Category Archives: Extraordinary Monetary Policy

Economic Policy Uncertainty and the Credit Channel…

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I am grateful to John Duca at the Federal Reserve Bank of Dallas for highlighting a recent NBER paper that he co-authored with Michael Bordo and Christoffer Koch.

The authors find that “policy uncertainty significantly slows U.S. bank credit growth, consistent with it having an effect on broad loan supply and demand.”

These results corroborate our findings in recent years evaluating the performance of CFS Divisia monetary aggregates.

Bordo, Duca, and Koch also did fine work quantifying the regulatory and reporting burden on banks since Dodd-Frank (see Figure 2 on page 26). In fact, their data stretch back to 1960. For instance, the number of pages per regulatory filing for banks was less than 10 from 1960 into the early 1980s, gradually advancing to roughly 50 prior to the financial crisis. Since the crisis, the pages per filing are near 90 and advancing at a seemingly geometric rate.

The paper is available at http://www.nber.org/papers/w22021.

Central bank policy is founded on flawed analysis

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Professor Michael Wickens (University of York and Cardiff Business School) publishes a thoughtful letter in the Financial Times “Central bank policy is founded on flawed analysis” – http://www.ft.com/intl/cms/s/0/44f54316-d0c3-11e5-92a1-c5e23ef99c77.html#axzz40FPPhp2x

Professor Wickens illustrates how assumptions underpinning monetary policy actions actually damage financial stability.

Center for Financial Stability members and friends know how our Advances in Monetary and Financial Measurement (AMFM) data developed under the leadership of Professor William A. Barnett illustrate present day challenges to the conduct of monetary management and financial stability.

For instance, Fixing the Fed’s Liquidity Mess – http://www.wsj.com/articles/fixing-the-feds-liquidity-mess-1437435242 – a Wall Street Journal piece that I wrote with Stephen Dizard highlights the specific challenge to financial stability from illiquid markets.  We offer three solutions.

 

U.S. Secular Stagnation?

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Johns Hopkins Professor Steve Hanke (CFS, Special Counselor) penned a thoughtful piece on “secular stagnation.”

Steve also meaningfully employs CFS Divisia monetary aggregates to examine future U.S. economic growth prospects.

The full article – U.S. Secular Stagnation? – is available at http://www.cato.org/publications/commentary/us-secular-stagnation.

WSJ features CFS monetary analysis and data…

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This morning’s Wall Street Journal features CFS views and data in “Shadow-Credit Rise Is Good Sign” by Michael Casey on page C3.

The article highlights how CFS data on market finance or “shadow banking” can measure the durability of the recovery and help frame the policy debate in a balanced way.

A few highlights include:

“Seven years after the financial crisis, lending in the so-called shadow-banking system finally appears to have bottomed out, a reversal that could presage a long-awaited uptick in U.S. economic growth.”

“Extrapolations from CFS data show that the level of market finance is significantly below where its post-1967 trend would predict. In other words, a great deal of expansion is needed to bring this market back even to a level projected by its prebubble state. Until then, shadow banking will continue to do far less of the heavy lifting in credit creation than it used to.”

For the full article “Shadow-Credit Rise Is Good Sign,” please see page C3 of this morning’s paper or view http://www.wsj.com/articles/shadow-credit-rise-is-good-sign-1427071556.

State of the International Financial System: House Committee on Financial Services Hearing

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The U.S. House Committee on Financial Services announced a full committee hearing titled “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.” The hearing is scheduled for March 17, 2015.

It will be informative to see how Secretary Lew assesses backdoor currency wars (see pages 2, 9, and 10 of the New York Society of Security Analysts presentation).

New! Hyperinflation Book by CFS…

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Despite the recent slip in inflation, many ponder a future of unexpectedly higher or more volatile inflation in the wake of extraordinary monetary measures over the last six years. While the Center for Financial Stability (CFS) is clearly NOT anticipating a return to runaway inflation, analysis of hyperinflation reveals lessons worth active study for public officials, investors, and the interested public.

CFS is delighted to release “Studies in Hyperinflation & Stabilization” by Professor Gail Makinen with a foreward by Thomas J. Sargent, co-recipient of the 2011 Nobel Prize in Economics.

Hyperinflation imposes heavy economic costs and undermines political and social stability – especially in emerging and frontier markets. Similarly, study of the evolution and stabilization of hyperinflation offers lessons to strengthen monetary and financial stability in advanced economies (For specific lessons)

Despite fears over the last few years regarding a surprise increase of inflation, CFS has warned against these concerns – based on the results of our Divisia monetary and financial data developed under the leadership of Professor William A. Barnett.

Best wishes into the holiday season and 2015.

Lawrence Goodman

The Economist on “The 70-Year Itch”

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In The Economist this week, there is a terrific article The Bretton Woods agreements: The 70-year itch.  Highlights include:

– America learned the benefits of economic co-operation the hard way. Its failure to create institutions to help steer the world economy after the first world war exacerbated the Great Depression and paved the way for the next conflagration.

– Yet today’s pre-eminent powers seem to have forgotten this lesson.

– If John Maynard Keynes were alive, he would sigh not just at the risks in all this economic nationalism but also the huge missed opportunity. Perhaps it is time to send another group of dignitaries to New Hampshire.

The full article is at http://www.economist.com/news/leaders/21606280-both-west-and-china-are-neglecting-institutions-help-keep-world-economy

The piece is similar to my Forbes column Lessons from the Summer of 1944.

The full column can be viewed at http://www.forbes.com/sites/greatspeculations/2014/06/06/lessons-from-the-summer-of-1944/

Taylor on Divisia and Monetary Policy Rules…

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Stanford economist John Taylor discusses new approaches to monetary policy rules, highlighting the Divisia index of the money supply in “Policy Rules When Money Still Matters.”

He cites “Interest Rates and Money in the Measurement of Monetary Policy” by Mike Belongia and Peter Ireland – which uses CFS Divisia monetary aggregates.

“Don’t be Fooled by Taper Talk” by Steve H. Hanke

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In this article by Professor Steve H. Hanke from Johns Hopkins University, Professor Hanke uses CFS Divisia measures to throw light on the economy. From January 2003 until the collapse of Lehman, the exponential annual trend growth rate for Divisia M4 was 8.79%. Since the Lehman collapse in September 2008, the exponential annual trend growth rate for Divisia M4 has been 0.77%. The decline can be attributed to a drop in bank money. Based on the anemic annual Divisia M4 growth rate of 2.6%, Hanke forecasts that the Fed will be forced to keep interest rates at the lower bound for longer than expected – and perhaps even into 2016.

For those looking to gain an intuitive understanding of Divisia measures and how they differ from the Fed’s simple sum measures, this article is well worth reading.

Read “Don’t Be Fooled by Taper Talk” by Steve H. Hanke.