News and Commentary
Matt Stoller has an interesting issue of his BIG newsletter describing the inequality in how the Fed sets interests rates and, more importantly, who gets to borrow at those rates. The ability to borrow cheaply through low interest rates should be a boon to everyone, except the only institutions that gain access to the markets which the Fed’s interest rate changes (directly) effect are private equity, large banks, and other established financial institutions. The merits of higher or lower interest rates and how market concentration influences the opportunity for productive investment aside, one point is clear: the monetary transmission mechanism is benefiting the ultra-wealthy, with negative effects on investment, productivity, and growth.
New Research
A new NBER paper analyzes the preferences of investors with respect to brokers. There is considerable heterogeneity among brokers, and while hedge funds are price-insensitive and place a higher premium on “order flow” (the difference between buy-initiated and sell-initiated orders), which indicates a model focused on arbitrage rather than productive investment. Additionally, investors prefer traders who live in close physical proximity to them, demonstrating the benefits of trust and personal relationships in investment.
A new article analyzes the history of laws that give regulators the power to prevent “unsafe and unsound” bank practices, not just the clear violation of certain laws. As originally written, this “unsafe and unsound” provision treated banks as an extension of the monetary policy regime (i.e. performing a government function), making macroprudential policy a feature of monetary policy. A return to the original understanding of this provision, while giving regulators increased discretion over bank functioning, would allow them to intervene to stop risky practices even if they are not per se prohibited.
Prior to the financial crisis, the “jumbo-conforming spread” (the difference between interest rates on loans for larger homes, which are not eligible for purchase by Fannie and Freddie, versus conforming loans, which are) was positive. A new AEI study examines why the spread is now negative, i.e. why the rates for jumbo loans are lower than those for conforming loans. They find that an increase GSE guarantee fees, an increase in demand for jumbo loans by banks, and the change from an implicit to an explicit guarantee for the GSEs resulting in an increased funding advantage all contributed to the now-negative spread.
A new paper from the Levy Economics Institute critiques the Barro-Ricardo equivalence, the theoretical underpinning for many forms of fiscal austerity and concern over debt levels, finding that (among other shortcomings) it does not take into consideration the degree of leverage in the financial system, which often necessitates government intervention in the form of bailouts.
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