2014-54 for the Money and Banking class

This just in: a report on how to reform Canada's payment system, with details on how it operates

2014-53 Japan slips into a recession - and the dates of Canadian recessions.

According to the recent economic data, GDP in Japan fell last quarter. This was the second consecutive quarter of output decline and so newspapers announced Japan is in a recession.

How is recession determined? The common definition is two consecutive quarters of falling output. But this is not a definition used by economists.

Governments typically do not formally announce when the economy is in recession, in part because such announcement may not be credible. For example the government in power may be tempted to declare, before an election, that the economy is booming. Instead, the dating of recessions is left to independent economists. In Canada, the C.D. Howe Institute, an independent research organization, has recently undertakenthe task of systematically dating Canadian recessions. The C.D. Howe Business Cycle Council determined, for example, that there was an expansion from April 1992 to October 2008 (the longest since the beginning of the data, in 1926), and a recession from October 2008 to May 2009 (one of the shortest). In the United States, most economists accept the dates for business cycle recessions and expansions determined by the National Bureau of Economic Research (NBER). For example, NBER determined that the business-cycle expansion began in November 2001 and ended in December 2007, and it determined that the following recession ended in June 2009, when the next expansion began.

How does the C.D. Howe Institute’s Business Cycle Council determine when a recession begins and ends? There are no simple, clear rules. The Council defines a recession as a pronounced, pervasive, and persistent decline in aggregate economic activity. The Council looks both at the length and size of the decline in output and employment and the sectors of the economy that are affected. To call a recession, the Council requires that output falls for at least one quarter. The decline in output needs not be large, but it has to be persistent: A 0.1% drop in GDP in one quarter when in adjacent quarters the economy is growing strongly would not be considered a recession. The Council also looks at the proportion of sectors with falling output, particularly in manufacturing and construction. These two sectors vary the most over the business cycle. A general decline accompanied by robust growth in manufacturing and construction is unlikely to be a recession.

The recession timing as determined by the C.D. Howe’s Business Cycle Council is as follows:

C.D. Howe Recession dates
Beginning, quarter	End, quarter
1929:Q2	1933:Q1
1937:Q3	1938:Q2
1947:Q2	1948:Q1
1951:Q1	1951:Q4
1953:Q2	1954:Q2
1960:Q1	1961:Q1
1974:Q4	1975:Q1
1979:Q4	1980:Q2
1981:Q2	1982:Q4
1990:Q1	1992:Q2
2008:Q3	2009:Q2

The Great Recession, as you can see from the table, was short - it lasted only 3 quarters, the 1990-1992 recession lasted almost 4 times longer. The term Great Recession is imported. It was the worst recession in the U.S. since the Greta Depression, but in Canada it was not as bad.

The economic data used by the C.D. Howe are collected by Statistics Canada, the Canadian federal statistical agency. Statistics Canada is generally considered to be one of the the best statistical offices in the world. It provides estimates of macroeconomic variables fairly quickly and the estimates are quite accurate: subsequent revisions are small. Nonetheless, the information is retrospective: first, the data measure economic activity during a period that has already passed; second, the collection and processing of data takes time. As a result, the start of the recession is determined several months after the recession has begun. The C.D. Howe Business Cycle Council list of recessions was published more than two years after the end of the last recession, and we do not know how long its delay in announcing future recessions and expansions will be. In the United States the delays are also substantial. For example, the announcement that the most recent recession began in December 2007 was made by NBER twelve months later, in December 2008.

2014-52 New rules on bankers' pay

In the UK, new rules are being debated for bankers' pay. Essentially, bonuses will be deferred for a long period of time (7 years) and not paid if wrongdoing is uncovered. There is pressure to apply those rules to traders and brokers.

The underlying idea: crime should not pay.

2014-51 Insider trading in Brazil

As this article points out, while in the U.S. (and, sometimes, in Canada) insider trading leads to criminal prosecution and jail, in Brazil nobody has ever gone to jail for insider trading

The person in question, Eike Batista, was once predicted to become the richest person in the world. He was worth $35 billion; now he is accused of insider trading.

2014-50 This pesky arithmetics

Question: At the beginning of the year the exchange rate between the Russian ruble and the Us dollar basket was around 32 rubles. Now it is 48. How much of its value has ruble lost?

The answer, from DailyFX which "provides forex news and technical analysis on the trends that influence the global currency markets."

Ah, the professional advisers on foreign exchange. Here is their answer, Written by Ilya Spivak, Currency Strategist and David Rodriguez, Senior Strategist for DailyFX.com

"precipitous drop in the currency that has thus far produced losses of as much as 47.8 percent this year against the greenback"

So many people make the same mistake. Now that you know the answer is .....
you have an advantage over them.

Here is the website of the pros

2014-49 Russian monetary policy again

In the second piece in this Bloomberg TV presentation (it starts in second 22 of the clip) the change in monetary policy in Russia is described. Previously, the Russian Central bank intervened in the forex in a predictable fashion, We discussed what the bank did in posting 2014-29. Here it is:

• the band is unusually wide:  ± 12.5% (the current band is, according to the article, to keep the ruble exchange rate between 35.65 and 44.65 rubles per basket (the formulation is odd because the exchange rate is calculated against a basket of currencies, not a single currency). A more typical band is ±1% or ±2.5%
• once the exchange rate approaches a limit of the band, the central bank intervenes - this is a standard procedure. Recently the ruble was weak so the bank would intervene to prop up (increase) its value by buying rubles (i.e. increasing demand for them) and selling foreign currencies. Also standard.
• once the daily intervention reaches a limit ($350 million) the band is moved up by 0.05 ruble (5 kopecks). This mechanical rule is also unusual. 

The Bank of Russia is ending this type of intervention. Why? As the Bloomberg reporter says, it was predictable and so could be taken advantage off by speculators. The bank will still intervene, but not in a predictable way.

It looks like Russian markets are shaky The Rubble has been falling, and bond yields have been increasing. The interest rate on Russian bonds with maturity of 13 years is 10.16%.

Unfortunately, the graphs mentioned in the article are not available.

2014-48 Penalties for currency manipilation

$3.4 billion fines were imposed on UBS, HSBC, Citigroup, RBS and JP Morgan

And a big surprise:
"Dozens of dealers have been suspended or fired for sharing confidential information about client orders and coordinating trades to make money from a foreign exchange benchmark used by asset managers and corporate treasurers to value their holdings in the latest scandal to hit the financial industry."

You may ask why. Well, read the article. There is a trail of e-mails by wrongdoing dealers. Even bankers, when there is clear evidence against them, get penalized.

But if you read the article carefully, another picture emerges as well. There were complaints for some time about currency rigging. The banks did not follow up. Here is a quote: "The bank said it regretted not responding more quickly to the complaints. The other banks were similarly apologetic."
It seems bank management that failed to supervise brokers did not suffer. 

What is interesting is that this was a joint investigation of US and British authorities. Finally, they are recognizing that banking became international, and national supervision may not be enough.

And about your belief that bankers suffer penalties when they misbehave, shown by your answer to question 55 on the macro exam and question 53 on the money and banking exam:

Benefit: "“He’s sat back in his chair … announcing to desk …that’s why I got the bonus pool,” said one trader to a rival after they colluded on a rate, earning, according to regulators, a profit of $513,000 on the trade."
Penalty: "nor were any traders or executives charged with wrongdoing."

The details of how it worked are here.
In case you cannot access NYT:
The fix is the rate set over 60 seconds at 4pm in London

"The F.C.A. and C.F.T.C. claim that the traders at different banks met in online chat rooms and colluded on trading strategies, particularly in the moments before a fix was determined, so that their own banks could profit.

By making a large number of bids, or orders, ahead of the fixing time, traders could potentially send the price of a currency up or down. They then could profit from the difference in the fix price and the average price they paid for euros or other currencies throughout the trading day."

Why this should not be done:

"Regulators say that making trades to manage a bank’s risk of holding too much of one currency is permissible. But the activity uncovered in this inquiry was strictly to amass outsize profits and not in the interest of bank clients."

"In one instance, the British regulator said a trader at Citigroup made a $99,000 profit based on trades executed in a 33-second period ahead of the E.C.B. fix after colluding with traders at four other firms."