Financial Crisis

First Liquidity, then Solvency

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.

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Posted by Perry G. Mehrling at 12:44 pm

Lords of Finance Redux

Forget the G7, Watch the C5

Martin Wolf endorses Adam Posen's call for quantitative easing at the Bank of England, and then goes one better, calling for direct monetary finance of government spending, i.e. helicopter money. Read more

Posted by Perry G. Mehrling at 11:48 am

Twisting in the Wind

While waiting for TALF

Bernanke did everything he could last week, short of a QE3 expansion of the Fed’s balance sheet, but apparently the market was expecting more.   A creature of habit, the market was fixated on the balance sheet that has done the global heavy lifting since Lehman, rather than on the balance sheets that are poised to do the heavy lifting now, namely the other central banks that jointly announced unlimited dollar lending last week, especially the ECB. Read more

Posted by Perry G. Mehrling at 9:29 am

Gerald Epstein - Banks: How Big Is too Big?

About the Interview

We all know it: The financial sector is bloated and banks are too big to fail. But just how bloated is it, and how much should it be shrunk? Gerald Epstein and his collaborator James Crotty use both micro and macro data to deliver the numbers. They build on James Tobin's concept of functional efficiency to separate the financial sector's beneficial activities (mobilizing savings, financing investment, and reducing risk) from its socially inefficient activities (gambling, and distorting the political process). An empirical study that is full of institutional detail and addresses the elephant in the room: big banks and regulatory capture -- this is new economic thinking. Read more

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Gerald Epstein

Bazooka

Understanding QE3

Liquidity is not a problem within the Eurozone, insisted European Central Bank president Trichet last Monday.  But the markets didn’t believe him.  The question now is whether the announcement last Thursday of a coordinated central bank intervention—by the ECB and also the Swiss National Bank, Bank of Japan, Bank of England, and the Fed--gives more reason to believe.  Read more

Posted by Perry G. Mehrling at 8:16 pm

Bank of the world, three ways

By Daniel H. Neilson

The U.S., in aggregate, acts as a bank to the rest of the world. The precise role of that bank has evolved over the course of the crisis. Read more

Posted by Daniel H. Neilson at 11:17 pm

Leanne Ussher and Sorin Solomon - Financial Fragility in a Network of Trade Credit

About the Interview

The physicist Sorin Solomon begins to feel dizzy when the economist Leanne Ussher talks econ lingo. Yet he listens, because the two of them have found a productive area of collaboration: some economic phenomena, they find, can be explained without recourse to the quirks that feed into human decision making. Sometimes, they say, we can model people as if they were particles, and explore consequences of the social structure that constrains their possible actions. Ussher and Solomon set up a model of Italian industry, stock-flow consistent and grounded in firm-level data on trade credits, to trace out the relation between network structure and financial fragility -- this is new economic thinking. Read more

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Leanne Ussher
Sorin Solomon

Bank of the World

The first graph shows US financial flows over the past five years. The BIS recently reminded us to look at gross flows, which I think is good advice. Just so, the blue line shows increases in US liabilities1 to the rest of the world, the green line increases in US financial assets abroad. The red line is the difference between them, plus a (sometimes considerable) statistical discrepancy. Read more

Posted by Daniel H. Neilson at 5:11 pm

Doyne Farmer - Macroeconomics From the Bottom Up

About the Interview

In 2006, the Fed asked its macroeconometric model what would happen if house prices dropped by 20%. The model projected the past into the future and said: "Not much." Well, the financial crisis proved it wrong. Meanwhile, DSGE models, the main alternative up to this date, do not feature financial institutions; "They are not even good enough to be wrong," says Doyne Farmer. That's why Farmer and his team are developing an agent-based model, of the housing market first and of the entire economy next, to mimic the current financial crisis. The team collects data on actual people to calibrate a rich model with millions of interacting agents. This is a bottom-up approach to macroeconomics -- this is new economic thinking. Read more

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Doyne Farmer

David Weinstein - When Banks Fail, the Case of Japan

About the Interview

What happens to Main Street when Wall Street fails? Japan expert David Weinstein squeezes a unique data set to answer this question. While in the US you will find data on banks and data on firms separately, in Japan there's data that links banks and firms -- a great opportunity to analyze the damage done by collapsing financial institutions. David Weinstein investigates the Japanese financial crisis during the 1990s to shed light on the US financial crisis today. This is research about Wall Street shaking Main Street -- this is new economic thinking. Read more

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David Weinstein