How ideology, education, and experience shape FOMC member views. New research from NBER analyzes the preferences of Federal Open Market Committee (FOMC) and the tendency of 70% of members over the past half-century to be either consistent “hawks” or “doves,” with the rest serving as “swingers.” The education of members at “freshwater” or “saltwater” institutions plays a role, but the study found that over the past 20 years there has been increased convergence between the two schools of thought.
Swedish House of Finance research finds no increase in talent for financial sector. Despite massive gains in compensation relative to the rest of the economy, new research finds that the productivity and efficiency of the financial sector haven’t increased in kind. While the authors find little evidence of a “brain drain,” their results imply that much of the gains made by workers in the financial sector are due to rents. See further analysis from the authors at Pro-Market.
Analysis of the Economic Growth, Regulatory Relief and Consumer Protection Act from the Wharton School. The recent financial regulation reform, also referred to as the “Crapo bill,” is still in the news two weeks after its passage. David Zharing of the University of Pennsylvania and Andy Green from the Center for American Progress discuss the implications of the reform in this podcast. The law reduces the compliance costs for smaller banks, but doing so is not without risk. Indeed, a number of the banks no longer required to undergo stress testing due to the newly-raised systemically important financial institution (SIFI) threshold required bailouts during the financial crisis or were bailed out by the Federal Reserve before.
More on the Volcker Rule. One of the more controversial provisions of the Crapo bill is the potential reform of the Volcker Rule, which prohibits banks from making short-term proprietary trades using their own funds. Opinions on the change are mixed. Critics maintain the rule is necessary to prevent risky speculation. Others aren’t so sure, since proprietary trading would remain illegal and most of the proposal refers to what is categorized as proprietary trading and how banks are expected to report these trades. The Fed is currently considering ways to implement these changes.
Forecasters predict modest growth boost from financial regulation rollback. A Wall Street Journal survey shows 61% anticipate moderately stronger growth thanks to the reform. However, 40% of those surveyed said the bill would “modestly weaken the stability of the financial system,” and about 50% believe there would be no effect.
Clearing House finds financial system stable, but credit growth slowed after Basel III. Regulations related to stress testing, leverage, and liquidity requirements in the financial sector make banks “the safest they’ve been in more than 20 years.” However, the push towards safer assets could result in lower yields on safe assets, requiring greater Federal Reserve intervention in the future.