Chapter 11. Great Recession and Lost Decade

Transcription

1 Chapter 11. Great Recession and Lost Decade UMSL Max Gillman Max Gillman () 1 / 37

2 Great Recession & Post 9/11 Negative Real Interest Rates Figure: Great Recession and Post 9/11 Negative Real Interest Rates (Green) vs. FFR (Blue) and CPI in ation at a monthly frequency (Red). Max Gillman () 2 / 37

3 Post 1954 to 2002: Positive Real Interest Rate the Norm Figure: Post 1954 to 2002, the Green Real Interest Rate was Positive as the Norm. Max Gillman () 3 / 37

4 The US Treasury: Who Won the War? Table: US federal government FY budget totals: FY Surplus Average : : Max Gillman () 4 / 37

5 US Federal Debt Held by Public & Federal Reserve Total Assets. Figure: US Federal Debt Held by Public and US Federal Reserve Total Assets. Max Gillman () 5 / 37

6 Acceleration: M1 monetary aggregate following 2008 Figure: Historic Acceleration of the M1 monetary aggregate following Max Gillman () 6 / 37

7 Fed balance sheet is excess reserves + MBS Figure: Total Fed Assets (Blue) Minus Mortgage Backed Securities (Green) shows Line (Purple) following Excess Reserves (Red). Max Gillman () 7 / 37

8 Subtract Excess Reserves & MBS, Almost 0 is left Figure: Purple Line shows (Fed Assets) Minus (MBS) and (Excess Reserves) = Zero. Max Gillman () 8 / 37

9 Historical acceleration of US Treasury debt held by the Fed Figure: Federal Debt Held by Fed Rose Dramatically from 2009 to 2015, up by $2 trillion. Max Gillman () 9 / 37

10 Total US debt increase: $8.1 Trillion. $6.1 trillion held by public, $2 trillion by Fed Figure: Federal Debt Held by the Public increased by $8.1 trillion after the NBER Dated End of the Great Recession, from 2009:3 to 2015:4. Max Gillman () 10 / 37

11 Real Interest Rates and the In ation Rate "Treasury In ation-protected Securities" (TIPS) Figure: Real Interest Rate of post period as Measured by In ation-indexed US Treasury 5-Year Maturity Debt. Max Gillman () 11 / 37

12 Unexpected In ation & Negative de ation: TIPS & In ation Figure: CPI In ation Rate moves Opposite of Real Rate, at times, during Max Gillman () 12 / 37

13 Loan Rates Follow Real Interest Rates Figure: Commercial and Industrial Loans from Commercial Banks Divided by All Checkable Deposits. Max Gillman () 13 / 37

14 Institutional Money Funds: were not, still not, FDIC insured Figure: Institutional Money Funds (Blue) and Demand Deposits (Red). Max Gillman () 14 / 37

15 Commercial & Industrial Loan to Deposit ratio: Lost Decade Figure: Loan to Demand Deposit Ratios: Consumer Loans Ratio in Red; Commercial and Industrial Loans Ratio in Blue. Max Gillman () 15 / 37

16 Financial, Physical, Human Capital Utilization Figure: Natural Log of Currency in Circulation and Natural Log of Demand Deposits: Slope of Graphs Equals Growth Rate of Each Series. Max Gillman () 16 / 37

17 Falling nancial capital utilization rate Post 2000 Labor Force Participation Rate reversed steadily down Post 2000 Figure: Ratio of Currency in Circulation to the Sum of Currency in Circulation and Demand Deposits. Max Gillman () 17 / 37

18 Why Fed Acted: Run on Mutual Funds Crash in US "Liquid Assets" to Deposits and Short Term Funding. Figure: Ratio of US Liquid Assets to Deposits plus Short Term Funding Max Gillman () 18 / 37

19 Theory: Bagehot s law of nancial e ciency holding the minimum amount of reserves in a centralized, government-run entity, su cient to provide liquidity for the entire nancial system while not imposing reserve requirements on rest of the private nancial intermediation system. "Bagehot s law of nancial e ciency" Max Gillman () 19 / 37

20 Bagehot Recommends 1) Allowing private nancial intermediaries keep all reserves at central authority, such as the Bank of England, 2) having access to additional reserves through private bank borrowing from such authority at increased interest rates when needed, and 3) allowing the central authority to add additional reserves as it deemed su cient, so 4) nancial system could stay "slimmed-down" in keeping a minimum of uninvested capital aside as reserves in case of emergencies. Max Gillman () 20 / 37

21 FDIC Modern Reserve of Bank System When Fed reopened after bank holiday in 1933, deposit insurance law was simultaneously enacted in 1933 Banking Act with the establishment of the FDIC and its explicit system for providing a fund for bank failures so as to avoid a system-wide panic. This created historical "bend-point" whereby future history became that of a deposit insurance system existing even while the gold standard remained tenuously alive. Complete end of the gold standard came in 1971 with FDIC & US government deposit insurance system still in place. In 2006 FDIC rst started risk-bases to allow for di erential risk-based premiums for FDIC deposit insurance classes. Max Gillman () 21 / 37

22 Famous 1960s Phillips curve during Giant Bank Productivty Boom and stock boom, as Global Finance and Multinational Corps Took o Figure: Dow Jones Industrial Average during the 1960 s. Max Gillman () 22 / 37

23 Phillips curves during Bank Productivity Booms or Crashes Debt-de ation downward sprirals in Grt Depression, Grt Recession Upward positive credit sprial in 1960s. Both Phillips Curves, but Special Times, Not General Phenomenon Also is one in when Banks lost productivity through lost seigniorage during Volcker De ation. Max Gillman () 23 / 37

24 Tax on Capital Markets and Welfare Loss Excess demand (NOT supply) for capital at the enforced ceiling. 1+r Excess Demand Capital Figure: Savings and Investment: Aggregate Supply and Demand for Capital k With Real Interest Rate Ceiling Max Gillman () 24 / 37

25 Low Real Interest Rate Ceiling Enforced 1+r Excess Demand Capital Figure: Savings and Investment: Aggregate Supply and Demand for Capital k With Real Interest Rate Ceiling Max Gillman () 25 / 37

26 Fed s Shift out of Supply of Capital through the Open Market Purchases of US Treasury or Treasury backed Securities: Creating the Bank System s Excess Reserves. 1+r Excess Reserves Capital Figure: Max Gillman () 26 / 37

27 "Triangle" of Deadweight Loss from Implicit Tax on Investment for Private Savers, and the "Deadweight Loss Triangle" 1+r Excess Reserves Capital Figure: rr Max Gillman () 27 / 37

28 George Selgin of the Cato Institute "A Legal Barrier to Higher Interest Rates" "To set a oor on how far the rate could go, the Fed started paying interest on banks reserve balances with the Fed, taking advantage of the 2006 Financial Services Regulatory Relief Act giving it permission to do so. Alas, it did not work. Government sponsored enterprises...which...weren t eligible for interest on reserves (IOR), started making overnight loans to banks at rates below the IOR rate. In e ect, this turned what the Fed hoped would be a oor on the fed-funds rate into a ceiling. To raise rates now the Fed increases the rate on reserves. Max Gillman () 28 / 37

29 "Seeking Yield": Capital Market Distortion Capital Yield Capital at Risk Figure: Optimal Portfolio Diversi cation between Market Portfolio (Tangency) and "Risk-free" Government Debt. Max Gillman () 29 / 37

30 Distorts from Human to Physical Capital: Less Growth Physical Capital Human Capital (Labor) Figure: Policy Induced Substitution from Human Capital to Physical Capital, from Light Green Tangency to Dark Green Tangency. Max Gillman () 30 / 37

31 Internationally Ine cient Bank Subsidization Arti cially low real interest rates in the US, forced down by US government policy, induce in e ect similar arti cially low real interest rates in other nations that trade with the US. So they avoid Currency exchange rate appreciation, which would demand export trade demand. Worldwide Great Recession has seen "quantitative easing" post to keep real interest rates negative across US, UK, Europe and Japan. Max Gillman () 31 / 37

32 Stagnation Hypothesis and Excess Savings is Alternative World in 65 year steady growth rate decline is claimed. Based on a Phillips curve for ENTIRE period, with positive in ation and Real GDP growth rate Relation. Even though only in 1960s, , and Apparently Biased View through New-Keynesian Lens. To justify saying: its Natural, Nothing to do: BUT KEEP NOMINAL INTEREST LOW. Which causes implicit Worldwide Capital Tax and creates worldwide low growth rates and stagnation. This is: "Deconstructing 3-Equation Central Bank Model" of New-Keynesian policy advice. Max Gillman () 32 / 37

33 Normalizing Policy Eliminate Interest on Excess Reserves. Let Federal Funds Rate be an actively traded market again. Let FFR rise above in ation rate. Re-establish Normal real interest rates of 2-3%. Allow Bulge in In ation Rate for many years. Until all Excess Reserves are lent out and Money-Multiplied by banks making loans and Firms making Investment. Max Gillman () 33 / 37

34 Economy s Python Digestion of Prickly Porkupine- In ation Figure: US Max Gillman () 34 / 37

35 Being Earnest on Banking Figure: Interest on Excess Reserves vs.federal Funds Rate, Max Gillman () 35 / 37

36 Who Gained From Interest on Excess Reserves? 10 Banks, including the 8 "systemically important" ones. idea of paying interest on Required Reserves morphed unexpectedly to all reserves in 2008 Panic, as a Result of Fed Bank Bailout terms. Average excess reserves 2014 to end 2015 about $2.4 trillion. At interest rate of 0.25% on excess reserves, paid $6 Billion. $12 Billion & 1.2 Bill per bank average during 2015 when rate was 0.5%. Now Rate is 1/0%, $24 Billion to 10 banks minimum in 2017, since rate appears to be rising steadily. FFR still a dead market. Max Gillman () 36 / 37

37 Je rey Lacker as Richmond Fed Pres. Now resigned for giving insider information to Banks Let s keep everything as is: in Congressional testimony "Many aspects of the Fed and our nancial system have changed since the Fed s founding, and some claim that the Federal Reserve s governance structure is a historical anachronism. Nevertheless, our core function providing stable monetary conditions to facilitate economic activity remains unchanged. And the continued relevance of the trade-o s taken into account by the authors of the Federal Reserve Act argues for the continued utility of the nely balanced arrangements they crafted." Max Gillman () 37 / 37