Japan’s Experience Suggests Quantitative Easing Helps Financial Institutions, Not Real Economy
A few days ago, we noted:
When an economy is very slack, cheaper money is not going to induce much in the way of real economy activity.
Unless you are a financial firm, the level of interest rates is a secondary or tertiary consideration in your decision to borrow. You will be interested in borrowing only if you first, perceive a business need (usually an opportunity). The next question is whether it can be addressed profitably, and the cost of funds is almost always not a significant % of total project costs (although availability of funding can be a big constraint)…..
So cheaper money will operate primarily via their impact on asset values. That of course helps financial firms, and perhaps the Fed hopes the wealth effect will induce more spending. But that’s been the movie of the last 20+ years, and Japan pre its crisis, of having the officialdom rely on asset price inflation to induce more consumer spending, and we know how both ended.
Tyler Cowen points to a Bank of Japan paper by Hiroshi Ugai, which looks at Japan’s experience with quantitative easing from 2001 to 2006. Key findings:
….these macroeconomic analyses verify that because of the QEP, the premiums on market funds raised by financial institutions carrying substantial non-performing loans (NPLs) shrank to the extent that they no longer reflected credit rating differentials. This observation implies that the QEP was effective in maintaining financial system stability and an accommodative monetary environment by removing financial institutions’ funding uncertainties, and by averting further deterioration of economic and price developments resulting from corporations’ uncertainty about future funding.
Granted the positive above effects of preventing further deterioration of the economy reviewed above, many of the macroeconomic analyses conclude that the QEP’s effects in raising aggregate demand and prices were limited. In particular, when verified empirically taking into account the fact that the monetary policy regime changed under the zero bound constraint of interest rates, the effects from increasing the monetary base were not detected or smaller, if anything, than during periods when there was no zero bound constraint.
Yves here This is an important conclusion, and is consistent with the warnings the Japanese gave to the US during the financial crisis, which were uncharacteristically blunt. Conventional wisdom here is that Japan’s fiscal and monetary stimulus during the bust was too slow in coming and not sufficiently large. The Japanese instead believe, strongly, that their policy mistake was not cleaning up the banks. As we’ve noted, that’s also consistent with an IMF study of 124 banking crises:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.
But (to put it charitably) the Fed sees the world through a bank-centric lens, so surely what is good for its charges must be good for the rest of us, right? So if the economy continues to weaken, the odds that the Fed will resort to it as a remedy will rise, despite the evidence that it at best treats symptoms rather than the underlying pathology.
Monday, August 30, 2010
ProPublica: Banks’ Self-Dealing Super-Charged Financial Crisis
Banks’ Self-Dealing Super-Charged Financial Crisis
Short/no reading version of the story:
Planet Money
Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.
Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:
They created fake demand.
A ProPublica analysis shows for the first time the extent to which banks -- primarily Merrill Lynch, but also Citigroup, UBS and others -- bought their own products and cranked up an assembly line that otherwise should have flagged.
The products they were buying and selling were at the heart of the 2008 meltdown -- collections of mortgage bonds known as collateralized debt obligations, or CDOs.
As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created -- and ultimately provided most of the money for -- new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain [1] that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.
Short/no reading version of the story:
Planet Money
Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.
Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:
They created fake demand.
A ProPublica analysis shows for the first time the extent to which banks -- primarily Merrill Lynch, but also Citigroup, UBS and others -- bought their own products and cranked up an assembly line that otherwise should have flagged.
The products they were buying and selling were at the heart of the 2008 meltdown -- collections of mortgage bonds known as collateralized debt obligations, or CDOs.
As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created -- and ultimately provided most of the money for -- new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain [1] that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.
Saturday, August 21, 2010
Econ 101: Macroeconomics Fall 2010
I will be posting course material here. As you probably noticed there is a direct link to this post on the right hand side of the blog.
The material posted here is for:
Econ 101: Macroeconomics
T-TH 9:25-10:40 Section: 9T3RA
I can be reached at:
andrew.a.bossie@gmail.com
Office Hours:
Tuesday and Thursday: 7:00 to 8:00 and 10:40-11:00
If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B
Final Grades
Final Grade Roster Explained:
The most you can score for your homework grade is 1 (100%). Homework total grades that have been bolded had scored higher than a 1 (100%).
Two students earned a full letter grade higher on the second midterm than the first, their whole entry has been bolded.
Syllabus
Required "Reading":
Planet Money: How Four Drinking Buddies Saved Brazil"
Homework:
Rules:
1. Must be handed in during class.
2. Must be stapled. Assignments not stapled will lose a letter grade
3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.
4. Rules for Emailing homework assignments (emrgencies only)
a. Must be a single, legible pdf or word document.
b. Must be time stamped before the begining of class on the day it is due.
Homework Assignment #1: Due 10/5
Homework Assignment #2: Due 10/14
Homework Assignment #3: Due 11/23
Old Exams:
Midterm #1
Midterm #2
Sample Final*
An answer sheet was requested for the sample homework. I have not included graphs, I have only explained what will happen to the graphs.
The answers to the sample final are here.
*A word of caution. This is last semesters final, do not simply take it for granted that this semesters final will look exactly like the one I gave this spring. Certain topics were covered differently.
Final Grades
Final Grade Roster Explained:
The most you can score for your homework grade is 1 (100%). Homework total grades that have been bolded had scored higher than a 1 (100%).
Two students earned a full letter grade higher on the second midterm than the first, their whole entry has been bolded.
The material posted here is for:
Econ 101: Macroeconomics
T-TH 9:25-10:40 Section: 9T3RA
I can be reached at:
andrew.a.bossie@gmail.com
Office Hours:
Tuesday and Thursday: 7:00 to 8:00 and 10:40-11:00
If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B
Final Grades
Final Grade Roster Explained:
The most you can score for your homework grade is 1 (100%). Homework total grades that have been bolded had scored higher than a 1 (100%).
Two students earned a full letter grade higher on the second midterm than the first, their whole entry has been bolded.
Syllabus
Required "Reading":
Planet Money: How Four Drinking Buddies Saved Brazil"
Homework:
Rules:
1. Must be handed in during class.
2. Must be stapled. Assignments not stapled will lose a letter grade
3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.
4. Rules for Emailing homework assignments (emrgencies only)
a. Must be a single, legible pdf or word document.
b. Must be time stamped before the begining of class on the day it is due.
Homework Assignment #1: Due 10/5
Homework Assignment #2: Due 10/14
Homework Assignment #3: Due 11/23
Old Exams:
Midterm #1
Midterm #2
Sample Final*
An answer sheet was requested for the sample homework. I have not included graphs, I have only explained what will happen to the graphs.
The answers to the sample final are here.
*A word of caution. This is last semesters final, do not simply take it for granted that this semesters final will look exactly like the one I gave this spring. Certain topics were covered differently.
Final Grades
Final Grade Roster Explained:
The most you can score for your homework grade is 1 (100%). Homework total grades that have been bolded had scored higher than a 1 (100%).
Two students earned a full letter grade higher on the second midterm than the first, their whole entry has been bolded.
Econ 215: Money and Banking; T-TH 8:00-915
I will be posting course material here. As you probably noticed there is a direct link to this post on the right hand side of the blog.
The material posted here is for:
Econ 215: Money and Banking
T-TH 8:00-9:15 Section: 8T3RA
Final Grades
Final Grade Roster Explained:
1. The most you can score for your homework grade is 1 (100%). Homework total grades that have been bolded had scored higher than a 1 (100%).
2. If you received a zero by either not handing something in or not taking a test the space was left blank. if you did hand something in or took a test and still received a zero it was marked as a zero.
3. Students who earned a full letter grade higher on the second midterm have had their whole entries bolded. There were quite a few.
4. The average grade for the semester was a 33 and the median grade was a 36. Students who scored within a few points of 33 or 36 got a C (which means average) and the rest of the curve was based around that.
I can be reached at:
andrew.a.bossie@gmail.com
Office Hours:
Tuesday and Thursday: 7:00 to 8:00 and 10:40-11:00
If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B
Syllabus
Texts:
You must read and listen to Gary Gorton and Charles Calomiris before the final.
Gary Gorton on the Financial Crisis
Calomiris on the Financial Crisis
The above link is a direct link to the October 29, 2009 EconTalk podcast. You can play the podcast directly from the site or download it. If you prefer, you can also subscribe to the podcast through the ITunes Store
Homework Assignments:
Rules:
1. Must be handed in during class.
2. Must be stapled. Assignments not stapled will lose a letter grade
3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.
4. Rules for Emailing homework assignments (emrgencies only)
a. Must be a single, legible pdf or word document.
b. Must be time stamped before the begining of class on the day it is due.
Homework #1 Due 10/14
Edit of Homework #1 Due 10/19
Homework #2 Due 11/16
Homework #3 Due 11/23
Final Grades
Final Grade Roster Explained:
1. The most you can score for your homework grade is 1 (100%). Homework total grades that have been bolded had scored higher than a 1 (100%).
2. If you received a zero by either not handing something in or not taking a test the space was left blank. if you did hand something in or took a test and still received a zero it was marked as a zero.
3. Students who earned a full letter grade higher on the second midterm have had their whole entries bolded. There were quite a few.
4. The average grade for the semester was a 33 and the median grade was a 36. Students who scored within a few points of 33 or 36 got a C (which means average) and the rest of the curve was based around that.
The material posted here is for:
Econ 215: Money and Banking
T-TH 8:00-9:15 Section: 8T3RA
Final Grades
Final Grade Roster Explained:
1. The most you can score for your homework grade is 1 (100%). Homework total grades that have been bolded had scored higher than a 1 (100%).
2. If you received a zero by either not handing something in or not taking a test the space was left blank. if you did hand something in or took a test and still received a zero it was marked as a zero.
3. Students who earned a full letter grade higher on the second midterm have had their whole entries bolded. There were quite a few.
4. The average grade for the semester was a 33 and the median grade was a 36. Students who scored within a few points of 33 or 36 got a C (which means average) and the rest of the curve was based around that.
I can be reached at:
andrew.a.bossie@gmail.com
Office Hours:
Tuesday and Thursday: 7:00 to 8:00 and 10:40-11:00
If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B
Syllabus
Texts:
You must read and listen to Gary Gorton and Charles Calomiris before the final.
Gary Gorton on the Financial Crisis
Calomiris on the Financial Crisis
The above link is a direct link to the October 29, 2009 EconTalk podcast. You can play the podcast directly from the site or download it. If you prefer, you can also subscribe to the podcast through the ITunes Store
Homework Assignments:
Rules:
1. Must be handed in during class.
2. Must be stapled. Assignments not stapled will lose a letter grade
3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.
4. Rules for Emailing homework assignments (emrgencies only)
a. Must be a single, legible pdf or word document.
b. Must be time stamped before the begining of class on the day it is due.
Homework #1 Due 10/14
Edit of Homework #1 Due 10/19
Homework #2 Due 11/16
Homework #3 Due 11/23
Final Grades
Final Grade Roster Explained:
1. The most you can score for your homework grade is 1 (100%). Homework total grades that have been bolded had scored higher than a 1 (100%).
2. If you received a zero by either not handing something in or not taking a test the space was left blank. if you did hand something in or took a test and still received a zero it was marked as a zero.
3. Students who earned a full letter grade higher on the second midterm have had their whole entries bolded. There were quite a few.
4. The average grade for the semester was a 33 and the median grade was a 36. Students who scored within a few points of 33 or 36 got a C (which means average) and the rest of the curve was based around that.
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