Serious people have been suggesting that we think hard about eliminating paper currency. Paper money facilitates criminality and creates the zero lower bound (ZLB) for nominal interest rates. So, why not just get rid of it and replace it with electronic money?
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Monetary policymakers always worry about inflation expectations. They can’t directly observe what households and business anticipate for the future path of prices, so they construct estimates from market prices and surveys. Why do they care so much? The reason is simple: keeping inflation expectations low and stable is the first step to keeping inflation low and stable. It also makes the economy more resilient in the face of adverse shocks...
Read MoreThe SEC has finally acted. On July 23, the SEC issued 859 pages of new rules for the operation of some money market funds. (You can find a mercifully short description here.) To summarize our reaction: we are underwhelmed! It is hard to see how the new rules will reduce systemic risk in any meaningful way...
Read MoreIn 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?
Read MoreIn 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.) ...Read More
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...Read More
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...
Read MoreImagine 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?
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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?
Read MoreGrowth 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...
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