On January 22, the ECB crossed the Rubicon twice – but in opposite directions. In an effort to combat deflation and years of anemic growth, the central bank announced a sustained program of large-scale asset purchases. At the same time, it capped the amount of risk-sharing in the Eurosystem. Other central banks have done the first, but not the second. And, while outright balance sheet expansion helped ease euro area financial conditions somewhat, the limit on risk-sharing works in the other direction. Rowing toward both shores at the same time doesn’t move a boat far or fast...Read More
In 2013, Robert Shiller shared the Nobel Prize for Economics with Eugene Fama and Lars Peter Hansen for their research on asset pricing. While Shiller is known as a critic of the efficient markets hypothesis and as a proponent of behavioral finance, less appreciated is his work on advancing financial technology to help societies manage fundamental economic risks.
At a time when the recent crisis has given financial innovation a bad name, Shiller’s contrarian message is that well-designed financial instruments and markets are an enormous boon to social welfare. We agree.Read More
Something odd has happened to the U.S. economy over the past 30 years. Aggregate income (measured by real GDP) has become more stable (even including the 2007-2009 Great Recession). But, at the household level, the volatility of income has gone up. Put differently, families face greater income risk than in the past despite generally fewer or smaller economy-wide wobbles. What should we make of this?Read More
Debt has been reviled at least since biblical times, frequently for reasons of class (“The rich rule over the poor, and the borrower is slave to the lender.” Proverbs 22:7). In their new book, House of Debt, Atif Mian and Amir Sufi portray the income and wealth differences between borrowers and lenders as the key to the Great Recession and the Awful Recovery (our term). If, as they argue, the “debt overhang” story trumps the now-conventional narrative of a financial crisis-driven economic collapse, policymakers will also need to revise the tools they use to combat such deep slumps...Read More