October 2011

By Daniel H. Neilson

Last week Goldman Sachs published a note in favor of the Fed's adopting a formal nominal GDP target, while Fed-watchers caught a whiff of a possible change in policy in the works. The proposal, specifically, is for the Fed to announce a target level for nominal GDP over the next 12 months, and to commit to undertaking asset purchases if it seemed that NGDP would come in too low. Scott Sumner, who has long advocated such a policy, felt vindicated, and other market monetarists also voiced their support. Even Paul Krugman seemed to think it might do some good. Read more

Plumbing Matters

The last few days have brought a remarkable, but as of yet unremarked, convergence of attention to the matter of making markets.   

We hear about the difficulty of implementing the so-called Volcker Rule, which requires drawing a bright line of some kind between proprietary trading (not allowed) and market making (allowed).  

We hear about banks getting out of the market making business, leading to unusually large spreads in corporate bond markets, large enough possibly to tempt others into the business. Read more

First ECB, then EFSF

Tightening money market conditions in Europe have now claimed their first victim, Dexia, and in so doing shifted the focus of policymakers from sovereign debt to banking recapitalization.  But it is just a change in approach; the underlying problem remains the same.

The demise of Dexia should remind everyone that liquidity kills you quick.  In this regard, Trichet's reminder that no European bank should worry about liquidity is reassuring, or should be anyway.