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UNDERSTANDING BANK CAPITAL: A PRIMER As the chart below shows, for the U.S. G-SIBs, in 2017 the leverage ratio was 8.24% under GAAP, but only 6.62% under IFRS. Back in 2012, the levels were lower and the disparity even larger: 6.17% vs. 3.88%. Put differently, under IFRS in 2012, the effective debt of HAS P2P LENDING ALREADY HIT THE WALL? The two biggest U.S. P2P lenders , Prosper and Lending Club, started operations in 2005 and 2007, respectively. Over the past decade, their business has grown so that they now originate more than $10 billion in loans per year. The public information provided by GAMESTOP: SOME PRELIMINARY LESSONS At its trough in April 2020, GameStop’s market capitalization was about $200 million, roughly in line with the firm’s net worth. Fast forward to Monday, January 11: the stock price neared $20 (more than seven times higher than nine months earlier),LEVERAGE AND RISK
May 02, 2016. A highly leveraged financial system is one prone to collapse. This notion underlies modern financial regulation: the control of systemic risk requires controlling leverage. And, it is what drives proposals for high capital requirements and to tax leverage. But, as is always the case with regulation, the devil is inthe details.
FREE RIDING IN FINANCE: A PRIMER Many features of our financial system—institutions like banks and insurance companies, as well as the configuration of securities markets—are a consequence of legal conventions (the rules about property rights and taxes) and the costs associated with obtaining and verifying information. When weGDP AT RISK
The level of the top dashed line hardly changes. In fact, over the entire 25-year period studied, the 95th percentile of the GDP growth distribution moves between a high of 5.99 percent and a low of 4.57 percent. This is in sharp contrast with the measure of GDP at risk (the lower dashed line), which ranges from +3.59 percent to ‑14.53percent.
MORAL HAZARD: A PRIMER The term moral hazard originated in the insurance business. It was a reference to the need for insurers to assess the integrity of their customers. When modern economists got ahold of the term, the meaning changed. Instead of making judgments about a person’s character, the focus shifted to inc MONEY, BANKING AND FINANCIAL MARKETSCOMMENTARYTHE AUTHORSLINKSPRIMERSCORE PRINCIPLESTABLE OF CONTENTS The work on this site is protected by the Creative Commons Attribution 4.0 International Public License. It may be copied, redistributed, remixed, transformed, or built upon for any purpose, so long as the work is attributed to Cecchetti and Schoenholtz, www.moneyandbanking.com, and any changes are indicated. Contact: admin@moneyandbanking.com. CONTAGION: BANK RUNS AND COVID-19 There are currently more than 85,000 confirmed cases of COVID-19 in at least 60 countries. The contagion rate could be double that of the common flu, with the fatality rate as much as 20 times higher. But, these estimates—the rate of transmission, the frequency with which people exhibit symptoms, and the consequence of becoming ill—are all OPTIMAL SETTLEMENT SPEED The following chart (based on their Table 1) shows a reduction of average daily liquidity needs in the January-April 2020 period by 61 percent, from $598 billion to $232 billion. Importantly, the additional netting benefits exceed this norm on high-volume trading days (like February 28 or March 30 of 2020), when liquidity needs aregreatest.
UNDERSTANDING BANK CAPITAL: A PRIMER As the chart below shows, for the U.S. G-SIBs, in 2017 the leverage ratio was 8.24% under GAAP, but only 6.62% under IFRS. Back in 2012, the levels were lower and the disparity even larger: 6.17% vs. 3.88%. Put differently, under IFRS in 2012, the effective debt of HAS P2P LENDING ALREADY HIT THE WALL? The two biggest U.S. P2P lenders , Prosper and Lending Club, started operations in 2005 and 2007, respectively. Over the past decade, their business has grown so that they now originate more than $10 billion in loans per year. The public information provided by GAMESTOP: SOME PRELIMINARY LESSONS At its trough in April 2020, GameStop’s market capitalization was about $200 million, roughly in line with the firm’s net worth. Fast forward to Monday, January 11: the stock price neared $20 (more than seven times higher than nine months earlier),LEVERAGE AND RISK
May 02, 2016. A highly leveraged financial system is one prone to collapse. This notion underlies modern financial regulation: the control of systemic risk requires controlling leverage. And, it is what drives proposals for high capital requirements and to tax leverage. But, as is always the case with regulation, the devil is inthe details.
FREE RIDING IN FINANCE: A PRIMER Many features of our financial system—institutions like banks and insurance companies, as well as the configuration of securities markets—are a consequence of legal conventions (the rules about property rights and taxes) and the costs associated with obtaining and verifying information. When weGDP AT RISK
The level of the top dashed line hardly changes. In fact, over the entire 25-year period studied, the 95th percentile of the GDP growth distribution moves between a high of 5.99 percent and a low of 4.57 percent. This is in sharp contrast with the measure of GDP at risk (the lower dashed line), which ranges from +3.59 percent to ‑14.53percent.
MORAL HAZARD: A PRIMER The term moral hazard originated in the insurance business. It was a reference to the need for insurers to assess the integrity of their customers. When modern economists got ahold of the term, the meaning changed. Instead of making judgments about a person’s character, the focus shifted to inc OPTIMAL SETTLEMENT SPEED The following chart (based on their Table 1) shows a reduction of average daily liquidity needs in the January-April 2020 period by 61 percent, from $598 billion to $232 billion. Importantly, the additional netting benefits exceed this norm on high-volume trading days (like February 28 or March 30 of 2020), when liquidity needs aregreatest.
COVID-19 STRESS TEST The COVID-19 shock is almost surely leading to a larger economic downturn than the Great Financial Crisis of 2007-09. However valuable, neither stress tests nor financial supervision in general has prepared us for a shock of this magnitude. These developments leave us profoundly concerned that the THE FED GOES TO WAR: PART 2 Financing all of the commercial paper plus three months of investment-grade corporate bond issuance requires less than $1.5 trillion. By our rough calculation, if U.S. commercial banks were to absorb all of this, the system’s average leverage ratio would fallfrom about 7.5% to
MARKET MAKER OF LAST RESORT In carrying out its obligations under the newly enacted CARES Act, the Fed is effectively transforming itself into a state bank that allocates credit to the nonfinancial sectors of the economy. Yet, picking winners and losers is not a sustainable assignment for independent technocrats. It is a role for fiscal authorities, notcentral bankers.
HAS THE U.S. DISTRIBUTION OF WEALTH WORSENED? Focusing on the period starting in 1989, there is an increase of 10.3 percentage for the top 1% share and of 8.9 percentage points for the top 10% share. The CMS estimates in red differ markedly. First, for the top 10%, the CMS share averages 10 percentage points lower. (The 1% share is 7½ percentage points lower.) GDP-LINKED BONDS: A PRIMER Gross government debt in advanced economies has surpassed 105% of GDP, up from less than 75% a decade ago. Some countries with especially large debts—including Greece (177%), Italy (133%) and Portugal (129%)—are viewed not only as a risk to CASH IS KING, BUT $100 BILLS ARE FOR CROOKS Over the past decade, the face value of U.S. dollar paper currency in public hands has doubled. Today, there is nearly $1.6 trillion in banknotes outstanding, more than 80 percent of which is in $100 bills (see chart)! In fact, there are thirty-nine $100 bills in circulation for each of the 326 million residents of the United States. NARROW BANKS WON'T STOP BANK RUNS Narrow Banks Won't Stop Bank Runs. April 28, 2014. Every financial crisis leads to a new call to restrict the activities of banks. One frequent response is to call for “narrow banks.”. That is, change the legal and regulatory framework in a way that severely limits HOUSE PRICES AT RISK House Prices at Risk. April 29, 2019. “The one thing that I don’t see now compared with 2005-2007 (when the housing market turned the last time) is a lot of talk about speculative excess. The financial crisis of 10 years ago was a record setter, and we don’t expect things like that to repeat.”. Robert Shiller, Bloomberg Interview,April
WALMART AND BANKING: IT'S TIME TO RECONSIDER The crucial concept is that the “Walmart Bank” that would provide banking services to the public would be organized as a separate subsidiary of the parent Walmart company. In essence, the parent Walmart company would be a bank holding company (BHC), which is a common ownership structure for U.S. banks. The Walmart Bank subsidiarywould be
MONEY, BANKING AND FINANCIAL MARKETSCOMMENTARYTHE AUTHORSLINKSPRIMERSCORE PRINCIPLESTABLE OF CONTENTS The work on this site is protected by the Creative Commons Attribution 4.0 International Public License. It may be copied, redistributed, remixed, transformed, or built upon for any purpose, so long as the work is attributed to Cecchetti and Schoenholtz, www.moneyandbanking.com, and any changes are indicated. Contact: admin@moneyandbanking.com. CONTAGION: BANK RUNS AND COVID-19 There are currently more than 85,000 confirmed cases of COVID-19 in at least 60 countries. The contagion rate could be double that of the common flu, with the fatality rate as much as 20 times higher. But, these estimates—the rate of transmission, the frequency with which people exhibit symptoms, and the consequence of becoming ill—are all COVID-19 STRESS TEST The COVID-19 shock is almost surely leading to a larger economic downturn than the Great Financial Crisis of 2007-09. However valuable, neither stress tests nor financial supervision in general has prepared us for a shock of this magnitude. These developments leave us profoundly concerned that the OPTIMAL SETTLEMENT SPEED The following chart (based on their Table 1) shows a reduction of average daily liquidity needs in the January-April 2020 period by 61 percent, from $598 billion to $232 billion. Importantly, the additional netting benefits exceed this norm on high-volume trading days (like February 28 or March 30 of 2020), when liquidity needs aregreatest.
THE FED GOES TO WAR: PART 2 Financing all of the commercial paper plus three months of investment-grade corporate bond issuance requires less than $1.5 trillion. By our rough calculation, if U.S. commercial banks were to absorb all of this, the system’s average leverage ratio would fallfrom about 7.5% to
FISCAL SPACE HAS LIMITS, TOO For the G-20 advanced economies, in just six months, the projected fiscal balance for 2020 deteriorated by 8.1 percentage points of GDP to -10.1 percent. This is almost surely the most rapid peacetime decline on record. The April projected U.S. balance of -13.5 percent is both the largest among advanced economies and the biggest since1945.
FREE RIDING IN FINANCE: A PRIMER Many features of our financial system—institutions like banks and insurance companies, as well as the configuration of securities markets—are a consequence of legal conventions (the rules about property rights and taxes) and the costs associated with obtaining and verifying information. When we UNDERSTANDING BANK CAPITAL: A PRIMER As the chart below shows, for the U.S. G-SIBs, in 2017 the leverage ratio was 8.24% under GAAP, but only 6.62% under IFRS. Back in 2012, the levels were lower and the disparity even larger: 6.17% vs. 3.88%. Put differently, under IFRS in 2012, the effective debt of MORAL HAZARD: A PRIMER The term moral hazard originated in the insurance business. It was a reference to the need for insurers to assess the integrity of their customers. When modern economists got ahold of the term, the meaning changed. Instead of making judgments about a person’s character, the focus shifted to inc CREDIT RATINGS AND CONFLICTS OF INTEREST And, at least so far, this aspect of the system seems to be working. But, as the evidence suggests, credit rating agencies are a different matter. As Baghai and Becker (BB) highlight, non-ratings revenues remain a source of conflict of interest. In 2015, for example, Moody’s reported $2.3 billion in ratings-related revenues forMoody’s
MONEY, BANKING AND FINANCIAL MARKETSCOMMENTARYTHE AUTHORSLINKSPRIMERSCORE PRINCIPLESTABLE OF CONTENTS The work on this site is protected by the Creative Commons Attribution 4.0 International Public License. It may be copied, redistributed, remixed, transformed, or built upon for any purpose, so long as the work is attributed to Cecchetti and Schoenholtz, www.moneyandbanking.com, and any changes are indicated. Contact: admin@moneyandbanking.com. CONTAGION: BANK RUNS AND COVID-19 There are currently more than 85,000 confirmed cases of COVID-19 in at least 60 countries. The contagion rate could be double that of the common flu, with the fatality rate as much as 20 times higher. But, these estimates—the rate of transmission, the frequency with which people exhibit symptoms, and the consequence of becoming ill—are all COVID-19 STRESS TEST The COVID-19 shock is almost surely leading to a larger economic downturn than the Great Financial Crisis of 2007-09. However valuable, neither stress tests nor financial supervision in general has prepared us for a shock of this magnitude. These developments leave us profoundly concerned that the OPTIMAL SETTLEMENT SPEED The following chart (based on their Table 1) shows a reduction of average daily liquidity needs in the January-April 2020 period by 61 percent, from $598 billion to $232 billion. Importantly, the additional netting benefits exceed this norm on high-volume trading days (like February 28 or March 30 of 2020), when liquidity needs aregreatest.
THE FED GOES TO WAR: PART 2 Financing all of the commercial paper plus three months of investment-grade corporate bond issuance requires less than $1.5 trillion. By our rough calculation, if U.S. commercial banks were to absorb all of this, the system’s average leverage ratio would fallfrom about 7.5% to
FISCAL SPACE HAS LIMITS, TOO For the G-20 advanced economies, in just six months, the projected fiscal balance for 2020 deteriorated by 8.1 percentage points of GDP to -10.1 percent. This is almost surely the most rapid peacetime decline on record. The April projected U.S. balance of -13.5 percent is both the largest among advanced economies and the biggest since1945.
FREE RIDING IN FINANCE: A PRIMER Many features of our financial system—institutions like banks and insurance companies, as well as the configuration of securities markets—are a consequence of legal conventions (the rules about property rights and taxes) and the costs associated with obtaining and verifying information. When we UNDERSTANDING BANK CAPITAL: A PRIMER As the chart below shows, for the U.S. G-SIBs, in 2017 the leverage ratio was 8.24% under GAAP, but only 6.62% under IFRS. Back in 2012, the levels were lower and the disparity even larger: 6.17% vs. 3.88%. Put differently, under IFRS in 2012, the effective debt of MORAL HAZARD: A PRIMER The term moral hazard originated in the insurance business. It was a reference to the need for insurers to assess the integrity of their customers. When modern economists got ahold of the term, the meaning changed. Instead of making judgments about a person’s character, the focus shifted to inc CREDIT RATINGS AND CONFLICTS OF INTEREST And, at least so far, this aspect of the system seems to be working. But, as the evidence suggests, credit rating agencies are a different matter. As Baghai and Becker (BB) highlight, non-ratings revenues remain a source of conflict of interest. In 2015, for example, Moody’s reported $2.3 billion in ratings-related revenues forMoody’s
UNDERSTANDING HOW CENTRAL BANKS USE THEIR BALANCE SHEETS This comment is jointly authored by Stephen G. Cecchetti and Sir Paul M.W. Tucker . Central banks have been reinvented over the past decade, first in response to the financial crisis, and then as a consequence of Covid-19. While trying to maintain monetary stability and promoteeconomic recover
MMLR — COMMENTARY — MONEY, BANKING AND FINANCIAL MARKETSEconomics Blogs
UNDERSTANDING BANK CAPITAL: A PRIMER Over the past 40 years, U.S. capital markets have grown much faster than banks, so that banks’ share of credit to the private nonfinancial sector has dropped from 55% to 34% (see BIS statistics here ). Nevertheless, banks remain a critical part of the financial system. They operate the pa FISCAL SPACE HAS LIMITS, TOO In the battle against the economic impact of COVID-19, governments around the world are pulling out all the stops. In advanced economies, leading central banks have pushed interest rates to zero or below. And, a recent IMF estimate puts the combination of discretionary spending and automatic fiscaCHAPTERS 15-19
Exchange-Rate Policy and the Central Bank. 06/25/18. Sudden Stops: A Primer on Balance-of-Payments Crises. 06/11/18. Banks and Money, Or Watch out What You Wish For. 01/30/17. CYBER RISK, FINANCIAL STABILITY AND THE PAYMENTS SYSTEM Cyber risk remains at the top of the list of risks to the financial system, and the financial system is well known as the primary target for hackers (see here , here and here ). In response, financial institutions expend huge resources on protecting their information systems—by one estimate , w PATIENCE VS FAIT: WHICH IS KEY IN THE NEW FOMC STRATEGY The Federal Open Market Committee’s (FOMC) policy strategy update incorporates two key changes. The first is a shift to flexible average inflation targeting (FAIT), while the second is a move to what we will call a patient shortfall strategy . FAIT represents a shift in the direction of price-l HAS THE U.S. DISTRIBUTION OF WEALTH WORSENED? Focusing on the period starting in 1989, there is an increase of 10.3 percentage for the top 1% share and of 8.9 percentage points for the top 10% share. The CMS estimates in red differ markedly. First, for the top 10%, the CMS share averages 10 percentage points lower. (The 1% share is 7½ percentage points lower.) WHY A GOLD STANDARD IS A VERY BAD IDEA Finally, consider a crude measure of financial stability: the frequency of banking crises. From 1880 to 1933, there were at least 5 full-fledged banking panics: 1893, 1907, 1930, 1931, and 1933. Including the savings and loan crisis of the 1980s, in the past half century, there have been two. So, on every score, the gold standardperiod was
MANAGING RISK AND COMPLEXITY: LEGAL ENTITY IDENTIFIER Prior to the financial crisis, even an informed observer might have naïvely believed that the CEOs of big financial firms could simply push a button to view the current exposure of their firms to any other firms in the world. Or, if less technologically advanced, they could call their chief risk off MONEY, BANKING AND FINANCIAL MARKETSCOMMENTARYTHE AUTHORSLINKSPRIMERSCORE PRINCIPLESTABLE OF CONTENTS Moneyandbanking.com is the site where you can learn about finance and economics. We provide commentary on events in the news and on questions of more lasting interest. CONTAGION: BANK RUNS AND COVID-19 There are currently more than 85,000 confirmed cases of COVID-19 in at least 60 countries . Yet, we know very little about this pathogen, except that everyone is worried. And, with the number of cases rising each day, intensifying concerns probably will lead many people to behave in ways that under COVID-19 STRESS TEST The COVID-19 shock is almost surely leading to a larger economic downturn than the Great Financial Crisis of 2007-09. However valuable, neither stress tests nor financial supervision in general has prepared us for a shock of this magnitude. These developments leave us profoundly concerned that the OPTIMAL SETTLEMENT SPEED Over the past year, a series of events has shifted the attention of both experts and laypersons to the arcane processes that support trading and settlement in the U.S. securities markets. The massive volume of U.S. Treasury sales in March 2020 FISCAL SPACE HAS LIMITS, TOO In the battle against the economic impact of COVID-19, governments around the world are pulling out all the stops. In advanced economies, leading central banks have pushed interest rates to zero or below. And, a recent IMF estimate puts the combination of discretionary spending and automatic fisca THE FED GOES TO WAR: PART 2 In this note, we update our earlier comment on the first set of Fed actions that appeared on March 23 just as a slew of new ones arrived. While most of the changes represent simple extensions of previous tools, the Fed also has introduced facilities that are going to involve it deeply in the allo FREE RIDING IN FINANCE: A PRIMER Many features of our financial system—institutions like banks and insurance companies, as well as the configuration of securities markets—are a consequence of legal conventions (the rules about property rights and taxes) and the costs associated with obtaining and verifying information. When we UNDERSTANDING BANK CAPITAL: A PRIMER Over the past 40 years, U.S. capital markets have grown much faster than banks, so that banks’ share of credit to the private nonfinancial sector has dropped from 55% to 34% (see BIS statistics here ). Nevertheless, banks remain a critical part of the financial system. They operate the pa MORAL HAZARD: A PRIMER The term moral hazard originated in the insurance business. It was a reference to the need for insurers to assess the integrity of their customers. When modern economists got ahold of the term, the meaning changed. Instead of making judgments about a person’s character, the focus shifted to inc CREDIT RATINGS AND CONFLICTS OF INTEREST 0 0 1 117 671 NYU Stern 5 1 787 14.0 Normal 0 false false false EN-USJA X-NONE
MONEY, BANKING AND FINANCIAL MARKETSCOMMENTARYTHE AUTHORSLINKSPRIMERSCORE PRINCIPLESTABLE OF CONTENTS Moneyandbanking.com is the site where you can learn about finance and economics. We provide commentary on events in the news and on questions of more lasting interest. CONTAGION: BANK RUNS AND COVID-19 There are currently more than 85,000 confirmed cases of COVID-19 in at least 60 countries . Yet, we know very little about this pathogen, except that everyone is worried. And, with the number of cases rising each day, intensifying concerns probably will lead many people to behave in ways that under COVID-19 STRESS TEST The COVID-19 shock is almost surely leading to a larger economic downturn than the Great Financial Crisis of 2007-09. However valuable, neither stress tests nor financial supervision in general has prepared us for a shock of this magnitude. These developments leave us profoundly concerned that the OPTIMAL SETTLEMENT SPEED Over the past year, a series of events has shifted the attention of both experts and laypersons to the arcane processes that support trading and settlement in the U.S. securities markets. The massive volume of U.S. Treasury sales in March 2020 FISCAL SPACE HAS LIMITS, TOO In the battle against the economic impact of COVID-19, governments around the world are pulling out all the stops. In advanced economies, leading central banks have pushed interest rates to zero or below. And, a recent IMF estimate puts the combination of discretionary spending and automatic fisca THE FED GOES TO WAR: PART 2 In this note, we update our earlier comment on the first set of Fed actions that appeared on March 23 just as a slew of new ones arrived. While most of the changes represent simple extensions of previous tools, the Fed also has introduced facilities that are going to involve it deeply in the allo FREE RIDING IN FINANCE: A PRIMER Many features of our financial system—institutions like banks and insurance companies, as well as the configuration of securities markets—are a consequence of legal conventions (the rules about property rights and taxes) and the costs associated with obtaining and verifying information. When we UNDERSTANDING BANK CAPITAL: A PRIMER Over the past 40 years, U.S. capital markets have grown much faster than banks, so that banks’ share of credit to the private nonfinancial sector has dropped from 55% to 34% (see BIS statistics here ). Nevertheless, banks remain a critical part of the financial system. They operate the pa MORAL HAZARD: A PRIMER The term moral hazard originated in the insurance business. It was a reference to the need for insurers to assess the integrity of their customers. When modern economists got ahold of the term, the meaning changed. Instead of making judgments about a person’s character, the focus shifted to inc CREDIT RATINGS AND CONFLICTS OF INTEREST 0 0 1 117 671 NYU Stern 5 1 787 14.0 Normal 0 false false false EN-USJA X-NONE
UNDERSTANDING HOW CENTRAL BANKS USE THEIR BALANCE SHEETS This comment is jointly authored by Stephen G. Cecchetti and Sir Paul M.W. Tucker . Central banks have been reinvented over the past decade, first in response to the financial crisis, and then as a consequence of Covid-19. While trying to maintain monetary stability and promoteeconomic recover
MMLR — COMMENTARY — MONEY, BANKING AND FINANCIAL MARKETSEconomics Blogs
UNDERSTANDING BANK CAPITAL: A PRIMER Over the past 40 years, U.S. capital markets have grown much faster than banks, so that banks’ share of credit to the private nonfinancial sector has dropped from 55% to 34% (see BIS statistics here ). Nevertheless, banks remain a critical part of the financial system. They operate the paCHAPTERS 15-19
Economics Blogs
FISCAL SPACE HAS LIMITS, TOO In the battle against the economic impact of COVID-19, governments around the world are pulling out all the stops. In advanced economies, leading central banks have pushed interest rates to zero or below. And, a recent IMF estimate puts the combination of discretionary spending and automatic fisca PATIENCE VS FAIT: WHICH IS KEY IN THE NEW FOMC STRATEGY The Federal Open Market Committee’s (FOMC) policy strategy update incorporates two key changes. The first is a shift to flexible average inflation targeting (FAIT), while the second is a move to what we will call a patient shortfall strategy . FAIT represents a shift in the direction of price-l CYBER RISK, FINANCIAL STABILITY AND THE PAYMENTS SYSTEM Cyber risk remains at the top of the list of risks to the financial system, and the financial system is well known as the primary target for hackers (see here , here and here ). In response, financial institutions expend huge resources on protecting their information systems—by one estimate , w HAS THE U.S. DISTRIBUTION OF WEALTH WORSENED? Wealth inequality in the United States is obvious to everyone. The Federal Reserve’s triennial Survey of Consumer Finance (SCF) documents the glaring and persistent divide between rich and poor, confirming that ownership of financial and real assets in the United States has been highly concentrateLEVERAGE AND RISK
0 0 1 116 662 NYU Stern 5 1 777 14.0 Normal 0 false false false EN-USJA X-NONE
MANAGING RISK AND COMPLEXITY: LEGAL ENTITY IDENTIFIER Prior to the financial crisis, even an informed observer might have naïvely believed that the CEOs of big financial firms could simply push a button to view the current exposure of their firms to any other firms in the world. Or, if less technologically advanced, they could call their chief risk off* Home
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Central Bank to the World: Supplying Dollars in the COVID Crisis6 days ago
In his comments at Jackson Hole last year, then-Bank of England Governor Mark Carney highlighted the continuing dominance of the U.S. dollar: it accounts for one-half of global trade invoicing; two thirds of emerging market external debt, official foreign exchange reserves, and global securities issuance; and nearly 90 percent of (one leg of) foreign exchange transactions. It also is the basis for the Global Dollar system (see our earlierpost
).
The BIS reports
that
short-term U.S. dollar liabilities of non-U.S. banks total $15 trillion. Foreign exchange forward contracts and swaps—with a grossnotional value of
more than $75 trillion—add substantially further to U.S. dollar exposures (see here ). And, the U.S. Treasury reports that foreigners hold more than $7 trillion of U.S. Treasury securities. To put these numbers into perspective, total assets of U.S. depository institutions are currently $20 trillion. In other words, the U.S. dollar financial system outside of the United States is larger than the Americanbanking system.
Like it or not, the Federal Reserve is the dollar lender of last resort not just for the United States, but for the entire world. The Fed’s role is _not_ altruistic. Instead, it reflects the near-certainty that, in a world of massive cross-border capital flows, dollar funding shortages anywhere in the world will spill back into the United States through fire sales of dollar assets, a surge in the value of the dollar, increased domestic funding costs, or all three. The Fed’s extraordinary efforts to counter the COVID-19 crisis include aggressive actions to counter dollar shortages outside the United States. In this post, we explore those actions, including the supply of dollar liquidity swaps to 14 central banks (“friends of the Fed”) and—to limit sales that might disrupt the Treasury market—the introduction of a repo facility to provide dollars to the others. We also note the challenges facing countries outside the small inner circle that do not have immediate access to the Fed’s swaplines….
Inflation is not (and should not be) a key worry todayA week ago
A very simple version of 1960s monetarism has two elements. First, controlling money growth is necessary and sufficient to control inflation. Second, leaving aside a financial crisis, the monetary base―the sum of currency in circulation and commercial bank deposits at the central bank―determines the quantity of money. Putting those together means that, in order to control inflation, all central bankers need to do is ensure that their liabilities grow at the appropriate rate. Conversely, when the central bank’s balance sheet grows quickly, inflation inevitably follows. This simple monetarist reasoning was still on display in 2010, when Ben Bernanke received this letter from a group of 24 economists warning against further large-scale asset purchases by the Fed. At that stage, the central bank’s assets exceeded 250% of their level in September 2008. Over just over two years, the Fed had purchased roughly $400 billion in Treasury securities and $1 trillion in federally guaranteed mortgage-backed securities. But, as Bernanke explained at the time,
the purpose of these asset purchases was to aid the economy in recovering from the crisis-induced recession. Moreover, in contrast to prior norms, since October 2008 the Fed had been paying interest onreserves
,
raising the opportunity cost for banks to lend. Subsequent experience proved the letter writers very wrong. The Fed’s balance sheet continued to grow, peaking at $4.5 trillion in early 2015. And, over the decade just ended, inflation (measured by the Fed’s preferred consumption expenditures price index ) averaged 1.6%―below the central bank’s long-run goal of 2%. If anything, in recent years, and despite massive central bank balance sheet expansions, inflation both in the United States and in other advanced economies has been toolow, not too high.
With central bank balance sheets now surging again, we recount this history in the hopes of blunting any inflation concerns, which we see as profoundly misguided. Over the six weeks ending April 22, the Fed’s assets have grown by the same amount as they did from September 2008 to March 2013. While this does raise some serious concerns, inflation is not high among them…. To read the full article, click the headline. Further commentary, click here.
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