Liberty Street Economics
Look for our next post on September 22.
August 04, 2017

A Closer Look at the Fed’s Balance Sheet Accounting



LSE_2017_A Closer Look at the Fed’s Balance Sheet Accountingt


An earlier post on how the Fed changes the size of its balance sheet prompted several questions from readers about the Federal Reserve’s accounting of asset purchases and the payment of principal by the Treasury on Treasury securities owned by the Fed. In this post, we provide a more detailed explanation of the accounting rules that govern these transactions.

August 02, 2017

Were Banks Ever ‘Boring’?



LSE_Were Banks Ever ‘Boring’?

In a previous post, I documented that much of the expansion into nontraditional activities by U.S. banks began well before the passage of the Gramm-Leach-Bliley Act in 1999, the legislation that repealed much of the Glass-Steagall Act of 1933. The historical record actually contains many prior instances of the Glass-Steagall restrictions being circumvented, with nonbank firms allowed to operate as financial conglomerates and engage in activities that go beyond traditional banking. These broad industry dynamics might indicate that the business of banking tends to expand firm boundaries beyond a
traditional—“boring”—perimeter.

July 31, 2017

Were Banks ‘Boring’ before the Repeal of Glass-Steagall?



LSE_Were Banks ‘Boring’ before the Repeal of Glass-Steagall?

Since the global financial crisis and Great Recession, many critics have called for regulatory and legislative reforms to restore a system of “boring” banks constrained to traditional banking activities like deposit taking and lending. The narrative underlying this argument holds that the partial repeal of the Glass-Steagall Act in 1999 by the Gramm-Leach-Bliley Act enabled banks to expand into nontraditional activities such as securities trading and underwriting, thereby contributing to the financial crisis some ten years later. The implication is that if we could restore the Glass-Steagall Act, banks would become boring once again, and financial stability would be enhanced. The reality, however, may be more complex; an in-depth look “under the hood” of banks’ organizational structure over the past forty years shows that bank holding companies (BHCs) began expanding into those financial activities in the early 1980s and that this expansion was, in fact, nearly complete by 1999.

July 11, 2017

How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities



LSE_2017_How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities

In our previous post, we considered balance sheet mechanics related to the Federal Reserve’s purchase and redemption of Treasury securities. These mechanics are fairly straightforward and help to illustrate the basic relationships among actors in the financial system. Here, we turn to transactions involving agency mortgage-backed securities (MBS), which are somewhat more complicated. We focus particularly on what happens when households pay down their mortgages, either through regular monthly amortizations or a large payment covering some or all of the outstanding balance, as might occur with a refinancing.

July 10, 2017

Just Released: Updated SOMA Portfolio and Income Projections



LSE_2017_Updated SOMA Portfolio and Income Projections

The Federal Reserve Bank of New York’s Markets Group today published a report presenting updated staff projections for the future path of domestic securities held in the System Open Market Account (SOMA) and portfolio-related income. The updated projections incorporate very recent information and are provided as a tool for the public to further understand factors affecting the evolution of the Federal Reserve’s balance sheet.

How the Fed Changes the Size of Its Balance Sheet



LSE_2017_How the Fed Changes the Size of Its Balance Sheet

The size of the Federal Reserve’s balance sheet increased greatly between 2009 and 2014 owing to large-scale asset purchases. The balance sheet has stayed at a high level since then through the ongoing reinvestment of principal repayments on securities that the Fed holds. When the Federal Open Market Committee (FOMC) decides to reduce the size of the Fed’s balance sheet, it is expected to do so by gradually reducing the pace of reinvestments, as outlined in the June 2017 addendum to the FOMC’s Policy Normalization Principles and Plans. How do asset purchases increase the size of the Fed’s balance sheet? And how would reducing reinvestments reduce the size of the balance sheet? In this post, we answer these questions by describing the mechanics of the Fed’s balance sheet. In our next post, we will describe the balance sheet mechanics with respect to agency mortgage-backed securities (MBS).

June 30, 2017

The Role of Central Bank Lending Facilities in Monetary Policy



Editor’s note: This post was originally published on June 30, 2017. We are running it again today, August 14, in conjunction with a companion piece scheduled for August 16. An error in the table was corrected on July 3.

LSE_The Role of Central Bank Lending Facilities in Monetary Policy

Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve’s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed’s discount window is less integrated into the monetary policy framework. In a follow-up post, we will discuss differences in the central banks’ counterparty and collateral policies.

Posted by Blog Author at 9:29 AM in Central Bank , Monetary Policy | Permalink | Comments ( 0 )

June 28, 2017

Market Liquidity after the Financial Crisis



LSE_Market Liquidity after the Financial Crisis

The possible adverse effects of regulation on market liquidity in the post-crisis period continue to garner significant attention. In a recent paper, we update and unify much of our earlier work on the subject, following up on three series of earlier Liberty Street Economics posts in August 2015, October 2015, and February 2016. We find that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, we do not find clear evidence of a widespread deterioration in market liquidity.

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments ( 3 )

June 26, 2017

Low Productivity Growth: The Capital Formation Link



Editor’s note: The labels on the y-axis of the chart “Nonfarm Business Sector: Real Output per Hour of All Persons” have been corrected. (June 26, 2017, 11:56 a.m.)

LSE_2017_Productivity-factory_GettyImages-184924253_460x288

A major economic concern is the ongoing sluggishness in the growth of output per worker hour, generally called labor productivity. In an arithmetic sense, the growth of the economy can be accounted for by the increase in hours worked plus that of labor productivity. With the unemployment rate now at a level widely regarded as near “full employment,” growth in hours worked is likely to be limited by demographic forces, most importantly the very limited expansion of the working-age population. If productivity growth also remains low, the sustainable pace of increase of real GDP will be limited and remain noticeably lower than historic norms.

Posted by Blog Author at 7:00 AM in Macroecon | Permalink | Comments ( 1 )

June 23, 2017

At the New York Fed: Twelfth Annual Joint Conference with NYU-Stern on Financial Intermediation



LSE_2017_At the New York Fed: Twelfth Annual Joint Conference with NYU-Stern on Financial Intermediation

Anyone who has a savings account, has taken out a mortgage, or has been part of a business seeking new capital has relied on the smooth functioning of the institutions and markets that collectively perform financial intermediation. Because financial intermediation is so critical to the functioning of a modern economy, it is important to understand its inner workings—its fundamental features, recent innovations, lines of transmission to real economic activity, its imperfections, and its interactions with regulatory policies. As part of an ongoing effort to foster such an understanding, the New York Fed recently hosted the twelfth annual Federal Reserve Bank of New York–New York University Stern School of Business Conference on Financial Intermediation. In this post, we explore some of the discussions and findings from the May 5 conference, which focused on recent advances in the study of financial intermediation.

Posted by Blog Author at 7:00 AM in Financial Intermediation | Permalink | Comments ( 0 )

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Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy. The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan.

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