The official name for the economics prize is the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.” The other Nobel prizes are simply called “The Nobel Prize in [field]” or, for the Peace Prize, “The Nobel Peace Prize.” Why is the name of the economics prize so different from the other Nobel prizes?
Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
Today’s release of the 2012Q2 Quarterly Report on Household Debt and Credit indicates a continuation of the downward trend in household debt, which followed a long period of substantial increases. As of June 30, 2012, total outstanding household debt was down nearly $1.3 trillion since its peak in the third quarter of 2008. In the Liberty Street Economics blog’s inaugural post, we used the FRBNY Consumer Credit Panel to decompose this change in household indebtedness. Leading up to the crisis, households increased their cash holdings available for consumption by extracting equity from their homes, using home equity lines of credit and cash-out refinances, and by increasing their nonmortgage balances, such as credit card and auto loan balances. When the Great Recession struck, consumers reversed this behavior and began reducing rather than increasing these obligations. We demonstrated that although some of the reduction in household debt was due to charge-offs (the removal of obligations from consumers’ credit reports because of defaults), much of the debt reduction seen at the overall level was attributable to deleveraging: households actively borrowing less and paying down existing liabilities. In this post and accompanying interactive charts, we update our analysis, using the newly available 2010 and 2011 FRBNY Consumer Credit Panel data to determine whether those trends have continued.
The United States has slid into eight recessions in the last fifty years. Each time, the Federal Reserve sought to revive economic activity by reducing interest rates (see chart below). However, since the end of the last recession in June 2009, the economy has continued to sputter even though short-term rates have remained near zero. The weak recovery has led some commentators to suggest that the Fed should push short-term rates even lower—below zero—so that borrowers receive, and creditors pay, interest.
Banks increasingly move money around the world. Over the last thirty years, gross international claims of banks from all countries have grown ten-fold, reaching a peak of about $25 trillion in 2007 (see chart below). Such global banking flows have been much in the news recently, sometimes depicted as a key culprit of the transmission around the globe of the shocks following the bankruptcy of Lehman Brothers, and more recently the European sovereign debt crisis. The discourse in the regulatory arena seems to share this sentiment, with a bias towards curbing some of the global banking activity (for example, Bank for International Settlements, CGFS 2010, and the United Kingdom Independent Commission on Banking 2011). We acknowledge that global banking has contributed to the international propagation of shocks during the 2007 to 2009 crisis, as shown in a range of recent studies (for example, Acharya and Schnabl 2010, Cetorelli and Goldberg 2011, and 2012). However, we argue that there still are many unknowns regarding the intensity and the direction of global banking flows, as well as the consequences of these flows. There is a pressing need to refine our understanding of these dynamics, not just from a positive angle, but also to inform policy analysis. We take steps in this direction in some of our research, discussed in this blog post. We show that global banks manage liquidity on a global scale and that internal funding reallocations are bank and business-model specific. This centralized liquidity management is a feature of normal times, as well as a feature of market stress periods.
The European Central Bank recently lowered from 0.25 percent to zero the interest rate it pays on funds that Eurozone banks hold on deposit with it. On the same day, Denmark’s central bank began charging banks 0.20 percent (that is, paying a negative interest rate) on certain deposits. These events have led commentators to ask what would happen if the Federal Reserve were to reduce the interest rate that banks in the United States earn on funds in their reserve accounts from its current level of 0.25 percent. In particular, some people wonder if lowering this rate would lead banks to hold smaller deposits at the Fed and instead lend out some of these “idle” balances. In this post, we use the structure of the Fed’s balance sheet to illustrate why lowering the interest rate paid on reserve balances to zero would have no meaningful effect on the quantity of balances that banks hold on deposit at the Fed.
As the FOMC continues to shape its communication strategy, perhaps it should consider opera. On August 6, 1979, Paul A. Volcker became chairman of the Federal Reserve Board, and shortly afterward a very short opera was broadcast attempting to explain to the general public the pros and cons of raising interest rates. The opera (11 min.) was masterminded by Robert Krulwich, a creative broadcast journalist who’s still going strong using radio to explain complex scientific and economic concepts to the layman. Although the broadcast is very comical, it isn’t comic opera!
Tobias Adrian and Ernst Schaumburg During the height of the 2007-09 financial crisis, intermediation activities across the financial sector collapsed. In response, the Federal Reserve invoked section 13(3) of the Federal Reserve Act, citing “unusual and exigent circumstances,” to authorize the creation of a series of emergency lending facilities. These liquidity facilities provided last-resort-lending options to qualified borrowers in several strained markets in order to prevent the distress on Wall Street from spilling over onto Main Street. In an earlier post, we discussed the commercial paper funding facility. In this post, we review the Primary Dealer Credit Facility (PDCF), a program that represents the Fed’s first lending facility to nondepository financial institutions since the Great Depression.
This is the first post in a series that details the steps taken by the Fed in its role as lender of last resort during the 2007-09 financial crisis. At the height of the crisis, financial intermediation activities had virtually collapsed. In response, the Federal Reserve created liquidity facilities authorized under section 13(3) of the Federal Reserve Act, citing “unusual and exigent circumstances.” These facilities provided last-resort lending options in strained markets to prevent stress in the financial sector from spilling over onto real economic activity. In this post, we review the Commercial Paper Funding Facility (CPFF), a crucial program among the special lending facilities.
O. Henry (William Sydney Porter), one of America’s most beloved short story writers, is famous for ending his stories with a twist. As it turns out, his career began with a twist; he became a serious writer while in prison for embezzling funds from The First National Bank of Austin, Texas, where he had been a teller. The facts of his criminal record and imprisonment were suppressed until a few years after his death, as described in a 1916 article from the New York Times.
Jason Appleson, Eric Parsons, and Andrew Haughwout
In our recent post on the state and local sector, we argued that structural problems in state and local budgets were exacerbated by the recession and would likely restrain the sector’s growth for years to come. The last couple of years have witnessed threatened or actual defaults in a diversity of places, ranging from Jefferson County, Alabama, to Harrisburg, Pennsylvania, to Stockton, California.
But do these events point to a wave of future defaults by municipal borrowers? History—at least the history that most of us know—would seem to say no. But the municipal bond market is complex and defaults happen much more frequently than most casual observers are aware. This post describes the market and its risks.