Historical Echoes: A Water Machine that Simulates the Economy

Amy Farber, New York Fed Research Library

In 1949, engineer/economist A. W. H. (Bill) Phillips unveiled a mechanical economic model, the Phillips machine, which could demonstrate—by pushing colored water through clear pipes—how money moves through the economy. What’s more, by manipulating the apparatus, one could demonstrate what happens to the economy if one lowers tax rates, increases the money supply, or changes other parameters in the model. If a manipulation was sufficiently dramatic, it could offset the equilibrium enough to cause water to splash onto the floor. Phillips invented the first machine at the London School of Economics; afterwards, thirteen more were built.

Fiscal Drag from the State and Local Sector?

Nora Fitzpatrick, Andrew Haughwout, and Elizabeth Setren

With July just around the corner, most cities and states are preparing for the start of a new fiscal year. Since the start of the recent recession, some have worried that fiscal stress on the sector would result in massive municipal bond defaults. At the end of 2011, many breathed a sigh of relief as aggregate state government revenues finally re-attained the peak they had achieved before tumbling during and after the recession. Unfortunately, relief may be premature. When adjusted for inflation, 2011 state tax revenues were still below their levels of four years ago, and local tax revenue continues to decline. In this post, we explore how the state and local public sector functions as part of the broader economy, how it responded to the most recent downturn, and why it could potentially be a drag on economic activity for years to come.

Mapping and Sizing the U.S. Repo Market

Adam Copeland, Isaac Davis,* Eric LeSueur,** and Antoine Martin

The U.S. repurchase agreement (repo) market is a large financial market where participants effectively provide collateralized loans to one another. This market played a central role in the recent financial crisis; for example, both Bear Stearns and Lehman Brothers experienced problems borrowing in this market in the period leading up to their collapse. Unfortunately, comprehensive and detailed data on this market are not available. Rather, data exist for certain segments of the repo market or for specific firms that operate in this market (see this recent New York Fed staff report). The spotty data make it difficult to understand the U.S. repo market as a whole and the relative importance of its different segments. In this post, we draw upon various data sources and market knowledge to provide a map of the U.S. repo market and to estimate its size. We argue that our estimate improves upon the $10 trillion estimate of Gorton and Metrick, which has received substantial press coverage.

Money Market Funds and Systemic Risk

Marco Cipriani, Michael Holscher,* Antoine Martin, and Patrick McCabe**

On September 16, 2008, Reserve Primary Fund, a money market fund (MMF) with $65 billion in assets under management, announced that losses in its portfolio had caused the value of shares in the fund to drop from $1.00 to $0.97. The news that an MMF had “broken the buck” spread panic quickly to other MMFs. In the two days following Reserve’s announcement, investors withdrew approximately $200 billion (10 percent of assets) from so-called “prime” MMFs, which, like Reserve, mainly invest in privately issued short-term securities. The massive redemptions and resulting strains on MMFs contributed to a freezing of the markets that provide short-term credit to businesses and financial institutions and a sudden spike in short-term interest rates. Responding to these severe disruptions, the Treasury Department intervened on September 19 with a government guarantee of the value of MMF shares, and the Federal Reserve announced on the same day a facility designed to provide liquidity to MMFs. These unprecedented actions stopped the run on MMFs (for more analysis of the run in 2008, see McCabe, 2010). In this post, we discuss why MMFs are a source of financial fragility and the need for reforms to mitigate the risks they pose to the financial system and the economy.

Historical Echoes: When Fed Officials Wax Poetic

Amy Farber, New York Fed Research Library

When was the last time a speech by a Federal Reserve official contained a full-length poem? (Answer at end.) One Fed governor, Menc Stephen Szymczak, tacked on Arthur Hugh Clough’s 1849 poem “Say Not the Struggle Nought Availeth” at the end of a twelve-page speech, “Recent Relations of the Federal Reserve System with Business and Industry,” which he gave before the Illinois Bankers Association in 1935.

Just Released: New York’s Latest Beige Book Report Signals Steady Growth

Jaison Abel and Jason Bram

The New York Fed’s latest Beige Book report points to continued moderate growth in the regional economy and some reduction in cost pressures. Eight times a year, each of the nation’s twelve Federal Reserve Banks produces a report on current economic conditions in its District, based on largely anecdotal information obtained from a variety of regional business contacts. The New York Fed’s report covers New York State, northern New Jersey, and southwestern Connecticut. The twelve District reports are combined with a national summary to produce what has come to be known as the Beige Book—a report that provides some of the most timely information available on economic conditions.

Is Wall Street the Only Street in New York City?

Jason Bram, Jonathan Hastings,* and James Orr

Has Wall Street—the term for the securities industry that symbolizes New York City’s role as a global financial center—become less of a specialty for the city? In this post, we show that while the securities industry continues to play an outsized role in the New York City economy, the city’s job base has become somewhat more diversified since 1990. Diversification can be beneficial, as it makes a local economy less vulnerable to adverse shocks to its key industry. A recent example appears in a post by Bram and Orr showing that with Wall Street in a bit of a slump, nonfinancial industries have picked up the slack and are leading the city’s employment recovery this time around.

Is the 2005 Bankruptcy Reform Working?

Donald P. Morgan

While the name of the Bankruptcy Abuse Prevention and Consumer Protection Act suggests two goals, BAPCPA seemed to be more about abuse prevention than consumer protection. The abuse alleged by proponents of BAPCPA, particularly credit card lenders, was that filers were using Chapter 7 bankruptcy to avoid paying credit card debt they could afford to pay. BAPCPA aimed to curb the alleged abuse through a variety of obstacles, most notably a means test intended to divert better off filers from Chapter 7, where credit card and other unsecured debts are discharged (forgiven), to Chapter 13, where unsecured debts may be rescheduled. In this post, I investigate whether BAPCPA is working, where by “working” I mean reducing the overall bankruptcy rate, and reducing that ratio of Chapter 7-to-Chapter 13 filings. Some observers have argued that the reform failed on both counts, but my analysis suggests that conclusion may be only half right.

Historical Echoes: The Symbolism of the Bull and the Bear

Amy Farber, New York Fed Research Library

The Bull and the Bear, respectively, are long-standing symbols of optimism and pessimism about the outlook for the stock market. How did this come about?