News and Commentary
Lyndsey Jefferson of Chatham House interviewed Matthew Oxenford on the dangers of financialization. We’ve gone past the tipping point where an increase in the size of the financial sector is a good thing, to the point where the financial sector is no longer creating value and its inherent instability contributes to the current political climate and resultant extremism on the left and right.
John Cochrane follows up on JP Koning’s criticism of the Fed’s denial of The Narrow Bank’s charter. Concerns about narrow banks’ implications for financial stability are nonsensical–it’s mathematically impossible for a narrow bank to fail. More important, however, is that traditional banks get the benefit of the interest payments TNB plans to capitalize on, plus the implicit promise of a bailout should a downturn TNB would be immune from occur.
It is true that financialization enabled a speculative flurry of home buying that, in part, contributed to the rise of home prices in the U.S. While some blame financialization for this, James Gleeson points out that financialization and affordable housing can be made compatible, if the supply of housing increases with demand.
A new NBER paper examined the effects of the Federal Reserve system on bank network failures during the Great Depression. Following the creation of the Fed, banks’ management of cash and their capital buffers were lower than would be expected–indicating a belief that the Fed would bail them out and creating a more vulnerable financial sector.
A model created in a new American Economic Review paper examines the effects of interest rates and loan to value (LTV) ratios on home prices. Declining interest rates, unsurprisingly, increase home prices while increasing the allowable LTV has mixed results.
A new American Economic Review paper finds a clear, positive relationship between home values and household borrowing.