Rent Check
Dan Takash has a new post critiquing the regulatory treatment of Contingent Convertible bonds. CoCos function like normal debt until the borrower becomes financially distressed, then the loan is converted into equity. It’s basically a private contract functioning like a bail-in, and therefore it is vulnerable to many of the same legal delays. As such, allowing CoCo’s to count towards a bank’s capital requirement is ill-conceived.
News and Commentary
Last week, an article in The Hill did a good job voicing the trepidation many feel concerning the fed’s recent decisions. In the piece, Professor Micheal Bordo argues that rules-based monetary policies have the best track record in controlling inflation and maintaining financial stability. Rules-based approaches prescribe that policy should generally mirror a mathematical model of how previous fed boards reacted in past situations. Meanwhile, others argue that policymakers need more latitude than a simple, and potentially outdated, rules-based approach allows. Niskanen advisory fellow Brad DeLong has an excellent post explaining a potential rationale behind the fed’s newfound dovish-ness. In his telling, they are surrendering to markets’ prediction of lower long-term interest rates, since their previous rate hikes were not followed by the expected consequences.
Macro Musings is an excellent podcast covering the gamut of economic policy issues. David Beckworth of the Mercatus Center interviews an academic or policymaker each week. Here are two past episodes we found particularly interesting. First, Peter Stella was head of the IMF’s Central Banking Division during the 2008 crisis. They discuss the “plumbing” of conducting monetary policy, safe-assets shortage theory (a twist on secular stagnation), and his hesitations about the quantity theory of money. Second, Paul Tucker is a veteran of the Bank of England and is now a senior fellow at the Center for European Studies. They consider the policy and political legitimacy of central banking in the shadow of unconventional monetary policies.
New Research
This study explores the effect of credit constraints on the labor supply. The authors examine the quantity of labor on the extensive margin (the number of workers) and the intensive margin (how long each worker works). Looking at the progress of banking deregulation in the US, they find that the ensuing expansion in credit leads to a decrease in the number of hours worked, particularly for the lower-middle-class. Since labor decreased on the intensive but not extensive margin, the evidence suggests greater access to credit allows workers the choice of scaling back the hours they have to work.
This paper traces the role of financial institutions in driving international trade. During the medieval period, banks played an important role in funding journeys and hedging risks. By the 19th century, London came to underwrite almost all global commerce. However, that British-centric system came apart during WWI, and our era’s wave of globalization relies on a more decentralized financial network. As such, countries must develop local banking institutions to meaningfully participate in international trade.
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