Finance Basic To Advance Level Knowledge

Back on the Eurozone crisis front we find find some great lines from Michael Darda and Marshal Auerback on the latest developments.  Here is Darda from his latest newsletter: Although there seems to be some optimism in European equity markets that Thursday’s finance ministers’ powwow will bring a “shock and awe”  announcement, we would not wait to exhale. As we’ve argued before, eurozone nominal GDP is about 10% below trend. This has caused tax revenues to collapse and debt burdens to mushroom. Since the ECB has tightened liquidity and raised rates instead of lowering  them and adding liquidity,  we simply  see  no path to  a  recovery in nominal GDP (and solvency) for the European periphery, whose costs and prices are out of whack with the rest  of the eurozone. Rearranging the deckchairs with  alphabet soup bailout schemes and fiscal austerity measures has failed for 14 months and will continue to fail unless accompanied by  a m...

Thanks to this David Leonhardt article , the balance sheet recession view is once again getting much discussion .  This view holds that households acquired excessive amount of debt during the housing boom, the value of their assets plummeted during the crash, and now their balance sheet are in need of great repair.  Consequently, the U.S. economy is undergoing a great deleveraging cycle that is slowly restoring household balance sheets.  Some take this view to also mean that only time can heal the wounds of a balance sheet recession.  I don't like this view for two reasons.  First, it is at best an incomplete story.  For every household debtor deleveraging there is a creditor getting more payments.  Yes, household debtors have cut back on spending, but so have creditors.  The creditors could in principle provide an increase in spending to offset the decrease in  debtors' spending.  They aren't and thus the economic recovery is sta...

Or is it the regime uncertainty that many observers attribute to the Obama administration? The answer from several recent surveys say it is weak aggregate demand.  First, a Wall Street Journal survey shows most economists see the lackluster recovery as a the result of weak aggregate demand rather than uncertainty over government policy:   The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey...In the survey, conducted July 8-13 and released Monday, 53 economists—not all of whom answer every question—were asked the main reason employers aren't hiring more readily. Of the 51 who responded to the question, 31 cited lack of demand (65%) and 14 (27%) cited uncertainty about government policy. The others said hiring overseas was more appealing. This conclusion is supported by the findings in the most recent NFIB's survey of sma...

Chairman Bernanke's testimony before Congress this week generated much attention because he mentioned the Fed remained open to further monetary easing.  Many observers interpreted this statement as Bernanke opening the door for QE3.  Though this was the big news from Bernanke's visit to Congress, there were four other important insights in his testimony worth mentioning too.  First , Bernanke affirmed his new-found love for the portfolio channel of monetary policy.   The idea behind this channel is that through its purchases of longer-term securities the Fed can cause investor's to rebalance their portfolios toward riskier but higher yielding assets like stocks and capital.  Eventually, these asset prices would increase and their yields drop providing a boost to consumption and investment spending . Here is Bernanke: The Federal Reserve's acquisition of longer-term Treasury securities boosted the prices of such securities and caused longer-term Treasury yie...

I was looking at the official transcript of Ben Bernanke's last press conference in June and found this exchange interesting: AKIHIRO OKADA.  Mr. Chairman, I am Akihiro Okada with Yomiuri Shimbun, a Japanese newspaper.  During the Japanese lost decade in the 1990s, you strongly criticized Japan’s lack of policies.  Recently Larry Summers suggested in his column that the U.S. is in the middle of its own lost decade.  Based on those points with QE2 ending, what do you think of Japan’s experience and the reality facing the U.S.?  Are there any historical lessons that we should be reminded about?  Thank you. CHAIRMAN BERNANKE.  Well, I’m a little bit more sympathetic to central bankers now than I was 10 years ago.  I think it’s very important to understand that in my comments—both in my comment in the published comment a decade ago as well as in my speech in 2002 about deflation—my main point was that a determined central ba...

The anemic economic recovery can be tied to the ongoing elevated demand for safe and liquid assets.  Paul Krugman and Brad DeLong refer to this phenomenon as a liquidity trap; I like to call it an excess money demand problem.  Either way the key problem is that there are households, firms, and financial institutions who are sitting on an unusually large share of money and money-like assets and continue to add to them.  This elevated demand for such assets keeps aggregate demand low and, in turn, keeps the entire term structure of neutral interest rates depressed too.  (Note, that since term structure of neutral interest rates is currently low, it makes no sense to talk about raising interest rates soon.  That would push interest rates above their neutral level and further choke off the recovery.)   As Scott Sumner notes , the weak aggregate demand also makes structural problems more pronounced.   Many observers, for example, claim that firms...

The demand for money and money-like assets remains elevated as indicated in the figure below.  This means nominal spending remains depressed.  Until this changes we shouldn't be surprised by employment reports like the one we got today. Update: Here is the household sector's money and money-like assets as a percent of total household assets plotted against the same civilian-employment population ratio. The money and money-like assets include the following: cash, checking account funds, time and saving account funds, money market funds, and treasury securities.