Did Unconventional Policy Responses to the Crisis Work? Evidence from a Cross-Country Analysis
The 2008-09 global recession produced a significant loss of output and a deflationary scare in many countries. The depth, scale, and duration of the crisis triggered monetary and fiscal policy actions that were “unconventional” in terms of their size and scope, leading to an ongoing debate over the role that these policy responses played in the stabilization process. How and to what extent were these policies effective? In this post, we examine cross-country experiences and find evidence consistent with the idea that the policies contributed to the stabilization process through their effect on expectations of output and inflation.
Historical Echoes: When Are Artists Like Central Bankers?
Answer: When they create money. A number of “trompe l’oeil” (literally, “fool-the-eye”) painters at the turn of the last century included money among the everyday objects they painted so realistically. Although most of these artists depicted the money alongside other objects, William Michael Harnett (1848-92) sometimes painted just the money and was arrested for counterfeiting in 1886. New York law officers seized a painting entitled “Five Dollar Bill” from where it hung in a saloon and demanded that Harnett hand over other “counterfeit” paintings. After viewing the painting, the judge advised that “the development and exercise of a talent so capable of mischief should not be encouraged.” Harnett never painted money again.
Stress Test Success and Bank Opacity
In contemplating the recent financial panic, it is easy to get lost in the weeds of repo markets and asset-backed securities and lose sight of the fact that, at the fundamental level, the panic was about inadequate information. Investors were uncertain about what particular assets were worth, and they were uncertain about which banks were exposed to those assets and to what degree. They were also uncertain about how the government would handle undercapitalized banks. It was against this background that the Treasury announced in February 2009 that the nineteen largest U.S. bank holding companies would be subject to an unprecedented stress test to determine if the banks had sufficient capital to survive and maintain lending in the event of a worse-than-expected recession. In this post, I discuss a recent New York Fed staff report that I wrote with Stavros Peristiani and Vanessa Savino that provides evidence that the stress test supplied new information to the market, and thus may have helped quell the panic.
Valuing the Capital Assistance Program
The Capital Assistance Program (CAP) was announced on February 10, 2009, in a joint statement by the U.S. Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision outlining a financial stability plan.
The Capital Assistance Program (CAP) was announced on February 10, 2009, in a joint statement by the U.S. Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision outlining a financial stability plan. The first phase of the plan called for a stress test to assess the capital needs of nineteen major U.S. financial institutions in the event of a worse-than-expected recession. In the second phase, banks requiring additional capital that were unable to raise sufficient private capital would sell to the Treasury convertible preferred securities and warrants on common shares. The combination of the stress test, which provided information about the downside risk faced by the largest U.S. banks, and the CAP securities, which provided backup capital to mitigate this downside risk, was an unprecedented regulatory response to a financial crisis. In this post, we discuss the valuation of CAP securities. The valuation described in our 2009 New York Fed staff report is aligned with the stock market reaction to the announcement of the CAP terms.
Historical Echoes: Communication before the Blog…
Over the years, the Federal Reserve System has used many methods to communicate about the role it plays in support of stable prices, full employment, and financial stability. Current communication tools include the new press conferences by the Chairman, speeches by Bank presidents, public websites, economic education programs, local outreach efforts, publications, and blogs like this one.
Will the Federal Reserve’s Asset Purchases Lead to Higher Inflation?
A common refrain among critics of the Federal Reserve’s large-scale asset purchases (“LSAPs”) of Treasury securities is that the Fed is simply printing money to purchase the assets, and that this money growth will lead to much higher inflation. Are those charges accurate? In this post, I explain that the Fed’s asset purchases do not necessarily lead to higher money growth, and that the Fed’s ability (since 2008) to pay interest on banks’ reserves provides a critical new tool to constrain future money growth. With this innovation, an increase in bank reserves no longer mechanically triggers a series of responses that could lead to excessive money growth and higher inflation.
Are Rising Commodity Prices Unanchoring Inflation Expectations?
The U.S. inflation outlook is the focus of considerable discussion in business and central banking circles. As shown in the chart below, headline inflation measured as a year-to-year percentage change declined over the first half of 2010, leveled off in the second half of the year, and has been rising recently—driven largely by higher commodity prices. An important question is whether this recent increase is likely to be transitory or the beginning of a more sustained rise in headline inflation. In this post, we examine data from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters (SPF) and discuss how the survey’s unique features and rich information on inflation expectations can shed light on this question as well as offer insight into the inflation outlook that is not available from other survey instruments. While inflation has indeed increased recently, our analysis suggests that inflation expectations are not presently at risk of becoming “unanchored,” or showing a greater concern over higher future inflation.
Historical Echoes: Two Out of Three Ain’t Bad
Joseph Schumpeter (February 8, 1883–January 8, 1950) was an Austrian-born economist famous for his contributions to many fields in economics, including growth theory and entrepreneurship. He is perhaps most famous for his theory of growth as a consequence of “creative destruction.” Schumpeter was also ambitious, as this recollection by Paul Samuelson, an even more famous economist, suggests:
“I have retold Schumpeter’s story about his three wishes in life—to be the greatest lover in Austria, the best horseman in Europe, and the greatest economist in the world—and his regret of having failed to fulfil the second wish.”
Why Are Adjustable Rate Mortgages So Rare These Days?
The fraction of mortgage borrowers who choose an adjustable-rate loan has fallen significantly over the past five years or so. Although the fraction edged up slightly in 2010, it remains close to historic lows, with less than 10 percent of mortgage originations since 2009 featuring an adjustable interest rate. What explains the striking decline? And what are its implications for borrowers and policymakers?
The Great Recession and Recovery in the Tri-State Region
In 2008, as the financial crisis unfolded and the U.S. economy tumbled into a sharp recession, the outlook for the tri-state region (New York, New Jersey, and Connecticut) and especially New York City—the heart of the nation’s financial industry—looked grim. Regional economists feared an economic downturn as harsh as the one in 2001, or the even deeper recession of the early 1990s. Now, as the recovery takes hold, we can report that although the economic downturn was severe in the region, with the unemployment rate surging above 9 percent in many places, it was less severe than many had anticipated. This post—which is based on the New York Fed’s May 6 Regional Economic Press Briefing—recaps how the Great Recession affected employment across the region, how the ensuing recovery has progressed, and what the prospects are for job growth as we go forward.