As textbook authors and educators, we read John Kay’s contribution to the May 21 Financial Times with interest. Kay has two specific complaints about economics training.The first is that modern universities care little about teaching, as opposed to research.The second is that instruction in economics and finance is insufficiently pragmatic and overly ideological. We disagree on both fronts...Read More
Commentary
With the publication of former Treasury Secretary Timothy Geithner’s book Stress Test comes a reconsideration of the many aspects of government intervention during the years of the financial crisis. Should banks have been nationalized? Should the fiscal stimulus have been larger? Should underwater households have received mortgage assistance?
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In a recent speech, Federal Reserve Governor Daniel Tarullo criticized the use of banks’ internal models for determining capital adequacy. There are several reasons to be dissatisfied with the internal ratings-based (IRB) approach, starting with the complexity and opacity that Governor Tarullo highlights. Our uppermost concern is the lack of consistent results across banks. That is, given the same portfolio of assets, different banks’ models yield very different estimates of required capital. These model-driven differences undermine both the trust in banks’ reported capital ratios and their usefulness.
Read MoreEuropean banks are uneasy. They’re concerned that – for the first time – they face a serious evaluation that could reveal big holes in their balance sheets. While the ECB is due to reveal the results of its ongoing asset quality review (AQR) only in October, officials reportedly will inform banks of serious deficiencies along the way so that the banks can address them immediately (“ECB set to alert banks to asset quality review problems,” FT, April 27, 2014). The fear is that rumors of a significant capital shortfall could trigger funding problems for a bank well before the AQR is complete.Read More
The European Central Bank is nervous. Inflation in the euro area has fallen to 0.5 percent (see chart), well below the ECB’s objective of slightly below 2 percent. Not only that, but most of the peripheral countries (including Cyprus, Greece, Slovakia. Spain, and Portugal) are now experiencing deflation. What to do?
Last week, President Mario Draghi signaled that the ECB Governing Council is likely to ease policy at its June 5 meeting. How?...
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If we asked you the value of your assets, how close would you get? Okay, we’ll give you a few hours to figure it out, but you need to include the value of the house and car(s). Do you think you could estimate the value to within 0.2%?Read More
Will the U.S. federal government ever exit mortgage finance? Not any time soon.Let us explain why.
In September 2008, as investors shunned the debt of Fannie Mae and Freddie Mac, the U.S. Treasury put these government-sponsored enterprises (GSEs) into federal conservatorship, kicking off the most intense months of the financial crisis. Not long after, the CBO estimated the fair value of the GSEs losses at $291 billion (or more than 5% of their end-2009 mortgage portfolios)...Read More
Following the collapse of Lehman in 2008, a run on U.S. prime money market mutual funds (MMMFs) was halted only when the U.S. Treasury provided a blanket guarantee. (Prime MMMFs typically invest in corporate debt, including the debt of intermediaries.) Shortly thereafter, the Federal Reserve added emergency machinery (the “Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility”) to encourage depositories to acquire illiquid assets from MMMFs...Read More
Every financial crisis leads to a new call to restrict the activities of banks. One frequent response is to call for “narrow banks.” That is, change the legal and regulatory framework in a way that severely limits the assets that traditional deposit-taking banks can hold. One approach would require that all liabilities that are demandable at par be held in the form of deposits at the central bank. That is, accounts that can be withdrawn without notice and have fixed net asset value would face a 100% reserve requirement. The Depression-era “Chicago Plan” had this approach in mind.Read More
Everyone is pro-growth and pro-employment. So, when an economy stagnates and unemployment rises, there is always concern. In Europe, real GDP remains below where it was at the end of 2007. That is, the economies in the euro area and the broader European Union (EU) have not collectively returned to the level of economic activity they enjoyed more than six years ago! Unsurprisingly, as the real economy has languished, unemployment across the EU has risen, going from a low of below 7% to its current level of 10.6%.
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