The global financial crisis started in 2007 when European banks came under increasing strain. If forced to specify the crisis kickoff, we would pick Thursday, August 9, the day that BNP Paribas halted redemptions from three investment funds because it couldn’t value their holdings of U.S. mortgages. Responding to the ensuing market scramble for liquidity, the ECB injected €95 billion that day into the European banking system and the Federal Reserve put $24 billion in theirs. Today, with the benefit of hindsight, these numbers appear quaint, but then they seemed enormous...
Read MoreCommentary
Most Americans want a college education, but it is expensive. On average, a four-year school costs about $25,000 per year, or $100,000 for a degree. That’s roughly half the median house price – a substantial investment. If you have to borrow to finance a college education – just like you borrow to own a house – is it really worth it?
The answer is yes for most people. But the outcome is not free of risk, especially for those students who borrow heavily relative to their future income prospects....
Read MoreNearly 30 years ago, the satirical Spy magazine began posing the now-familiar question – “separated at birth?” – above lookalike images of two unconnected public figures. Donald Trump was paired with Elvis Presley, Marie Osmond with Monica Lewinsky, and the list goes on (and on). Had Spy found humor in juxtaposing institutions rather than personalities, it still wouldn’t have landed on the Fed and the ECB (which didn’t yet exist): their buildings look nothing alike...
Read MoreJuly 21, 2014 was the fourth birthday of the Dodd–Frank Act (DFA). It is maturing faster than a human, but slower than a dog. Of the nearly 400 rules that DFA requires regulators to write, just over half have been completed. At the end of August, the SEC finished another one – regarding credit rating agencies (CRAs). The result makes us wonder what took so long...
Read MoreEver since Bagehot, central banks acting as lenders of last resort have tried to distinguish banks that are illiquid, who should be eligible for a loan, from banks that are insolvent, who should not. The challenge persists. As one analyst put it recently: “Liquidity and solvency are the heavenly twins of banking, frequently indistinguishable. An illiquid bank can rapidly become insolvent, and an insolvent bank illiquid.” The lesson is that the appropriate level of a bank’s capital and the liquidity of its assets are necessarily related.
Forged in the crucible of the financial crisis, Basel III took this lesson to heart, creating a new regime for liquidity regulation to supplement the capital rules that were originally developed 30 years before.
Read MoreBy almost any measure, China saves more than virtually any country in the world. Over the past decade, gross national savings has amounted to about one-half of GDP. And that phenomenal rate continues: only Qatar and Macau save more (see chart). There are many good reasons to save. At the top of the list in China has been the high marginal return on capital that naturally accompanies rapid economic growth.
Despite this, households in China until recently have had few attractive avenues for saving....
Read MoreA central lesson of the 2007-09 financial crisis is that we should be much more worried about financial intermediation performed outside the banking system. Even if banks are resilient, with capital buffers sufficient to withstand all but the largest shocks, other parts of the financial system can make it fragile. Indeed, making the banks safe may simply shift risk-taking elsewhere...
Read MoreWhen the Chinese government wanted to damn the great Yangtze River, it moved more than a million people. When it wanted ring roads running through the 20 million people of Beijing, China built 270 miles in less than 30 years. So, when Chinese leaders say that they want Shanghai to be a global financial center and their currency the renminbi (RMB) to be an international leader, it’s natural to ask how, when, and at what cost...
Read MoreOn the occasion of the Fed’s Jackson Hole Symposium, the New York Sun published an editorial attacking central banking and fiat money. Let’s get this out of the way at the start: we are big fans of both. In our view, the world is a more stable and prosperous place with central banks than it was without them. And fiat money allows a central bank to stabilize the price of goods and services that would be quite volatile if, instead, we chose to steady the price of gold (the Sun’s apparent favorite). The result is higher growth from which we all benefit.
We also like tabloids. They’re fun. Our main problem with the Sun’s piece is its all-too-common mode of argument.
Read MoreNot long ago, we posted a commentary discussing the difficulty of interpreting GDP data. The problem is one of extracting the true signal of economic growth from the noisy way that we measure output.
This signal extraction problem is generic in economics (and other sciences that use statistics). Indeed, one of us began his professional career trying to discern the trend of U.S. inflation. It was 1980 and the inflation numbers were hitting a peak of nearly 20%. The standard operating procedure at the time was to take things like food, energy and some housing-related items out of the index and recalculate them. But that meant removing only the components that had gone up more than average! How could you justify that?
Read More