The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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October 28, 2009

Selling stocks short: Ever controversial

Selling securities short has been a controversial practice as long as financial markets have existed, and the recent financial crisis brought short selling to the fore yet again. In the last week, a bill to impose new restrictions on short selling was introduced.

And earlier this month in its inaugural conference, the Atlanta Fed's new Center for Financial Innovation and Stability (CenFIS) provided a forum for discussing the topic of short selling.

Why does short selling have such a bad reputation? Financial economists generally have a positive view of short selling because short sellers take positions with risk of loss based on their view of a firm's prospects. Some others, though, generally do not take such a benign view of short selling.

Attitudes toward short selling reflect views about speculation. As Stuart Banner notes, a common historical view was that "[s]peculation was both productive and wasteful; it satisfied an evident demand, but its practitioners added no value to the community" (Banner 1998, p. 23). Banning short selling also has a long history. In the United Kingdom, "An act to prevent the infamous practice of stock-jobbing" was passed in 1734, an effort that attempted to ban short selling and was not repealed until 1860. In the United States, contracts to sell stock not owned at the time of sale were unenforceable in New York courts from 1792 to 1858.

Possibly short selling has a bad reputation partly because of its association with "bear raids." A bear raid is a set of trades in which a stock is sold short at a high price, negative rumors are spread to cause the price to fall, and then the short sales are covered by purchasing the stock at the lower price. Some discussions of bear raids suggest that buying stock on the way back up is a way of adding to the raider's profits from manipulating the stock price.

Bear raids are similar to speculators' manipulation of foreign exchange (Friedman 1953). Both are based on attempts to move a financial market price independent of any underlying development. Successful instances of bear raids and exchange-rate manipulation are similar in another way: They are far less frequent than complaints about them.

Selling securities short has a long and controversial history. While it's not clear whether proposed legislation on short selling will be enacted, it's a good bet that short selling's risks and benefits will be debated for quite some time.

By Gerald P. Dwyer, director of the Atlanta Fed's Center for Financial Innovation and Stability


Banner, Stuart. 1998. Anglo-American Securities Regulation. Cambridge: Cambridge University Press.

Friedman, Milton. 1953. "The Case for Flexible Exchange Rates." In Essays in Positive Economics, pp. 157-203. Chicago: University of Chicago Press.

October 28, 2009 in Capital Markets | Permalink


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Here is the problems with short selling. First, because of the idiosyncrasies involved with the reporting and borrowing of stock, players are able to short more stock than is actually available to short. Matt Taibbi has a good article on this in Rolling Stone of all places.

Secondly, the uptick rule gave good discipline to short sellers, since you were only able to short when someone was doing some buying. No uptick rule means that risk profiles are different. They favor the short sellers, since they can literally short at will. Because of the aforementioned stock reporting rules, they are in fact able to conduct bear raids on stocks.

Because the rules of the SEC are drawn to favor the big banks, there is no way for a company, or a group of shareholders to stop it. The short sale might start in a dark pool of liquidity, away from where the rest of the market can even see it. It might start on an order that has been internalized-and the price/volume isn't reported to the market for hours.

I am not against short selling. I am for it-but with correct restrictions. Bring back the uptick rule. Don't allow excess shares to be shorted.

Secondly, change the market structure to make the playing field level. Outlaw dark pools of liquidity, payment for order flow, and internalization of orders, and ban dual trading. Make every order be competitively bid on an organized exchange in which all market participants can see price/volume.

Shorting would provide an economic benefit to the marketplace under those conditions.

Posted by: Jeff Carter | October 30, 2009 at 01:16 PM

Short selling is a positive thing for markets that is best appreciated in markets where it is absent. It helps to moderate - I stress moderate, not stop - euphoric markets and helps to manage falling markets - again, I stress manage, not stop. In falling markets without shorts there can be literally no buyer. In markets with shorts as the market falls, shorts tend to cover, providing liquidity to sellers. Some may find this argument tough to swallow given the vicious markets of the past year, but looking at even more aggressive falls and gaps in EM markets without shorts suggests the US markets would have had an even rougher ride w/o shorts.

None of the above is to argue that the practice of short selling should not be regulated to prevent market abuse...in the same vein as the need to regulate longs that aim to abuse markets, for example by trying to corner a security. My point is to avoid throwing the baby out with the bathwater.

Posted by: rfarris | November 01, 2009 at 04:57 AM

The U.S. necessarily has regulated capitalism, because of monopolies, etc., etc.

Savings used as financial transactions to sell stocks short doesn't add to the goods and services produced, it subtracts from the potential of new goods & services produced.

That should be reason enough to outlaw wasted speculation.

Posted by: flow5 | November 01, 2009 at 09:12 PM

Just wondering, why was Stock-jobbing allowed again?

Did they have a good reason, like see something amiss in the system? Or was it just politics?

Posted by: FormerSSResident | November 02, 2009 at 03:25 PM

Stock jobbing is now called High Frequency Trading, or day trading.
It's allowed, and it would be more expensive if they outlawed payment for order flow.

Posted by: jeff | November 03, 2009 at 04:33 PM

Short-selling also can help investors moderate the overall risk in their portfolios. Certainly, an investor with a long-short portfolio last year would have been better-positioned than one with a long-only portfolio. Piotroski (2000) showed the impressive returns that can be generated by a long-short portfolio based on value investing fundamentals (such as financial strength versus financial distress).

Posted by: David Pinsen | November 04, 2009 at 11:04 AM

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October 21, 2009

The growing case for a jobless recovery

The Wall Street Journal repeats the unhappy news:

"Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.

"Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction."

I'd like to be able to contradict what most forecasters expect, but we at the Atlanta Fed have been building the case for a similar outcome on macroblog. Here are few salient points from previous posts.

Job opportunities are scarce. (Oct. 14, 2009)

"At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low."

This development could, of course, turn around as business activity picks up, but there is more than a little evidence that some structural impediments are afoot.

Job losses have been disproportionately concentrated in small businesses. (Oct. 6, 2009)

As Melinda Pitts pointed out a few weeks back, businesses with fewer than 50 employees account for about one third of net employment gains in expansions. They have accounted for about 45 percent of job losses since the beginning of this recession. Given that these are the types of businesses most likely to be dependent on bank lending—and given that bank lending does not appear poised for a rapid return to being robust—the prognosis for an employment recovery in these businesses is a question mark.

The share of workers reporting that they have been involuntarily cut back to part-time is at a recorded high. (Aug. 14, 2009)

"… the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions. Although the increase in these workers has moderated some since the spring of this year, the number of people in the category of working part-time for economic reasons remains at 8.8 million, well above the level of past contractions in both absolute and relative terms."

One potential implication of this fact is that firms probably have the capacity to expand production without hiring new workers (or increasing worker productivity). All these firms have to do is give more hours to existing workers, who have indicated they would be plenty eager to have them. Good for them—and good for GDP growth—but not much help on the employment front.

Here is one additional concern that we have not previously emphasized.

The percentage of employee separations labeled permanent is at a recorded high.

Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.

The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:


Of course, none of this is proof positive that we are in for a "jobless recovery," but, to me, the odds appear to be increasing.

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

October 21, 2009 in Labor Markets | Permalink


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» Unemployment Rates By State In The U.S. from Prose Before Hos
Jobless recovery, in case you were wondering, is a tidy euphemism for the rich are fine now, but you sure as hell arent: ... [Read More]

Tracked on Oct 22, 2009 10:25:25 AM


Many of the jobs lost have been manufacturing jobs and obivioisly thing trickle down. But the reality is those jobs are not coming back, they have been out sourced. Secondly I think it is insane entirely base over economy's stability on the stock market. most of the firm that are gooding great are investing in third world countries and there progress is reported in the US being a US firm. so we really cant believe that will help the unemployment.

voyage home loans

Posted by: fharefinance@voyagehomeloans.com | October 21, 2009 at 06:03 PM


Regarding the access to credit for small business, the National Federation of Independent Business (NFIB) do not see it as a problem base on a survey of half million of their members.


See the "Small Business Economic Trends - October 2009" link in the "NFIB On The Move" section.

Here is Bloomberg's interview of William Dunkelberg, the chairman of NFIB. The interview on access to credit for small business start at 00:13:20 way into the interview.


At any rate, only 4% in the survey complained about access to credit. The real difficulty is a lack of customers. This also implies the demand for credit is low.

Do you have other data point that contradict this?

Posted by: silly things | October 21, 2009 at 06:17 PM

Is this recession similar to past ones in terms of employee reluctance to hire? We have heard casual comments about how the pending health care legislation, the cap and trade legislation, the expiration of tax cuts have all contributed to small business hesitating to hire. Is there data to support this claim?


Posted by: RK | October 21, 2009 at 06:35 PM

Every recession since 1990 has been followed by a jobless recovery, and the present one is unlikely to be any different. The mechanisms for robust and rapid growth in payrolls and wages just do not exist any more. Thanks to a lowering of international trade barriers, thanks to outsourcing and off-shoring, and thanks above all to Chinese labor’s entry into the global marketplace, workers in the first world have little or no bargaining power these days.

If anything, this lack of bargaining power is even more pronounced during economic downturns. Corporations increasingly take advantage of recessions to make dramatic cuts to payrolls, cuts that they would find politically inexpedient to make in good times. When the recovery comes (as it eventually must), the replacement hires are, more often than not, made overseas.

It is no coincidence that the last few recessions – specifically, those after China’s entry to world commerce – have been followed by jobless recoveries. Indeed, the shape of the world’s labor market today is such that ‘jobful’ recoveries are guaranteed not to happen.

A more detailed version of this analysis, along with an exploration of the policy implications, can be found here:

Thank you for reading!

Posted by: Meta Finance | October 22, 2009 at 09:59 AM

A jobless recovery is not a recovery. Nice try, though.

Posted by: wally | October 22, 2009 at 04:28 PM

How about "Growthless Recovery". Hmmm, that would be a nice research topic and I could even be nominated for economics nobel prizzzee...

Posted by: A Gupta | October 22, 2009 at 11:37 PM

I agree. It seems more and more like a jobless recovery.

My views on this and many other issues are available in my website: http://kunalsthoughts.weebly.com

Posted by: Kunal Kumar Kundu | October 23, 2009 at 06:04 AM

Jobless yes/recovery no the actual unemployment rate is closer to 14-15% when you take in account discouraged workers no longer receiving benefits .
What you are seeing now in the equity & housing market is strictly a dead cat bounce,pushed up by billions of dollars of liguidity close to 0% interest rates tied to unrealistically low mortgage rates 1st time buyers home rebate, cash for clunkers,
S&P500 PE at143 the 100s of billions given to the banks & investment houses has poured into the equity markets not into loans at the consumer level good luck the 2nd leg down is starting now

Posted by: rich | October 25, 2009 at 02:32 AM

if you are experiencing a "jobless recovery" -- necessarily indicating increasing poverty and dwindling tax receipts -- how long will it take yu to ask yourselves if you are actually experiencing a "recovery" at all, or if you have merely succeeded in jimmying the instruments on a plane flying into the ground so they indicate straight and level flight. Are you guys flying the dashboard or the plane? Both will seem to work until you run out of altitude.

Altitude in this case means the combination of dollar confidence and dollar centrality to the currency regime that make it possible to debase the currency through QE measures and forcing a mispricing of risk through artificially low central bank rates without causing a disorderly revaluation.

Posted by: Byzantine_Ruins | October 26, 2009 at 05:58 AM

So we have learned the obvious. That monetary creation can juice up the S&P 500, but doesn't create solid new industries. It seems that a simple thought experiment would have told us that instead the government does runs experiment with our lives. At least I own a few hundred ounces of silver, I am buying a few more every week just in case. Good Luck!

Posted by: Gabe | October 26, 2009 at 05:42 PM

Yup, something has happened and it's a game changer. I see very subtle signs that our young people, kids really, are picking up on it. Out here you could make the case were in a Quazi Europe where ambition and rising standards of living that so many of our American descendants had, is over. At least in their minds.

I don't think this has hit the east coast yet, but it is here in the west. And as we know history in our country is that the future moves from west to east. Scary..

Posted by: FormerSSResident | October 27, 2009 at 07:38 PM

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October 16, 2009

The September CPI with all the trimmings

Yesterday, the U.S. Bureau of Labor Statistics reported that retail prices rose 2 percent (annualized) in September, and it characterized the increase as "broad based, although tempered by a decline in the food index." Indeed, the traditional measure of core inflation (the consumer price index, or CPI, less food and energy) also rose 2 percent (annualized) in September.

But if you read just a few sentences further into the report, you get this observation:

"Contributing to this increase were advances in the indexes for lodging away from home, medical care, new vehicles, used cars and trucks, and public transportation. The increase occurred despite declines in the indexes for rent and owners' equivalent rent, the first decreases in those indexes since 1992. The energy index also increased in September, as increases in the indexes for gasoline, fuel oil and electricity more than offset a decline in the index for natural gas."

This observation begs an important question: What exactly does "broad based" mean here? Rent and owners' equivalent rent actually declined last month. These categories represent a shade more than 30 percent of the CPI. If you add in all the other things that showed outright price declines in September, like food, car rentals, men's apparel, and furniture, about 44 percent of the CPI fell last month. In fact, the two of us believe there is ample evidence in the data of significant disinflationary pressure—much more than the CPI or the core CPI would imply.

One way to get a sense of how broadly based the September price increases are is to examine the "trimmed-mean" estimators produced by the Federal Reserve Bank of Cleveland. Trimmed-means compute the rise in the CPI after excluding, or trimming, a proportion of the most extreme price movements. (If you want to learn more about this procedure, we suggest you read here or watch the Cleveland Fed's "Drawing Board" segment on the idea.)

The figure below shows all of the trimmed-mean CPI estimators ranging from just a tiny proportion of the items trimmed to virtually all of the items trimmed.


For the September CPI, note the rather dramatic drop in the estimate of retail inflation as you trim only a small share of the extreme price changes in the CPI market basket. Just cutting out the most extreme 6 percent of the highest and 6 percent of the lowest price changes reduces the measured inflation rate from 2 percent to 1.5 percent. And the more you trim, the lower the inflation estimate. The median CPI rose a mere 0.5 percent last month.

An interpretation of these data is that the September CPI increase was anything but broad-based. Moreover, the data seem consistent with the idea that prices overall are on a path of disinflation. During the first four months of 2009, the majority of the trimmed-mean estimators put retail inflation roughly between 2 percent and 2.3 percent. In the May to August period, most of the estimators were under 1.3 percent. In September, the majority were under 1 percent.

By Michael Bryan, a vice president in research at the Atlanta Fed, and Brent Meyer, an economic analyst at the Cleveland Fed

October 16, 2009 in Data Releases, Inflation | Permalink


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I'm not an economist, but I was poking around trying to find some justification fromthe governments own statistics for not raising Social Security benefits. Confuses me a little bit, but I am going to re-read this a couple of times.

Posted by: Smyrna roofer | October 18, 2009 at 10:43 AM

It's interesting that:
- September appears to follow the trend that we've seen in the May-August time period.
- September's CPI appears to less positive (as you reduce the outliers/tails) than the May-August trend

Posted by: Our Man in NYC | October 19, 2009 at 06:27 PM

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October 14, 2009

A look at another job market number

As we've written in this blog recently, U.S. labor markets are weak at present and are likely to remain that way for some time. Last week's U.S. Bureau of Labor Statistics' August JOLTS (Job Opening and Labor Turnover Survey) report provided further evidence of labor market weakness (see here and here), with both the vacancy and quit rates at record lows (the JOLTS survey has comparable data back to December 2000).

At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low. This is an especially significant issue given the large number of people who are looking for work. The ratio of the number of unemployed to the number of job openings was greater than 6 in August. In contrast, that ratio was under 1.5 in 2007 and previously peaked at 2.8 in mid-2003, suggesting that finding a job right now is extremely difficult (see the chart).


The quit rate moved back down to its record low of 1.3 percent, as relatively few people want to leave a job voluntarily in the face of such a weak labor market. At the same time, the rate of involuntary separations moved up from 1.6 percent to 1.8 percent, not far below the peak of 1.9 percent in April.

The low probability of finding a job has also caused the average amount of time spent unemployed to rise substantially. The average duration of unemployment is up from around 20 weeks in 2004 (the previous peak) to 26 weeks now, with those unemployed more than 26 weeks now accounting for 36 percent of all unemployed versus 22 percent in 2004. Congress is considering an extension of unemployment insurance benefits (currently due to expire December 31) as the mismatch between job openings and the number of people looking for jobs grows.

By John Robertson, a vice president in the Atlanta Fed's research department

October 14, 2009 in Labor Markets | Permalink


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It appears that your dates are wrong in the graph above (by one year). The "2001" recession is shown to have occurred in 2000, etc.

Posted by: ciel | October 16, 2009 at 01:55 AM

When all the jobs run out we're done. I mean, if the white house thinks Government is the answer, then why would they just give out money that working people earn?

I'm blessed to have 3 jobs. 1 makes me money, one is in a slowdown, and one is my own business. Can't make money doing that these days.

Posted by: Scentsy Bricks | July 06, 2010 at 01:17 PM

the graph of job market looks very positive as we have seen a continous rise in the market since 2007 and been steadly going up in 2008

Posted by: resume help | March 09, 2011 at 08:31 PM

Any discussion about the troubled job prospects for millennials must of course also make mention of their debt problems. The average student, according to Forbes, already carries $12,700 in credit-card and other kinds of debt. And nationwide, tuition debt just recently passed the $1 trillion mark.

Posted by: Market research job | December 07, 2012 at 08:35 PM

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October 13, 2009

Reviewing the recession: Was monetary policy to blame?

Reviewing the Recession: Was Monetary Policy to Blame?
In a recent speech given at the University of South Alabama, Federal Reserve Bank of Atlanta President Dennis Lockhart added his voice to what is now the general consensus: "I agree with all who are declaring that a technical recovery is under way."

There is still much work to be done, of course, not least the continuing examination of just what led to the recession and how a repeat performance can be avoided. One theme of this examination appeared in last week's Financial Times:

"It is certainly true that the most recent bubble, its bursting and the Fed's actions in the aftermath have inspired existing critics and recruited new ones. The first charge is that interest rates under Alan Greenspan, [current Fed Chairman Ben] Bernanke's predecessor, were kept too low for too long, contributing to a bubble of easy credit."

Here is an exercise that that I find intriguing. Suppose we try to estimate, as closely as we can, the actual interest rate decisions of the Federal Open Market Committee (FOMC) over the period spanning the beginning of Greenspan's tenure to the present. It turns out that by using an approach based not only on measures of inflation and actual output relative to potential but also on the lagged fed funds rate, you can actually get pretty darn close to statistically describing what the FOMC did:


I'm going to resist the temptation to call this approach a "Taylor rule." The estimating "rule" used here does in fact include realizations of inflation and a measure of the output gap (that is, a measure of how different gross domestic product is from its potential). These are the essential ingredients of the Taylor rule, but not the source of the close fit evident in the chart above. Over the period covered by the chart, you could have done a pretty good job mimicking the actual federal funds rate outcomes in any given month using knowledge of the previous month's rate. (If you are interested in the details of the estimating rule, you can find them here.)

The interpretation of the tendency for today's federal funds rate to generally follow yesterday's rate—sometimes referred to as interest rate smoothing—is controversial. Glenn Rudebusch (from the Federal Reserve Bank of San Francisco) explains:

"Many interpret estimated monetary policy rules as suggesting that central banks conduct very sluggish partial adjustment of short-term policy interest rates. In contrast, others argue that this appearance of policy inertia is an illusion and simply reflects the spurious omission of important persistent influences on the actual setting of policy."

Rudebusch is decidedly in the second camp, but for our purposes here the exact interpretation may not be that important. Though I am glossing over some not insignificant caveats—such as the difference between final data and the information the FOMC had to react to in real time—the chart above suggests that whatever the underlying structure of policy decisions, after the fact the FOMC appears to have behaved in an extraordinarily consistent way over the period extending from the late 1980s. This observation, in turn, suggests to me that there was nothing all that unusual about monetary policy in 2003 once you account for the state of the economy.

Which leads me to my main point on the chart above: If you are of the opinion that interest rate policy was good through the late 1980s and 1990s, then there seems to be a good case the FOMC was just sticking with "proven" success as it set interest rates through the dawning of the new millennium.

There is, of course, the possibility that the pattern of the funds rate depicted in the chart above was incomplete all along in the sense that whatever variables are explicit and implicit in the estimated rule, they did not include information to which the FOMC should have responded. In calmer times, the story would go, not including potentially pertinent information was not much of a problem. Eventually the missing-data chickens could come home to roost. The prime omitted variable suspect would, of course, be some sort of asset prices.

Scratch any gathering of macroeconomists these days and out will bleed a steady stream directed at incorporating credit and financial market activity into thinking about the aggregate economy. The necessity of proceeding with that work was emphasized by no less an authority than Don Kohn, vice chairman of the Federal Reserve Board of Governors, speaking at just such a gathering of macroeconomists last week:

"It is fair to say, however, that the core macroeconomic modeling framework used at the Federal Reserve and other central banks around the world has included, at best, only a limited role for the balance sheets of households and firms, credit provision, and financial intermediation. The features suggested by the literature on the role of credit in the transmission of policy have not yet become prominent ingredients in models used at central banks or in much academic research."

I will admit that economists were not exactly ahead of the curve with this agenda, but prior to 2007 it was not at all clear that detailed descriptions of how funds moved from lenders to borrowers or how short-term interest rates are transmitted to longer-term interest rates and capital accumulation decisions were crucial to getting monetary policy right. Models without such detail tended to deliver policy decisions not far from the sort depicted above, and, as I noted, they seemed to be working quite well in terms of macroeconomic outcomes.

Thus far, one of the lessons from models in which financial intermediation is taken seriously is that interest rate spreads or stock prices or other asset prices do become part of the policy rate recipe. Your response might well be something along the lines of "duh." You are entitled to that opinion, and I won't push back too hard. But it is yet far from clear that the financial crisis can be explained by a misstep in the setting of the federal funds rate caused by the failure to make whatever adjustments might have been indicated by the inclusion of pertinent financial variables in implicit rate-setting rules of thumb. Furthermore, early versions of research I have seen that combines capital regulation policy and interest rate policy suggest that the macroeconomic consequences of getting the former wrong may be much greater than the consequences of getting the latter wrong. To me, that conclusion has the ring of truth.

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

October 13, 2009 in Federal Reserve and Monetary Policy, Monetary Policy | Permalink


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On the former G.6 release, all debits cleared thru demand deposits, with the exception of Mutual Savings BAnks (an obvious error).
I.e., real estate, financial transactions, etc. all cleared thru DDs. Thus if you take the 2 rates-of-change in bank debits, you can measure all economic activity (including bubbles). Contrary to all other economic theory, the methodology has been infallable.

Posted by: flow5 | October 13, 2009 at 02:21 PM


The graph is very intriguing. One question I have is what inflation measures are being used. If one had substituted the Case-Shiller index of home prices for the Owner's equivalent rent part of the CPI, would that significantly change the resultant interest rates?

If the inflation metrics used to set policy aren't adequately representing true inflation, then the prescribed policy response as set by the so-called rule may also be wrong.

Posted by: uber_snotling | October 13, 2009 at 02:33 PM

At what point does coming up with a myriad of form fitting Taylor rules just look like Butter in Bangladesh (datamining)? Why does the fact that there exists some mechanical rule amidst many possible ex ante formulations which renders all Fed policy consistent provide information whether that is a meaningful consistency? I can't help but wonder if we could come up with a seemingly relevant Taylor-type formula that would fit almost any pattern of random Fed Funds rates. Of course, I also don't think deviating from one of these supposedly tight-fit rules like the actual Taylor is likewise great evidence that the Fed made a mistake in the first place, though many seem to disagree.

Posted by: dlr | October 13, 2009 at 02:55 PM

The recession had as its origin the sub-prime lending crisis. Further, home prices in many US cities were being driven very high, year after year, in comparison to the CPI. However, this price growth of this one asset, residential housing, could not have occurred without the strong availability of mortgage credit. It follows that what is required is a very intense study of the sources of that mortgage credit. In the end, it is money supply, but from what origin? Interest rates alone cannot account for the availability of mortgage credit. The mortgage credit availability drove a very powerful "inflation" in one asset. The consequence of the eventual "deflation" was the dire impact on the balance sheets of the banks, as their collateral collapsed and the sure-fire real estate growth ceased and then reversed. It seems quite doubtful that the Fed by itself could have caused all of the excess mortgage credit availability. This is what must be studied, what kind of institutions made the mortgage loans and from whence came the money supply to fuel the loans. The answer is likely quite complex.

Posted by: mme | October 13, 2009 at 09:37 PM

David - I enjoy your posts, but I wanted to add one observation about this particular argument. I agree that a monetary policy misstep had nothing to do with the proximate cause of the current events, but some of those who criticize the Fed...of whom I am one; see my book "Maestro, My Ass"...actually are critical of the stability and forecast-ability of the rate. By leaching uncertainty from the market, the Fed enabled much greater leverage than if they had been spastic, or at least more stochastic. Your post actually demonstrates that the rate path was HIGHLY predictable (which we knew, but it's a great illustration of just how predictable), and that is in fact the main error the Fed made...not the level, but the variance.

Keep the posts coming! They are very thoughtful.

Posted by: Mike Ashton | October 14, 2009 at 08:01 AM

The technical appendix to your estimating rule states: "The primary difference from the original Taylor rule is the inclusion of the lagged Fed funds rate". Taylor likes to remind people that according to his understanding of his rule, the Fed funds rate became too low around the beginning of '02 and didn't catch up with his rule until sometime around '06 (see, e.g., "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong"). Your estimating rule works well as an approximation of actual interest rate decisions, so is the inclusion of the lagged Fed funds rate really making up essentially all of the difference between how well your rule works and how well Taylor's rule works?

Posted by: Rich Fitzgerald | October 14, 2009 at 08:32 AM

There are some other aspects to the "rates to low" argument that are essentially implicit in your "rule". For one thing we were after all entering a 2nd war while still being involved in a first in '03. Then job creation was extremely weak and didn't pick up until '03 and peaked on a YoY basis in '04, indicating a very weak recovery. Finally there is the infamous conundrum - long rates stayed low even after s.t. were raised. What else was the Fed to do - quantitative tightening? We now know (ahem) that the conundrum was based on "excess" savings in the trade surplus countries being re-cycled into the US to finance over-consumption on leveraged debt. Which by the by gets to the heart of the real criticism of Uncle Allen's last years - the failure to enforce existing regulatory regimes. In other words you are so right about which factors turn out to be important. Sadly none of this has entered the common wisdom or general discussions.

Posted by: dblwyo | October 14, 2009 at 09:33 AM

In my experience, the rates-were-too-low crowd can be shut up by asking two questions:

1. How much higher should rates have been? (If this doesn't stop them in their tracks completely, they will nominate something fairly moderate, say 2 percentage points. Scarily few of the people in this camp have actually thought about the answer to this question.)

2. Do you REALLY think that rates X percentage points higher would have stopped the speculative behaviour in housing and credit markets?

The Fed could not have stopped the bubble with interest rates alone. They would have had to jack rates up so far it would have killed the economy.

Posted by: michelle color me shocked | October 14, 2009 at 07:08 PM

I think you mean:

"The Fed COULD have stopped the bubble with interest rates, BUT they would have had to jack rates up so far it would have killed the economy."

Of course this was already baked in to the picture. Wealth cannot be created by simply increasing the money supply, the misallocation of capital that is caused by steady increases in unsound money supply always results in a in a future crisis...cause by the misallocation of capital. This is good for the banks that have implicit ability to tax the masses to socialize losses whenever they want(Goldman Sachs, JP Morgan), but it is bad for all of those who cannot(regular hard working people raising families).

Posted by: Gabe | October 15, 2009 at 10:13 AM

Given that the Great Recession had as one of its primary causes the government-sponsored easing of residential mortgage lending criteria over the past decade plus, I am intrigued by the statement that "...early versions of research...that combines capital regulation policy and interest rate policy suggest that the macroeconomic consequences of getting the former wrong may be much greater than the consequences of getting the latter wrong." Such research is sorely needed.

Posted by: sts | October 15, 2009 at 04:19 PM

No additional research is needed to understand that low rates were part of a witches brew comprised of 1) a product in high demand (houses); 2) supported by large government subsidies of for both capital formation (FHA, FNMAE, FRDMAC) and tax treatment (homeowner deduction, cap gains exclusion); 3) encouraged by trade organizations and unions (real estate and construction industry) and media advertising revenue; 4) financed by a securitization process that generated outsized profits compared to historically low risks; 5) supported by ratings agencies with explicit conflicts of interest; 6) levered by deregulated investment banks 30:1; 7) enabled by a trade deficit that generated a "virtuous recycling" of the so-called "savings glut" with our Asian trading partners; and 8) which was substantially the result of central bank currency manipulation. The question is whether this brew would have poisoned our economy had rates been higher. Clearly, low rates were a necessary but not sufficient factor. Look at that chart again: the drop from over 6 to less than 2 allowed the mortgage industry to create products that dropped the carrying cost of homes by two thirds and still left plenty of "profit" for the banks. Dropping the carrying costs by two thirds directly caused prices to more than double given all of the above factors working together.

Posted by: Jeffrey Goodrich | October 24, 2009 at 01:33 PM

Is it but a coincidence that the "Taylor rule" is also a concept in Calculus that allows for approximation of integrals (areas) of graphs similar to that of the Fed's interest rate changes.

Posted by: rankpay | October 26, 2009 at 04:00 PM

It is certainly true that the most recent bubble, its bursting and the Fed's actions in the aftermath have inspired existing critics and recruited new ones. The first charge is that interest rates under Alan Greenspan

Posted by: Piano chord chart | October 01, 2010 at 07:19 AM

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October 06, 2009

Prospects for a small business-fueled employment recovery

In a speech yesterday, William Dudley, the president of the Federal Reserve Bank of New York, identified financial constraints for small businesses as a restraint on the pace of economic recovery. Specifically, he said:

"For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated because of the length and severity of the recession—making many less creditworthy. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up as banks have responded to rising credit losses in these areas by tightening credit standards. Third, small businesses have few alternative sources of funds. They are too small to borrow in the capital markets and the Small Business Administration programs are not large enough to accommodate more than a small fraction of the demand from this sector."

President Dudley's comments are even more relevant in the current recession if one considers the disproportionate effect the recession has had on very small businesses. In general, the Small Business Administration defines a small business as a firm with less than 500 employees. However, for my analysis here I focus on the very small firms (those with less than 50 employees) as the data indicate these firms have been the most affected by the current recession. (Look here for another take on how to define a small business).


During periods when national employment levels were expanding since 1992 (when this data series began), firms with less than 50 employees have made up approximately one-third of the nation's employment growth. During the employment declines associated with the 2001 recession, these firms made up only 9 percent of job losses. In the current recession, though, these very small firms have made up 45 percent of the nation's job losses.

Looking ahead, it's not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.

By Melinda Pitts, research economist and associate policy adviser

October 6, 2009 in Labor Markets | Permalink


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In my browsing this morning, I came across this article from the Federal Reserve Bank of Atlanta - Prospects for a small business-fueled employment recovery. Here is a quote from a speech given by William Dudley of the Federal Reserve... [Read More]

Tracked on Oct 7, 2009 11:02:17 PM


This is absolutely the problem. One thing that has hurt is the fact that if you are self employed you have to show 2 years of income at a certain rate before obtaining a mortgage. By the time these owners can prove that business has grown....we could be in another recession.

In addition, the credit card companies are pounding these people....sometimes just profiling their line of business. Add this to the fact that health insurance costs 40% more and rapidly rising and you can see why these people would not or could not hire!

Posted by: Annie | October 07, 2009 at 02:55 PM

"Third, small businesses have few alternative sources of funds. They are too small to borrow in the capital markets..."

Why "too small"? Are capital markets simply wary of lending to small businesses or are sb's denied access to these markets via regulation? If the latter, it can be changed and I don't see a reason it shouldn't and if the former, it seems an excellent opportunity for capital marketeers to open a new market. If impoverished Africans and SE Asians are proving a good market for micro-loans, I don't see why American small businesses shouldn't be a good bet so long as the lender does his due diligence. The loans might come with more risk, but you should be able to hedge that in some way.

Posted by: The Apologist | October 07, 2009 at 03:16 PM

It is not just credit. We live in a new environment where you need political connections to succeed in business. Friends in congress, etc. Things just not available to the little guy who just wants to make a living charging a fair price for a good or service.

Posted by: JQT | October 07, 2009 at 03:27 PM

The Apologist - The cost of doing due diligence does not scale at a 1:1 ratio. A firm 1/10th the size does not cost 1/10th as much to investigate to see whether a loan is worth it. Below a certain size the cost of due diligence exceeds the expected profit of loans so... no loans.

At some point somebody's going to make a killing by bringing that due diligence cost radically down but nobody's figured it out yet so the small business capital access problem persists.

Posted by: TM Lutas | October 07, 2009 at 03:41 PM

The specters of higher taxes and less credit are also accompanied by the expectation of more onerous regulation in the coming years. Small business only pays taxes on profits but regulatory costs are incurred before any profits are had. Why invest in such a climate? Hunker down and hope to survive is what we are all doing. Except for those with government connections that is.

Posted by: Steve Plunk | October 07, 2009 at 05:18 PM

What TM Lutas said. Now, extend that point to securitization. While even larger loans now mostly have to be carried on bank books, the hope is that securitization will pick up. Banks will want to have the most readily (cheaply) securitizable loans on their books. That means rated firms with publicly available books - publicly listed firms come before mom and pop firms. Now, compound the cost problem by the fact that banks are cutting costs and loan risk in just about any way they can. They have an incentive to simply stop processing applications from small firms until their risk-adjusted capital is ready for more risk.

It's a pretty bad situation.

Posted by: kharris | October 08, 2009 at 08:24 AM

Though Dudley is certainly another bank-centric, he is correct in putting deterioration of fundamentals at the top. From that, the rest follows.

Posted by: wally | October 09, 2009 at 05:42 PM

I'm not hiring. My small business customers, home owners needing roofs, almost always need financing to get it done. They can't get it easily. I hope it changes soon..

Posted by: Atlanta roofer | October 18, 2009 at 10:48 AM

Health insurance, or the lack thereof is the reason for hiring problems for small businesses. Insurance costs much more to purchase through a small business, than a large corporation that it is hard to compete for good employees.

I know, I was an HR Manager for a small company and the premiums charged to small businesses is much more than large corporations.

Posted by: Flan | November 07, 2009 at 01:40 PM

Being on the middle of this kind of crisis isn't really good. There was a report before that the economy is back to normal status but then a latest report comes out that it's not doing fine again.

Hmmm... I just hope it will recover as soon as possible so that small business operators will earn what they should've earn last year. In that way, opportunities will come out again.

Posted by: Sam@ home business | September 21, 2010 at 11:55 PM

“Severity of the recession, credit card borrowing and home equity loans; and few alternative sources of funds” I agree with what Dudley said because I think that small business find it hard to operate their business because of this constraints. In our bba syllabus, recession affects the business a little but the longer it the recovery period, the recovery also took a long turn. Another is that, it is not recommended for small business to use credit cards to pay their bills, as it would be much better to use cash as some accidentally use the money to pay our use to pay their activities, forgetting that they still have obligations to see.

Posted by: bba syllabus | October 10, 2010 at 11:43 PM

he is correct in putting deterioration of fundamentals at the top.

Posted by: ashu | November 01, 2010 at 08:09 AM

Banks will want to have the most readily (cheaply) securitizable loans on their books. That means rated firms with publicly available books - publicly listed firms come before mom and pop firms, great lens will credit this and save.

Posted by: scoremore | November 05, 2010 at 10:33 AM

Small business only pays taxes on profits but regulatory costs are incurred before any profits are had...

Posted by: scoremore | November 08, 2010 at 09:52 AM

Small business only pays taxes on profits but regulatory costs are incurred before any profits are had.

Posted by: scoremore | November 09, 2010 at 08:03 AM

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October 02, 2009

Economic troughs, changes in the unemployment rate, and fed policy

Recent data on the U.S. economy have been mixed. But today's weak labor market report (discussed more here, here, and here) provides a reminder that thinking of the economy as being in anything other than a technical recovery at this time is likely an exaggeration. The report showed the unemployment rate inching higher to 9.8 percent—and it would have been even higher absent a measured decline in labor market participation. Those active in the labor market declined by an estimated 571,000 in August. Discouragement about job prospects is a likely explanation for at least part of this decline.

In the face of such a weak labor market, it is interesting to consider the relationship between the timing of a recession's end and the peak in the unemployment rate. The following table shows the National Bureau of Economic Research's recession dates, lining those dates up with the month when the unemployment rate peaks. (Note that I exclude the 1980 recession since the unemployment rate did not peak before the 1982 recession.)

Historical lag between end of recession, unemployment rate peak, and beginning of funds rate tightening cycle
End of Recession

rate peak

Beginning of funds rate tightening cycle

Months from end of recession to unempl. peak

Months from unempl. peak to beginning of funds rate tightening cycle

Nov 2001

Jun 2003

Jul 2004



Mar 1991

Jun 1992

Feb 1994



Nov 1982

Dec 1982

Jun 1983



(Jul 1980)





Mar 1975

May 1975

May 1976



Nov 1970

Aug 1971* Mar 1972



*Following the 1970 recession, the unemployment rate was 6.1 in December 1970 and again in August 1971. If the December 1970 peak is used, months from end of recession to unemployment peak is 1 and months from unemployment peak to beginning of funds rate tightening cycle is 15.
Source: Bureau of Labor Statistics, National Bureau of Economic Research, and Federal Reserve Board

From the table, it is clear that there is considerable variation in how long it takes for the unemployment rate to move lower after the economy enters recovery mode. The typical explanation for the lag is that, as the economy shows signs of improvement, more people enter the labor force. These additional people raise the denominator in the unemployment rate calculation that often more than offset actual declines in unemployment (more on the labor force from Calculated Risk).

The past two recessions stand out as cases where the months from the end of the recession before the unemployment rate peak were very long—more than a year.

Of related interest is the historical relationship between the peak in unemployment and the beginning of a policy tightening. (Tim Duy discusses prospects for Fed policy and contrasts some recent economic data with recent Fed commentary.) Of course, the Fed does not base policy solely on movements in the unemployment rate, and the always useful advice to not casually extrapolate future decisions based on the past is even more important given the unusual circumstances of this recession. Nonetheless, historically, the beginning of a tightening cycle has lagged behind the peak in the unemployment rate by many months. This pattern is true for expansions when the FOMC was felt to have done a poor job in managing inflation, such as the post-1975 period, and it is equally true for periods when the Fed is believed to have done a very good job of managing inflation, such as the post-1991 episode.

Let me be clear that I am not offering a forecast but instead a reminder that the dynamics of unemployment do not always follow the dynamics of recessions. And for what it's worth, Federal Reserve policy has not historically responded immediately to declines in the unemployment rate—for both better and worse.

By John Robertson, a vice president in the Atlanta Fed's research department

October 2, 2009 in Data Releases, Labor Markets, Monetary Policy | Permalink


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John - a useful perspective and helpful for looking at the future. There's a chart running around that looks at comparisons of Unemployment in various recessions (fyi - it was first concieved by CR but rapidly percolated until the NYT blog was getting credit). By eyeball it looks like every one fits into a similar genus of curve but two highly differentiated species. Short and deep vs shallow and long. One with sufficient math skills would be tempted to create and estimate a set of parametric curves.
This one is "shallow" and very long but shallow is already deeper then the prior deeps. All the curves are symmetrical as well, self-similar. So if unemployment peaks around 10% or better in the Spring when it peaks that'll mean it lasted for ~27 months. That puts positive growth around Q312. Now that's optimistic in the sense that we get growth sufficiently far north of 2.5% in real GDP at some point, which on the odds is unlikely. Which might push off positive employment growth even farther.
One could then speculate about Fed policy, credit conditions, troubled loans and sustained weakness in the banking sector; particularly if one were concerned with monetary policy and the soundness of the banking system and noted that very few seem to be contemplating these scenarios.
FWIW - some of these using some simple graphics just got considered in a recent post:

Posted by: dblwyo | October 03, 2009 at 07:39 AM

NB: forgot so let me add that the recent OMB mid-session update seems to mirror these arguments almost exactly.

Posted by: dblwyo | October 03, 2009 at 07:41 AM

the employment data were no surprise, especially the benchmark revision 00 for anyone who has been paying attention to the birth/death adjustment. in addition, the key variable is cap utilization not employment. you can read all my remarks at econmkts.blogspot.com


Posted by: steven blitz | October 03, 2009 at 02:07 PM

Dear John, NFP data were disappointing but in any case they show an improvement of the job market that should produce a first positive reading in the first quarter of 2010. Market expectations of a below 200k NFP reading were biased by an exceptionally good result in August. If September had confirmed August, we would have probably had the first positive reading in October, in sharp contrast with the lead-lag data that you mentioned.
I would like also to add an observation about monetary policy. Today, monetary policy anticipated (with the minimum in fed funds rate) the end of the recession by many months. That was not true for some of the previous crises that you mentioned. Between the end of recession and the peak in unemployment in the last two recessions (2001 and 1991) interest rates were lowered by c.a. another 2% according to your timing. This change in monetary policy during the loosening phase means in my opinion that we don't have to take for granted another 36 months of zero rates. Much more likely a faster exit like the ones of the comparable big crises of the '70s and '80s.

Posted by: exp | October 04, 2009 at 07:14 AM

Oh, what is the cause & the effect? In the area of economics, those who believe that history is certain to repeat, are certain to error.

Posted by: flow5 | October 10, 2009 at 01:30 PM

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