This Week in Financial Regulation, March 17th

This Week in Financial Regulation, March 17th

News and Commentary

The Bank of England announced economic measures as households and businesses brace for the Covid-19 epidemic. The measures include a cut to interest rates, more generous lending rates to small and medium-sized firms, and a cut to the countercyclical capital buffer which will free up capital requirements for lenders. Meanwhile, Sweden’s FSA has cut the countercyclical capital buffer to 0% as well to safeguard a credit supply for companies and households.

Norbert Michel writes at Forbes about Fannie Mae and Freddie Mac in anticipation of a new capital requirement proposal by FHFA Director Mark Calabria later this year. Michel notes the abnormal returns shareholders of these two government-sponsored enterprises enjoyed from 1990 to 2004 and attributes it to radically different capital requirements. If Fannie and Freddie are to go forward out of government conservatorship established in 2008, he stresses they must play by the same rules as other lending institutions.

In The Washington Post, Daniel W. Drezner argues that economic policymakers must quickly offer support to those harmed by the quarantines, including credit to airlines for flight cancellations and sick leave funding in anticipation of the pandemic. But he stresses that further economic policy ultimately lies in an effective public health policy, which must include robust testing, accurate information, and other efforts to lower the infection curve. Only through such measures can investors and employers be reassured.

New York Magazine’s Jonathan Chait makes a progressive case for Joe Biden’s platform, emphasizing the changes from the current administration. He also points out that any legislative aspirations will run into the reality of whoever the 50th Senator. That might be a reassurance to those who are not as left-wing on economics as Chait’s critics.

American Banker has a new piece by Rob Blackwell suggesting the coronavirus might end up being the first real test of the Dodd-Frank Act. He astutely notes that writers of the bill saw risky financial products as a potential cause of the next recession and built tough capital and liquidity standards accordingly. Blackwell points to the fact that the future recession will almost certainly be due to necessary quarantine procedures coming into place right now, so the question remains if these regulations actually solidify the banking sector.

Dean Baker at CEPR pushes back at The Washington Post’s Editorial Board, arguing there was no reason for bailing out the banks because a second Great Depression could have just as easily been prevented with another type of stimulus. He points at the moral hazard of giving low interest loans to institutions which might encourage more risky behavior and failure down the road.

Professor Gabriel Mathy of American University writes in Ordinary Times about the looming recession due to necessary quarantine measures to slow the coronavirus pandemic. He notes the long history of acyclical service consumption, a sector which today makes up a little less than half of our national economy. But while these quarantine measures are necessary, they will certainly induce a major sectoral shock. Fiscal measures should target individual Americans so they can still afford to spend on necessities even as layoffs and leaves rise. Gabriel Mathy also has a blog post providing a very broad political economy and sectoral comparison of our situation to the Great Depression which you can read here.

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By |2020-03-19T14:49:33-07:00March 19th, 2020|Blog, Financial Regulation|