Thursday, 26 March 2015

The Canadian “Committee for Monetary and Economic Reform” lawsuit.


CMER is taking legal action with a view to forcing Canada’s central bank, the Bank of Canada, to revert to one of its founding principles which was to provide government with interest free loans. CMER has my full backing.

Far as I can see, the latter interest free loans come to much the same thing as the combined monetary and fiscal policy system advocated by Positive Money. That consists of having the central bank supply government with money (which government can spend any way it likes) when the central bank thinks inflation and unemployment justify extra demand.



If bank capital is expensive, how come bond mutual funds survive?


Bank regulators and politicians are suckers: they fall for every sob story spun to them by banks. In the case of politicians, an additional motive to fall for the sob stories is of course the cash in brown envelopes offered to politicians by banks - or perhaps the phrase “cash in brown envelopes” is impolite. Let’s re-phrase that and call it “contributions to election expenses”.

Anyway, one of the main sob stories is that bank capital ratios cannot be raised too much because bank capital is allegedly a more expensive way of funding banks than debt (i.e. deposits or bonds).


Modigliani Miller.

The most na├»ve reason for thinking that capital is expensive is the fact that bank shareholders demand a higher return than depositors or bond holders. That’s because when a bank is in trouble, it’s shareholders who lose out before debt holders.

However, that does not prove that if capital ratios are raised, that the TOTAL cost of funding a bank rises. Reason is that the total risk involved in running a bank is determined by how risky its loans and investments are, not by how it is funded. E.g. a bank which concentrates on NINJA mortgages is riskier than one that concentrates on standard mortgages.

Thus if a bank is funded by more capital and less debt, that has no effect on the total risk the bank runs. I.e. given a rise in the capital ratio, all that happens is that return demanded PER SHAREHOLDER or PER SHARE will fall, leaving the TOTAL return demanded by shareholders and debt-holders unchanged, as explained by the two economics Nobel laureates Modigliani and Miller.


Bond mutual funds.

Now a mutual fund (“unit trust” in the UK) which invests just in bonds (and there are plenty of funds which do that), comes to very much the same thing as a bank which is funded just by shareholders.

The stakes obtained in those funds by those who buy into such funds are not actually CALLED SHARES. But that’s what those stakes are, to all intents and purposes. For example the value of those stakes rise and fall in line with the value of the underlying assets just as shares tend to. Plus the money put into those funds is effectively loaned to a variety of corporations and perhaps cities or local or national governments (depending on what the fund specialises in). And what do you know? That’s what banks do: lend to a variety of borrowers.

So for those who want to claim that bank capital is expensive, I have a question: how do bond mutual funds survive, given that they amount pretty much to banks funded just by capital?



Capital ratios.

What makes this whole argument very silly is the MINUTE increases in bank capital proposed by for example the Basel regulators and the UK’s Independent Commission on Banking. According to Martin Wolf (chief economics commentator at the Financial Times), the ICB proposed increasing that ratio from a measly 3% to a measly 4%. And the ICB spend hundreds of hours scratching their heads over whether to raise the ratio any further.

Well the “3% - 4%” argument is a COMPLETE IRRELEVANCE given that it can well be argued that a 100% ratio (i.e. having banks funded JUST BY shares) would not raise bank funding costs.

Or as an alternative, you might prefer the 25% or so ratio advocated by Martin Wolf and Anat Admati of Stanford. But certainly the “3%-4%” argument is a joke.




Monday, 23 March 2015

Sectoral balances make a mockery of debt-phobes.


The world economy can be split into any number of sectors you like. You can split it into different countries, or into households occupied by single people, married couples and non-married couples. Sectoral balance analysis was used extensively by the UK economist Wynne Godley decades ago, and MMTers have been keen on sectoral balance analysis for many years.

However when it comes to the sectoral balance idea as it affects an individual country, the world is normally split into three sectors: 1, the country’s government or public sector, 2, the country’s private sector, and 3, the rest of the world, i.e. the “foreign sector” as it’s normally called.

The basic idea of sectoral analysis is that flows of money out of one sector must be balanced by flows of money INTO one or more other sectors. And sectoral balance analysis gives you a good idea of what’s going on in an economy over a given period, all of which might sound a bit boring. However, there’s a sting in the tail, as follows.

Deficit-phobes and debt-phobes are for ever warning us of the dangers of government deficits and debt. Deficits and national debts are by definition “bad”. Indeed most of the Harvard department of economics (certainly Kenneth Rogoff and Carmen Reinhart) have been constantly tearing their hair out over the debt over the last few years. And Congress has recently imposed yet another cap on the debt.

And in the UK in the run-up to the forthcoming election, politicians are screaming B.S. laden insults at each other on the subject of the debt – that’s when they aren’t screaming B.S. laden insults at each other on some other subject.

However, money flowing out of the government sector (the deficit) equals private sector SAVINGS. And saving is widely regarded as “good”. Indeed, we have dozens of schemes which keep thousands of bureaucrats employed aimed at encouraging saving.

So get this, and try not to die laughing. When money flows OUT OF the public sector, that’s “bad”. But that money absolutely has to go SOMEWHERE. And when it flows INTO the private sector, the flow immediately becomes “good”.

Mad or what?


Of course there's the foreign sector to consider, but assuming there are no dramatic flows from or to that sector, then $X leaving the public sector will be balanced by about $X entering the domestic private sector. And even if THERE ARE significant flows to the foreign sector, the latter is itself composed to a significant extent if not mainly of the private sectors of sundry other countries.

It should also be said that saving in the above sense (as already intimated) refers to the accumulation of money or (much the same thing) government debt. I.e. saving in the form of accumulating cars, houses, etc is not what sectoral balance analysis is about.

But there are plenty of schemes (employing thousands of bureaucrats) aimed at saving in the “accumulating money or government bonds” sense.

And finally, the above is not to suggest that government debt is NEVER a problem. As I’ve pointed out before, it’s a problem when INTEREST on the debt rises significantly above zero.

But debt AS SUCH is not a problem. In fact you might as well call it – er – “private savings”.

Saturday, 21 March 2015

Green QE.


With the recession now largely over, discussing stimulatory measures is no longer of any IMMEDIATE practical significance. However, many of the THEORETICAL questions surrounding stimulus are still not settled, and the paragraphs below are concerned with some of those theoretical points.

Printing money and spending it on infrastructure, renewables, etc boosts GDP by more than printing money and buying government debt (conventional QE). That has induced large numbers of less than entirely clued up folk to conclude that the latter is preferable to the former.

There is a flaw in that argument, namely that it assumes there is some sort of limit to the amount of money that can be printed. Therefor we have to choose between the above two options. (Incidentally when I say “printed”, I don’t of course mean literally “printed” as in turning out £10 notes: I mean “create new money” in the way that at least 90% of new money is created nowadays (by central or commercial banks), namely via book keeping entries).

There is actually NO LIMIT to the amount of money that can be printed / created. To take a silly example, if it became fashionable to decorate one’s living room with a modern art exhibit that consisted of £1bn of £10 notes stacked inside a glass cage (the sort of thing that might actually win you the Turner Prize), there’d be no harm in printing trillions of pounds of £10 notes and distributing them to all and sundry so as to satisfy demand for the above modern art. Of course there’d have to be some way of ensuring the £10 notes didn’t actually get spent. But let’s assume that problem can be solved.

The above modern art would have almost no effect on aggregate demand or jobs (though a few more people would be employed making paper and printing £10 notes.)

And something similar applies to conventional QE. That is, conventional QE is widely regarded (I think rightly) as not having a HUGE stimulatory or “job creating” effect. Thus if large amounts of money are printed and used to effect conventional QE, that DOES NOT STOP further amounts being printed and used to fund Green QE or some other form of stimulus which brings more jobs per pound of “printing”. Put another way, the merits of conventional QE and Green QE should be considered SEPARATELY: they should not be seen as alternatives.

In fact I set out some ideas on the pros and cons of conventional QE here recently. And concluded the conventional QE was in fact justified, even though the employment creating effects are not spectacular.

As to Green QE, the fact that the phrase “Green QE” includes the word “green” attracts large numbers of woolly minded individuals, as does any fashionable word.

The truth is that the decision as to whether to implement more green investment is almost ENTIRELY SEPARATE from the question as to whether more stimulus is required.

That is, if a particular investment (green or otherwise) makes sense, it should go ahead even if the economy is at capacity (aka full employment). Of course, assuming an economy IS AT capacity, then demand will have to be restrained in some way (e.g. via tax or borrowing) so as to make room for the investment spending. But is not an argument AGAINST that investment spending.


Conclusion.

There’s an awful lot of hot air and twaddle talked about “green QE”. First, advocates of green QE tend not to get the point that green QE and conventional QE are not alternatives: i.e. we can do BOTH.

Second, investment spending (including green investment) has nothing to do with escaping recessions. That’s first because if an investment makes sense (from the economic and environmental perspective) it should go ahead EVEN IF the country is NOT IN recession. Second, investments (particularly infrastructure investments) are a poor way of escaping recessions. Reason is that they normally take YEARS to get going, plus the relevant spending goes on for YEARS, which means that infrastructure spending is as likely to stoke the next boom as to cure the current recession.

Of course I’ve made the latter point dozens of times before, but unfortunately the only way to get a message across to 90% of the human race is to repeat the message ad nausiam.

Friday, 20 March 2015

Revelation: central banks can print money.


Positive Money has just produced this paper entitled "Would a Sovereign Money System be Flexible Enough". The paper deals with full reserve banking: that's a system where private banks cannot "print" or create money - only the central bank is allowed to. Certainly I see no reason why the profits derived from seigniorage (aka money printing) should be captured by private banks. 


The paper refers to a mysterious critic of PM’s ideas who claims that a Sovereign money system would result in “a shortage of money, high unemployment and low economic activity..”. But the critic is not actually named. Well after approximately 30 seconds of Googling, I tracked down the offender: it’s Ann Pettifor.

Tee hee.


Evidently Ms Pettifor hasn't tumbled the fact that the UK’s finance minister at the height of the crises, Alistair Darling, created £60bn of sovereign money (aka base money) at the click of a computer mouse for the benefit of two failing bank. Plus she is presumably unaware that the British state created vastly more than that amount of base money (also at the click of a computer mouse) to fund QE.


Lack of flexibility - my ar*e. Under a Sovereign money system, government and the central bank would have no more difficulty implementing stimulus (via creating and spending base money) than implementing the right amount of stimulus under the EXISTING system.

________
 
22nd March 2015.  On closer inspection I see the paper DOES ACTUALLY mention Ann Pettifor. Sorry about that mistake.

Thursday, 19 March 2015

Drivel from the Financial Times on Grexit.


Today’s leading editorial in the FT argues against Grexit.

The first sentence says that the word “Grexit” is “ugly”. Gosh – so the FT’s personal taste in words says something about the underlying ideas does it? I find the word “gravity” ugly: which proves according to FT logic that apples don’t fall from trees, I suppose.

The second sentence says that “the decision to walk away from a currency is more akin to ripping up the rules of the game”. Oh yes? Well every single EXISTING member of the Eurozone “walked way” from its own national currency when joining the Euro. Looks like the FT hoists itself by its own petard there.

Plus the Scots are talking about “walking away” from the pound sterling if they become independent. Personally I don’t favour Scottish independence, but I don’t see a huge problem in quitting one currency block and joining another.

Well that’s the first two sentences of the FT article dealt with. Rest assured that the rest of the article is equally garbage strewn. But if you want a few details, read on.

The third para says that Grexit would constitute an “existential” threat for Europe. Ooooh, that’s an important sounding word: “existential”. The word used to refer just to Jean Paul Sartre’s existentialism. But sundry pseudo sophisticates and academic poseurs, like the ones who write for the FT reckoned the word sounded technical and important, since which time they’ve flogged the word to death.

Though credit where credit is due: important sounding words do fool about 90% of the population, so the FT’s use of the word “existential” is a good propaganda ploy.

Next, the article makes the extraordinary claim in connection with returning to the Drachma and devaluing that “If devaluation is so beneficial, Greece would never have joined the Euro in the first place”.

Well I wouldn’t expect the economic illiterates who write for the FT to know this, but given a fall in a country’s competitiveness in the Euro, the solution adopted is INTERNAL DEVALUATION in contrast to what might be called standard devaluation which is what happens to a country with its OWN CURRENCY given a fall in competitiveness. And there’s not much difference between internal and standard devaluation, except that internal devaluation takes much longer to effect and involves heavy social costs.

Thus the FT’s next point, namely that “A weaker currency makes imports more expensive” applies just as much to internal as to standard devaluations.


Conclusion.

I keep trying to persuade the FT to have one of the snails in my garden write their editorials: that would work out cheaper than employing a human journalist. But they haven’t taken up the offer so far.

Wednesday, 18 March 2015

Keynes though the quantity of money didn’t matter.


He said “Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.” (H/t to Lars Syll). That's from a letter from Keynes to Roosevelt in the 1930s.
 

What's Keynes on about? Of course its spending that matters rather than the stock of money, but to claim the stock has NO EFFECT AT ALL is going a bit far. When people win a lottery their weekly spending rises, doesn’t it? Of course I’m extrapolating from the micro to macro there which is always dangerous. However, there’s plenty of surveys been done into the effect that tax cuts or tax rebates have on household spending across the nation as a whole (which is macro) and the effect (amazing as this might seem) is the household spending rises as a result. E.g. see here, here and here.

Of course it's important to distinguish between commercial bank created money and central bank created money (base money). But Keynes refers to money created by the "public authority" in the above letter, so it's pretty obviously base money he's referring to.

Monday, 16 March 2015

QE is no use because it just boosts asset prices?



The above is a popular criticism of QE.  And those who make that criticism often then go on to advocate “QE for the people”, “green QE” or something of the sort. The latter variations on standard QE involve printing money and using it to fund a selection of public spending items (education, health, etc) or fund tax cuts.

No doubt QE for the people has a bigger effect on employment per pound or dollar than the asset price boosting variety of QE. (Incidentally, 99% of the assets bought by the Bank of England to effect QE have been government bonds rather than other privately held assets, and I’m assuming that QE in fact takes that “government bond” form.)

However to criticise QE because it “just boosts asset prices” assumes that asset prices were at their optimum level PRIOR to the boost, and that as a result of the boost, asset prices are then above optimum. Well it can equally well be argued, at least on the face of it, that asset prices PRIOR to the boost were BELOW optimum, and that QE brings asset prices BACK TO their optimum level. So why might that be? Well to sort this out, it’s first necessary to get government debt incurred to fund public investment out of the way.


Debt incurred to fund public investments.

The idea that government debt is justified if it funds public investments is a popular one. In fact Milton Friedman, Warren Mosler and yours truly have argued that governments should borrow NOTHING: not even to fund publicly owned investments. (See here for more details).


However, we don’t need to get bogged down in that argument here. Let’s just assume that government debt used to fund public investments is justified up to the point where that debt equals X% of GDP, where X can be anything between zero and whatever you like.

Assuming QE is implemented, it is reasonable to assume that the latter chunk of debt should not be QEd. That is, the only debt that should be QEd is debt incurred so as to fund stimulus.

But is it right to use debt to fund stimulus? Well Keynes said that stimulus can be funded with EITHER borrowed or printed money. (See 2nd half of 5th para here.) But quite what the point of borrowing so as to fund stimulus is, I don’t know. After all, the effect of borrowing is “anti-stimulatory”. Why do something which brings the OPPOSITE of the desired effect? The word “bonkers” springs to mind.

One possible excuse for borrowing to fund stimulus is that the existence of government debt or government bonds makes that stimulus easier to reverse, should the need arise. But the flaw in that argument is that even if there is no government debt, and the state wants to apply a dose of “anti-stimulus” (i.e. deflation), that’s easily done by having the state wade into the market and offer to borrow at above the going rate of interest for risk free loans. (As it happens under current arrangements, that job would probably be done by the central bank, but there’s no fundamental reason why the treasury couldn’t do that job – in the same way as there’s no fundamental reason why treasuries cannot issue base money: something the UK treasury actually did during WWI.)


Conclusion.

The case for funding stimulus with borrowed rather than printed money is feeble. Ergo if borrowing IS USED to fund stimulus, asset prices will be artificially DEPRESSED. And that means that if QE is then implemented, far from artificially raising asset prices to above their optimum level, asset prices will have been artificially depressed by the latter borrowing, which means that QE will RETURN asset prices to their optimum level.

But that’s not to criticise “QE for the people” or “green QE”. Indeed the latter idea, which consists of having the state simply print money and spend it, was being advocated by Milton Friedman just after WWII, by Abba Lerner around the same time and more recently by MMTers.

Saturday, 14 March 2015

Bank regulators think risk can be made to vanish.


Bank regulators (aka zombies whose brains are controlled by banksters) have a way of making risk vanish. Assuming they’ve got this right, they deserve a Nobel Prize. Their amazing “risk removal” trick goes like this.

Suppose a bank is funded entirely by equity. The return demanded by shareholders is composed essentially of two elements. First there’s the fact that shareholders (like bond-holders or those putting money in term accounts) sacrifice current consumption so that someone else CAN CONSUME. That is, shareholders lend to those borrowing from banks, and as is normal, lenders require some reward or return for that sacrifice.

Second, shareholders require a reward or return to reflect the risk they take: the value of their shares may decline – perhaps even to nothing.


Enter debt, stage left.

Now suppose the bank decides to fund itself say 50% by shares and 50% by debt (in the form of bonds or deposits). According to regulators (aka zombies), the TOTAL cost of funding the bank declines because equity is inherently expensive, so if you use less equity, the total cost of funding the bank declines.

Now this is amazing. Assuming to keep things simple that the bank’s total assets and liabilities remain constant, then the total amount loaned by savers to borrowers (intermediated by the bank) remains constant. So there should be no change in the TOTAL return demanded by bank funders stemming from that source.

As to RISK, that is also unaltered. Reason is that the risk run by a bank is determined entirely by the nature of its loans and investments. E.g. a bank specialising in NINJA mortgages clearly runs a bigger risk than one specialising in more standard mortgages. And there is no reason to think that because a bank replaces some shareholders with debt-holders that the nature of its loans and investments changes.

But (to repeat) according to regulators (aka zombies) bank capital is inherently expensive, thus replacing shareholders with bond-holders or depositors reduces the total cost of funding the bank.

Amazing: the total charge made for covering risk has been reduced even though total risk has remained unaltered. Evidently risk has vanished. I’m amazed.

Well actually I’m not: the truth is that bank capital is not inherently more expensive than other types of bank funding, debt in particular. But banks go to HUGE LENGTHS to persuade all and sundry (zombies included) that bank capital IS INDEED expensive, and that propaganda effort pays off: that is, zombies then believe that bank capital is expensive.

The fact that that belief involves a blatant nonsense, i.e. that risk can be made to vanish, doesn’t matter: banks know that zombies will never notice the nonsense.


Cut your insurance costs by not insuring!

Also the above nonsense isn't quite the full picture and for the following reasons.

It’s virtually impossible for a bank funded entirely by equity to go insolvent. Thus the risk involved in running the bank is fully covered so to speak.

However, if the bank is largely funded by debt, it’s much more likely that the bank DOES GO insolvent. In which case, of course, the risk of running the bank is not fully covered. At least the bank is not insured against closure or collapse.

It’s a bit like house insurance. There’s a fantastically clever way of cutting the cost of insuring your house or car: don’t insure them, or don’t FULLY insure them.

So in addition to the above points about risk, it looks like bank regulators and politicians have also fallen for the latter bank insurer’s snake oil trick.




Friday, 13 March 2015

Do “non productive” loans matter? Nope.


Summary.     There is a myth doing the rounds to the effect that loans that fund so called “productive” activities (like building houses) are preferable to loans that fund so called “non-productive” activities (like the purchase of EXISTING houses). The flaw in that argument is as follows.

The basic constraint on loans and other methods of increasing GDP (like increasing the deficit, cutting interest rates, QE, etc) is inflation. And the latter is sparked off when aggregate demand exceeds the ability of the economy to supply (aggregate supply). And aggregate supply is limited by factors like the size and skill of the workforce. Thus if a series of non-productive loans are implemented, the result will be relatively few demands on the economy, thus such loans leave room for further loans, or other ways of boosting GDP, like interest rate cuts, QE, and so on. In contrast, a series of “productive” loans results in relatively LARGE NUMBERS of people being employed which leaves less room or no room for further GDP increasing.

Thus the fact that a series of loans are “non-productive” is immaterial.
____

An example of the idea that “productive” loans are preferable to “non-productive” ones appears in this Positive Money publication, which reads, “However, banks currently direct the vast majority of their lending towards non-productive investment, such as mortgage lending and speculation in financial markets. This does not increase the productive capacity of the economy, and instead simply causes prices in these markets to rise, drawing in speculators, leading to more lending, higher prices, and so on in a self-reinforcing process.”

Certainly that’s a plausible argument. To illustrate, a loan that funds the CONSTRUCTION of a new house creates roughly two or three years work (for plumbers, bricklayers, carpenters, etc). In contrast, a loan that funds the purchase of an EXISTING house creates roughly a week’s work for an estate agent (“realtor” in US parlance) and a week’s work for the bank staff that organise the mortgage.

A point that lends credence to the above productive / non-productive argument is that there some types of loan based activity which without any doubt ARE unproductive in the proper sense of the word: e.g. loans which fund clever clever bets on derivatives which, when they go wrong help cause credit crunches. But by the same token, there are “productive” or GDP increasing loans which fund equally undesirable activities, like loans that fund cannabis farms (assuming for the sake of argument that cannabis farming is labour intensive).

Another example of GENUINELY unproductive loans, are loans granted for the purpose of purchasing existing houses where the net effect of those loans is exacerbate cyclical fluctuations in house prices.

But there remains the important question as to whether there is anything INHERENTLY undesirable about “non-productive” loans i.e. loans that don’t create much employment. Well the answer is: “no, there isn't”.


Flaws in the “unproductive” argument.

The flaw in the “productive / unproductive” argument is that it assumes there is some sort of limited stock of money available for loans. The reality is that there is NO LIMIT to the amount of money banks can create and lend out as long as they think the borrower is credit worthy, and as long as the economy is not at capacity: i.e. as long as the economy can handle the extra economic activity that stems from new loans.


Debt per $ of GDP.

A plausible argument against “non-productive” loans is that they increase total indebtedness per dollar of GDP by more than “productive” loans, and the word “debt” has negative overtones, ergo we all benefit if non-productive loans are minimised.

Well the answer to that is that debt is only a problem where debts are incurred in an incompetent or irresponsible manner. I.e. carte blanche objections to debt as such or to a rise in debt  per dollar of GDP are absurd.


Conclusion.

In deciding between different types of loan, banks should simply do what they already do, namely go for the most PROFITABLE loans. Indeed, profitability is a very good measure of productiveness, unless it can be shown that the profit derives from something underhand or dishonest.









Thursday, 12 March 2015

Moronic drivel in the Financial Times on Islamic extremism.


I do like this FT editorial which purports to tell us how to deal with Islamic extremism.
 

The article is entitled “UK Conservative’s crass new plan to fight extremism”. Wow: so the FT has some vastly BETTER ideas on how to solve the problem? You’ll be agog to learn what the FT solution is. Well their solution is contained in the following three sentences.

“Britain’s policies on terrorism and extremism should remain practical and agile. The UK security services need adequate surveillance capabilities and must act within the law. Local authorities and Muslim leaders need to foster strong community relations, identifying those at risk of radicalisation.”

Let’s take that sentence by sentence.

So government policy (on Islamic extremism or anything else come to that) should be “practical” rather than “impractical”. Absolutely amazing. Silly me: I’d never have been able to work that out on my own.

Next, the “UK security services” need “adequate” rather than “inadequate” surveillance capabilities. This is Nobel Prize stuff.

And the security services should “act within the law” rather an act illegally. I’m flabbergasted at the sheer genius of this article.

And finally, “Local authorities and Muslim leaders need to foster strong community relations, identifying those at risk of radicalisation.”

“Identifying those at risk” is a brilliant idea: but the big problem is that in the case of the three girls who recently went off to the Middle East to join ISIS, not even THEIR OWN FAMILIES knew they’d been radicalised. How in God’s name are “strong community relations” going to crack that one? They won’t, of course. Not that the FT gives a hoot.
 

Are you mentally retarded - an inmate of a lunatic assylum? Well there’s a job waiting for you at the Financial Times and numerous other British broadsheet newspapers writing editorials. Apply today: you’ve nothing to lose. Those with a fully functioning set of brain cells needn’t apply.

Dean Baker does a fine job taking the p*ss out of the never ending flow of drivel that appears in the Washington Post. We could do with a Dean Baker in the UK.








Wednesday, 11 March 2015

Fake bank capital isn't possible under full reserve banking.


Barclays came up with a good trick for improving its capital ratio a year or two ago, and it wasn’t the only bank that employed this trick. What Barclays did was to lend money (produced from thin air) to an Arab oil Sheik on condition that the Sheik “bought” shares in Barclays.

In effect, Barclays just printed extra shares to make its balance sheet look better.

Of course in the event of Barclays going insolvent, Barclays creditors can in theory chase after the Sheik for money. But I’m sure the Sheik will have taken the precaution of putting his own person wealth beyond the reach of those creditors. He’ll have put the debt owed to Barclays in some sort of limited liability company or something of the sort.

In contrast, under full reserve banking, commercial banks cannot simply create money out of thin air. The only form of money is state issued or “base” money. Thus anyone wanting to buy shares in Barclays first has to obtain something of real value, that is, some of that base money, and give it Barclays in exchange for the shares.

Of course whatever banking laws we impose, there’s a high chance that banks will cheat, lie and game the system. Thus the latter “anti share printing” characteristic of full reserve banking may well not be fool-proof. Still, it’s an improvement on the existing banking system.


Tuesday, 10 March 2015

A parallel currency for Greece.


There have been a large number of suggestions recently to the effect that Greece and indeed other PIGS might benefit from a second or parallel currency, e.g. see here and here.

Parallel currencies are not to be sniffed at: Switzerland has had a second currency for 70 years, the WIR, and 60,000 businesses in Switzerland use it. Plus Switzerland is one of the most successful countries in Europe: it has a decent GDP per head plus low unemployment. Thus it’s the last country you’d think would really NEED a second currency.

Obviously the Eurozone authorities DON’T LIKE second currencies because the whole idea of the EZ is to implement a Europe wide SINGLE currency. But there’s no need for any RIGID insistence on the latter. Moreover, there are any number of shades of grey between having the Euro as THE ONLY currency used in a particular country, and that country essentially using its own currency, with the Euro being used just occasionally for international transactions. In other words I’m baffled as to why “Grexit” is portrayed as such a big deal.


Indeed, every country in the world which issues its own currency is at the same time in a sort of Euro system in that every country in the world to a greater or lesser extent uses US dollars for international transactions.

 

Public versus private 2nd currencies.
 
The Swiss WIR system is a PRIVATE sector system: the Swiss government does not issue WIRs and won’t accept them in payment of Swiss taxes. But there’s nothing to stop the GOVERNMENT of an EZ country issuing a parallel currency and accepting it in payment of taxes. Obviously that constitutes a significant move along the “shades of grey” scale towards (in the case of Greece) re-establishing the Drachma. Or you could argue, quite reasonably, that would actually constitute a re-establishment of the Drachma.

Another choice that has to be made in deciding which shade of grey to go for involves the question as to HOW MUCH of the new currency to issue. Assuming it’s government that issues it, clearly it can issue large volumes of the new currency or a smaller volume.

The obvious DISADVANTAGE of issuing a LARGE volume is that that pretty much constitutes reverting to a national currency, which in turn means there are risks and costs involved in international trade: converting the national currency to Euros, etc.

In contrast, the obvious ADVANTAGE of issuing a large volume of the parallel currency is that that boosts demand INSIDE the relevant country by citizens of that country. To enlarge on that, Greek citizens who are currently short of Euros are resorting to barter. A supply of Drachmas would enable them do that sort of business (between Greek citizens) more efficiently.


Monday, 9 March 2015

Neoliberalism is wicked. I’m disgusted.


It’s pathetically easy to organise a witch hunt: i.e. get the human race worked up into a frenzy of righteous indignation about almost anything.

As William Hazlitt (1778-1830) put it, “Defoe says that there were a hundred thousand stout country fellows in his time ready to fight to the death against popery, without knowing whether popery was a man or a horse.”

One of the currently fashionable witches to hunt is “neoliberalism”. All self-respecting lefties have declared themselves willing to die in the fight against neo-liberalism (without actually being able to define the term). Looking up words in dictionaries is far too much like hard work for lefties, and indeed most of the rest of the population.

One of the many disasters allegedly wrought by neo-liberalism is the current Euro shambles, i.e. the austerity being suffered by the EZ periphery. Just Google “neoliberalism” and “eurozone” and “periphery” and you’ll find dozens of articles attributing Europe’s problems to neoliberalism. But there’s a couple of examples here and here.
 

As to the definition of neoliberalism, it’s defined in most dictionaries as a belief in the merits of free markets and minimising government involvement or interference in the economy.

Now what is particularly “free market” about the Eurozone? The basic or defining characteristic of the Eurozone is simply that it’s a geographical area which uses the same currency, rather than each country having ITS OWN currency. I can’t see anything inherently neoliberal about that.

And when it comes to competitiveness disparities between different countries, that is dealt with in the Eurozone by internal devaluation, as compared to “regular” or “normal” devaluation in the case of countries which all have their own currencies. Nothing inherently neoliberal there either.

There is of course the point that internal devaluation takes much longer to work than normal devaluation, and results in more austerity. But the architects of the Eurozone presumably thought that was a price worth paying for the benefits of the Eurozone. It looks very much like they miscalculated. But that miscalculation does not stem from a belief in neoliberalism.

Sunday, 8 March 2015

Bank capital is expensive? LOL. Part II.


I dealt here with some flaws in the claim that bank capital is more expensive than debt (i.e. bonds or deposits): in particular claims to that effect were made by the UK’s “Independent Commission on Banking”. In the paragraphs below I’ll examine two more of the ICB’s arguments.


The ICB’s section A3.46.

To recap, the Modigliani Miller theory makes the very simple point that if the proportion of a bank’s funding that comes from shareholders is increased, that simply DECREASES the risk per share or per shareholder. Thus as MM point out, raising bank capital ratios ought to have no effect on bank funding costs.

The ICB rebuts that idea (in the 2nd half of A3.46) with the following obscurely worded two sentences.  “Second, the yield on bank debt is lowered by guarantees. An increase in bank equity reduces the value of this guarantee – a private cost to the bank, but again one that is offset by a reduction in the contingent liability of the government.”

Did you understand that? No – I didn’t either at first reading. At any rate, I assume the ICB is simply making the point that there are various taxpayer funded guarantees for bank creditors: that’s certainly the case with depositors in the UK (deposits are insured by the taxpayer). As to guarantees for bond-holders, there is no EXPLICIT guarantee there, however it is widely accepted that in the recent crisis, the authorities throughout Europe just couldn’t stomach the idea of large numbers of bank bondholders being ruined, which partially explained the billions of taxpayers’ money devoted to bank rescues. Thus it can well be argued that bank bond holders enjoy taxpayer funded guarantees as well.

And clearly, as A3.46 says, if a bank is funded to a greater extent by shares and to a lesser extent by those lovely depositors (and/or bond holders) who enjoy taxpayer backing, then funding the bank will cost more.

But that increased cost stems purely from the removal or partial removal of a subsidy. Indeed, the ICB admits as much when it says the increased cost “is offset by a reduction in the contingent liability of the government.”

So the ICB demolishes it’s own point! So what was the purpose of making the point??


Section A3.47.

This section reads as follows:

“Capital structure affects incentives on managers, and from this perspective there is merit in banks issuing both debt and equity. Bank creditors focus on downside risks, whereas shareholders benefit from upside risks. This makes bank creditors act differently to shareholders, and in particular to exert more control when banks are performing poorly. A combination of debt and equity may therefore induce good risk-taking incentives.”

OK, so the suggestion is that without debt, shareholders would not “focus on downside risks”, or wouldn’t do so to a sufficient extent. That claim is complete nonsense, and for the simple reason that the value of the shares in any corporation is very definitely related to the value of the corporation. Thus if the corporation is run incompetently, the value of the corporation drops, as do the value of the shares. So whence the ICB’s bizarre claim that shareholders are not motivated to think about the downside?

Of course, if a corporation is funded just by shares rather than say 50% by shares and 50% by bonds, the EXACT WAY and pace at which shares lose value as the corporation declines is altered. But that’s an minor technicality. The important point is that when a corporation performs poorly, its shareholders lose out (unless I’ve completely lost contact with reality).

Friday, 6 March 2015

Bank capital is expensive? LOL.


Those who supply equity to a bank (or indeed ANY corporation) run a bigger risk that those who fund a bank via DEBT (e.g. bonds, or in the case of banks, deposits). Thus equity providers or “shareholders” understandably require a bigger return on capital that bond-holders.

A plausible but in fact flawed conclusion often drawn from the above is that if bank capital is raised, the cost of funding banks will rise. The flaw in that argument is that if the proportion of a bank’s funding that comes from equity is raised at the expense of debt , then the risk per share or per shareholder declines pari passu. Thus altering the latter proportion should have NO EFFECT whatever on the cost of funding banks (as pointed out by Messers Miller and Modigliani).

However the Modigliani Miller theory has been criticised, and one very popular criticism is that the tax treatment of debt is not the same as the tax treatment of equity. For example, the UK’s main official response to the bank crisis, the “Independent Commission on Banking” (ICB) claimed in para A.3.46 that:

“First, the returns on debt are deductible from taxable profits, whereas the returns paid to shareholders are not. More equity therefore means banks pay more tax – a cost to the banks but not, in the first instance, to society.”

Well hopefully you’ve spotted the glaring flaw in that ICB argument. It’s that tax is an ENTIRELY ARTIFICIAL imposition. Tax bears no relation to, and tells us nothing about REAL COSTS, which is what those concerned with bank regulation ought to be concerned with.

To illustrate, if red cars are taxed more heavily than cars painted with a different colour, does that mean that the REAL COST of making or running a red car are higher than the cost of making or running a car with a different colour? Of course not. The average six year old ought to be able to work that out.

Indeed, the ICB sort of admits to the irrelevance of its tax point when it says “More equity therefore means banks pay more tax – a cost to the banks but not, in the first instance, to society.” Yes quite: that is, there’s no “cost to society”.

But what’s that about “in the first instance”? The hint, or the implication is presumably supposed to be that actually THERE IS some sort of cost: in the “second” instance, so to speak.

So what is this mysterious “second instance” cost? Well the ICB doesn’t tell us.

This would be hilarious if the consequences (credit crunches, excess unemployment etc) were not so serious.

Given the high stakes involved here (getting bank regulation right versus making a hash of it), it’s tragic than I need to point to a glaring and simple error like the above, isn't it?


Arbitrage.

Another “glaring and simple error” comes shortly after the above one (in para A3.50), where the ICB claims that raising bank capital requirements just in the UK would lead to what might be called “regulation evading arbitrage”, that is, banking activity shifting to foreign banks where capital regulations are more lax.

Well the flaw in that argument is that ANY FORM of regulatory imposition on UK banks will tend to lead to the latter form of arbitrage, if other countries do not impose similar improved regulations. Thus the “arbitrage” point is not a weakness SPECIFICALLY in higher bank capital ratios.

As to other alleged weaknesses in the Modigliani Miller theory which the ICB points to, I’ll deal with those hopefully in the near future.


Provisional conclusion.

Messers Modigliani and Miller were right. As a result, bank capital can be raised just as high as we like, even to 100% (as advocated by supporters of full reserve banking). The result will not be to raise the cost of funding banks.

Moreover, where a bank is funded entirely by equity, it’s next to impossible for it to go insolvent, which greatly reduces the chance of, and severity of credit crunches. Thus even a large increase in bank capital DOES INCREASE bank funding costs somewhat, those costs may be insignificant compared to the CATASTROPHIC costs of banking crises like the one we had five or so years ago.


Thursday, 5 March 2015

What’s the optimum amount of national debt?


I’ll argue below that the optimum amount is “none”. And for those interested in science, there’s something appealing about simple answers to complex questions. E=MC2 was an example of that sort of simple answer. Moreover, Milton Friedman and Warren Mosler also argued for  “zero debt”, so I’m in reasonably good company. (Re Friedman see para starting “Under the proposal..” and for Mosler, see his 2nd last para). Anyway, down to business.

National debts have risen over the last five years or so as a result of dealing with the recession. The standard and not very clever response from most economists is approximately as follows.

“The word debt has negative overtones, so debt must be bad. Plus we obviously need to reduce the extent of anything bad. Ergo the debt should be reduced to about where it was prior to the recession” Indeed that’s been pretty much the response of the IMF and OECD – except that they refer to debt reduction with a technical sounding phrase to make themselves sound important: they refer to “fiscal consolidation”.

Well the fact that some country’s national debt used to be say 50% of GDP and then rises to 75% is not a reason to return to 50%. The important question is: what’s the OPTIMUM amount of debt? The new “post recession” optimum could be 10%, or it might be 70%. Who knows?

 As I’ve pointed out several times before, the concept “optimum” seems to be beyond the comprehension of almost every economics commentator including economics professors at the world’s top universities (no names mentioned). Makes you wonder what’s inside their skulls: brain cells or something else.

Anyway, four plausible but actually flawed arguments for government borrowing are considered below. They’re as follows.

1. Government should borrow to fund public investments like infrastructure.

2. Borrowing makes it possible to spread the cost of public investments across generations.

3. Letting those with cash to spare lend to government is a good idea.

4. Borrowing provides government with money with which to implement stimulus.


1. Borrowing for infrastructure.

It’s often argued that governments should borrow to fund infrastructure and similar investments, whereas TAX should be used to fund CURRENT spending. And that sounds sensible: after all, households and firms often borrow to fund investments, like buying a house, factory or office block.

However, the idea that investments should ALWAYS be funded by borrowing is nonsense:   there’s no point whatever in borrowing if you happen to have more than enough cash to spare. No one in their right mind borrows to buy a car if they’ve more than enough cash lying idle. And governments have a near inexhaustible supply of cash, namely the taxpayer.

Of course politicians are often RELUCTANT to raise taxes to fund investments. Reason is that politicians can normally ingratiate themselves with voters by cutting taxes, increasing borrowing and leaving it to some poor sucker in ten years’ time to sort out the resulting debt. Or as David Hume put it 250 years ago:

“It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to impower a statesman to draw bills, in this manner, upon posterity.”

But the fact remains that governments have a near inexhaustible supply of cash: the taxpayer. Thus the excuse for borrowing, namely that “I don’t have enough cash” just won’t wash in the case of governments.


2. Spreading the burden across generations.

A second plausible reason for borrowing is that since the benefit of a long term investment is enjoyed by more than one generation, each generation should carry some of the cost, and that can be done by making people in fifty or a hundred years’ time responsible for some interest and repayment of some of the capital sum. (This argument takes some time to dispose of – you have been warned!)

The basic problem with the later “generation” argument, is that it involves time travel: that is, it assumes for example, that people in 2050 can make a real sacrifice and for example produce steel and concrete to help build a bridge which is put up in 2015. That’s clearly impossible: it involves time travel.

Put another way, if government in 2015 borrows $X to build a bridge, then all the person hours and other real resources needed to build the bridge have to be produced and consumed in 2015 (or earlier). As to the bonds issued by government in respect of the bridge, those are purchased by one set of people who pass them on to their descendants, plus another set of people inherit the liability to pay taxes to fund the interest and repayment of capital on those bonds. Thus on balance, the next generation makes no net sacrifice.


Foreign debt .

There are two apparent flaws in the above “time travel” argument. The first is that where debt is held by foreigners, that’s a genuine debt for the country as a whole. I.e. it really is possible to borrow from foreigners so as to fund a bridge built in 2015. Then in 2050 or whatever comes payback time, and the country has to make a real sacrifice to pay back those foreigners.

However, against that “foreigner” point, there’s the fact that national debt of country X held by people in country Y will to some extent be cancelled out by national debt of country Y held by people in country X. Also, the amount owed to foreigners (e.g. by the US to China) is determined by factors TOTALLY UNRELATED to how much infrastructure investment the US is doing. Thus the whole “foreigner” point is pretty irrelevant.


The Nick Rowe theory.

Another weakness in the above time travel argument (put by Nick Rowe) and which doesn’t in fact stand inspection is as follows.

Rowe argued that the bonds issued by government at one point in time can be sold by bond owners in their retirement to younger working people. And the latter can in their retirement sell to the next generation, and so on. That way one can pass the cost of government spending down the generations.

The flaw in that argument is that different generations actually engage in the latter sort of “passing the buck” activity ANYWAY as part of pension provision.

Pensions can be funded or unfunded. The former involves saving up and investing in assets, like government bonds. In contrast, an UNDFUNDED pension scheme invests in nothing: youngsters at any given point in time simply pay taxes or make a payment in some other way which is passed straight to pensioners living at the same time.

Now on the very reasonable assumption that people ALREADY HAVE the pension provision that they want, they’re not going to want EVEN MORE pension provision just because government builds a series of bridges and highways.

Thus I suggest the Nick Rowe theory doesn’t dent the basic argument I’m putting here, which is that the “spreading the burden across generations” argument does not stand up.


3. Why not let people lend to government if they want to?

A third plausible argument for government borrowing is thus. If people (particularly those with cash to spare) want to lend to government, why not let them?

Well the problem with that argument is as follows.

The basic point of the tax and borrowing that funds public spending is to supress PRIVATE spending. That is, assuming the economy is at capacity, if government is going to spend $Xbn more, then the private sector must spend $Xbn less, otherwise we get excess spending and excess inflation.

Now the idea that because £Xbn of extra tax is extracted from the private sector, that therefor the private sector will spend $Xbn less, is a gross over-simplification. What the private sector will do is certainly to spend SOMEWHAT less, but it won’t cut its spending by as much as $Xbn.

And in the case of borrowing, the relationship between borrowing and subsequent cuts in spending by the private sector is even more feeble. In particular, if private sector entities lend to government because they have money to spare, money they’d have left idle in the event of not lending it to government, then the cut in private spending that results from that money being loaned to government will be near non-existent.

(Incidentally, you should have noticed that lending to government (macroeconomics) is very different to lending to a microeconomic entity like a household or firm. In the case of the latter two it’s simply a case of getting hold of the right amount of cash. In the case of lending to government, it’s a case of SUPRESSING private spending by the right amount)



4. Borrow to fund stimulus.

As Keynes pointed out, governments can escape recessions by spending EITHER printed money OR borrowed money. So which is best?

Well I’m darned if I can see the point of BORROWING. The purpose of stimulus is to increase demand. But borrowing has a deflationary or “demand reducing” effect. So borrowing in order to obtain the money to implement stimulus is a bit like throwing dirt over your car before washing it.

John Cochrane (professor of economics at Chicago) pointed to the problems involved in borrowing money in order to effect stimulus. Cochrane went too far in suggesting that borrowing COMPLETELY negates the desired stimulatory effect. But even so, and to repeat, doing something anti-stimulatory when you’re trying to implement stimulus is a strange thing to do.


Conclusion.

I probably haven’t TOTALLY DEMOLISHED the case for government borrowing above, but I’ve thrown plenty of cold water over the idea.

So my provisional conclusion is that governments ought to aim at borrowing nothing. Put another way, Milton Friedman was right to say that the only liability issued by the government / central bank machine should be boring old cash, or “base money”.

But that’s not to say that there will NEVER be a case for some borrowing. For example if there’s a serious outbreak of Greenspan’s “irrational exuberance” and inflation looks like rising too far and it looks like fiscal measures won’t rein in the exuberance, there’d be no harm in government or central bank wading into the market and offering to borrow money at above the going rate of interest, and raising taxes so as to pay for that interest.

But note that that is not “borrowing” in the normal sense of the word. Borrowing in the normal sense of the word (e.g. borrowing in order to fund the construction of a house) involves the LOAN or TRANSFER of real resources from the lender to the borrower. In contrast, in the case of the above “anti irrational exuberance” so called borrowing, there is no transfer of real resources. All that happens is that TOKENS commonly known as “money” are removed from private sector pockets so as to cut down on private sector consumption.

So all in all, the case for government borrowing in the normal sense of the word “borrow” looks very feeble. Looks like David Hume was right 250 years ago: the REAL motive for government borrowing is that it enables politicians to ingratiate themselves with voters.









Wednesday, 4 March 2015

Kenneth Rogoff discovers quantitative easing.



Kenneth Rogoff (along with his side-kick Carmen Reinhart) has given more academic credibility to austerity world-wide than just about anyone else over the last five years. First there were his dire warnings about the lack of growth in countries with a debt/GDP ratio of more than 90%. It then turned out that that claim was based on a spread-sheet error.

Apart from that, he has had numerous articles over the last five years in the Financial Times and other publications warning of the horrors of what he calls the “debt overhang”. The word “overhang” has a sort of menace, and for those into propaganda and psychology rather than logic, the psychological overtones of words are much more important than reason.

 

Quantitative easing.
 
However, there was always a huge problem with the “debt overhang” theory: any old fool of a government can make its national debt disappear in a puff of smoke by simply printing money and buying the debt back, a process called “quantitative easing”. The result of QE is of course that base money replaces debt.

So Rogoff, as soon as he opens his mouth on the subject of QE which he does in this recent article, faces an obvious problem.


That is, he has two options. One is to claim that the impending disaster that stems from the “debt overhang” is equally applicable to base money. The second is to say that the impending disaster vanishes in a puff of smoke. But to admit to the latter is to say that an impending disaster can be removed by something as simple as printing more dollar bills, pound notes etc, which in turn implies the “disaster” claim is nonsense.

So his only LOGICAL course of action is to go for the first option, i.e. argue that replacing the “debt overhang” with the “base money overhang” solves nothing.

So is he sufficiently sure of his “dreaded overhang” claims to say out loud that QE simply replaces the debt overhang with an equally bad “QE induced overhang”? Well no. Rogoff in the above article basically just waffles and exudes hot air. He doesn’t say anything that the average Financial Times or Wall Street Journal doesn’t already know.

He does however go a small way towards the above mentioned only logical option, namely claiming that QE in no way reduces the “overhang” problem. He says “Why doesn’t the government just finance its entire debt at zero interest? Wouldn’t that free up public funds for other uses and save the taxpayers a lot of money? Yes, but here’s the rub: As the composition of government debt shifts to more short-term debt, the public finances become more exposed if some external factor drives up global interest rates. If all debt were very short-term and interest rates unexpectedly rise, taxpayers would suddenly face vastly larger interest costs as the debt gets rolled over at higher rates.”

OK, let’s examine the latter claim, and let’s assume just to keep things simple that government funds itself with ULTRA short term zero interest debt: i.e. plain simple old cash, or “base money” if you like.

Now suppose, horror of horrors, that “interest rates unexpectedly rise”. What of it? Rogoff claims “taxpayers would suddenly face vastly larger interest costs”. Whaaaaat?

How can government or “taxpayers” face higher interest costs when they aren’t borrowing anything? Rogoff’s claim is laughable.

In the case of closed economy (to keep things simple) those holding excess amounts of cash might easily try to dump or spend away some of their cash. That would result in excess demand. But that’s easily enough dealt with, at least in theory, by raising taxes and “unprinting” the money collected.

Depending on exactly which taxes are raised, there could be POLITICAL problems involved in doing that: certainly voters don’t like increased taxes. But to repeat, there’s no problem in THEORY. Moreover, the UK cut and then substantially increased its sales tax (VAT) in the recent recession, and scarcely anyone noticed. There wasn’t a single riot, demonstration or anything of the sort.

And a further point is that the economic illiterates in Congress and other elected bodies around the world are constantly pushing for a balanced budget or even a budget surplus. Thus they shouldn’t object to a request by the central bank and treasury to raise taxes, and/or cut government spending in some way or other.

 

Open economies.
 
Having assumed a closed economy above, there is of course the question as to what happens in an OPEN economy, particularly one where large volumes of its debt and currency are held overseas.

If interest rates world-wide rose substantially, obviously foreign holders of zero interest yielding dollars would dump them to some extent in search of yield elsewhere. That would cause the dollar to decline relative to other currencies. But the dollar has RISEN substantially over the last year or two, which has hit US based exporters. Obviously a panic and large scale dumping of dollars would be disruptive, but modest scale dumping wouldn’t do much harm.

 

Conclusion.
 
The horrendous “debt overhang” problem about which Rogoff makes so much can be made to disappear in a puff of smoke by simply printing money and buying back the debt, i.e. QE. Thus the alleged problem is non-existent. Obviously that increase in the money supply could be inflationary (though in practice QE hasn’t proved all that inflationary). But to the extent that IT IS inflationary, that is easily dealt with simply by raising taxes and/or cutting public spending and unprinting the money collected.

And assuming the DEFLATIONARY effect of that unprinting is equal to the INFLATIONARY effect of the QE, then the net effect is zero. I.e. GDP would remain the same. Of course equalising those two effects would be difficult to do with TOTAL precision in the real world. But in principle there is no problem there: certainly no “debt overhang” problem.