Greg Ip

Articles by The Economist’s U.S. Economics Editor

Archive for the ‘Financial crisis’ Category

Free exchange: Macro control, micro problems

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History shows the limits of macroprudential policy in curbing dangerous risk-taking

Jun 1st 2013 |From the print edition
[Greg Ip] AMERICA’S Federal Reserve faces a dilemma: to put the economy back on its feet it is keeping interest rates at zero and buying bonds; but in doing so, it worries, it is egging on dangerous risk-taking. Cue “macroprudential” policy. In theory, central banks would use regulatory and supervisory authority to stamp out excesses in specific markets while leaving monetary policy to take care of inflation and employment.

History suggests this is easier said than done. “Macroprudential” may be new jargon, but America has tried variants of it for decades, from credit controls to down-payment limits. And the record is not a ringing endorsement for macroprudential policy, according to a new working paper by Douglas Elliott of the Brookings Institution, Greg Feldberg of America’s Treasury Department and Andreas Lehnert of the Fed. Read the rest of this entry »

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May 31, 2013 at 9:50 pm

Lehman, PSI and the consequences of credit policy: The third lever of macroeconomics

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May 2nd 2013, 19:20  by G.I. | WASHINGTON, D.C.

By credit policy (or banking policy or financial policy) I mean anything that affects how the financial system influences aggregate demand. Of course, we’ve always known aggregate demand depends on both the central bank’s policy rate and the spread over that rate paid by households and firms. But before the cirisis the relationship between the policy rate and what borrowers paid was assumed to be either constant, or endogenous to monetary policy or the business cycle.

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Written by gregip

May 2, 2013 at 12:05 pm

Free exchange: Bond shelter

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America’s ability to issue debt is helped by a resemblance between Treasuries and money

Mar 10th 2012 | from the print edition

IN A financial landscape full of oddities, the prospect of America being paid interest by its creditors when its national debt is rocketing is one of the oddest. The Treasury recently disclosed it is exploring how to let investors enter negative yields when bidding at debt auctions. Clearly, demand for American government debt is driven by much more than a hunger for returns. Financial-market participants use Treasury bonds and bills as collateral to secure lending, for instance. And for risk-averse investors such as foreign central banks, money-market funds and retirees, America’s debt is uniquely suited to storing savings without much due diligence. In short, its government debt is a lot like money.

This analogy is not perfect, of course. Treasury bonds are less useful for buying things and government debt carries at least the possibility of default. But in terms of liquidity, risk and returns, few things come closer to money. In a recent paper* Arvind Krishnamurthy and Annette Vissing-Jorgensen of Northwestern University quantify the money-like properties of American debt by comparing its supply from 1926 to 2008 with market-based measures of safety and liquidity. They find that when the supply of Treasuries is lower (as measured by the debt-to-GDP ratio), demand goes up, widening the spread between their yields and those on AAA-rated corporate bonds. Read the rest of this entry »

Written by gregip

March 8, 2012 at 1:48 pm

Too big to fail: Fright simulator

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How to deal with a collapsing bank under the Dodd-Frank rules

Nov 12th 2011 | NEW YORK | from the print edition

[Greg Ip] OF ALL the questions unleashed by the bankruptcy of MF Global, a broker, the most important is whether America is prepared to deal with a bigger collapse, on the scale of another Lehman Brothers. The Dodd-Frank reform law creates an alternative to letting a systemically important firm go bankrupt, known as “resolution”. But it also prohibits bail-outs: shareholders and creditors must bear losses.

The Economist simulated the failure of a global bank at its Buttonwood Gathering on October 27th in New York (a video can be seen here). Larry Summers, a former treasury secretary and once Barack Obama’s top economic adviser, was joined by five other ex-officials and a prominent bank lawyer to play the parts of officials at the Treasury, the White House and regulatory agencies on a Friday afternoon in April 2013. The group was confronted with a teetering, $1 trillion bank-holding company called New Jefferson. Without their intervention, it would not open on Monday, an event guaranteed to send markets into free fall. Read the rest of this entry »

Written by gregip

November 10, 2011 at 10:24 am

Economics focus: Pulling for the home team

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Central-bank lending to government serves a valuable, though risky, purpose

Nov 5th 2011 | from the print edition

[Greg Ip] IT CANNOT be pleasant to start a new job with a continent’s fate resting on your shoulders. On November 1st, Mario Draghi’s first day as president of the European Central Bank (ECB), peripheral-government bond yields shot up and stockmarkets sank on fears that Greeks might reject a rescue plan agreed days earlier. On November 3rd, as The Economist went to press, Mr Draghi was presiding over his first policy meeting. Much is riding on what the ECB decides then and in coming weeks because it alone currently has the means to stem the intensifying crisis. It has bought Greek, Portuguese and Irish debt; since early August, it has also purchased Spanish and Italian bonds. But its purchases have been intermittent and begrudging. Without a firm commitment to buy as much as needed to prevent yields on Italian and Spanish bonds rising so high that both countries become insolvent, investors have less incentive to return. The ECB’s reluctance to make such a commitment is understandable: its legal mandate and doctrinal persuasion bar it from directly supporting governments. Yet throughout history central banks have been lenders of last resort to their governments. In 1694 the English monarchy was broke and in need of a loan so that it could wage war with France. A group of financiers agreed to lend the crown £1.2m in return for a partial monopoly on the issue of currency. Thus was born the Bank of England. Read the rest of this entry »

Written by gregip

November 3, 2011 at 9:20 am

Central banking and the crisis: Emergency manoeuvres

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With developed economies in dire straits, central bankers have taken the tiller. Not all of them are happy about that.

Aug 13th 2011 | from the print edition

[Greg Ip]

COMETH the hour, cometh the central bankers. On August 8th the European Central Bank (ECB) began buying Italian and Spanish bonds in an effort to stop the sovereign-debt crisis from crippling two of the continent’s largest economies. And a day later America’s Federal Reserve made an unprecedented commitment to keeping interest rates at more or less zero for two more years to keep a stalling economy out of recession.

In both cases the dramatic steps were taken in the face of political failures to get to the heart of the problems at hand. The fact that they took both banks well outside their normal zones of operation was underscored by the internal dissent both moves faced, dissent rarely seen in the consensus-driven world of central banking.

The initial market reaction was positive, at least on one side of the Atlantic. Yields on Italian and Spanish bonds fell sharply relative to Germany’s. In America Treasury yields fell and stocks rose—but not for long, as equity markets fell again on August 10th. No one should see this as a fundamental turnaround. The ECB’s earlier bond-buying hasn’t saved smaller countries from punitively high government-bond yields; the Fed’s previous interventions haven’t spurred a robust recovery. The big issues of America’s stagnant economy and Europe’s debt crisis remain in the hands of elected politicians who still seem inadequate to the task. But at least central banks have shown themselves ready and able to act.

The entire article is linked here.

America’s bail-out maths: Hard-nosed socialists

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America’s loathed TARP may turn a profit. That could be a problem

Jun 9th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] THE federal government is bowing out as America’s most hated fund manager. On June 3rd the Treasury reached an agreement to sell the rest of its holdings in Chrysler, a carmaker, to Italy’s Fiat. Ten days earlier it began to sell its stake in American International Group (AIG) through a public offering of the insurer’s shares. General Motors has returned to the stockmarket (the government still owns 26% of it) and Ally Financial, a former financing arm of GM and Chrysler, will soon follow. In March the Federal Reserve began selling mortgage-backed bonds it inherited from AIG.

Nobody liked the bail-outs, not even the
rescued. Tim Geithner, who oversaw them first at the New York Federal Reserve and now as treasury secretary, this week quipped to bankers: “I’m glad to not have as much equity in all of you as a group anymore.” “So are we,” one shot back. The public was the most outraged, yet on a narrow reckoning of profit and loss, taxpayers have little cause for complaint.

The entire article is linked here.

Written by gregip

June 9, 2011 at 3:47 pm


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