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
Commentary
The VIX has been called the fear index. That is, it is a measure of the uncertainty and risk that investors see over the near future (specifically, the next 30 days). Constructed from options on S&P500 index futures, the VIX is technically a gauge of what is called implied volatility. (For a definition, see the brief note at the end of this post.)
The technicalities are not all that important, as the VIX and similar options-based measures of implied volatility (like the DJIA Volatility Index shown with the VIX in the chart below) track financial conditions pretty well. When implied volatility is low, conditions are relatively accommodative; when it is high, they are restrictive. Today, volatility is unusually low...
Read MoreImagine Fed Governor Rip van Winkle started his nap at the beginning of 2007 and just woke up to find that inflation is close to the Fed’s objective and the unemployment rate is at its 30-year average. You could forgive him for expecting the federal funds rate to be close to its long-run norm of about 4%, and for his surprise upon learning that the funds rate is at 0.1% and Fed assets are five times where they were when his snooze began.
Is the Fed already behind the curve? Why do policymakers emphasize their expectation that rates will stay low “for a considerable time” beyond October (when asset purchases are expected to halt)? What risks are they seeking to balance?
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Last week, in her most important speech since becoming Fed Chair in February, Janet Yellen articulated the emerging policy consensus about the relationship between monetary policy and financial stability. What is that consensus? How confident should we be about its precepts? How will it influence Fed monetary policy over the medium term?
Read MoreGrowth from the fourth quarter of 2013 to the first quarter of 2014, originally thought to have been about +0.1% in April, was revised last week to –2.9%. That’s at a seasonally-adjusted, annualized rate (SAAR) – the way the U.S. Bureau of Economic Analysis (BEA) usually reports real GDP growth. News reports varied between shock and concern. Was the anemic recovery over?Or, was it just that this winter was especially harsh?
In reality, these headline growth numbers simply don’t contain all that much information for real-time business cycle analysis...
Read MoreIn the winter of 1997, musician David Bowie issued $55 million worth of bonds backed by royalty revenue from 287 songs he had written and recorded before 1990. The bonds had a 10-year maturity, a Moody’s A3 rating, and a 7.9% interest rate (at the time, the 10-year Treasury yield was around 6.5%, so the spread was relatively modest). “Bowie bonds” were no accident: by the late 1990s, the U.S. financial system had evolved to the point where virtually any payment stream could be securitized.
The success of U.S. securitization – as an alternative to bank finance – is a key factor behind the current push of euro-area authorities to increase securitization...
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Since the collapse of Lehman Brothers in September 2008, the Federal Reserve has stabilized the financial system and put the economy back on a path to sustainable growth. This task involved creating a colossal balance sheet, which now stands at $4.37 trillion, more than four times the pre-Lehman level ($940 billion). As textbooks (like ours) teach, along with this increase in Fed assets has come an increase in reserve liabilities (which represent deposits by banks at the Fed). Today, banks’ excess reserves (that is, the extra reserves beyond those that banks must hold at the Fed) are at $2.56 trillion, compared to virtually zero prior to the crisis. Getting the money and banking system back to normal requires doing something to manage these excess reserves ...Read More
When the U.S. economy was booming in the 1990s, new firms flourished and willing workers found jobs quickly. In the current decade, these patterns faded. Startup and job finding rates have slowed so that employment has only just surpassed its 2007 peak. While part of current U.S. frailty remains cyclical, these trends suggest a worrying loss of economic dynamism...
Read MoreShould central banks target inflation, the price level or nominal GDP? The question of the appropriate policy target has been a subject of analysis at least since the 1980s and has become a matter of intense debate (see here and here) for the past several years. Many proponents of price-level or nominal GDP targeting share the idea that – by credibly committing to make up the shortfalls in the price level or in nominal GDP relative to the pre-crisis trend – policymakers could drive down the current real interest rate and accelerate the economic recovery. Looking at where we are today, what would this mean?Read More
Among its numerous, innovations Basel III proposes that national authorities use countercyclical capital buffers to temper booms in credit growth and asset prices. [...] Will it work? Is such a system either practical or desirable? Our view is that regardless of how theoretically attractive, making such time-varying capital regulation discretionary is unlikely to work in practice. Rules would serve us all much better.Read More