How big can the U.S. current account stay?

In the past few years, the U.S. current account deficit has shrunk from over 6% of GDP in mid-2006 to less than 3% today. Since these current account deficits reflect capital account surpluses, many people view them as a symptom of the problems that led to the crisis. That is, funds from abroad were fueling the credit boom in the United States, which in turn fed the boom in housing prices, etc.

Over the past three decades the U.S current account has been in surplus only briefly in the first half of 1990. Since then, it has been continuously in deficit. How is it that the United States can keep borrowing without a collapse in the currency or a surge in borrowing costs? Is there some sort of limit?

Truth or consequences: Ponzi schemes and other frauds

In the financial world, the real scandal is often what’s legal, but you still have to watch out for fraudsters. If you don’t pay the costs of screening and monitoring your financial counterparties, you may lose your house.

The never-ending need for financial vigilance came to mind recently when we noticed that the 1920 home of Charles Ponzi was for sale in Lexington Massachusetts. It’s a very large house – 7 bedrooms, 6 bathrooms, 7000 square feet of space (650 square meters) on nearly an acre of land (0.4 hectares).(You can see a picture here.) ...

Debt, Great Recession and the Awful Recovery

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...

The VIX: The only thing to fear is the lack of fear itself

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...

Is the Fed Behind the Curve?

Imagine 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?

Monetary Policy and Financial Stability: Never Say Never

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?

GDP: Seasons and revisions

Growth 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...

How securitization really works

In 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...

Reverse Repo Risks

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 ...

Growth and dynamism: troubling facts

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...

Commentary

Money, Banking, and Financial Markets