Archive for April 26th, 2010

Growth inflation trade-off

April 26, 2010

A recent paper by IMF economists said inflation damages growth only beyond a certain level. So, central banks could move to a higher inflation target so that zero lower bound does not impact as severely as it has in this crisis. In one of the interviews on the paper:

(more…)

Advertisements

Do different religions lead to different economic behavior?

April 26, 2010

I came across this fascinating paper on the topic by economists Daniel Benjamin, James Choi, and Geoffrey Fisher. They evaluate whether different religions lead to different economic behavior.

They evaluate 6 hypotheses based on previous research on the subject. They use laboratory settings to test these hypotheses:

(more…)

Well, crisis was all about other people’s money….

April 26, 2010

James Hamilton has a fascinating post looking at possible sources of this crisis:

According to Yale Professor Robert Shiller’s data, the run-up and collapse of U.S. home prices over the last decade were without precedent over the previous century. Where did U.S. households get the money they needed to bid up house prices so high? — The answer is, they borrowed it, with household mortgage debt growing more than twice as fast as GDP between 1999 and 2006

And where did the money come from that the institutions lent to U.S. households? The loan originators, who provided the initial mortgage loans, quickly sold them off to loan aggregators

OK, so where did the loan aggregators get the money with which they bought the mortgages from the loan originators? The GSEs took the majority of loans they purchased and collected them into securitized pools that were sold off to banks, pension funds, mutual funds, state and local governments, and buyers all around the world.

Another good chunk of the loans that the GSEs purchased they ended up holding themselves. And where did the money for that come from? Again, it was borrowed.

But most of the later egregious NINJA loans (no income, no job, no assets) were made by private loan aggregators. And where did they get the money? Again, much of it seems to have been borrowed.

To sum up,

The question of how the house price run-up was funded thus has a pretty clear answer: Other People’s Money. Because of so much money pouring into house purchases, the price was driven up. And because house prices continued to go up, the shaky quality of many of the underlying loans for a while did not come back to bite anybody.

The other perspective of what happened beginning in 2007 is that those Other People– the ones who ultimately provided the Money that drove all this– finally started to wise up.

Excellent stuff from Hamilton. Explaining the crisis was never so easy.

6 economists provide fixes for financial system

April 26, 2010

NYT profiles 6 economists who provide their fixes for the financial system (HT: Anna Lusardi’s Blog) on the topic.

  • Joseph Stiglitz: End Dollar Hegemony
  • Thomas Jackson: GIve bankruptcy a chance
  • Robert Pozen : Banks should issue subordinated debt
  • Anna Lusardi: Financial literacy should become part of high school course curriculum
  • Laurence Kotlikoff: Wants to dismantle banks and let all cash mutual funds take over
  • Andrew Lo: Set up a safety board to understand the lessons from the crisis

Laurence Kotlikoff fix is a radical one so needs to be posted in full:

(more…)


%d bloggers like this: