June 21, 2013
The ECB's OMT and the German Constitutional Court
The Outright Monetary Transactions (OMT) program undertaken by the ECB has been key in stabilizing sovereign yields in the euro area periphery. Helmut Siekmann and Volker Wieland have evaluated the (German) legal concerns surrounding the program, here.
The paper is summarized in the Economist. The authors note:
A case may be made that the OMT exceed the European System of Central Banks’ (ECSB) competences and violate the prohibition of monetary financing enshrined in EU primary law. While standard open market operations are aimed at fine-tuning monetary conditions in the whole area of the euro, OMT imply subsidies to selected sovereigns by lowering risk premia demanded by the market. Granted that the threat of deflation has led other central banks to purchase government debt, this debt has been federal or national debt rather than debt of regional authorities. The Federal Reserve has bought federal debt but not mitigated financial problems of troubled states such as California. Also, the Bundesbank has never tried to influence debt costs of German member states. Finally, the current membership of the euro zone cannot be guaranteed by the ECB as long as Member States remain sovereign.
The Economist article is here.
Posted by Menzie Chinn at June 21, 2013 07:05 AMdigg this | reddit
The OMT did exceed the Central Banks' authorities. So what are you going to do about it? This is ultimately a political decision on the fly; to my mind not too different from the problems US policy-makers encountered around the Lehman debacle.
I don't particularly like the usurping of authority, but I probably would have done the same thing. Not clear there was a realistic alternative at the time.
On the other hand, it certainly does encourage moral hazard, both for lenders and borrowers, and the whole enterprise may still come crashing down.
Posted by: Steven Kopits at June 21, 2013 06:22 AM
Krugman goes full stupid today, referring to Apple as a monopolist.
On the other hand, for the first time I can recall (or maybe second), he is making a supply-side constrained case for slow economic growth. Why isn't Apple investing its hordes? he says.
Now, if only he had pursued this line of reasoning in a non-ideological way, he might have been on to something.
As he points out, low investment is not due to a lack of cash or low interest rates. It's not low equity valuations. It's not a lack of labor.
Well, then, what is it? What is a plausibly supply-constrained commodity that could explain such weakness? Do we have a commodity in wide use, critical to almost everyone, with few substitutes, currently at prices unaffordable to the OECD economies? Do we see a commodity with such pull that it is sucking down a huge proportion of global investment without providing any reasonable increase in output?
Of course we do.
If Krugman had simply followed his own line of reasoning a bit farther, if he had just been an analyst instead of an ideologue, he would have found the answer with no more than two hours' thought.
Posted by: Steven Kopits at June 21, 2013 06:36 AM
Menzie, thanks for the link to Siekmann/Wieland.
Posted by: Johannes at June 21, 2013 06:50 AM
Kopits: "Krugman goes full stupid today, referring to Apple as a monopolist."
What do you call a company that literally spends more each year on litigation to stifle competition than it spends on research and development? It certainly isn't free market competition. Intellectual property laws provide the full force of government power to limitation competition. This government enforced monopoly allows Apple to extract monopoly rents on its products. A company able to extract monopoly rents through litigation is strongly incentivized to spend more money on lawyers than product developers.
Posted by: Joseph at June 21, 2013 09:43 AM
Apple has been spending $11.6M a day on R&D, per their latest filings. They spent $2.1B in the first 2 quarters of their fiscal year. Took me tying "Apple Rese" before Google filled in the rest. About 4 seconds.
Posted by: jonathan at June 21, 2013 02:32 PM
The notion of a monopolist has a very specific meaning. It means there's no choice for the consumer.
In the case of Microsoft Windows and Office products, this is essentially true--but it's been true for 30 years.
And cable providers are near monopolists.
But neither mobile phones, tablets nor MP3 players are monopolies. Go to your AT&T store, and you'll see phones from Apple, Samsung, HTC, Nokia and others available.
Now, I personally believe that intellectual property laws are too restrictive. But that has little to do with monopoly.
Posted by: Steven Kopits at June 21, 2013 04:31 PM
jonathan: "Apple has been spending $11.6M a day on R&D, per their latest filings. They spent $2.1B in the first 2 quarters of their fiscal year."
$2.1B? Heck, that nothin'. Apple spent $2.6B last year with one stroke of a pen to buy a patent portfolio from a defunct telecom company. None of the patents are particularly valuable except as a legal cudgel to beat down their competitors. That's rent-seeking at its finest and far outstrips money spent on innovation.
Apple is on track to spend about $4B on R&D out of $170B in revenues this year. That's barely 2%, a pitiful amount of R&D for technology companies that typically run about 15%. They also had about $145B in cash that they couldn't think of anything better to do than buy back their own shares. Why sweat and compete when you can just sit back and collect monopoly rents.
Posted by: Joseph at June 21, 2013 04:32 PM
Kopits: "The notion of a monopolist has a very specific meaning. It means there's no choice for the consumer...Now, I personally believe that intellectual property laws are too restrictive. But that has little to do with monopoly."
Do you think that when Apple forces a competitor to withdraw from the market any phones that have "rounded corners" that customers have more choices?
Patent and copyright laws are by their very definition government-granted monopolies. "A government-granted monopoly (also called a "de jure monopoly") is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement."
It's funny how conservatives are always complaining about government regulation but are all for it when government coercion is used to abuse and extract rents from consumers on behalf of corporations.
As for all monopolies, government-granted monopolies decrease market efficiency, increase prices, reduce customer choices and decrease innovation.
Posted by: Joseph at June 21, 2013 07:16 PM
Steven Kopits The notion of a monopolist has a very specific meaning. It means there's no choice for the consumer.
Krugman wasn't talking about monopolies; he was talking about monopoly rents...with the emphasis on rents. A firm doesn't have to be a monopolist to capture monopoly rents. In Apple's case the way they do this is through product differentiation that indeed makes them a "monopolist" in the sense that consumers see Apple as selling something unique that no they can't buy anywhere else. Notice that I didn't say consumers saw Apple as producing something unique, but as selling something unique. That wedge is what creates an opening for monopoly rents because they are able to set the selling price above marginal cost. It's that increment above marginal costs that would have gone as consumer surplus that instead becomes rent for Apple.
And Krugman isn't suddenly switching gears and making a supply side argument for "constrained economic growth." What is new is that he now seems to be tipping toward the argument that income inequality is bad for long term growth. In the past he has always worried about income inequality, but from a social justice perspective rather than a long term economic growth perspective. In the past he's always been skeptical of the argument that income inequality hurts economic growth. So if you want to equate "supply side" with "long term," then fine. That's not the usual meaning, but each to his own. But the trend towards a larger share of measured GDP growth coming from rents rather than profits long predates the current recession, as does growing income inequality. We have two different problems. The immediate problem is weak aggregate demand. There is a longer term structural problem with so-called "industries" that make their money off of selling copyrights with prices well above marginal costs, and all of the inefficiencies that implies, but that is not an argument against additional stimulus right now.
Posted by: 2slugbaits at June 22, 2013 05:37 AM
I think Ben is really scared because this crisis is the one that may cause government to take over USD as they took over gold from FED in 1934. After that, it took about 20-30 years for FED to regain clout.
I think its coming as FEDs help to banks and clear negative effect of QE to economy ( collateral removal reducing money velocity enormously and encouraging even further hoarding) will remind even politicians owned by banks but with survival instincts that FED/banks caused 1929 depression and many others just to profit from both booms and busts plus bailouts and bail-ins.
I think FED is doomed in a sense its role will be greatly diminished very soon. And Bernanke knows it as his liquidity helicopter injections into bank reserves has not led to lending in real economy- as it DID NOT in 1933. QE has failed, and with that any action FED can make to show its still needed.
So, I think USG will take money issuance over in some form, bypassing the FED. Take over USD same way they took aver gold in 1934.
FED is in the corner. Bernanke knows it. Obama ( or whoever thinks for him) knows it as well. So, FED will be fired.
Even IMF knows it:
Posted by: Ivars at June 22, 2013 06:48 AM
Re: the iPhone - Apple is unable to extract monopoly rents from consumers. Again, I refer you to your AT&T store. You'll find the iPhone is priced the same as the Samsung Galaxy S3 and S4. There are essentially only two price points there, $99 and $199. Apple has an offering at both levels.
Indeed, if Apple's such a great monopolist, why has its share price fallen by $300 over the last year?
As for supply vs demand constrained: You better get the call right. If you're supply-constrained, then big deficits will only dig you a big hole, and GDP growth won't respond very much. This is exactly what we've seen in Europe, the US, and Japan. Big deficits have not led to robust GDP growth.
On the other hand, if you're demand-constrained, then deficits should help. In which case Italy and Greece should be doing great and Germany should be in the hopper. But it's exactly the opposite. Indeed, the US seems to be doing better post-sequester than the year before. If sequester was a tragedy, well, it's not particularly visible in everyday life.
Posted by: Steven Kopits at June 22, 2013 08:35 AM
Steven Kopits Way wrong. Simply way wrong. Apple earns a return that exceeds marginal costs; that means they are earning monopoly rents. And oh by the way, so is Samsung. That's the point of Krugman's post. His argument is that a lot of measured GDP growth doesn't come from producing actual products, but comes from copyrights, intellectual property rights, software, etc. The marginal cost of producing one extra copy of MS Office is close to zero...especially if it's delivered over the internet; but I can assure the price is nowhere near zero. You need to quit focusing on the "monopoly" part and concentrate on the "rent" part.
why has its share price fallen by $300 over the last year?
Well...one reason is that Steve Jobs died. Part of Apple's monopoly rents came from this whole iLife image they cultivated and Jobs was very much part of the brand's image. Remember the commercials with the nerdy PC guy and the hip Mac? Guess which one got the cute girl. And monopoly rents don't last forever.
This is exactly what we've seen in Europe, the US, and Japan. Big deficits have not led to robust GDP growth.
What world have you been living in? US deficits have been shrinking at a rather alarming rate. The UK under conservative austerity policies has been a basket case. And the European periphery has to deal with a unified monetary authority without unified fiscal policy. I don't know of anyone who thinks big deficits in Spain or Italy or Greece would be good policy. But deficits in Germany coupled with inflation in northern Europe would be helpful.
If sequester was a tragedy, well, it's not particularly visible in everyday life.
Then you live a sheltered life. The major impact on upper middle class business types would have been longer delays at airports, but Congress made sure that wouldn't be a problem for upscale constituents. Afterall, can't have the best people feeling any inconvenience. Still, most of the sequester has not yet kicked in. The sequester doesn't really start to kick in for most government offices until the work week beginning 8 July.
Posted by: 2slugbaits at June 22, 2013 01:54 PM
Profits exceeding marginal cost do not mean monopoly rents. It means people like Apple's products better than the other guy's. As a result, Apple has sold many, many of them, and made huge profits.
As for MS Office, by owning a standard, MS is a de facto monopolist. I said it above. It's interesting to see whether Microsoft will be able to repeat this with the X-Box. Because video game have migrated to multiuser, online format, owning the standard becomes very important. All the kids want to play together. In recent times, Microsoft has been killing the competition. (I have two teenage boys.) Word on the schoolyard is that the boys will desert X-Box in the next iteration because of the $499 price. So PS is supposed to be the up-and-coming thing. In any event, MS has the opportunity to recreate their Office standard with the X-Box, if they play their cards right. Then they will own two monopolies.
On deficits: A balanced budget isn't hurting Germany. Meanwhile, the Euro is causing policy-induced depressions in the periphery.
A sheltered life: Yes, I live a sheltered life, because I have to work the hours to pay the taxes for all that government spending. So a falling deficit is good from my perspective, because I am the guy who has to pay for it, but more importantly, because I think it will eventually be a disaster for the country, and because I think we are supply, not demand, constrained.
Posted by: Steven Kopits at June 23, 2013 08:26 AM
What do you call a company that literally spends more each year on litigation to stifle competition than it spends on research and development?
Another one, Microsoft never had lobbyists until the government attacked!!
Posted by: Ricardo at June 24, 2013 05:10 AM