Daniel Boffey: Brexit: leading banks set to pull out of UK early next year: Anthony Browne, head of the British Bankers’ Association, warns that major lenders are poised to hit relocate button

Brahman: A Few Thoughts…: “Trouble is that even @MarkFieldMP MP for the City can’t be bothered to fight to stay within the Single Market…

…A few thoughts on this Observer piece this morning:

Finance firms (FF) have high operational gearing – v high fixed costs and v low marginal costs so profitability depends on scale in capturing revenues – hence front line staff bonuses linked to revenue until quite recently not profits. This makes this a scale game in which a few successful firms do v well, (& pay a lot) & a large tail just do enough. Many FF of course are vanity projects that lose money all the time but are subsidised by offshore parents… that’s how the big US IBs built up their London activities in the first place, as famous paper by @JamesvS father Piers described so well in the late 1980s when he was at Warburgs.

The key is to keep fixed costs down and revenues high. Operating costs almost incidental and scale has implications. As only a few biz can be very profitable most just get by because scaled firms can pay more and weaken smaller biz and command wage premium for key staff Key staff can be reduced if biz is located in a fin centre where lots of qualified ppl work.

London big beneficiary of both passport that allows London firms to capture revenue scale across EU market and labour pool helps reduce labour costs. Remember that given operational gearing small falls (or increases) in revenue have big effects in firm profits in %. London faces TWO challenges – much higher fixed costs – regs and compliance, security, capital and IT move breakeven point for revenue & loss of passport may mean loss of some revenue. Even small loss could be an issue for many firms. Passport works now b/c whole EU has the same rules, regulators monitored by EU bodies and ECJ has final say. Hard to see how this survives post Brexit.

Fin Firms have to weigh loss of revenue involved in passport and higher costs of some things in Lon with wage premium needed to move key staff. Risk Lon firms face is that if any EU based firm manages to secure scale they could poach key staff and undermine profitability of London based business. It’s not just about whether Lon firms move. It’s also about competitive dynamics and risk.

If firms stay in London and no where emerges in EU as alt centre then London firms have to scale back given lower revenues & higher fixed costs. Not sure what Govt can do about this given Brexit direction of travel <end>

Must-Read: I used to tell people that the United States did not have a long-run exploding deficit problem or an exploding debt problem or a sustainability-of-the-social-insurance system problem. I used to tell people that the United States had a dysfunctional health care finance regulatory system problem.

And, lo and behold, we pass ObamaCare and make health care finance regulation somewhat less dysfunctional:

Has the CRFB noticed this? Do they highlight this in any of their reports?

Paul Krugman: Debt, Diversion, Distraction: “There was a time… when deficit scolds were actively dangerous…

…raising the Medicare age (which wouldn’t even have saved money) and short-term fiscal austerity…. They continue to play a malign role in our national discourse… distract[ing] attention… [and] depriving crucial issues of political oxygen….

Why is this a crucial issue right now? Are debt scolds demanding that we slash spending and raise taxes right away? Actually, no: the economy is still weak, interest rates still low (meaning that the Fed can’t offset fiscal tightening with easy money), and as a matter of macroeconomic prudence we should probably be running bigger, not smaller deficits in the medium term. So proposals… don’t involve actual policy moves now, or for the next 5-10 years…. If you try really hard, you can argue that locking in policies now for this future adjustment will make the transition smoother. But that is really a second-order issue…. By putting the debt question aside, we are NOT in any material way making the future worse… a total contrast with climate change….

So my message to the deficit scolds… I would respectfully request that you people just go away.

Must-Read: Cardiff Garcia: Bengt Holmstrom: Money Markets and Opacity: “Stock markets are about price discovery for the purpose of allocating risk efficiently…

…Money markets are about obviating the need for price discovery using over-collateralised debt to reduce the cost of lending. Yet, attempts to reform credit markets in the wake of the recent financial crisis often draw on insights grounded in our understanding of stock markets. This can be very misleading. The paper presents a perspective on the logic of credit markets and the structure of debt contracts that highlights the information insensitivity of debt. This perspective explains among other things why opacity often enhances liquidity in credit markets and therefore why all financial panics involve debt. These basic insights into the nature of debt and credit markets are simple but important for thinking about policies on transparency, on capital buffers and other regulatory issues concerning banking and money markets.

http://www.bis.org/publ/work479.pdf

Must-Read: I am starting to think Phil Mirowski has lost what he needs to play the game:

Noah Smith: Do Economists Have Physics Envy?: “Philip Mirowski… is not too happy with my post. In a recent interview, he explains why…

…Let’s take a recent example of a popular contemporary economist blogger, insisting that economists don’t suffer from physics envy…. He just blurts out some random impressions…. I cannot make this stuff up…. The level of arrogance combined with parochial ignorance is pretty stunning, but not unusual. He has no conception of the historical track record of the disciplines of economics and physics evolving through time, with earlier points of interaction being masked by later developments, and further waves of strange action at a distance…

A couple of observations here. First, responses that rely on phrases like “I cannot make this stuff up” and “the level of arrogance combined with parochial ignorance”, but fail to substantively address the argument in question, are indicative of a degraded discourse…. There’s no reason at all that Mirowski should spend time and effort addressing or rebutting my points… but if he’s not going to, at least he might consider ignoring my post completely instead of lobbing some sputtering disdain in my direction and moving on!…

I think this is very good advice from Noah.

I would add: if you are going to attack someone in such terms, it is very bad manners not to name them, and not to link to what they wrote: calling them “a popular contemporary economist blogger” rather than “SUNY finance professor Noah Smith” is untold.

And if you want to demonstrate that you understand–or even have read–the literature in physics, you do not misquote: Einstein did not say “strange action at a distance”. What he said was: “spooky action at a distance”.

Must-Read: Dietz Vollrath: Dumb Luck in Historical Development: “Philip Hoffman’s Why Did Europe Conquer the World?…

…on its face is another entry in a long line of global history books that argue Western European economic and colonial dominance is, at its heart, due to a rather specific characteristic: disease tolerance, or cows, or a knobbly coastline…. Hoffman… attributes Europe’s dominance to gunpowder technology, and the ability to use it very efficiently… a model of learning-by-doing in gunpowder technology, but where learning-by-doing only occurs if you actually fight. Hence… four conditions for rapid development of gunpowder technology: frequent war, lots of resources expended on those wars, use of gunpowder specifically in those wars, and few barriers to adoption on new technology…. Europe happened to meet the four conditions because of contingent historical events. In other words, Europe randomly found itself with a political setting that encouraged many high-stakes wars that involved gunpowder. Its lead was not due to some unique European characteristic, but rather was luck of the draw….

If you want to argue for some kind of unique European characteristic that systematically led to their lead in firepower, then you have to first argue that Europe’s lead in firepower was larger than we could expect to arise by pure chance…. Only then should you start speculating about what the systematic advantage for Europe was. Most global history books or theories jump right to the “speculating about systematic advantages” part…. Are there any deep structural advantages that Europe had? Maybe. But my guess is that a good portion (over 50%?) of the reason Europe advanced ahead of other areas was dumb luck…. A tip of the hat to Hoffman for his effort in that direction…

Must-Read: Vitor Gaspar, Maurice Obstfeld, Ratna Sahay, et al.: Macroeconomic Management When Policy Space Is Constrained: A Comprehensive, Consistent, and Coordinated Approach to Economic Policy: “Global output remains below potential, unemployment above its natural rate, and inflation below target…

…Concern is widespread that countercyclical policies have run out of space or lack the power to raise growth or deal with the next negative shock. The common perceptions are that the effective lower bound on policy interest rates limits the room to loosen monetary conditions further and that high debt constrains fiscal policy, including automatic stabilizers….

This Staff Discussion Note argues that room exists for effective policies and that it should be used if appropriate… a comprehensive, consistent, and coordinated approach to policymaking….

Comprehensive policy… entails the mutually supportive use of the three policy prongs—monetary, fiscal, and structural—tailored to specific country circumstances…. Demand-management policies can support implementation of structural reforms that increase potential growth…. When monetary policy is constrained, fiscal policy provides support. Similarly, monetary policy accommodation prevents a crowding out of the expansionary fiscal response to a negative shock. Some countries have room for fiscal stimulus, especially in an environment of extremely low long-term interest rates. For others where room for fiscal maneuver is especially limited… better tailoring the pace of necessary fiscal adjustment and implementing growth-friendly fiscal rebalancing. Financial sector policies that strengthen banking systems and markets help improve the transmission of monetary policy and dampen shocks.

Consistent policy frameworks anchor long-term expectations while allowing decisive short- to medium-term accommodation whenever necessary. They do so by systematically linking instruments to policy objectives over time…. Monetary policy… allows effective stimulus, even when the policy interest rate is at its floor, in the form of a planned temporary overshoot of the inflation target. Fiscal policy must commit to managing public balance sheet risks…. Credible commitment and enduring practice of prudent management allow fiscal policy the flexibility to support economic activity when appropriate.

Finally, coordinated policies across major economies amplify the helpful effects of individual policy actions through positive cross-border spillovers…. Coordination of active monetary and fiscal policy adds particular value if the current policy approach falls short of reviving growth, or in the event of a further downward shock.

Must-Read: Antonio Fatas: The Stock Market Looks Cheap: “I constructed the difference between RF – E/P…

…by using price-to-earnings ratio and 10 year nominal interest rate from Shiller. And I converted nominal into real interest rates using forecasts of inflation from the survey of professional forecasters posted at the Philadelphia Fed…. This is what the stock market “bubble” index looks like…. This chart tells a very different story from the unadjusted P/E ratio. The 90s bubble is still there…. We can also see that the financial crisis of 2008 sent stock prices close to the lowest levels…. Compared to the expansion of the 80s or the 2000s, the stock market today remains “cheap”…. In other words, the stock market tells us that either investors are pessimistic about growth or very risk averse (which is the opposite of what you expect to see during a typical bubble).

Does this mean that the stock market is undervalued? No…. [But] unlike the strong warning signals we get when looking at record-level nominal stock prices or even at the P/E ratio, a simple adjustment of P/E ratios by current levels of interest rates… tell[s] us that the stock market today is on the cheap side relative to previous similar phases of the business cycle.