For the last three years, there has been no breakfast for journalists on the opening day of Jackson Hole, while we write up a dramatic, market-moving speech by Ben Bernanke. It’s a more sedate start this year with a thoroughly wonkish paper by Stanford’s Robert Hall.
There is not much new in it on policy. It starts with a fairly straightforward rundown on why the economy got into such a mess when interest rates hit zero after the financial crisis, and it ends by agreeing with last year’s paper by Michael Woodford on what to do with monetary policy (QE doesn’t work, you need commitments about future policy, not just guidance).
The meat of Mr Hall’s paper is about why inflation did not fall much after the crisis despite high levels of unemployment. This has been a surprise during the last few years: unemployment has not driven down wages in a way that led to deflation. Read more
The initial resting place for Timothy Geithner, who stepped down as Treasury secretary two weeks ago, will be at the Council on Foreign Relations in New York. Per their release today:
Timothy F. Geithner, the 75th Secretary of the U.S. Department of the Treasury, will join the Council on Foreign Relations (CFR) later this month as a distinguished fellow. Geithner, who was previously a senior fellow at CFR in 2001, will be based at the organization’s headquarters in New York. Read more
The first paper of Jackson Hole 2012 is a statistical review on cross-border financial contagion by Kristen Forbes of MIT. With the eurozone crisis rumbling on, it is a timely topic for Jackson Hole, although the paper illustrates rather than resolves some frustrations with the post-crisis literature on contagion.
Increasingly, financial assets tend to move in unison across borders, both in normal times and during crises. Prof Forbes describes that phenomenon in detail, especially for times of crisis, and then offers some policy conclusions on how to prevent and mitigate contagion through four main channels. Here is a crude summary: Read more
By Norma Cohen, economics correspondent
In the months and years since the financial crisis began, the Bank of England has been notably reluctant to fall on its collective sword in connection with its oversight role, or even to murmur a modest “mea culpa” in connection with any aspect of it.
Bank of England. Image by Getty
The most it has done has been to insist that it did not have the tools necessary to actually stop excesses from happening even where it could spot them. At least, that has been its public stance.
But in private, economists at the Bank may have a more nuanced role about their discipline and more generally, about what needs to be done to prevent another financial crisis. Read more
The arguments in the speech and research paper that Ben Bernanke presented in Paris today will be fairly familiar if you’ve come across the influential 2009 AER paper by Ricardo Caballero and Arvind Krishnamurthy (indeed Mr Bernanke cites it specifically).
The basic point is that large capital inflows into the US in 2003-2007 were mainly in search of safe assets: and the US financial system responded by manufacturing them in the form of AAA-rated CDOs and similar moneytraps. Read more
Federal Reserve chairman Ben Bernanke is speaking now at his old employer, Princeton University. He has taken the opportunity to forget about current monetary policy, wonk out, and talk about “The Implications of the Financial Crisis for Economics”.
Mr Bernanke’s conclusion? There are not that many implications. Most of the economic theory was correct but regulators did not update their practices to keep up with financial innovation and when the crisis came they were slow in their response.
Most of Mr Bernanke’s speech deals with microeconomics – of bank runs, moral hazard, asset price bubbles, and market liquidity – which is a little odd given that the most valid criticisms are of macro models that did not predict the crisis, and could not predict the crisis since they do not have a financial sector. Read more
Breathtaking research from an ECB paper, stacking up the measures taken and bodies set up by central banks around the world. An invaluable resource – high praise to authors Stéphanie Marie Stolz and Michael Wedow.
For data junkies, see tables on pages: 25, 30, 37 and 58.
Failure to predict change, ignoring the worst-case scenario and assuming certain tasks were someone else’s responsibility are sins at the root of the Irish banking crisis – and they were perpetrated by bankers, central bankers, regulators and politicians alike.
These are themes repeated in a report into the crisis by new central bank governor Patrick Honohan. The report is one of two released yesterday, the other by Klaus Regling and Max Watson. Both are precursors to a statutory investigation.
Mr Honohan says that bank management failed to maintain ‘safe and sound’ practices; that government policies were unduly ‘accommodative and procyclical’; that regulators were ‘deferential’ and unwilling to rock the boat; and, perhaps most significantly, that the central bank and regulator (CBFSAI):
do not appear to have realised – or at least could not bring themselves to acknowledge – before mid-2007 at the very earliest, not only how close the system was to the edge, but also the extent to which the task of pulling it back from the edge fell to the CBFSAI
Some of Mr Honohan’s points seem guilty of ‘confirmation bias’ – they are Read more
The Federal Reserve today released the transcripts from its 2004 FOMC meetings. Here’s a prescient comment, if ever there was one, from Cathy Minehan, president of the Boston Fed:
I remain concerned that the current very accommodative stance of monetary policy and the assureances that markets seem to have that we are on hold has increased leverage across all markets. When rates return to a more neutral place, as they ultimately will, this could create a burst of financial instability.
A security should be for life, not just for Christmas. Or at least part of the security.
That is—paraphrased—one of the many judicious suggestions from the Stability section of the ECB’s fourth Financial Integration in Europe report, released today. The proposals seem clever and heart-warmingly risk averse. But the elephant in the room—whether further integration is actually a good thing—is taken as a given: “the progress towards more advanced and integrated financial markets cannot and should not be seen to stand in contrast with the objective of financial stability,” states the report.
Specific suggestions …on …financial reform …include requirements that originators retain an economic interest in their securitisations, that products be simpler and more standardised, intermediation chains shorter, collateral better documented, the role of ratings reduced and investor diligence strengthened, and – more generally – that capital and liquidity requirements be strengthened and made less pro-cyclical.
Today Alan Greenspan is speaking before the financial crisis inquiry commission about the Federal Reserve’s actions during the housing and mortgage boom which preceded the bust. Mr Greenspan has already spoken widely about his view of the Fed’s role in the crisis before Congress, in media interviews, in a recent academic analysis, and in his memoirs. But now it’s the FCIC’s turn to have a crack at him. They’ve got their work cut out for them if they want to get any fresh information from the former Fed chairman.
Update: They do a pretty good job. Note especially that Mr Greenspan says that Congress’s push toward homeownership affected the Federal Reserve’s decisions.
This is the second set of hearings, called “Subprime lending and securitisation and government-sponsored enterprises”. The hearing will last three days and cover 17 witnesses. Mr Greenspan is the first.
The hearing’s over. But here is the FT’s live blog, written as it happened, on the new (and old) Mr Greenspan had to say about the Fed and the crisis. Read more
Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, today argued that the primary reason for financial market instability was a poorly defined government safety net for financial institutions. The bursting housing bubble, he said, caused pain for financial groups, but there was nothing fundamentally destabilising about it: institutions overvalued certain assets, and as the market corrected itself, people lost money.
The considerable downturn in housing market fundamentals alone would have led one to expect substantial movements in financial prices and quantities, with attendant strains for many institutions, even in a very well-functioning financial system.
Interconnectedness isn’t inherently destabilising, he argues. Financial institutions have every reason to “neglect the implied exposure to their counterparties’ counterparties.”
But, he says, the moral hazard created by the government’s implied guarantees to large interconnected institutions is destabilising. Read more
I had an ulterior motive last night when I went to a dinner on Shakespeare and the crisis. I thought the session, led by Carol and Ken Adelman, founders of Movers and Shakespeares, would be ripe for ridicule and typical of some of the enjoyable nonsense of Davos. Their website, after all, does talk guff about teaching “critical business skills through Shakespeare’s greatest works”.
How wrong I was. A highly enjoyable evening was spent discussing the Bard and his works with two people who could not have been further from the caricature of vacuous motivational speakers. Read more
Spencer Dale, the Bank of England’s chief economist, explained his lonely vote against extending quantitative easing at November’s monetary policy committee meeting in a speech today. Though his view is not pivotal on the Committee, his views shed some light on the MPC’s thinking.
First, Dale says he wasn’t that far from the consensus to increase QE by £25bn. I am sure this is true. He says that because of the uncertainty surrounding the degree of spare capacity, “my preference was to aim to grow the economy a little less rapidly“. Read more
Giving evidence at the Treasury Select Committee, Mervyn King, Bank of England governor, has just repeated his view that “banks that screw it up should be allowed to fail”.
You can see why. The Bank has also just revealed a few minutes ago that it engaged in secret emergency lending to RBS and HBOS at the height of the crisis last year. £61.6bn was lent between 1 October 2008 and 16 January 2009. These huge sums kept cash machines open. The alternative was very scary. No wonder King hates the banks so much.
Money Supply, a Financial Times blog, wraps up the news of the day for Thursday, October 15 Read more
There is ongoing excitement about a global tax on banks to pay for the implicit insurance they receive from the state. Many different policies shelter under this umbrella, writes Chris Giles of the Financial Times, but they have the unifying feature that if they were implemented, it would be an admission by the authorities that they will fail to regulate the banking system better in future. Read more
As Russia invites foreign investment, China encourages domestic investment in commercial property. US housing prices are marginally improved but on thin volume, and unemployment data looks grim Read more
Former Monetary Policy Committee member David Blanchflower opens the lid on the secretive Bank of England. Some great lines, which will make Mervyn King, Bank governor, choke on his cornflakes – but lots of self-justification, writes Chris Giles Read more