Michael Kevane

“Inside Job” filmmaker Charles Ferguson replied to Mishkin:

First, Prof Mishkin alleges that I focused exclusively on his report on Iceland. But in an interview in September 2009 lasting more than an hour, and for which I can supply both video and transcript, I asked Prof Mishkin about his general views of the financial crisis and its causes, his 2006 report Financial Stability In Iceland, his activities as a governor of the Federal Reserve Board, his post-crisis views on issues ranging from financial reform to the growing inequality of income and wealth in the US and his consulting activities since returning to Columbia University.Prof Mishkin suggests that his 2006 report on Iceland identified various systemic risks, that the majority of bad behaviour in Iceland’s financial system occurred afterwards, and that Iceland’s real risks were unknowable. At the time he wrote his report, Iceland’s banking system had already borrowed $50bn, more than four times Iceland’s gross domestic product, in the preceding five years Iceland’s Financial Supervisory Authority had a total of 40 employees, including clerical staff, to monitor all of the country’s financial companies and markets, including banking, investing, and insurance and during the bubble about a third of these regulators departed to work for the banks. Prof Mishkin’s report does not mention this.Moreover, Prof Mishkin writes in his article: “The filmmaker made insinuations that I didn’t disclose that I was compensated for the study – even though he learned the precise amount of the fee in 2006 from a public disclosure that I made.”However, Prof Mishkin did not disclose in the report that he was paid to write it. Indeed, one of the most disturbing things I learned in making Inside Job, an issue discussed in the film, is that US universities do not require disclosure of financial conflicts of interest by faculty members, place no limits on the sources and size of professors’ outside income, and do not collect information on the size of this income. The only reason we now know of Prof Mishkin’s payment for the Iceland report is that he was later forced to disclose it when he was appointed to the US Federal Reserve Board.

via The director of ‘Inside Job’ replies | Economists’ Forum.

Preludes to the Icelandic Financial Crisis

Iceland became one of the symbols of the fourth wave of the financial crisis, since the end of the first decade of the twenty-first century. Between 2003 and 2008, the market value of the stock of Iceland’s biggest companies increased by 700 per cent, and the assets of its three banks multiplied eightfold to eight times the country’s GDP. When the bubble burst, it helped bring the world economy to its knees.This volume brings together several papers written by professional economists before the crash, warning of the dangers of the bubble economy that was being created. The papers discuss the imbalances created by an inflow of foreign capital, the hazards of a rapidly expanding banking system, and the perils that all banks face in a bubble economy. The chapters also provide a case study of the economics profession before the collapse of the international financial system. What did and didn’t they see coming, and why? An introduction and conclusion contextualize the articles and draw out some important lessons.This book is essential reading for all interested in macroeconomics, economic policy and international finance, as well as anyone seeking to grasp the causes of the deepest global recession since the Great Depression.

via Preludes to the Icelandic Financial Crisis – Robert Z. Aliber – Palgrave Macmillan.

The United States economy rebounded heartily in the spring after a dismal winter, the Commerce Department reported on Wednesday, growing at an annual rate of 4 percent from April through June and surpassing economists’ expecations.In its initial estimate for the second quarter, the government cited a major advance in inventories for private businesses, higher government spending at the state and local level and personal consumption spending as chief contributors to growth. Economists, who had been hoping for a full reversal of the first quarter’s decline, were cheered by the second quarter’s numbers. The consensus forecast for G.D.P. was 3 percent.

via U.S. Economy Grew at 4% Rate in Second Quarter, Beating Expectations – NYTimes.com.

After starting with a ridiculous teaser headline (basically, “Janet Yellen doesn’t want you to get a raise”) the article doesn’t get even to an intermediate macroeconomics textbook level.

But wage growth contributes to inflation (your pay boost is your customers’ higher prices), and the Fed has to rein in inflation that’s too high before it wreaks havoc on the US economy. [“wreaks havoc” indeed… the reason the author cannot mention any actual havoc that could be wreaked from, dare we even mention an unspeakable, shudder, inflation rate of 5.2% is that… there isn’t any…]

It’s that recent spike [OMG, to 1.8% annual rate!] that the Fed has to contend with. Inflation for the most part doesn’t look like a serious threat right now — most FOMC members at their June meeting said they expected price growth to remain at or below 2 percent through 2016 [so why are we writing and reading this article?] , and LeBas agrees that there’s no reason to worry right now. But should something like a spike in wages help send inflation even higher, the central bank will want to tighten policy to keep the economy from overheating, for example by raising interest rates… Once wage growth catches on among lots more workers, it could help send inflation over that 2-percent mark. And while too little inflation can tank the economy, so can too much, as people’s money diminishes in value. [Oh really? But wait, weren’t wages rising? So incomes are not actually diminishing in value…?]

At the end of the day, the article reinforces the “money illusion” that is probably exactly the job of an outfit like vox.com to dispel!  Talk about irony.  via Janet Yellen doesn’t want you to get too big a raise – Vox.

My MBA class is using Mishkin’s macro textbook, and we are exploring his notoriety as author of an analysis of Iceland’s macroeconomy circa 2006.

The quote of the day, from Thorvaldur Gylfason:

In 2012, senior Central Bank officials testified in the Court of Impeachment hearing of the criminal case brought by Parliament against Iceland’s pre-crash Prime Minister, Geir Haarde, that the writing was on the wall already in 2006. On the stand, one senior Central Bank official likened the operations of the Icelandic banks before the crash to the Ponzi scheme operated by Bernard Madoff in the US. Even so, the Central Bank continued to lend money to the banks without adequate collateral, bankrupting itself in the process. The fiscal cost of recapitalizing the three commercial banks amounted to another 18% of GDP.

Pretty gosh darn clear explanation.  Get that money working.  If you earn nothing (or negative return) then you are more likely to lend the funds to someone who is actually going to do something (start a restaurant, expand a cleaning business, build a new app).

Why has the ECB introduced a negative interest rate? The European Central Bank’s mandate is to ensure price stability by aiming for an inflation rate of below but close to 2% over the medium term. Like most central banks, the ECB influences inflation by setting interest rates. If the central bank wants to act against too high inflation, it generally increases interest rates, making it more expensive to borrow and more attractive to save. By contrast, if it wants to counter too low inflation, it reduces interest rates.Since euro area inflation is expected to remain considerably below 2% for a prolonged period, the ECB’s Governing Council has judged that it needs to lower interest rates. The ECB has three main interest rates on which it can act: the marginal lending facility for overnight lending to banks, the main refinancing operations and the deposit facility. The main refinancing rate is the rate at which banks can regularly borrow from the ECB while the deposit rate is the rate banks receive for funds parked at the central bank. All three rates have been lowered.To maintain a functioning money market in which commercial banks lend to each other, these rates cannot be too close to each other. Since the deposit rate was already at 0% and the refinancing rate at 0.25%, a cut in the refinancing rate to 0.15 % meant the deposit rate was lowered to − 0.10 % to maintain this corridor.The cut is part of a combination of measures designed to ensure price stability over the medium term, which is a necessary condition for sustainable growth in the euro area.Do I now have to pay my bank to keep my savings for me? What is the effect of this negative deposit rate on my savings? There will be no direct impact on your savings. Only banks that deposit money in certain accounts at the ECB have to pay. Commercial banks may of course choose to lower interest rates for savers. At the same time, though, consumers and businesses can borrow more cheaply and this helps stimulate economic recovery.In a market economy, the return on savings is determined by supply and demand. For example, low long-term interest rates are the result of low growth and an insufficient return on capital. The ECB’s interest rate decisions will in fact benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.But why punish savers and reward borrowers?A central bank’s core business is making it more or less attractive for households and businesses to save or borrow, but this is not done in the spirit of punishment or reward. By reducing interest rates and thus making it less attractive for people to save and more attractive to borrow, the central bank encourages people to spend money or invest. If, on the other hand, a central bank increases interest rates, the incentive shifts towards more saving and less spending in the aggregate, which can help cool an economy suffering from high inflation. This behaviour is not specific to the ECB; it applies to all central banks.Isn’t it possible for banks to avoid the negative deposit rate? For example, can’t they simply decide to hold more banknotes?If a bank holds more money than is required for the minimum reserves and if it is not willing to lend to other commercial banks, it has only two options: to hold the money on an account at the central bank or to hold it as cash. But holding cash is not cost-free either − not least since the bank needs a very safe storage facility to warehouse the banknotes. So it is unlikely that any bank would choose to do this. The more likely outcome is that banks either lend money to other banks or pay the negative deposit rate.

via ECB: Why has the ECB introduced a negative interest rate?.

From NY Times:

The long-term unemployment rate, which soared in 2009 to heights not seen since the Great Depression, is finally declining rapidly. The proportion of the work force that has been unemployed for at least 27 weeks has fallen to 1.98 percent, less than half the record high of 4.4 percent reached in 2010.

via A Drop in the Long-Term Unemployed.

A recent paper on long-term unemployment is “Are the Long-Term Unemployed on the Margins of the Labor Market?” Alan B. Krueger, Judd Cramer, and David Cho

This paper explores the plausibility of a unified explanation for the recent shifts in the price and real wage Phillips Curves and Beveridge Curve in the U.S.: namely, that the long-term unemployed, whose share of overall unemployment rose to an unprecedented level after the Great Recession, are on the margins of the labor force and therefore exert very little pressure on the job market and economy. The hypothesis we seek to test is that the long er workers are unemployed the less they become tied to the job market, either because, on the supply side, they grow discouraged and search for a job less intensively (e.g., Krueger and Mueller , 2011 ) or because, on the demand side, employers discriminate against the long-term unemployed, based on the (rational or irrational) expectation that there is a productivity – related reason that accounts for their long jobless spell…