The return of moderation: Sea of tranquillity

Volatility has disappeared from the economy and markets. That could be a problem

May 24th 2014 | WASHINGTON, DC | From the print edition
A DECADE ago, the business cycle was an endangered species. Recessions in the rich world had become rare, shallow and short; inflation was predictably low and boring. Economists dubbed this the “Great Moderation” and gave credit for it to deft macroeconomic management by central banks. Such talk, naturally, ended abruptly with the financial crisis.

But obituaries of the Great Moderation may have been premature. Since America emerged from recession in 2009, its growth, although low, has been as stable as during the Great Moderation’s heyday, from the early 1980s to 2007, judging by the volatility of quarterly gross domestic product (see chart) and monthly job creation. That, in turn, has pushed the gyrations of stock and bond prices to their lowest levels since 2007. The trend is less pronounced outside America, but economists at Goldman Sachs nonetheless find that pre-crisis levels of tranquillity have returned in Germany, Japan and Britain.

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Supersize me

Central banks’ swollen balance-sheets have their uses

May 17th 2014 | WASHINGTON, DC | From the print edition

AMONG the many questions surrounding the Federal Reserve’s programme of quantitative easing (QE) is what will happen to the vast stockpile of bonds it has accumulated in its efforts to lower interest rates. Officials at the bank have never been comfortable with their gargantuan balance-sheet. Since 2011 they have maintained that once QE has achieved its aims, the Fed would shrink back to its former size. As its bonds mature, the story goes, they will disappear from its balance-sheet, along with the money the Fed created to pay for them. A new paper by two former advisers to the central bank, however, suggests a potential plot twist.

The opposite of insurance

A new book argues that household debt, not broken banks, fuelled the recent recession

May 17th 2014 | From the print edition:

BEFORE Ben Bernanke found himself trying to prevent a second Great Depression as chairman of the Federal Reserve, he had become well known in economic circles for explaining why the first one happened. In a paper published in 1983, Mr Bernanke blamed the collapse of the banking system for constricting the supply of credit, which “helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression”.
The notion that financial crises are transmitted to the broader economy by the “bank-lending channel” has dominated subsequent policymaking. It is why Mr Bernanke fought so hard to stop the panic in 2008 and to recapitalise the banking system afterwards. Tim Geithner, who was at the Fed with Mr Bernanke and then became Barack Obama’s treasury secretary, spends much of his new memoir reiterating their argument (see article): “When the financial system stops working, credit freezes, savings evaporate and demand for goods and services disappears, which leads to lay-offs and poverty and pain.”
Another new book*, by Atif Mian of Princeton University and Amir Sufi of the University of Chicago, challenges this orthodoxy.

Review: Tim Geithner’s Stress Test

A former treasury secretary tells all

May 17th 2014 | 

Stress Test: Reflections on Financial Crises. By Timothy Geithner. Crown; 580 pages; $35. Random House Business Books; £25. Buy from Amazon.com,Amazon.co.uk

THE financial crisis that began with the collapse of America’s mortgage market was just one of many episodes of recent financial mayhem, from the Mexican and Asian financial crises of the 1990s to the euro crisis and America’s near-default in the summer of 2011.

To draw common lessons from such disparate events, it helps to have had a hand in responding to them. Tim Geithner, President Barack Obama’s former treasury secretary, has certainly done so, and it shows. Consider the moment when he was trying to negotiate a deal to keep a bank from cutting off funding to Countrywide, a big mortgage lender. Angelo Mozilo, Countrywide’s chief, brought to mind Thailand’s bewildered finance minister at the start of the Asian financial crisis a decade earlier: Mr Mozilo seemed “overwhelmed and unclear about what was happening,” Mr Geithner writes in “Stress Test”. That sort of battlefield observation cannot be learned from briefing books; it is what makes this less a memoir and more a how-to manual for anyone faced with a financial crisis.

The author has always been something of an enigma. At a state dinner in 2011, Barbra Streisand told him he must be alright because he was a Brooklyn Jew. It was “kind of her,” he writes, “except that I’m not Jewish and I’ve never lived in Brooklyn.” Congressmen often assumed he was an investment banker, when in fact he had spent almost his entire life in public service. Perhaps his lack of political or economic conviction is to blame; he holds no lasting partisan allegiances, and found his one university economics course “dreary”.

Mr Geithner is good under pressure, though. He became a point man for Robert Rubin and Larry Summers during the Mexican and Asian financial crises in the 1990s, and, as president of the Federal Reserve Bank of New York and then treasury secretary (he stepped down in 2013), he was a central player in America’s own crises. Though often overcome with fear, dread and nausea, Mr Geithner seems to thrive in the cauldron of crisis. When the stress of the Asian crisis ebbed briefly in 1998, he took up triathlons to compensate.

Mr Geithner was known for his brutal candour, and as an author, he does not disappoint. At one meeting he realised that John Thain, Merrill Lynch’s chief, did not know the name of his chief risk officer who was sitting next to him. It was, he writes, “an awkward moment”, and explained the sorry state of Merrill’s risk management. Mr Geithner also takes the opportunity to respond to his many naysayers. He describes Neil Barofsky, the self-styled crusading inspector-general of the Treasury’s bail-out programme, as being “untainted by financial knowledge or experience…outraged by every programme, uninterested in context.”

Mr Geithner has been criticised for doing too little to rein in the banks, in particular Citigroup, that he supervised before the crisis, and for doing them too many favours afterwards. He concedes the first point, a bit, admitting that Mr Rubin’s presence on its board “gave Citi an undeserved aura of competence in my mind”. On the second, he is defiant. Saving the financial system was essential to saving the economy, and his book is full of charts and notes that try to prove his point.

Mr Geithner is hardest on himself for failing to persuade the public of this point, blaming his failings as a public speaker and his “empathy mistakes”. He cuts off one liberal advocate who is trying to describe the human costs of the crisis and demands practical advice instead. When people complained that Mr Obama was not doing enough, he responded defensively instead of listening. “You’re only making it worse,” he was told.

Mr Geithner will not convince his most strident critics, but less obdurate readers will find his advice invaluable. Governments should not respond to every financial failure, he counsels, but must be ready to intervene with overwhelming force to keep them from becoming a systemic crisis. An institution that is important, but badly run, should not be allowed to fail if the government lacks the tools to protect other similar institutions. Letting it fail to prevent moral hazard will just trigger more runs, bigger bail-outs and, ultimately, more moral hazard.

Putting such advice to use is no easy task. How can anyone know when the failure of one firm is an isolated event or the start of a broader conflagration? Mr Geithner leans towards the latter, though it makes him, in others’ eyes, the “walking embodiment of moral hazard”. Unlike Hank Paulson, George Bush’s treasury secretary, and Ben Bernanke, the then Fed chairman, Mr Geithner would have used public money to help another bank take over failing Lehman Brothers.

In 2008 he had the right instinct. But taken too far, it affirms suspicions that many firms and markets are “too big to fail”—surely an invitation to future crises. Mr Geithner thinks the financial reforms he helped design will enable his successors to shut down big firms without the chaos of Lehman’s collapse or the moral hazard of bail-outs. Only the next crisis will prove whether he is right.

The original article is linked here.

 

Fannie Mae and Freddie Mac: Return of the toxic twins

Mel Watt wants easier credit for homebuyers. What could go wrong?

May 17th 2014 | WASHINGTON, DC |

THEIR reckless investments helped inflate the housing bubble. Their collapse in 2008 triggered a government takeover and a costly bail-out. Many people would like to see Fannie Mae and Freddie Mac, America’s twin mortgage giants, abolished. But their new regulator wants the two firms, which guarantee 55% of new American mortgages, to promote easier credit—again.

Mel Watt, a Democratic ex-congressman, took over as boss of the Federal Housing Finance Agency (FHFA) this year. He replaced Ed DeMarco, who had focused on shrinking the twins and recovering the bail-out cash. On May 13th Mr Watt signalled a break with all that.

Homes in New York: Gimme shelter

Bill de Blasio’s plan for cheap homes rests on shaky foundations

May 10th 2014 | From the print edition

“WE ARE approaching a crisis in the housing situation,” a member of a task force set up by New York city’s mayor declared. “Unless radical action is taken, something drastic will happen.” Those words were spoken in 1920; but to listen to Bill de Blasio, the current mayor, not much has changed. When he campaigned against the growing gap between the rich and the rest last year, soaring apartment prices were his most potent exhibit.

On May 5th he revealed what he wants to do about it: he plans to add 200,000 more affordable housing units over the coming decade by preserving existing ones and encouraging the construction of more.
New York has certainly become less affordable. Between 2005 and 2012, the median inflation-adjusted rent in the city rose 11%, while the median renter’s income rose only 2%, according to the Furman Centre at New York University. It reckons that 54% of New York tenants spent more than 30% of their income on rent (the usual cutoff for “affordable”), up from 40% in 2000.
Plutocrats bear some of the blame. Like London, Miami and other desirable cities, New York has become a playground for billionaires. Developers can earn more selling luxury flats to oligarchs than basic ones to firefighters. But as a driver of the housing shortage, inequality is less important than demand and supply. On the demand side, New York has an enviable problem: people desperately want to live there. After decades of decline, its population resumed growing in the 1990s, reaching a new high of 8m in 2000, 8.2m in 2010 and 8.4m last year. Neither the attack on the Twin Towers, nor Hurricane Sandy nor, it seems, even the financial crisis have put people off. Talented and ambitious folk have more fun, and make more money, when living close to each other.

Global banking: Inglorious isolation

To avoid another crisis, the Fed further fragments global finance

Feb 22nd 2014 | Washington, DC | From the print edition

THE economics of international banking are straightforward enough: raise funds in countries where they are cheap, lend where they are dear. Done right, this is both lucrative for bankers and good for the world, by channelling savings to their most productive use.

Those economics have begun to come apart over the past five years, battered first by the excesses of profit-seeking bankers and now by regulators. On February 18th the Federal Reserve Board voted to “ring-fence” foreign banks’ American operations, forcing them to meet the same standards for capital and liquidity as American banks, rather than allowing them to rely on their parents’ buffers.

Closing the gap: Unemployment in America

America’s labour market has suffered permanent harm

Feb 15th 2014 | From the print edition
IT TOOK barely a month for the bubble of optimism that formed over the American economy at the start of the year to deflate. Job growth slowed sharply in December, and stayed weak in January, suggesting more than bad weather was to blame.
The unemployment rate, though, tells a much cheerier story: it dropped to 6.6% in January from 7% in November. Indeed, it could soon hit the Federal Reserve’s 6.5% threshold at which it may consider raising interest rates.

Saudi America: The economics of shale oil

The benefits of shale oil are bigger than many Americans realise. Policy has yet to catch up

Feb 15th 2014 | MIDLAND, TEXAS | From the print edition
DENNIS LITHGOW is an oil man, but sees himself as a manufacturer. His factory is a vast expanse of brushland in west Texas. His assembly line is hundreds of brightly painted oil pumps spaced out like a city grid, interspersed with identical clusters of tanks for storage and separation. Through the windscreen of his truck he points out two massive drilling rigs on the horizon and a third about to be erected. Less than 90 days after they punch through the earth, oil will start to flow.
What if they’re dry? “We don’t drill dry holes here,” says Mr Lithgow, an executive for Pioneer Natural Resources, a Texan oil firm. In the conventional oil business, the riskiest thing is finding the stuff. The “tight oil” business, by contrast, is about deposits people have known about for decades but previously could not extract economically.

Assortative mating: Sex, brains and inequality

How sexual equality increases the gap between rich and poor households

Feb 8th 2014 | WASHINGTON, DC | From the print edition

 IN “MAD MEN”, a series about the advertising industry in the 1960s, women are underpaid, sexually harassed and left with the kids while their husbands drunkenly philander. Sexual equality was a distant dream in those days. But when Don Draper, the show’s star, dumps the brainy consultant he has been dating and marries his secretary, he strikes a blow for equality of household income.Nowadays, successful men are more likely to marry successful women. This is a good thing. It reflects the fact that there are more high-flying women. Male doctors in the 1960s married nurses because there were few female doctors. Now there are plenty. Yet assortative mating (the tendency of similar people to marry each other) aggravates inequality between households—two married lawyers are much richer than a single mother who stacks shelves. A new study* of hundreds of thousands of couples investigates the link.