist and NY Times columnist Paul Krugman needs no introduction. LSE economist Willem Buiter, former chief economist (2000-2005) at the European Bank for Reconstruction and Development, has held academic appointments at Princeton University, the University of Bristol, Yale University and the University of Cambridge. Buiter’s schooling at Cambridge and Yale does not stop him from deriding Anglo-American PhD education.

Update: Via Nick Rowe, Casey Mulligan and Karl Smith, here is John Cochrane’s response to Paul Krugman’s essay in the NY Times Magazine. Cochrane’s response is a spirited defence of modern macroeconomics in general and the New Classical school in particular. Keep your eye out for Paul Krugman’s ‘response to Cochrane’s response’.