Financial Crisis

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

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

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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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

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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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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Sympathy for the Devil

Privatizing QE3

Pity the plight of the central banker.   The halcyon days of inflation targeting recede ever farther into the past, along with the glorious simplicity of agonizing whether 25 bp is enough.  Instead, the fate of the world seems to hang in the balance, even while the Fed Funds rate remains stuck at zero.

All over the world, central banks are stepping in to catch the falling knife dropped by their ostensible political masters, the issuers of sovereign debt.   Most notably, the ECB has extended its bond-buying to Spain and Italy, and the Fed has guaranteed another two years of ZIRP. Read more

Okay, leadership, but by whom?

And heading where?

The deficit in political leadership, both in the US and Europe, is the focus of FT commentary today (see herehere, and here).  It seems clear that another financial crisis is brewing, with its epicentre this time in European sovereign debt problems rather than U.S. subprime mortgages, but policy response has so far been woefully inadequate to the task.

But what would you have them do?  

As John Authers points out, "sovereign credits are no longer available for use.  The rebound of 2009 came once it was clear that governments were prepared to put their own credit behind the troubled banks.  This time around, sovereign credit itself is at issue."   Read more

Haircuts and Instability

Updating Hawtrey for the Shadow Banking System

Notwithstanding the U.S. debt deal—which takes default off the table--dollar money markets remain queasy, and longer term capital markets show clear signs of flight to safety, as market rates on the best stuff fall and rate spreads to the next best stuff widen.

Slowly, but surely

Slowly, but surely

Most people seem to be reading this as Wall Street reaction to changed expectations about the fortunes of Main Street.  Economic slowdown in the real economy is coming, probably globally, and consequently there is a premium on safe assets to ride out the storm. Read more

Moral Hazard in Congress

Fed to the Rescue?

The solvency of the U.S. government is not in any serious doubt.  The imminent S&P downgrade of Treasury debt is not about economics; it is about politics.   It is, at root, about the public display of political dysfunction in Congress.

One symptom of this dysfunction is the current brinkmanship over the debt ceiling.  Since there is no real solvency problem, the point seems to be to provoke a liquidity crisis, and to use that crisis to force the other guy to back down.   

On this point, impressively, bi-partisan agreement is the rule. Read more