Many of the people I've talked to about the financial crisis like to suggest that the cause for the financial crisis was the change in lending practices of Fannie Mae during the Clinton Administration (1999). Although these changes did increase the risk on the balance sheet of the largest mortgage lender in the US, I don't feel this played a significant role in getting us to where we are now.
The reason, because in 1999 and until April 2004, the amount of capital that could be leveraged by investment banks was capped. However, this rule changed on April 24, 2004 for any investment bank over $5 billion in market capitalization. Banks who qualified were now allowed to almost double the amount of leverage. Who qualified under this little known rule change? Just 5 companies.... maybe you remember them: Bear Sterns, Lehman Brothers, Merrill Lynch, Mogan Stanley, and Goldman Sachs.
So before the rule change, the fuel that could be put on the fire was at least known and limited, after the rule change, the fuel [read potential disaster] almost doubled.
This is a slideshow by the NY Times. What's great about this is the actual audio from the meeting when this rule change was debated and passed.
"The Day the SEC Changed the Game"
http://www.nytimes.com/interactive/2008/09/28/business/20080928-SEC-multimedia/index.html
Monday, February 23, 2009
Friday, February 20, 2009
An Inconvenient Monetary Base?
Recently, a student of mine shared with me a YouTube video of a Glenn Beck (Fox News) piece on... well, that's what I'm not sure about.
You tell me, what's the chart about and what point is Beck trying to make?
http://www.youtube.com/watch?v=C7Xu3xUkpEE
If you said that the chart is about our national debt and Beck is making the point that it's immoral to leave such a large national debt as the one he appears to point to in the chart... well, you are wrong. Join the majority of people who watch Beck and, sadly, I think Beck believes this too. However, I do agree with the point Beck is trying to make about the national debt, if only it had anything to do with the debt.
What Glenn Beck actually has in the unlabeled chart is the "Adjusted Monetary Base and Reserves" from the St. Louis Federal Reserve Bank (go here to see the actual chart: http://research.stlouisfed.org/fred2/series/AMBNS).
The adjusted monetary base is a measure of the currency in circulation and the cash reserves banks have in an account with the Federal Reserve (both required and excess reserves). In essence, this is the Fed's balance sheet, specifically the Fed's liabilities. In September 2008, this measure began to grow faster than during any other time since the beginning of the Federal Reserve System. There are a couple of reasons for the excessive growth in the monetary base since September 2008. First, the Fed has been adding to the excess reserves of banks by buying distressed bank assets and replacing them with Treasury bills. The Fed then engages in open market operations and buys the Treasury Bills, giving the banks excess cash. Hence, what was not on the Federal Reserves balance sheet before the crisis is now on their balance sheet, some of which is in the form of bank reserves. The idea here is that with these excess reserves (instead of "toxic" assets) and added liquidity, the banks will have the ability and incentive to make new loans.
Second, and I feel the most significant factor in the growth of the monetary base, is that the Fed began to pay interest on the reserves of banks starting in October 2008. Before this time, any bank reserves held by the Fed came at a significant opportunity cost because they did not earn interest. Hence banks only kept their "required" minimum reserves in their account with the Fed. Since the change, banks began putting their excess reserves in their Fed account. Why? Well, to earn interest and because the Fed appears to be a much safer place to put money than in the hands of borrowers in such an uncertain economy. Yes, this policy does seem to go against the idea of getting banks to loan money, but the Fed argues that this measure is important in their ability to manage interest rates in this environment (for the Fed's explanation read: http://www.newyorkfed.org/markets/ior_faq.html).
So think about it. If you are a bank and you had excess reserves before this rule change, you might consider loaning the money out to the public or other banks, albeit cautiously. But now that the Fed is paying interest, and although it's not a great return on excess reserves, given the alternative which is to lend to the public in this economic environment, I think I'd go with the Fed too. Hence, the Fed's balance sheet has soared and the Adjusted Monetary Base has soared and that's what Beck had in his chart as he went up his "An Inconvenient Debt" lift.
What's this all mean? Well, for one, this does not have much to do with the national debt which is what I took away from Beck's video. It means that there is a significant amount of bank reserves waiting for some stability in the economy and when that happens, it would be logical to expect banks to lend to the public. With a significant amount of potential lending, there is a risk of inflation but we are a long way from there and the Fed has tools to control the amount of lending when the time is right.
I know, I know... you question the Fed's ability to control or time anything... that will have to wait for another post.
You tell me, what's the chart about and what point is Beck trying to make?
http://www.youtube.com/watch?v=C7Xu3xUkpEE
If you said that the chart is about our national debt and Beck is making the point that it's immoral to leave such a large national debt as the one he appears to point to in the chart... well, you are wrong. Join the majority of people who watch Beck and, sadly, I think Beck believes this too. However, I do agree with the point Beck is trying to make about the national debt, if only it had anything to do with the debt.
What Glenn Beck actually has in the unlabeled chart is the "Adjusted Monetary Base and Reserves" from the St. Louis Federal Reserve Bank (go here to see the actual chart: http://research.stlouisfed.org/fred2/series/AMBNS).
The adjusted monetary base is a measure of the currency in circulation and the cash reserves banks have in an account with the Federal Reserve (both required and excess reserves). In essence, this is the Fed's balance sheet, specifically the Fed's liabilities. In September 2008, this measure began to grow faster than during any other time since the beginning of the Federal Reserve System. There are a couple of reasons for the excessive growth in the monetary base since September 2008. First, the Fed has been adding to the excess reserves of banks by buying distressed bank assets and replacing them with Treasury bills. The Fed then engages in open market operations and buys the Treasury Bills, giving the banks excess cash. Hence, what was not on the Federal Reserves balance sheet before the crisis is now on their balance sheet, some of which is in the form of bank reserves. The idea here is that with these excess reserves (instead of "toxic" assets) and added liquidity, the banks will have the ability and incentive to make new loans.
Second, and I feel the most significant factor in the growth of the monetary base, is that the Fed began to pay interest on the reserves of banks starting in October 2008. Before this time, any bank reserves held by the Fed came at a significant opportunity cost because they did not earn interest. Hence banks only kept their "required" minimum reserves in their account with the Fed. Since the change, banks began putting their excess reserves in their Fed account. Why? Well, to earn interest and because the Fed appears to be a much safer place to put money than in the hands of borrowers in such an uncertain economy. Yes, this policy does seem to go against the idea of getting banks to loan money, but the Fed argues that this measure is important in their ability to manage interest rates in this environment (for the Fed's explanation read: http://www.newyorkfed.org/markets/ior_faq.html).
So think about it. If you are a bank and you had excess reserves before this rule change, you might consider loaning the money out to the public or other banks, albeit cautiously. But now that the Fed is paying interest, and although it's not a great return on excess reserves, given the alternative which is to lend to the public in this economic environment, I think I'd go with the Fed too. Hence, the Fed's balance sheet has soared and the Adjusted Monetary Base has soared and that's what Beck had in his chart as he went up his "An Inconvenient Debt" lift.
What's this all mean? Well, for one, this does not have much to do with the national debt which is what I took away from Beck's video. It means that there is a significant amount of bank reserves waiting for some stability in the economy and when that happens, it would be logical to expect banks to lend to the public. With a significant amount of potential lending, there is a risk of inflation but we are a long way from there and the Fed has tools to control the amount of lending when the time is right.
I know, I know... you question the Fed's ability to control or time anything... that will have to wait for another post.
Wednesday, February 18, 2009
Stimulus Bill = Government Jobs for Recent Grads
It is even hard for the experts to predict how many and where new jobs will be created from the stimulus bill. But it seems obvious to me that in order for the government to manage various aspects of the stimulus bill, they will need to hire workers. I think this is one place where job creation is almost certain. I asked one of my students, Jillian Golomboski, to find out some information and here is what she has to report.
With the troubled state of the economy, it is scary as a student to think about attempting to find a job after college graduation. However, the recently passes stimulus bill is predicted to save or create 3.5 million jobs across the US which some people are optimistic about. As a college student in hopes of getting a job after graduation, or as a graduate in the middle of a job search, it would be nice to have a way of finding the government jobs that are being created.
These jobs can be searched for at USAjobs.gov which is a government website that is similar to other job search engines but is specific to government positions. This website is a great place to find new jobs that are opening due to the recently signed stimulus bill. On the site, you can search for a specific position you may be looking for, a certain city you may want to live in, or both. You can also find info about which jobs are currently in high demand. The website allows you to post a resume so recruiters can contact you or you can apply for positions online and send your resume in yourself.
As a member of the site, USAJOBS will keep you updated by sending you alerts and updates on the latest listings. The site will give you tips on searching for jobs so you can find the position you are looking for and the site has guides that can help you with the basic tasks of applying for a job.
In addition, studentjobs.gov is a website that can be helpful for current students. It can help you find internships in both government and non government organizations. It also connects you with different websites to search for careers, many of which are government related.written by Jillian Golomboski
Tuesday, February 17, 2009
Lesson on "Real" vs. "Nominal"
Here's a lesson idea that builds off my post in "More Than Just Invisible Hands" about the hidden shift in state funding for students attending the state system universities (Post on February 7, 2009, "The Hidden Shift in Higher Education Funding").
If you want to adjust a series of current dollar values (a.k.a "nominal") like wages, prices, or investment returns, for inflation (a.k.a. "real"), you first need a price index. A price index is created by taking a basket of goods or services and tracking the purchasing power needed to buy the same basket over time. The basket, theoretically, doesn't change resulting in a consistent measure of inflation. There are many price indices available for use depending on what you want to adjust for inflation. The Bureau of Labor Statisics is a good source for price indices and so is Economagic.
The Consumer Price Index is a common price index used to adjust many statistics for inflation. One example is the Cost of Living Adjustment (COLA), that adjusts the amount retirees receive in Social Security benefits. The purpose of the SS system is to provide retirees with an adequate amount of income to live on consistent (to a point) with the standard of living they had when they retired. If SS benefits were not adjusted for inflation, then the purchasing power of the money they receive would buy less and less over time.
There are other price indices that may be better measures of inflation for specific goods or services. If you were interest in adjusting wages for inflation then you would use the "employment cost index" and you could choose a version of the ECI for the particular occupation or industry.
In the post, I was interested in adjusting the appropriation from the state and the cost of tuition and fees for a general measure of inflation so I chose the CPI for all goods and services in the Mid-Atlantic region (since the data represents PA).
Here is an excerpt from my excel spreadsheet.
FTE = Full Time Equivalent student
As you can see, once you adjust the nominal appropriation for inflation, it starts to fall short of the inflation adjusted value around 1988. By the end of 2008, the two measures are $1600 apart.
To calculate the "real" column, use the following equation:
where t = year of the inflation adjusted value
By adjusting the data for inflation, we can see that despite the nominal value per student increasing every year, the inflation adjusted value should be much more. In other words, the actual contribution from the state subsidizes a lot less of a college education in 2008 than it did in 1984 and students are paying more for their education.
If you want to adjust a series of current dollar values (a.k.a "nominal") like wages, prices, or investment returns, for inflation (a.k.a. "real"), you first need a price index. A price index is created by taking a basket of goods or services and tracking the purchasing power needed to buy the same basket over time. The basket, theoretically, doesn't change resulting in a consistent measure of inflation. There are many price indices available for use depending on what you want to adjust for inflation. The Bureau of Labor Statisics is a good source for price indices and so is Economagic.
The Consumer Price Index is a common price index used to adjust many statistics for inflation. One example is the Cost of Living Adjustment (COLA), that adjusts the amount retirees receive in Social Security benefits. The purpose of the SS system is to provide retirees with an adequate amount of income to live on consistent (to a point) with the standard of living they had when they retired. If SS benefits were not adjusted for inflation, then the purchasing power of the money they receive would buy less and less over time.
There are other price indices that may be better measures of inflation for specific goods or services. If you were interest in adjusting wages for inflation then you would use the "employment cost index" and you could choose a version of the ECI for the particular occupation or industry.
In the post, I was interested in adjusting the appropriation from the state and the cost of tuition and fees for a general measure of inflation so I chose the CPI for all goods and services in the Mid-Atlantic region (since the data represents PA).
Here is an excerpt from my excel spreadsheet.
| Year | Nominal State Appropriation per FTE student | CPI - PA,NJ,DE,MD | Real or Inflation Adjusted Appropriation per FTE Student |
| 1983-84 | $3,003 | 105.6 | |
| 1984-85 | $3,182 | 110.7 | $3,148 |
| 1985-86 | $3,349 | 112.6 | $3,202 |
| 1986-87 | $3,449 | 118.9 | $3,381 |
| 1987-88 | $3,497 | 125.6 | $3,572 |
| 1988-89 | $3,596 | 129.9 | $3,694 |
| 1989-90 | $3,751 | 139.4 | $3,964 |
| 1990-91 | $3,711 | 144.4 | $4,106 |
| 1991-92 | $3,980 | 147.5 | $4,195 |
| 1992-93 | $3,916 | 151.3 | $4,303 |
| 1993-94 | $4,196 | 155.4 | $4,419 |
| 1994-95 | $4,432 | 159.1 | $4,524 |
| 1995-96 | $4,553 | 164.3 | $4,672 |
| 1996-97 | $4,567 | 166.4 | $4,732 |
| 1997-98 | $4,572 | 169 | $4,806 |
| 1998-99 | $4,736 | 172.9 | $4,917 |
| 1999-00 | $4,869 | 177.5 | $5,048 |
| 2000-01 | $4,921 | 179.9 | $5,116 |
| 2001-02 | $4,842 | 185.3 | $5,269 |
| 2002-03 | $4,575 | 189 | $5,375 |
| 2003-04 | $4,294 | 197.8 | $5,625 |
| 2004-05 | $4,376 | 204.9 | $5,827 |
| 2005-06 | $4,408 | 211.6 | $6,017 |
| 2006-07 | $4,564 | 219.03 | $6,229 |
| 2007-08 | $4,669 | 218.19 | $6,205 |
FTE = Full Time Equivalent student
As you can see, once you adjust the nominal appropriation for inflation, it starts to fall short of the inflation adjusted value around 1988. By the end of 2008, the two measures are $1600 apart.
To calculate the "real" column, use the following equation:
where t = year of the inflation adjusted valueBy adjusting the data for inflation, we can see that despite the nominal value per student increasing every year, the inflation adjusted value should be much more. In other words, the actual contribution from the state subsidizes a lot less of a college education in 2008 than it did in 1984 and students are paying more for their education.
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