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Death of Banking

Izabella Kaminska, FT Alphaville, Negative rates as a precursor to death of banking, redux, here. Part of her Death of Banks series

Paul Krugman, NYT, Why Bankers Want Rate Hikes, here.

I’ve been arguing that a major source of the urge to hike interest rates despite low inflation is the self-interest of bankers, whose profits suffer in a low-rate environment. Right on cue, the BIS has a new paper documenting that relationship. The key argument:

The “retail deposits endowment effect” derives from the fact that bank deposits are typically priced as a markdown on market rates, typically reflecting some form of oligopolistic power and transaction services. If the markdown becomes smaller as interest rates decline, then monetary policy tightening will increase net interest income. The endowment effect was a big source of profits at high inflation rates and when competition within the banking sector and between banks and non-banks was very limited, such as in many countries in the late 1970s. It has again become quite prominent, but operating in reverse, post-crisis, as interest rates have become extraordinarily low: as the deposit rate cannot fall below zero, at least to any significant extent, the markdown is compressed when the policy rate is reduced to very low levels.

Borio, Gambacorta, & Hofman, BIS, The influence of monetary policy on bank profitability, here.

Nate Cohn, NYT, Hurricane Joaquin Forecast: Why U.S. Weather Model Has Fallen Behind, here. Gonna spit out my morning coffee if these guys upgrade their computer to run an American Java Weather forecasting program. Maybe get some of that HFT Erlang code from Wall Street – it cannot hurt, right?

It’s not the first time that the European model has led the pack. It’s almost a repeat of what happened with Hurricane Sandy, but in reverse. Three years ago, the European model anticipated, far in advance, Sandy’s unusual “left hook” into New Jersey. This time, the other models called for a left turn, and the European model dissented.

Rainy weather in Belmar, N.J., on Thursday as people on the East Coast watched the progress of Hurricane Joaquin. Credit Yana Paskova for The New York Times
It’s a familiar story for meteorologists who have been calling for vast and attainable improvements in American weather forecasting for years.

Over the last few decades, faster computers, superior models and new data have allowed all weather forecasting to improve, by a lot. But the United States hasn’t quite matched that effort. It didn’t invest in computing power and models that kept up with the potential for better forecasts.

By early 2013, the European model had nearly 10 times the raw computing capacity of the Global Forecast System, or G.F.S., which is run by the National Weather Service. There were other problems, too, and the cumulative effect was obvious and irrefutable: The G.F.S. was doing worse than it rivals, and it played out in high-profile cases, like Sandy.

After Hurricane Sandy, Congress gave the National Weather Service the money for more powerful computers. In January 2015, The National Oceanic and Atmospheric Administration announced that it had increased computing capacity and begun running an upgraded model with higher resolution — a more detailed prediction.

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