The Swedish Riksbank – a neo-liberal idiot

7 May, 2012 at 11:58 | Posted in Economics | Comments Off on The Swedish Riksbank – a neo-liberal idiot

Can anyone please E-mail this lot and tell them that they issue the currency?

Sometimes I have to look up the date when I read an article just to make sure it isn’t April 1st. Take this Bloomberg news story (April 27, 2012) – Riksbank Says Considering Establishing Krona Bond Portfolio

The Swedish Riksbank issued its latest – Economic Commentary: The operational framework for the implementation of monetary policy and experience of the financial crisis – on April 27, 2012.

The first part of the document describes the way in which the central bank (Riksbank) maintains its policy rate – “the overnight rate as its operational target”. It says that the;

Riksbank can determine the terms and conditions for overnight deposits and lending for the banks that participate in the Riksbank’s central payment system, RIX.

They outline a totally standard set of operations whereby the “banking system is balanced at the end of every day” and, initially “the banks do this between themselves on the overnight market by means of overnight loans”. But the banks can also:

… deposit money overnight with the Riksbank or borrow against collateral using the so-called standing facilities where the lending rate is equal to the repo rate plus 0.75 percentage points and the deposit rate is equal to the repo rate minus 0.75 percentage points.3 These interest rates conditions create an incentive for the banks to come to an agreement with each other on an overnight rate that lies within the corridor formed by the Riksbank’s deposit and lending rates. The Riksbank thus in practice sets the conditions governing the overnight market.

As I said totally standard.

They then describe how the Riksbank drains (or adds) liquidity to the overnight market to ensure the overnight rate is stable and consistent with its policy target. We read that:

… when the banking system has a liquidity surplus in relation to the Riksbank, the Riksbank needs to draw in this surplus using various market operations so that the balance of the banks’ accounts at the end of the day is as close to zero as possible.

The liquidity surplus (that is, excess reserves) would induce banks to lend at decreasing rates to each other – even though such lending can only shuffle the excess not eliminate it (all these transactions net to zero) – and would compromise the central bank’s policy target.

The central bank says that the “total sum in these draining operations is limited to the banking systems total liquidity surplus”.

When there is a deficit in the banking system, the central bank will add liquidity via repos (repurchase agreements) and overnight loans.

The document then describes how the Riksbank reacted to the financial crisis which included “lending banks large sums” with the “aim of managing the negative effects of the crisis on the liquidity of the banking system”. There were other measures taken – all of which are fairly standard.

Interestingly, they say in relation to some of the measures they took in the crisis, that:

It was necessary, for example, to revise both legal agreements with external counterparties and the Riksbank’s internal regulations.

I have often said that the artificial restrictions that governments (treasury) and central banks place on themselves to give a pretence of financial restriction bend as quickly as is needed. It is clear that in the Swedish case, they had created neo-liberal structures – for example, the transfer of the market-maintaining repo facility to the Swedish National Debt Office in 2001 – to make it harder for the government to spend and the central bank to fund that spending.

But in the crisis – they revised “legal agreements” and their “internal regulations” in a flash.

The document then says that to meet a future emergency the “Riksbank needs to add to its toolkit: to have “an infrastructure in place that enabled them at very short notice to take extraordinary measures in a situation where this was deemed necessary”.

They claim that the Riksbank is unusual because it doesn’t “have a portfolio of assets in its own currency” and so to it needs to acquire:

… a bond portfolio in Swedish kronor once again could ensure that the Riksbank has the systems, routines and knowledge needed to be able to take extraordinary measures at short notice in the future. Under normal conditions, however, the holding and management of such a bond portfolio by the Riksbank should not be seen as signs that the Riksbank intends to intervene in the market for monetary policy purposes. To avoid the portfolio affecting interest rate formation or sending undesired monetary policy signals it should therefore be limited in size and managed transparently.

So they want to hold some assets in the currency it issues, even though it can lend in that currency unlimited amounts. At the same time, it doesn’t want to manipulate yields in the bond markets or give the impression it might be funding government spending.

What a joke!

The world will be much more simple when these neo-liberal idiots leave the stage.

Source: Bill Mitchell

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