At the third plenary session of China’s 18th Central Committee (the “Third Plenum”) in November 2013, China’s leaders adopted a broad national reform strategy (see here for a scorecard of the economic plans). Included were the liberalization of the country’s government-controlled financial system and the internationalization of its currency, the renminbi (RMB). A year ago, we argued that when it comes to freeing both its domestic and its external finances, China had a long way to go. We also suggested that the pace of liberalization would remain gradual, reflecting policymakers’ gradualist strategy to manage the risks associated with greater financial flexibility.
Well, they still have a long way to go; but the pace of regulatory change has unmistakably quickened. Authorities have been poking bigger and bigger holes in China’s Great Financial Wall. So big, in fact, that it may not be long before the wall is more symbolic than real.
Central bankers usually steer clear of discussions about inequality. They view monetary policy as a tool for stabilizing the economy. For many central banks, like the ECB or the Bank of England, this means price stability. For others, like the Federal Reserve, it means a combination of high employment and low inflation. Regardless of the goals, issues involving the distribution of income are generally left to the fiscal authorities.
For the most part, this division of labor is sensible. However, their mandates require central banks to make policy tradeoffs that are influenced by the prevailing income distribution. Specifically, the way in which monetary policy is conducted should depend on the access individuals have to the financial system, including both savings and credit. And we believe that it does.
Senior Fellow, Johns Hopkins School of Advanced International Studies; former Acting Managing Director, International Monetary Fund; former Vice Chairman, JPMorgan Investment Bank; former chief economist, JPMorgan Chase.
Has the experience of the crisis changed your view of the central bank policy toolkit?
Managing Director Lipsky: In many ways, the onset of the Global Financial Crisis underscored earlier views about central banks' policy roles and policy options. At the same time, recent experience highlighted both the expanded policy agenda currently facing central banks, as well as the inevitably individualized nature of the responses of any single monetary institution to a specific set of practical challenges....
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereafter, DF), the most sweeping financial regulatory reform in the United States since the 1930s. DF explicitly aims to limit systemic risk, allow for the safe resolution of the largest intermediaries, submit risky nonbanks to greater scrutiny, and reform derivatives trading.
How to celebrate its fifth birthday? Well, if you are like us, it will be a sober affair, reflecting serious worries about the continued vulnerability of the financial system.
Let’s have a look at the most noteworthy accomplishments and the biggest failings so far. Starting with the successes, here are our top five:
In the run-up to the 2012 U.S. Presidential election, Planet Money asked five economists from across the political spectrum for proposals that they would like to see in the platform of the candidates. The diverse group agreed, first and foremost, on the wisdom of eliminating the tax deductibility of mortgage interest.
The vast majority of economists probably agree. We certainly do. But it won’t happen, because politicians with aspirations for reelection find it toxic...
Just three years ago, the World Bank estimated that 2½ billion adults (15 years and above) had no access to modern finance: no bank deposit, no formal credit, and no means of payment other than cash or barter. Stunningly, the Bank now estimates that even as the global population has increased, the number of “unbanked” has dropped by 20 percent. Between 2011 and 2014, 700 million adults have gained at least basic financial access via banks or mobile phone payments systems...
If you ask monetary economists whether we should care if a central bank’s capital level falls below zero (even for an extended period of time), most will say no. Pose the same question to central bank governors, and the answer in nearly every case will be yes.
What accounts for this stark difference? How can something that seems not to matter in theory be so important in practice?...
If there were a regulatory Richter scale that measured the shaking of the financial system, the 2010 Dodd-Frank Act would register about 8, while the 2011 Basel III framework might be a bit above 7. (For reference, the 1906 San Francisco earthquake was a 7.8). Fortunately, this shaking is mostly for the better – helping to make the financial system more resilient in the long run.
The new “Bailout Prevention Act” of Senators Vitter and Warren also might be an 8 on the shaking scale, but it would be a true disaster, because it undermines the Fed’s role as crisis lender of last resort. In contrast, the Senate Banking Committee’s new discussion draft of a “Financial Regulatory Improvement Act of 2015” is probably a 2 or a 3. If enacted, it will be “felt slightly by some people” but probably won't do much damage...
We find your WSJ op-ed (Wednesday, May 6) misleading, short-sighted, self-serving, and very disappointing.
Vanguard has been in the forefront of providing low-cost, reliable access to U.S. and global capital markets to millions of customers, including ourselves. Following the financial crisis of 2007-2009, the firm naturally should be a leader in promoting a more resilient financial system. Your op-ed sadly goes in the opposite direction.
Senior Advisor, Pew Charitable Trusts and Chairman, Systemic Risk Council; former Chairman, Federal Deposit Insurance Corporation; former Assistant Secretary of the Treasury for Financial Institutions; former Commissioner of the Commodity Futures Trading Corporation; and former Counsel, Senate Majority Leader Robert Dole.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Chairman Bair: It has made me more – not less – worried about the considerable power of the Fed. I am more concerned about how extensively their power has been used and could be used in the future, and the way that power has and could disrupt markets now and in the future.
Zero interest rates have gone on for far too long. We had a crisis that was based on solvency problems: banks and households were borrowing too much. They needed to go through a process of deleveraging. Monetary policy cannot address that...