Greg Ip

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

Procyclicality everywhere

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Jul 1st 2010, 13:02 by G.I. | WASHINGTON, DC

FISCAL austerity in a time of near recession is a bad idea when monetary policy is helpless as Brad DeLong has been pointing out for oh, several years now. Let’s broaden this debate about procyclicality beyond fiscal and monetary policy. As we saw during the crisis, both regulatory policy (forbearance) and credit policy (bail-outs and liquidity) can also be used for macroeconomic stimulus. How are they doing now: still stimulating? Unfortunately, no: they are showing symptoms of the same inchoate procyclicality as fiscal policy.

The latest sign of this was the hasty decision by House and Senate negotiators to kill the Troubled Asset Relief Programme, effective immediately, to help pay for financial reform after Republican senators blocked the original $19 billion bank tax. As it was, TARP was already due to wind up in October. I don’t think we’ll need to bail anyone out anytime soon, and resolution authority in the financial-reform plan is supposed to make TARP unnecessary. But if what we’re seeing in Europe is any indication, it’s way too early to take the bail-out option off the table, and if there is a second leg to this crisis, the odds of getting something like TARP passed again in Congress are close to zero. It’s not a smart idea to throw a spare tire like this away when there’s no prospect of getting another.

What about regulatory policy? It, too, seems to be going in the wrong direction. The Dodd-Frank bill has lots of good intentions about ending procyclical regulation, with its deposit insurance assessments and capital requirements for example. But on balance it will impose a lot of new burdens on loan origination, and (along with Basel 3) force banks to raise a lot of additional capital. Like deficit reduction, both must be done, eventually, to ensure financial stability. But done too hastily, they compound lenders’ preexisting inclination to lend less. I’m sure the bank industry is exaggerating these risks, and regulators have leeway about how fast they impose these new requirements. But the direction, and the bias, is clear: more capital, sooner, rather than later. This is not going to help the supply of credit, which continues to contract.

 The original post is here.

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Written by gregip

July 1, 2010 at 8:00 am

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