Author Archives: Luciano Sobral

About Luciano Sobral

Economist based in São Paulo, Brazil, been working in financial markets for 11 years. Avid reader & writer; big fan of Belgian beer, Argentinian jazz, Ethiopian coffee and the joys of a peaceful and globalized world.

Three Questions for Professor Charles Goodhart

The following article deals with the topic “The Future of Central Banking: Inflation Targeting vs. Financial Stability,” which is currently being discussed at the Global Economic Symposium in Rio. The author intends to enrich the discussion at the symposium with his personal stories and ideas.

Professor Charles Goodhart was one of the participants in the GES 2012 “The Future of Central Banking: Inflation Targeting versus Financial Stability” panel. He served as a member of the Bank of England’s Monetary Policy Committee from 1997 to 2000 and became Emeritus Professor at the London School of Economics in 2002. He formulated what is widely known as “Goodhart’s law,” a description of a kind of “observer effect” typical to social sciences:

“Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”

Goodhart’s law seems to me a very smart and humbling idea, and it comes to my mind every time I hear about explicit targets for economic variables, such as inflation and the recent idea of NGDP targeting. I had the chance to ask him three questions I judged most relevant in the current debate on central banking:

Professor Charles Goodhart at the 2012 Global Economic Symposium | Photo by the author

Continue reading

Of Monopoly and Monetary Policy

The following article deals with the topic “The Future of Central Banking: Inflation Targeting vs. Financial Stability,” which will be discussed at the Global Economic Symposium in Rio this October. The author intends to enrich the discussion at the symposium with his personal stories and ideas.

One of the FAQs from the rules of Monopoly (the board game) goes like this:

What if the Bank runs out of money?

Some players think the Bank is bankrupt if it runs out of money. The Bank never goes bankrupt. To continue playing, use slips of paper to keep track of each player’s banking transactions — until the Bank has enough paper money to operate again. The banker may also issue “new” money on slips of ordinary paper.

Continue reading

When Stupidity Can’t Fail

The following article deals with the topic “The Future of Central Banking: Inflation Targeting vs. Financial Stability,” which will be discussed at the Global Economic Symposium in Rio this October. The author intends to enrich the discussion at the symposium with his personal stories and ideas.

In September 1998, following the financial collapse of Russia, a hedge fund went belly up. It wasn’t an ordinary hedge fund: among its board members were two economics Nobel laureates, and its failure triggered a coordinated bailout orchestrated by the Federal Reserve Bank of New York. Almost all of the major investment banks operating in the United States at that time were involved, with contributions totaling $3.6 billion.

1997 economics Nobel laureate Myron Scholes, of Black-Scholes model fame, and one of the partners of LTCM | Photo by Magnus Manske on Wikimedia Commons, CC BY 2.0

The story of Long Term Capital Management (LTCM) became, at the hands of journalist Roger Lowenstein, a best-selling book ingeniously titled When Genius Failed. Some of the several possible lessons implied from the book are: no single player is bigger than the market, extreme outcomes are incredibly hard to predict, and hubris can take a financial system down. In sum, even geniuses sometimes fail spectacularly; it’s part of the game we used to call capitalism. Capital unwisely invested is punished and changes hands to more efficient players, who are only as good as their last investment decision. Harsh as it may sound, this grand scheme of organizing society helped take mankind to levels of prosperity that were unimaginable before it emerged.

Ten years after the failure of LTCM, Lehman Brothers filed for bankruptcy, and global markets entered a destructive spiral, only interrupted after the largest injection of public money in financial institutions ever seen. In the minds of many economists and policymakers, one fact was directly linked to the other: Lehman’s failure triggered chaos in financial markets, so we should avoid large bank failures at any cost. This is one of the main pillars of what is now being called “financial stability.”

Continue reading

Getting Political on Central Banking

The following article deals with the topic “The Future of Central Banking: Inflation Targeting vs. Financial Stability,” which will be discussed at the Global Economic Symposium in Rio this October. The author intends to enrich the discussion at the symposium with his personal stories and ideas.

Federal Reserve Chairman Ben Bernanke responding to questions from the House Budget Committee | Photo by Peter Larson/Medill News Service on Flickr, CC BY 2.0

On August 23rd, in an interview with Fox Business Network, Republican U.S. presidential candidate Mitt Romney said if he wins the race for the White House, he will not appoint Ben Bernanke for a new term as chairman of the Federal Reserve. Bernanke’s current term, his second in a row, ends in 2014, months before the end of the period in which the current monetary policy committee announced it would leave interest rates at extraordinarily low levels.

Continue reading

Food Prices Rise: What Is the Role of Central Banks?

The following article deals with the topic “The Future of Central Banking: Inflation Targeting vs. Financial Stability,” which will be discussed at the Global Economic Symposium in Rio this October. The author intends to enrich the discussion at the symposium with his personal stories and ideas.

 

Corn field in Canada, Photo taken by Perry McKenna on Filckr, CC BY 2.0

 

After an 18-month reprieve, world food prices are on the rise again. The Food Price Index from the Food and Agriculture Organization of the United Nations (FAO) went up by more than 6% in July, with the Cereals sub-index surging 17% in that month. Corn and soya recently hit all-time highs in nominal terms.

Continue reading