Yogi Berra and the Dollar

Some forecasters are confidently predicting a large further rise in the U.S. dollar against key currencies like the euro and the yen. And a few ominously warn of impending currency wars where central banks outside the United States will manipulate their currencies to gain a global trade advantage.

Not so fast. First, currency forecasting is a hazardous business. And second, even if (as widely projected) the dollar were to rise substantially, its appreciation would seem consistent with relative growth prospects, not currency management by policymakers.

Higher capital requirements didn't slow the economy

During the debate over the 2010 Basel III regulatory reform, one of the biggest concerns was that higher capital requirements would damage economic growth. Pessimists argued that forcing banks to increase their capitalization would lower long-run growth permanently and that the transitional adjustment would impose an extra drag on the recovery from the Great Recession. Unsurprisingly, the private sector saw catastrophe, while the official sector was more positive...

Steve Cecchetti and Kim SchoenholtzDecember 15, 2014Capital requirements, Basel III, Credit, Deleveraging

Should we really worry about currency wars?

In September 2010, Brazil’s former finance minister, Guido Mantega, made headlines when he accused the Federal Reserve, the European Central Bank and the Bank of England of engaging in a currency war. The complaint was that easy monetary policy was driving down the value of the dollar, the euro and the pound, at the expense of his country and those like it. More recently, similar charges have been levied against Japan: namely, that the Bank of Japan’s extraordinary balance sheet expansion is aimed at driving down the value of the yen, damaging the country’s trading partners and competitors...

Your Friend FRED

“Captain, we’re here. Why not avail ourselves of this opportunity for study? … No other vessel has been out this far.” Lt. Commander Data, Star Trek: The Next Generation, “Where No One Has Gone Before” (1987)

If you are a student of economics – or an inquisitive android like Lt. Commander Data of Star Trek: TNG fame – then you have a great friend to help you understand the world: FRED. The Federal Reserve Economic Database (FRED for short) is provided free of charge to the public by the Federal Reserve Bank of St. Louis. FRED currently includes more than 238,000 time series from nearly 80 sources covering about 200 countries, and it continues to grow...

Steve Cecchetti and Kim SchoenholtzDecember 1, 2014FRED, Taylor rule, Data analysis, Inflation, Output gap

The right direction

The recent international agreement to improve the loss-absorbing capacity of globally active banks is an important move in the right direction. But financial regulators should go significantly further to make these banks and the global financial system resilient...

It's the leverage, stupid!

In the 30 months following the 2000 stock market peak, the S&P 500 fell by about 45%. Yet the U.S. recession that followed was brief and shallow. In the 21 months following the 2007 stock market peak, the equity market fell by a comparable 52%. This time was different: the recession that began in December 2007 was the deepest and longest since the 1930s.

The contrast between these two episodes of bursting asset price bubbles ought to make you wonder. When should we really worry about asset price bubbles? In fact, the biggest concern is not bubbles per se; it is leverage. And, surprisingly, there remain serious holes in our knowledge about who is leveraged and who is not.

Steve Cecchetti and Kim SchoenholtzNovember 17, 2014Leverage, Stock market, Real estate, MBS, ABCP, SIV

Monetary Policy: A Lesson Learned

The Federal Open Market Committee (FOMC) recently ended another round of large-scale asset purchases, so now is a good opportunity to take stock of what Fed policy has achieved since the peak of the financial crisis in fall 2008.

Back in 2002, then-Governor Ben Bernanke gave a speech entitled “Deflation: Making Sure "It" Doesn't Happen Here.” His message was that the experience of the 1930s taught us the importance of using aggressive monetary accommodation to avoid deflation. As Chairman of the Federal Reserve Board during the financial crisis of 2007-2009, Bernanke and his colleagues took actions that their 1930s predecessors had not. The result was a Great Recession, not another Great Depression...

A Primer on Bank Capital

When a financial system is hit by unforeseen, adverse events, bank capital is the first line of defense. Capital, or net worth, is the owners’ stake in the bank. Profits and losses from a bank’s activities alter its net worth, guiding investment and risk-taking. If losses wipe out its capital, the bank becomes insolvent – its assets are inadequate to cover its fixed liabilities – and typically fails...

The Importance of Being Europe

If Oscar Wilde were still around, he could write a wonderful comedy about European Economic and Monetary Union (EMU). Like the life of his protagonist, Ernest John, the evolution of EMU is rarely pure and never simple. But it would take a Wilde imagination to see exactly how EMU gets to a happy ending.

Despite its name, EMU was not and is not primarily an economic endeavor...

Rolling the dice, again

The headline on Reuters at Mon Oct 20, 2014 6:05pm EDT read “U.S. regulator targeting lower down payments on mortgages.” At first, we thought perhaps the headline was from 2004, not 2014. After the financial crisis of 2007-2009, it seemed inconceivable that U.S. authorities would again put some of the largest U.S. intermediaries – or the taxpayers who provide for them – at risk of failure. Sadly, we were wrong...

Steve Cecchetti and Kim SchoenholtzOctober 21, 2014Leverage, Mortgage, GSEs, Down payment, House prices

Commentary

Money, Banking, and Financial Markets