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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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December 21, 2011


In search of an agenda for job creation

In a macroblog post yesterday, Dave Altig, research director at the Atlanta Fed, discussed some recent research from the Federal Reserve Bank of Cleveland focused on the relationship between uncertainty and job creation by small businesses. That research, which is based on survey responses from members of the National Federation of Independent Businesses (NFIB), found that a high degree of uncertainty was correlated with a scaling back in hiring plans.

Yesterday's macroblog post also delved into the connection between small business hiring plans and actual job creation, pointing out that this connection requires further examination because job creation has not, contrary to popular conversation, been a broad characteristic of the population of small businesses. Instead, it has tended to be young businesses (and especially businesses less than seven years old) that account for most of the job creation. Most young businesses are small, but relatively few small businesses are young.

I believe that understanding the job creation challenges we currently confront may require that we increasingly turn our attention to the factors restraining the high growth sectors of the economy. Some evidence from this segment of the business universe came from a recent poll of fast-growing firms that the Kauffman Foundation conducted at the Inc. 500/5000 conference in September. This table summarizes the results of that poll, which are juxtaposed with roughly comparable responses from the NFIB survey.


The interesting thing about the Kauffman survey is that the overwhelming problem reported by those companies that are in growth mode is the inability to find qualified workers. That observation is important because it bears on such questions as: To what degree is our elevated unemployment rate structural? How do we explain the observation that the number of unemployed workers appears to be elevated relative to the number of reported job vacancies? and so on.

It is obviously not appropriate to extrapolate from a single snapshot of a sample of fast-growing firms to the U.S. economy as a whole—and that is not the message here. But it is increasingly clear that the search for a single smoking gun that will clarify what is happening in labor markets is likely to be a hopeless quest. The answer to the question asking what a jobs agenda would look like is like your Christmas wish list: one size probably does not fit all.

Note: Today's macroblog post is the last for 2011. Look for macroblog's return in early January.

John RobertsonJohn Robertson, vice president and senior economist in the Atlanta Fed's research department

 

December 21, 2011 in Data Releases, Economic Growth and Development, Employment, Labor Markets | Permalink

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This is why Alex Tabarrok's assertions about immigration reform are so important right now and why we need to pair that with some serious job training programs for the unemployed and ultimately reform our education system.

Posted by: Daniel | December 21, 2011 at 04:14 PM

About a year before the firm I used to work for outsourced several hundred IT jobs to India they fired all their internal IT trainers and cancelled their decades-long IT talent development program.

Why train US workers when you can simply import the workers you need. It's only a little harder now when the "real unemployment rate" (the U6 rate) is at 20%.

To bring in more cheap labor today you also need to hire a PR firm to plant stories about "Structural Unemployment" and phony schemes like these;

http://boss.blogs.nytimes.com/2011/12/14/the-start-up-boat/

As Dean Baker is fond of saying, when firms complain of not being able to "find qualified employees" they leave off the "who are willing to work for the wage we are offering."

There is no STEM worker shortage in the US. The salaries of US-based STEM workers have been stagnant for the past 12 years.

Posted by: The OutSourced One | December 23, 2011 at 02:59 AM

Presumably small businesses that are not well known and have small HR departments find it difficult to find qualified people all the time. The question at issue is: what is different about the present situation, as against before the financial crisis or during previous recoveries?

The best piece of analysis I have seen on this (I forget where) simply charted the NFIB survey responses through time. The response that jumps sharply after 2007 is the state of the economy. That supports the idea that what is unusual about the present situation is the sluggish economy.

It would be interesting to see some analysis on the components of the index in the previous post. It appears to be highly correlated with recessions.

Posted by: John Butters | December 28, 2011 at 09:30 AM

Was being rather lazy -- I had a look at the components. It strikes me that the "policy uncertainty" that the index captures likely arises from events that have a negative or uncertain impact on the economy -- hence the spikes during wars and the upward trend during recessions. If this is the case, then it is not possible to infer that the situation would be better if Republicans and Democrats would just get along.

On the same topic, you reminded me of a piece I wrote a while ago:

I have been thinking a bit more about "confidence," which I talked about yesterday. In the 1980's TV series "The A Team," when a member of the team or the team as a whole was in the mood for intelligent risk-taking it was said that they were "on the jazz." Why is it "confidence" that is lacking in the economy, and not "the jazz?" When one is on the jazz, one enjoys taking calculated risks in the pursuit of an objective, and it strikes me that this is just the kind of attitude that the economy needs -- a bit of entrepreneurial spirit. What is more, unlike the "confidence" analysis, there is empirical support for my jazz theory, inasmuch as growth in the US was stronger in the three decades of macroeconomic volatility before 1980 than in the three decades of stability that followed that year. The jazz, you see, requires real danger, and less danger means less jazz. As B.A. Baracus says to John "Hannibal" Smith on one occasion: "Hannibal, when you're on the jazz, you're dangerous". In the present environment the problem is that, to be on the jazz, one needs to see a reasonable prospect of success in a dangerous situation. Deleveraging, austerity and weak economy have robbed people of this prospect. Thus the prescriptions of the jazz analysis are just those policies that will create enough macroeconomic volatility to bring some success to people (and thus to give everyone the prospect of success and promote a general restoration of the jazz). This means debt- or money-financed fiscal stimulus and further unconventional monetary easing measures.

Of course, neither the "jazz" analysis nor the "confidence" analysis is a good one. My point is that the former is just as compelling as, and has more empirical support than, the latter. But neither is a proper model of how the economy works. I think that the popularity highlights the fact that the most common mode of human reasoning is not deduction or induction, but analogy. The "confidence" theory is appealing because, when a person loses his confidence, he looks depressed -- and the economy looks depressed. What this means is that we have to be careful with the analogies we use. There are reasons to think that we cannot understand the economy intuitively like we understand a person: empirically, this method does not seem to allow people to make good predictions, and other successful theories about the world (such as quantum physics) are not intuitive; and theoretically, mathematicians have given us the theory of complex systems that tells us that the outputs of such systems can be highly counterintuitive. 

Posted by: John Butters | December 28, 2011 at 09:44 AM

It really strikes me that the kind of business matters a good deal more than the age of the business for the macroeconomic growth, though I understand that the age of businesses makes for easy-to-come-by data. Jobs programs ought to be aimed at the best growth-contributing businesses.

For example, the age of a dentist's office doesn't matter too much, as there should be a more or less slowly increasing number of offices with the increasing number of teeth, and not a big net growth contributor. Drywall contractors would seem to cycle up and down with booms, but employment-wise not contribute a great deal on average, with productivity possibly even balancing population gains.

My own high-tech widget and gadget firm, on the other hand, ought to be able to grow not only the number of number of our own employees, but the qualitatively new products should help grow other new businesses that otherwise cannot be built without our devices.

The small business innovative research program (SBIR/STTR, sbir.gov) supports exactly this sort of business development, currently employing about 25k people in small firms on 1-to-3 person development projects. Ramp this up by a factor of 100 for 2 to 4 years, which would prime the macroeconomic demand pump while also developing new services and products and while investing in the broader human technical and business capital needed for such efforts. The federal infrastructure to ramp these programs essentially overnight and supervise them already exists.

(And, FWIW, Alex Tabarrok's immigration assertions are nuts. Pay a little more, and I have found you can hardly swing a stick without knocking over a couple of domestic Ph.D. engineers and skilled technical staff.)

Posted by: MSM | December 29, 2011 at 07:39 PM

i think is also good to know that what makes a business to stand the test of time is not its level of age or size but the good and grounded knowledge of the business, the market field and analsyis of final consumers. Then the sustainability of the business through several means

Posted by: binary options brokers | January 07, 2012 at 08:15 PM

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December 20, 2011


Uncertainty about uncertainty

One of the hotly debated issues among those debating policy in the pages of various Fed publications (virtual and otherwise) is why job creation in the United States cannot seem to break out of its sluggish mode. One potential source is an elevated level of uncertainty about the political and economic future that is damping business enthusiasm for risk and, consequently, holding back the expansion.

Heightened uncertainty as an impediment to growth has intuitive appeal to many and, in our Reserve Bank's experience, considerable anecdotal support from business contacts. Unfortunately, intuition and anecdote don't quite rise to the level of evidence. Fortunately, the work of uncovering the evidence (one way or the other) is under way. One example is a recent entry by Mark Schweitzer and Scott Shane in the Federal Reserve Bank of Cleveland's Economic Commentary series:

"In this Commentary, we empirically examine the hypothesis that 'policy uncertainty' adversely impacts small business owners' expansion plans. To do this, we looked at the statistical association between data on small business plans to hire and make capital expenditures and a measure of 'policy uncertainty.' The data on small business plans cover January 1986 through July 2011 and were collected by the National Federation of Independent Business (NFIB)."

The picture relating the claims of respondents to the NFIB survey and the uncertainty measure employed by the authors is pretty compelling:


The correlation that can clearly be seen in this chart survives more formal statistical analysis:

"We find statistically significant negative effects of policy uncertainty on small business owners' plans to hire and make capital expenditures over the 1986 to 2011 period. We also find a large effect of the economic downturn on small business plans, but the two effects do appear to be independent. The negative effects of policy uncertainty show up even when we weight the components of policy uncertainty in several different ways. The results also stand up when consumer confidence is controlled for, suggesting that the effects are distinct from consumer sentiment."

The authors note the appropriate caveats but are pretty clear about how they read the results of the analysis:

"While this statistical analysis is informative about the relationship between policy uncertainty and small business expansion plans, we cannot say that 'policy uncertainty' causes small business hiring and capital expenditure plans to decline. That is because a purely statistical model cannot identify fundamental causes. But whatever the fundamental cause, our analysis indicates that adding information about policy uncertainty improves our ability to explain the survey responses provided by the NFIB's survey respondents.

"In that sense, we can say that the correlations between the two are strong enough to reject the argument that policy uncertainty is irrelevant for currently weak small business expansion plans. In our view, policymakers should take seriously the widespread anecdotal reports that policy uncertainty is adversely affecting small business owners' expansion plans."

I think this study is really intriguing, but I would add another caveat to the results, emphasized not too many posts back here at macroblog:

"Talking about the role of the average or typical small business in job creation is problematic. Discussing it is challenging because job creation is highly skewed along the age dimension of small firms."

Smallness per se is not the defining characteristic of the businesses that are responsible for driving job creation. In fact, research shows that once firm age is controlled for, no systematic relationship exists between net growth and firm size. The distinction between young and mature firms—which our own regular poll of small businesses verifies is important—is absent in the NFIB data that Schweitzer and Shane exploit.

Although the Schweitzer-Shane study is a good start to turning anecdotal reports into evidence, the results would be more compelling if they pertained to the actual universe of companies that we would expect to be creating jobs—that is, firms that are young, not just small.

David AltigBy Dave Altig, senior vice president and research director at the Atlanta Fed

 

December 20, 2011 in Data Releases, Economic Growth and Development, Employment, Labor Markets | Permalink

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In a historical study like this, why are we calculating a correlation with "planning to hire"? Who cares whether a someone told a pollster 2 years ago that they were planning to hire someone? Why not look at whether they actually did hire or not? Similarly, why are we counting number of business owners rather than number of jobs?

Posted by: DirkKS | December 20, 2011 at 05:29 PM

I am of the opinion that the number of small business owners is significant, because they represent the largest number and basic core of our economy.
Unfortunately, the sector is being ignored. Any significant recovery must begin from modest growth of business in this area, that will lead to new hirings.

Posted by: Hugo A. Castro | December 27, 2011 at 02:39 PM

I believe the focus should be on hoe to provide sufficient jobs and not just count the number of successful businesses.

Posted by: ultrasonic cleaner | January 03, 2012 at 08:33 AM

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December 16, 2011


Maybe this time was at least a little different?

Earlier this week, Derek Thomson, a senior editor at The Atlantic, began his article "The Graph That Proves Economic Forecasters Are Almost Always Wrong" with some observations that don't really require a graph:

"As the saying goes: 'It's hard to make predictions. Especially about the future.' Thirty years ago, it was obvious to everybody that oil prices would keep going up forever. Twenty years ago, it was obvious that Japan would own the 21st century. Ten years ago, it was obvious that our economic stewards had mastered a kind of thermostatic control over business cycles to prevent great recessions. We were wrong, wrong, and wrong."

In a recent speech, Dennis Lockhart—whom most of you recognize as president here at the Atlanta Fed—offered his own thoughts on why forecasts can go so wrong:

"… you may wonder why forecasters, the Fed included, don't do a better job. To answer this question, let me suggest three reasons why forecasts may be off.

"While it's relatively trivial in my view, the first reason involves missing the timing of economic activity. An example of that was mentioned earlier when I explained that GDP for the third quarter had been revised down while the fourth quarter is expected to compensate.

"A second reason that forecasts miss the mark is, in everyday language, stuff happens.

"To be a little more precise, unforeseen developments are a fact of life. In my view, the energy and commodity shocks early in the year had a significant impact on growth in the first half of 2011. The tsunami-related supply disruptions, though temporary, were an exacerbating factor. In fact, a lot of shocks or disruptions are quite temporary and don't cause one to rethink the narrative about where the economy is likely going.

"Which brings me to the third reason why economic prognostications go off track: we, as forecasters, simply get the bigger story wrong.

"What I mean by getting the bigger story wrong is failing to understand the fundamentals at work in the economy."

"Getting the bigger story wrong" is Simon Potter's theme in the New York Fed's Liberty Street Economics blog post, "The Failure to Forecast the Great Recession":

"Looking through our briefing materials and other sources such as New York Fed staff reports reveals that the Bank's economic research staff, like most other economists, were behind the curve as the financial crisis developed, even though many of our economists made important contributions to the understanding of the crisis. Three main failures in our real-time forecasting stand out:

1.  Misunderstanding of the housing boom …

2. A lack of analysis of the rapid growth of new forms of mortgage finance …

3. Insufficient weight given to the powerful adverse feedback loops between the financial system and the real economy …


"However, the biggest failure was the complacency resulting from the apparent ease of maintaining financial and economic stability during the Great Moderation."

Potter does not implicate any of his Federal Reserve brethren, but you can add me to the roll call of those having made each of the mistakes on the list.

Should we have known? A powerful narrative that we should have has taken hold. The boom-bust cycle associated with large bouts of asset appreciation and debt accumulation has a long history in economics, and the theme has been pressed home in its most recent incarnation by the work of Carmen Reinhart and coauthors, including the highly influential book written with Kenneth Rogoff, This Time is Different: Eight Centuries of Financial Folly.

Unfortunately, even seemingly compelling historical evidence is not always so clear cut. An illustration of this, relevant to the failure to forecast the Great Recession, was provided in a paper by Enrique Mendoza and Marco Terrones (from the University of Maryland and the International Monetary Fund, respectively), presented last month at a Central Bank of Chile conference, "Capital Mobility and Monetary Policy." What the paper puts forward is described by Mendoza and Terrones as follows:

"… in Mendoza and Terrones (2008) we proposed a new methodology for measuring and identifying credit booms and showed that it was successful in identifying credit boom events with a clear cyclical pattern in both macro and micro data.

"The method we proposed is a 'thresholds method.' This method works by first splitting real credit per capita in each country into its cyclical and trend components, and then identifying a credit boom as an episode in which credit exceeds its long-run trend by more than a given 'boom' threshold, defined in terms of a tail probability event… The key defining feature of this method is that the thresholds are proportional to each country's standard deviation of credit over the business cycle. Hence, credit booms reflect 'unusually large' cyclical credit expansions."

And here is what they find:

"In this paper, we apply this method to data for 61 countries (21 industrialized countries, ICs, and 40 emerging market economies, EMs), over the 1960-2010 period. We found a total of 70 credit booms, 35 in ICs and 35 in EMs, including 16 credit booms that peaked in the critical period surrounding the recent financial crisis between 2007 and 2010 (again with about half of these recent booms in ICs and EMs each)…

"The results show that credit booms are associated with periods of economic expansion, rising equity and housing prices, real appreciation and widening external deficits in the upswing of the booms, followed by the opposite dynamics in the downswing."

That certainly sounds familiar, and supports the "we should have known" meme. But the full facts are a little trickier. Mendoza and Terrones continue:

"A major deviation in the evidence reported here relative to our previous findings in Mendoza and Terrones (2008) is that adding the data from the recent credit booms and crisis we find that in fact credit booms in ICs and EMs are more similar than different. In contrast, in our earlier work we found differences in the magnitudes of credit booms, the size of the macroeconomic fluctuations associated with credit booms, and the likelihood that they are followed by banking or currency crises.

"… while not all credit booms end in crisis, the peaks of credit booms are often followed by banking crises, currency crises of Sudden Stops, and the frequency with which this happens is about the same for EMs and ICs (20 to 25 percent for banking and currency for banking crisis, 14 percent for Sudden Stops)."

Their notion still supports the case of the "we should have known" camp, but here's the rub (emphasis mine):

"This is a critical change from our previous findings, because lacking substantial evidence from all the recent booms and crises, we had found only 9 percent frequency of banking crises after credit booms for EMs and zero for ICs, and 14 percent frequency of currency crises after credit booms for EMs v. 31 percent for ICs."

In other words, based on this particular evidence, we should have been looking for a run on the dollar, not a banking crisis. What we got, of course, was pretty much the opposite.

No excuses here. Speaking only for myself, I had the story wrong. But the conclusion to that story is a lot clearer now than it was in the middle of the tale.

David AltigBy Dave Altig, senior vice president and research director at the Atlanta Fed

 

December 16, 2011 in Business Cycles, Financial System, Forecasts | Permalink

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When your currency is the global reserve currency, there is nothing
available in sufficient size to run TO. Therefore, a run ON the dollar
was an impossibility. The ONLY other possibility was the only one remaining, a run on the Banking System.

Posted by: Robert K | December 18, 2011 at 01:13 PM

Indeed, you can't predict economic events. No kidding.

However, that fact means you must also give up attempts to control the economy.

If you cannot predict any future, how do you navigate to one particular desired future?

There is no actual evidence over 50-year periods that any country has successfully done so. Economists have destroyed a lot of countries in their attempts, however.

Abolish the Fed.

Posted by: Lew Glendenning | December 18, 2011 at 08:51 PM

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December 02, 2011


The ongoing lender of last resort debate

Two days do not a policy success make, and it is a fool's game to tie the merits of a policy action to a short-term stock market cycle. But at first blush it does certainly appear that Wednesday's announcement of coordinated central bank actions to provide liquidity support to the global financial system had a positive effect. The policy is described in the Board of Governors press release:

"The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank… have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013."

Or, as explained by The Wall Street Journal:

"Under the program, the Fed lends dollars to other central banks, which in turn make the dollars available to banks under their jurisdiction. The action Wednesday made these emergency Fed loans cheaper, lowering their cost by half a percentage point.

"When the Fed launched the swap lines, it saw them as critical to its efforts to tame the financial storm sweeping the globe. Banks in Europe and elsewhere hold U.S. mortgage securities and other U.S. dollar securities. They get U.S. dollars in short-term lending markets to pay for these holdings. In 2008, when dollar loans became scarce, foreign banks were forced to dump their holdings of U.S. mortgages and other loans, which in turn pushed up the cost of credit for Americans.

"The latest action was at least in part an attempt to head off a repeat of such a spiral."

It is at least interesting that this most recent Fed action occurs as criticism of its past actions to address the financial crisis has once again arisen. The immediate driver is another installment in a series of Bloomberg reports that parse recently released details from Fed lending programs during the period from 2007 to 2009.

I have in the past objected to the somewhat conspiratorial tone in which the Bloomberg folks have chosen to cast the conversation. I certainly do not, however, think it objectionable to have a cool-headed conversation on what we can learn from the Fed's actions during the financial crisis and how it might inform policy going forward. Following on the latest Bloomberg article, Felix Salmon and Brad DeLong have taken up that cause.

It may be useful to start with my institution's official answers to the question: Why did the Federal Reserve lend to banks and other financial institutions during the financial crisis?

"Intense strains in financial markets during the financial crisis severely disrupted the flow of credit to U.S. households and businesses and led to a deep downturn in economic activity and a sharp increase in unemployment. Consistent with its statutory mandate to foster maximum employment and stable prices, the Federal Reserve established lending programs during the crisis to address the strains in financial markets, support the flow of credit to American families and firms, and foster economic recovery."

Neither Salmon nor DeLong argues with this assertion, and even the Bloomberg article includes commentary broadly supporting Fed actions, even if not all details of the implementation. More controversial is this observation from the Fed's frequently asked questions (FAQs):

"The Federal Reserve followed sound risk-management practices under all of its liquidity and credit programs. Credit provided under these programs was fully collateralized to protect the Fed—and ultimately the taxpayer—from loss."

Here is where opinions start to diverge. From DeLong:

"In the fall of 2008, counting the Fed and the Treasury together, a peak of 90% of Morgan Stanley's equity—the capital of the firm genuinely at risk—was U.S. government money. That money was genuinely at risk: had Morgan Stanley's assets taken another dive in value and blown through the private-sector's minimal equity cushion, it would have been taxpayers whose money would have been used to pay off the firm's more senior liabilities. 'Fully collateralized' the loans may have been, but had anything impaired that collateral there was no way on God's Green Earth Morgan Stanley—or any of the other banks—could have come up with the money to make the government whole."

And from Salmon:

"The Fed likes to say that it wasn't taking much if any credit risk here: that all its lending was fully collateralized, etc etc. But it's really hard to look at that red line and have a huge amount of confidence that the Fed was always certain to get its money back. Still, this is what lenders of last resort do. And this is what the ECB is most emphatically not doing."

As Salmon's comment makes clear, he does not view these risks as a repudiation of the appropriateness of what the Fed did during the crisis. And if I read Brad DeLong correctly, his main complaint is not about the programs per se, but on the pricing of the support provided to banks:

"When you contribute equity capital, and when things turn out well, you deserve an equity return. When you don't take equity—when you accept the risks but give the return to somebody else—you aren't acting as a good agent for your principals, the taxpayers.

"Thus I do not understand why officials from the Fed and the Treasury keep telling me that the U.S. couldn't or shouldn't have profited immensely from its TARP and other loans to banks. Somebody owns that equity value right now. It's not the government. But when the chips were down it was the government that bore the risk. That's what a lender of last resort does."

I wish that we could stop commingling TARP and the Fed's liquidity programs. At the very least, the legal authorities for the programs were completely distinct, and the Federal Reserve did not have any direct authority for the implementation of the TARP program. But that is probably beside the point for the current discussion. What is germane is the observation that the TARP funds did come with equity warrants issued to the Treasury. So in that case, there was the equity stake that DeLong urges.

As for the Fed programs, here again is a response taken from Fed FAQs:

"As verified by our independent auditors, the Federal Reserve did not incur any losses in connection with its lending programs. In fact, the Federal Reserve has generated very substantial net income since 2007 that has been remitted to the U.S. Treasury."

This observation does not, of course, repudiate Felix Salmon's point that losses may have been incurred, or the DeLong argument that the rates paid for loans from the Fed were not high enough by some metric. Nor should turning a profit be seen as proof that lending policies were sound (just as incurring losses would not be proof that the policies were foolhardy). But doesn't the record at least provide some support for a case that the Fed used reasonable judgment with respect to its lending decisions and acted as prudent steward of taxpayer funds even as it took extraordinary measures to address the worst financial crisis since the Great Depression?

In fact, the main point raised by Felix Salmon is not that risks were taken, but that those risks were not communicated in a transparent way:

"And it's frankly ridiculous that it's taken this long for this information to be made public. We're now fully ten months past the point at which the Financial Crisis Inquiry Commission's final report was published; this data would have been extremely useful to them and to all of the rest of us trying to get a grip on what was going on at the height of the crisis. The Fed's argument against publishing the data was that it 'would create a stigma,' and make it less likely that banks would tap similar facilities in future. But I can assure you that at the height of the crisis, the last thing on Morgan Stanley's mind was the worry that its borrowings might be made public three years later. When you need the money, and the Fed is throwing its windows wide open, you don't look that kind of gift horse in the mouth."

One thing I wish to continually stress is that we should be clear about what Bloomberg refers to as "secret loans." One last time from the Fed FAQs:

"All of the Federal Reserve's lending programs were announced prior to implementation and the amounts of support provided were easily tracked in weekly and monthly reports on the Federal Reserve Board's website."

So the missing information was not about the sums of money being lent but the exact details of who was receiving those loans. In most cases, these loans were not targeted to specific institutions, but obtained from open funding facilities such as the Term Auction Facility. And, though you can argue the point, stigma was a real concern, as Chairman Bernanke has testified:

"Many banks, however, were evidently concerned that if they borrowed from the discount window, and that fact somehow became known to market participants, they would be perceived as weak and, consequently, might come under further pressure from creditors. To address this so-called stigma problem, the Federal Reserve created a new discount window program, the Term Auction Facility (TAF). Under the TAF, the Federal Reserve has regularly auctioned large blocks of credit to depository institutions. For various reasons, including the competitive format of the auctions, the TAF has not suffered the stigma of conventional discount window lending and has proved effective for injecting liquidity into the financial system."

Salmon argues that this resolution to the stigma problem would not have been weakened by the current rules that require reporting the lending specifics with a lag. It is a reasonable argument (in what is, as an aside, a balanced and reasoned article by Salmon), and reasonable people can disagree. In any event, lagged reporting of details on the recipients of Fed loans is now the law. As a consequence, if such liquidity programs are needed again we can only hope that Felix Salmon's beliefs turn out to be true.


UPDATE: The Board of Governors has posted a response to recent reports on the Federal Reserve's lending policies.

David AltigBy Dave Altig, senior vice president and research director at the Atlanta Fed

 

December 2, 2011 in Banking, Federal Reserve and Monetary Policy, Financial System, Monetary Policy | Permalink

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Laziness is no excuse for ignorance, but sometimes information isn't easy to find. Although, the press will report what sells, others lack the...ability and know-how to find the information they are looking for sometimes.

A question the tech & internet industry pose for the future is;

"how can information we are looking for find us?"

A good starting point for answering this is, how do we find information?

Posted by: Jake Lopata | December 02, 2011 at 02:48 PM

Stock markets' reaction to a 50 bps cut in swap rates is no measure of the success of the policy, but a reaction to the optics of central bank coordination. As to the Fed's extraordinary support to banks and the subsequent secrecy, that is troubling. You may say the Depression was avoided, but if it worked, why are we back in the soup with the same sort of action required?

Posted by: demandside | December 03, 2011 at 09:31 AM

"...it is a fool's game to tie the merits of a policy action
to a short-term stock market cycle.

But at first blush it does certainly appear
that Wednesday's announcement
of coordinated central bank actions to provide liquidity support
to the global financial system
had a positive effect."

Dave Altig,
senior vice president and research director
at the Atlanta Fed
.
.
Could the second statement make you appear a bit foolish?
.
.
"It is at least interesting that this most recent Fed action
occurs as criticism of its past actions
to address the financial crisis has once again arisen.

...the Bloomberg article includes commentary
broadly supporting Fed actions,
even if not all details of the implementation."

Dave Altig,
senior vice president and research director
at the Atlanta Fed
.
.
Were there crimes committed Dave?
.
.
"...doesn't the record at least provide some support for a case
that the Fed used reasonable judgment
with respect to its lending decisions
and acted as prudent steward of taxpayer funds
even as it took extraordinary measures
to address the worst financial crisis since the Great Depression? "

Dave Altig,
senior vice president and research director
at the Atlanta Fed
.
.
No.


Posted by: Abner Doon | December 03, 2011 at 05:51 PM

First and foremost the Federal Reserve continually using equity reactions to gauge policy appeal is getting absurd. The stock market voting mechanism is becoming more polluted and distorted by the day. As a result, signal is beginning to look a lot more like noise and its relative usefulness as signal is diminishing.

Swap lines to the ECB are only as good as the ECB as an institution exists. While Europe as a continent has been around for the ages, ECB as an institution has not. To lend dollars cheaper to an institution that is failing to keep its own house in order strikes me as dangerous in itself, let alone lending these dollars at lower rates than they are available to our own banks.

Which brings me to my final point. The problems now are not about liquidity, they are about credit. The institutions that have kept their leverage at 50:1, never marked down their books and never took the opportunity to raise capital during good times should be punished. The fed has kept the 'too big to fail' problem alive and now it is exporting this policy as well.

Posted by: brian | December 13, 2011 at 07:38 AM

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