Janet Yellen discusses a report on “the macroeconomic implications of oil price movements”:
Discussion of “Oil and the Macroeconomy: Lessons for Monetary Policy” by Janet Yellen, President, FRB SF1: It’s a pleasure to discuss this thoughtful and comprehensive report on the macroeconomic implications of oil price movements. Even though we are no longer faced with sky-high oil prices, the issues discussed here remain important and policy relevant. It is hard to believe that oil prices will not go up again sometime in the future, so it is vital that we learn from the last episode, both about how the economy is likely to be affected and how monetary policy should respond.
Perhaps not surprisingly, most of my discussion relates to the latter topic, namely the Fed’s policy response to the swings in oil prices over the last seven years.
I was invited to speak on Friday at the XBRL Risk Governance Forum, hosted by the IBM Data Governance Council. Having said that, most everyone is going to be tempted to yawn and stop reading further. Don’t. Within the work of this Forum are the seeds of reducing the risk of future market crisis. Indeed, it could be the foundation for a quantum leap in the value of risk management. To explain why, let me start by going through the dynamics of market crises. A market crisis occurs when there are highly leveraged investors in a market that is under stress. These investors are forced to sell to meet their margin requirements. Their selling drops prices further – especially because the market was under stress to begin with. So you get a cascade down in the price of that market. A shock that might have initially led to only a five percent drop gets amplified, and the market might drop multiples of that. We have seen this in various guises in the current crisis, from the banks’ ‘toxic waste’, to the downward spiral in housing prices, to the deleveraging of the carry trade, to the quant fund crisis in August 2007.
Italian business confidence fell to a record low in February as concern that the fourth recession in seven years will damp orders more than offset lower oil prices and borrowing costs. The Isae Institute’s business confidence index dropped to 63.2, the lowest since the index was created in 1986, from a revised 65.4 in January.
The disastrous meltdown of structured securitization represents a dual failure of market discipline and government supervision. At every stage of the securitization process, incentive conflicts tempted private and government supervisors to short-cut and outsource duties of due diligence that they owed not only to one another, but to customers, investors, and taxpayers.
This is Brad Setser once again. Thanks to both Rachel Ziemba and Paul Swartz for filling in for me last week. I rather enjoyed not having to write a post every day …
China has now released data on the PBoC’s other foreign assets (what I have called China’s hidden reserves) for December. The US TIC data for December is now out at as well. The two together permit us to paint a reasonably comprehensive picture of Chinese demand for US financial assets in 2008. This post updates the estimates of China’s true demand for US assets laid out in my paper with Arpana Pandey.* It consequently touches on the central subject of Geoff Dyer’s FT analysis piece, namely the scale of China’s holdings of US assets and China’s willingness to continue to add to its US portfolio.
In 2008, banks commenced foreclosure proceedings on 2.2 million homes. This year could be worse.1 While economists disagree on whether this is the worst economic crisis since the Great Depression, everybody agrees that this is the worst real estate crisis since the Great Depression. Foreclosure is not just a human tragedy, it is an economic tragedy as well. Foreclosed houses are poorly maintained if not looted. As a result, foreclosed properties lose a substantial fraction of their value, between 30 and 50 percent.2 If this was not enough, foreclosure has some very negative spillover effects. Forced sales depress the value of the surrounding properties. When forced sales become frequent, they undermine the value of a neighborhood, pushing other people to sell or default. Finally, widespread defaults reduce the social stigma of defaulting, leading to the possibility of a vicious circle of default causing other defaults, depressing real estate prices further and causing still more defaults.3