Op-Ed's

Finance and blockchains

We are constantly bombarded by reports of how blockchain technology will change the world. This column describes the technology, the problem it is designed to solve, and the impact it might have on finance. Conceivably, a blockchain system could securely track the ownership of every financial instrument and exposure in the global economy. While this is a very tall order, it would be truly revolutionary. In practice, however, we are still a long way off...Vox

Target-2 masks reduced fragmentation

By Stephen Cecchetti, Kim Schoenholtz

The claims of the Bundesbank on the European Central Bank through the Target-2 system are approaching...OMFIF

Ten Years after Bear

By Stephen Cecchetti, Kim Schoenholtz

Ten years ago in March, the run on Bear Stearns kicked off the second of three phases of the Great Financial Crisis (GFC) of 2007-2009. Last year, we argued that the crisis begain in earnest on August 9, 2007, when BNP Paribas suspended redemptions from three mutual funds invested in US subprime mortgage debt (Cecchetti and Schoenholtz 2017b). In that first phase of the crisis, the financial strains reflected a scramble for liquidity combined with doubts about the capital adequacy of a widening circle of intermediaries...CEPR

The stubbornly high cost of remittances

By Stephen Cecchetti, Kim Schoenholtz

Despite recent technological advances, the costs for migrants to send money across borders to their families remain extremely expensive, with fees often surpassing 5%. This column explores the various factors shaping remittance prices and identifies two key avenues for cost reduction: consumer education and competition. In particular, expanding mobile technology is helping to displace banks and squeeze remittance costs...Vox

Financing intangible capital

By Stephen Cecchetti, Kim Schoenholtz

The Global Crisis dramatically revealed the severity of ignorance about risk exposure in the global financial system. A major issue is the complexity of legal structures with webs of subsidiaries and a lack of consolidated information systems. This column describes efforts to address these failings through the launching of a global legal entity identifier. The initiative offers great promise for addressing the complex information problems. However, network externalities imply that its success will depend on participation and adoption incentives...Vox

GDP at risk

By Stephen Cecchetti, Kim Schoenholtz

Managing risk and complexity: Legal entity identifier

By Stephen Cecchetti, Kim Schoenholtz

Banking the unbanked: the Indian Revolution

By Stephen Cecchetti, Kim Schoenholtz

Financial inclusion - providing universal access to financial services and encouraging their use - is an important means for promoting economic development. As of 2014, the World Bank estimated that there were still two billion adults without a bank account, and many others with only a tenuous connection to the financial system...Vox

Black Monday: Thirty Years after

By Stephen Cecchetti, Kim Schoenholtz

Black Monday has been referred to as the first contemporary global financial crisis. This column reviews key aspects of the 1987 crash and discusses the subsequent steps taken to improve the resilience of the financial system. It also highlights a key lingering vulnerability - the lack of a mechanism for managing the insolvency of critical payment, clearing, and settlement institutions...Vox

Eclipsing LIBOR

By Stephen Cecchetti, Kim Schoenholtz

Financial firms have paid fines totalling more than $9 billion for manipulating LIBOR, yet this flawed benchmark has not been replaced. This column argues that there are reduced incentives for banks to participate in setting the LIBOR rate, and so the potential of, and incentives for, manipulation remain. Although LIBOR is unsustainable, international regulators are working to produce more robust alternatives and to smooth the transition....Vox

The financial crisis, ten years on

By Stephen Cecchetti, Kim Schoenholtz

There is still a notable lack of consensus over when exactly the 2007-09 financial crisis started. This column argues that the crisis began on 9 August 2007, when BNP Paribas announced they were suspending redemptions. In 2007, the US and European financial systems lacked two key shock absorbers: adequate capital to meet falls in asset values, and adequate holdings of high-quality liquid assets to meet temporary liquidity shortfalls. Lacking these, the financial system was vulnerable to even relatively small disturbances, like the BNP Paribas announcement...Vox

Bank resolution: The importance of a public backstop

By Stephen Cecchetti, Kim Schoenholtz

In April 2017, the US House of Representatives passed a bipartisan revision of the bankruptcy code, which would expedite the resolution of adequately structured intermediaries. This column considers the new Financial Institutions Bankruptcy Act of 2017 and how it fits in with the existing Dodd-Frank mechanism. By raising the odds of an effective resolution, the Act (as a complement to Dodd-Frank) boosts the credibility of the US regime. However, in the absence of an Orderly Liquidation Fund-like provision for temporary government funding, investors and foreign regulators will expect a future US government to re-introduce an ad hoc bailout mechanism when it is inevitably needed...Vox

A Step Backward in Financial Regulation

By Kim Schoenholtz, Larry White

The scarring experience of the financial crisis of 2008, and the federal government's actions to avert widespread chaos in the financial system, remain poorly understood events across the political landscape.

Although Congress enacted the Dodd-Frank Act in 2010 to prevent such crises from recurring, some of its provisions reflect that poor understanding. Rather than surgical precision, Dodd-Frank took an inefficient broad-brush approach to making the financial system safer. And despite being overly burdensome, it failed to address a range of issues, including the need to streamline the regulatory framework itself...Bloomberg

The Fed's price stability achievement: A case for Federal Reserve independence

By Stephen Cecchetti, Kim Schoenholtz

US monetary policy has been the target of substantial criticism over the years. This column outlines one key area where the Federal Reserve has done remarkably well - managing price stability. Its ability to control inflation is a key reason that, for the sake of the US and global economies, the Fed's independence should be preserved...Vox

The Fed's Favorite Inflation Predictors Aren't Very Predictive

By Stephen Cecchetti, Michael E. Feroli, Peter Hooper, Anil Kashyap, Kim Schoenholtz

The Federal Reserve has met one part of its legal mandate: Unemployment is low enough that most people looking for a job can usually find one. Yet interest rates in the United States remain at historic lows. The reason is that inflation remains below the central bank's target of 2 percent per year, and the Fed is reluctant to raise rates quickly until policymakers are confident that inflation will return to its desired level...538

GDP-linked bonds: A primer

By Stephen Cecchetti, Kim Schoenholtz

Gross government debt in advanced economies has surpassed 105% of GDP, up from less than 75% a decade ago. As a result, policymakers and economists have been looking for ways to make it easier to manage these heavier debt burdens....Vox

Ending too big to fail

By Stephen Cecchetti, Kim Schoenholtz

"Too big to fail" is an enduring problem for financial authorities and regulators. While forbidding government bailouts may be a popular move, the strategy lacks credibility. This column examines the proposals of the Minneapolis Plan to End Too Big to Fail. The plan has many virtues that tackle systemic problems and that build on the Dodd-Frank Act's crisis prevention and management tools. However, further analysis of the plan is still needed to ensure that its measures aren't circumvented...Vox

The Bank of Japan at the policy frontier

By Stephen Cecchetti, Kim Schoenholtz

The Bank of Japan has recently implemented one of the largest central bank policy shifts in modern times, raising its inflation target explicitly to 2% and kicking off the most rapid balance sheet expansion among the leading central banks. This column assesses this policy decision and its potential pitfalls, and compares it to similar policies enacted in the past. Unless policy has a significantly larger impact on financial conditions going forward than it has to date, the revised framework will likely be insufficient to achieve the Bank's inflation target any time soon...Vox

Reforming Mutual Funds: A proposal to improve financial market resilience

By Stephen Cecchetti, Kim Schoenholtz

US capital markets are the deepest and broadest in the world, fortifying the country's financial system and making its assets both liquid and attractive. A major part of this capital market advantage is due to the role played by mutual funds, which provide retail investors with a low-cost means of diversifying risk while earning a market return on their savings.

However, a growing class of mutual funds - those that hold mostly illiquid assets - appear to be a potential source of systemic risk (Gelos and Oura 2015). In this column we explain why, and then go on to suggest a change that is simple to implement and might mitigate the problem...Vox

A Primer on Helicopter Money

By Stephen Cecchetti, Kim Schoenholtz

Helicopter money is not monetary policy. It is a fiscal policy carried out with the cooperation of the central bank. That is, if the Fed were to drop $100 bills out of helicopters, it would be doing the Treasury's bidding.

We are wary of joining the cacophony of commentators on helicopter money, but our sense is that the discussion could use a bit of structure. So, as textbook authors, we aim to provide some pedagogy...Vox

Brexit stress test

By Stephen Cecchetti, Kim Schoenholtz

Capital -the excess of assets over liabilities- determines solvency, so policymakers are used to thinking of it as a tool for keeping banks and the banking system safe. House Financial Services Chair Hensarling's proposal to allow banks to opt for a simple capital standard that would substitute for other regulatory oversight is just the most recent example...Huffington Post

Bank Capital and Monetary Policy

By Stephen Cecchetti, Kim Schoenholtz

Donald Trump, Treasury Debt and the Dollar

By Stephen Cecchetti, Kim Schoenholtz

The time has come to start weighing in on presidential candidate Donald Trump's statements on economic policy. In this post we examine his comments about U.S. government debt. After saying that he is the "king of debt" and that he "loves debt," Mr. Trump recently went on to suggest that if interest rates were to rise, he would seek to "make a deal" on U.S. Treasury debt. In his words, "I could see long-term renegotiations where we borrow long term at very low rates." He also called this action: "refinance debt with longer term."...Huffington Post

How Low Can They Go?

By Stephen Cecchetti, Kim Schoenholtz

Not long ago, nearly everyone thought that nominal interest rates could not go below zero. Now, we have negative policy rates in the euro area and Japan, while in Sweden and Switzerland, the lowest controlled rate is below -1%. And government securities worth trillions of dollars bear negative rates ,too.

When we first wrote about negative rates a year ago, we argued that the effective lower bound (ELB, rather than ZLB) for nominal rates was determined by the transactions costs of storing and transferring cash...Huffington Post

The Scandal is What's Legal

By Stephen Cecchetti, Kim Schoenholtz

If you haven't seen The Big Short, you should. The acting is superb and the story enlightening: a few brilliant outcasts each discover just how big the holes are that eventually bury the U.S. financial system in the crisis of 2007-2009. If you're like most people we know, You'll walk away delighted by the movie and disturbed by the reality it captures. [Full disclosure: one of us joined a panel organized by the film's economic consultant to view and discuss it with the director.]

But we're not film critics. The movie -along with some misleading criticism- prompts us to clarify what we view as the prime causes of the financial crisis...Huffington Post

Falling Interest Rates and Government Investment

By Stephen Cecchetti, Kim Schoenholtz

Switzerland is an amazing place, not least the skiing, the chocolate, and the punctual trains. The latter is part of the country's exquisitely maintained infrastructure: there are no potholes, and no deferred maintenance of train tracks, tunnels, airports, or public buildings. Few countries go so far, but many can take a lesson: it pays to maintain infrastructure at least so that it doesn't fail...Huffington Post

How the Fed Tightened

By Stephen Cecchetti, Kim Schoenholtz

Back in August, we explained in our blog the mechanics of how the Fed can tighten policy in today's world of abundant bank reserves. Now that the first policy tightening under the new framework is behind us, we can review how the Fed did it, if there were any surprises, and what trials still lie ahead.

So far, the new process has been extraordinarily smooth - a tribute to planning by the Federal Open Market Committee (FOMC) and to years of testing by the Market Desk of the Federal Reserve Bank of New York (FRBNY). But it's still very early in the game, so uncertainties and challenges surely remain...Huffington Post

A Primer on Central Bank Independence

By Stephen Cecchetti, Kim Schoenholtz

"These are my principles. If you don't like the...well, I have others." - Groucho Marx

Central bank independence is controversial. It requires the delegation of powerful authority to a group of unelected officials. In a democracy, this anomaly naturally raises questions of legitimacy. It also raises fears of the concentration of power in the hands of a select few...Huffington Post

Making Driving Safe

By Stephen Cecchetti, Kim Schoenholtz

Unless you are a skydiver or bungee jumper, getting into a car is almost surely the riskiest thing you regularly do. The data bear this out. The National Highway Traffic Safety Administration (NHTSA) reports that in 2013, people in the United States drove 3 trillion vehicle miles and were involved in accidents causing 32,719 fatalities to occupants and non-occupants, or 1.09 deaths per 100 million vehicle miles driven. That is 300 times higher than the fatality rate in commercial air travel!...Huffington Post

Virtual Frenzies: Bitcoin and the Block Chain

By Stephen Cecchetti, Kim Schoenholtz

Bitcoin has prompted many people to expect a revolution in the means by which we make and settle everyday payments. Our view is that Bitcoin and other "virtual currency schemes" (VCS) lack critical features of money, so their use is likely to remain very limited.

In contrast, the technology used to record Bitcoin ownership and transactions -- the block chain -- has potentially broad applications in supporting payments in any currency. The block chain can be thought of as an ever-growing public ledger of transactions that is encrypted and distributed over a network of computers. Even as the Bitcoin frenzy subsides, the block chain has attracted attention from bank and nonbank intermediaries looking for ways to economize on payments costs. Only extensive experimentation will determine whether there are large benefits...Huffington Post

Open Letter to Senator Rand Paul

By Stephen Cecchetti, Kim Schoenholtz

We read with interest your August 21 Bloomberg View that calls for "a thoughtful congressional discussion of the pros and cons of a more thorough audit" of the Federal Reserve. While we share your desire for effective congressional oversight of the Federal Reserve, we strongly disagree on the best way to do it...Huffington Post

After Greece: Saving EMU

By Stephen Cecchetti, Kim Schoenholtz

Euro-area leaders announced yet another agreement with Greece in mid-July. However, the survival of the euro area has never been about the fate of Greece. Instead, it is whether the Europeans will implement the reforms necessary to keep the euro area together. If they do, the common currency will endure. If they don't, then the euro may not survive the next big adverse shock...Huffington Post

Dodd-Frank: Five Years After

By Stephen Cecchetti, Kim Schoenholtz

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereafter, DF), the most sweeping financial regulatory reform in the United States since the 1930s. DF explicitly aims to limit systemic risk, allow for the safe resolution of the largest intermediaries, submit risky nonbanks to greater scrutiny, and reform derivatives trading...Huffington Post

The Euro Area's Debt Hangover

By Stephen Cecchetti, Kim Schoenholtz

The ongoing difficulties in Greece - combined with the ECB's dramatic actions to ward off deflation - are distracting attention from what may be the euro area's biggest and most pervasive problem: debt.

You wouldn't know it from the record low level of government bond yields, but much of Europe lives under a severe debt burden. Nonfinancial corporate debt exceeds 100 percent of GDP in Belgium, Finland, France, Ireland, Luxembourg, Netherlands, Portugal, and Spain. And, gross government debt (as measured by Eurostat) is close to or exceeds this threshold in Belgium, France, Greece, Ireland, Italy, Portugal and Spain...Huffington Post

A Simple Guide to "Secular Stagnation"

By Stephen Cecchetti, Kim Schoenholtz

Since its cyclical peak in 2007 - just prior to the financial crisis - the U.S. economy has grown by only 1.2% at an annual rate. This is down sharply from the 3.0% pace that had prevailed since 1990. The resulting cumulative shortfall now exceeds $2 trillion, or more than $6,500 per capita. Naturally, we all want to know why. And what, if anything, to do about it...Huffington Post

The Congressional Reserve Board: A Really Bad Idea

By Stephen Cecchetti, Kim Schoenholtz

What would you think if you were to open your morning newspaper to find the following headline?

"Congress Closes Down Fed, Takes Over Monetary Policy"

If you're like us, you'd panic. In short order, you'd think that long-term inflation expectations would rise, pushing bond yields higher. You'd anticipate an increase in the volatility of growth, employment and inflation. That more volatile environment would drive up the risk premium required on new investments, hindering long-term economic growth. Finally, you'd be very worried about how these Congressional policymakers would manage the next financial crisis...Huffington Post

ECB Paddles Both Ways in the Rubicon

By Stephen Cecchetti, Kim Schoenholtz

On January 22, the ECB crossed the Rubicon twice -- but in opposite directions. In an effort to combat deflation and years of anemic growth, the central bank announced a sustained program of large-scale asset purchases. At the same time, it capped the amount of risk-sharing in the Eurosystem...Huffington Post

The ECB's Not-So-Sweet 16th

By Stephen Cecchetti, Kim Schoenholtz

Sixteenth birthdays can be momentous occasions. A coming of age of sorts. Well, New Year's Day 2015 the European Central Bank turned 16. It is a momentous birthday, but not all that sweet...Huffington Post

A Homestead Act for the 21st Century

By Stephen Cecchetti, Kim Schoenholtz

When the U.S. government wanted people to settle the western frontier, it gave them land, not a loan. Today, when the government seeks to promote home ownership, it offers cheap debt. That creates bad incentives and risks financial instability. American history teaches us that the government should subsidize home equity, not mortgage debt...Huffington Post

Investing in College

By Stephen Cecchetti, Kim Schoenholtz

Most Americans want a college education, but it is expensive. On average, a four-year school costs about $25,000 per year, or $100,000 for a degree. That's roughly half the median house price - a substantial investment. If you have to borrow to finance a college education - just like you borrow to own a house - is it really worth it?...Huffington Post

Has Paper Money Outlived its Purpose?

By Stephen Cecchetti, Kim Schoenholtz

Serious people have been suggesting that we think hard about eliminating paper currency. Paper money facilitates criminality and creates the zero lower bound (ZLB) for nominal interest rates. So, why not just get rid of it and replace it with electronic money?...Huffington Post

Market Tantrums and Monetary Policy

By Michael Feroli, Anil Kashyap, Kim Schoenholtz, Hyun Song Shin

Assessments of the risks to financial stability often focus on the degree of leverage in the system. In this report, however, we question whether subdued leverage of financial intermediaries is sufficient grounds to rule out stability concerns. In particular, we highlight unlevered investors as the locus of potential financial instability and consider the monetary policy implications...Download

Europe Needs a Credible Deflation Strategy

By Thomas Cooley, Kim Schoenholtz

The great promise of the European common currency was that a single disciplined central bank could end the persistent inflationary bias in much of Europe and foster greater integration. How things have changed!...CNBC.com

Who Will Carry the Water?

By Thomas Cooley, Kim Schoenholtz

To make the U.S. financial system safe, we need to end the era of big bailouts. In December, the U.S. and the UK took a significant step in that direction, announcing a common strategy for resolving insolvent cross-border financial giants, known as global systemically important financial intermediaries (G-SIFIs)...The Huffington Post

The Euro: Bad Idea, Poorly Executed, Hard to Fix

By David Backus, Kim Schoenholtz

When the Norwegian Nobel Committee awarded the 212 Peace Prize to the European Union (EU), they cited advances in "peace, democracy, and human rights." The common currency zone we call the Euro Area isn't mentioned, unless it's impled by the phrase "grave economic difficulties"...The Huffington Post

Taking the L-I-E Out of Libor

By Kim Schoenholtz, Lawrence White

The recent revelations by Barclays Plc (BARC) probably spell doom for the London interbank offered rate, at least in its present form.

Many banks facing huge legal risks could decide to end their participation in the rate-setting process. And even if most institutions remain involved, Libor needs fundamental reform if it is to restore its credibility as a benchmark for hundreds of trillions of dollars of finacial contracts...Bloomberg

Europe's Banks Need a TARP of Their Own

By Thomas Cooley, Matthew Richardson, and Kim Schoenholtz

In spite of Sunday's victory of pro- bailout parties in the Greek election, the European Monetary Union remains in a battle for its survival. What began as a debt predicament is now compounded by a rapidly expanding banking crisis and growing political instability that threaten European integration...Bloomberg.

The Euro Exit

By Thomas Cooley, Matthew Richardson, and Kim Schoenholtz

This Sunday, June 17, Greeks once again will go to the polls to elect a new leader. Unlike the past when elections were all about the right versus the left side of the political spectrum, this one is about whether Greece should stay in the European Monetary Union (EMU) and implement the necessary austerity...The Huffington Post.

Transparency Can Be Trying

By Kim Schoenholtz

Last week the Fed released - for only the second time- individual members' projections of the target federal funds rate. The median projections for late-2014 is now at 1% - about 25 basis points higher than in the original January projections. Moreover, only four of 17 FOMC members now expect that the first rate hike will occur after 2014, down from the previous tally of six...Stern Economics Blog.

Why European Banks Are Stressed Out

By Anil Kashyap, Kim Schoenholtz and Hyun Song Shin

Europe seems determined to repeat its mistake and undertake a second round of ineffectual stress tests on its banks. The 2010 version did little to alleviate banks' spiraling funding costs or to restore confidence in European markets. Unless the design of this year's tests is fundamentally different from last year's, Europe's crisis will persist...WSJ.com.

How Shape-Shifting Banks Foil Dodd-Frank Act

By Thomas Cooley and Kim Schoenholtz

Deutsche Bank AG (DBK) recently separated its U.S. investment bank from its bank holding company, removing it from supervision by the Federal Reserve.

So far, U.S. regulators have reacted passively to such moves by foreign banks to avoid the heightened capital requirements mandated by the Dodd-Frank Act.

That's because Dodd-Frank failed to heed a fundamental law of architecture: Form must follow function...Bloomberg.

Will EU Fail Stress Tests?

By Anil Kashyap, Kim Schoenholtz and Hyun Song Shin

The Federal Reserve's 2012 stress tests of U.S. Banks suffered from some of the same weaknesses as the ones it conducted last year.

We hope the same won't hold true of the european Banking Authority, which has delayed another round of exams of the region's banks until 2013, after failing to credibly carry out its supervisory mandate in 2011...Bloomberg

Stress Tests and the Financial System

By Kim Schoenholtz

For decades, financial institutions have used stress test to assess their well-being. These tests usually simulate the performance of one bank in a scenario that coud make it illiquid (unable to sell assets or to borrow) or insolvent (liabilities exceed assets). Until recently however, typical test scenarios were far less challenging than the actual experience of the financial crisis that began in 2007...NYU Stern Economics Blog

The Battle Over Money Funds

By Kim Schoenholtz

Both Securities and Exchange Commission Chairman Mary Schapiro and Federal Reserve Chairman Ben Bernanke have warned in recent days that money market funds remain vulnerable to runs. That is unquestionably true, and if a run occurs, U.S. taxpayers will bear the costs of bailing them out. Should taxpayers continue to subsidize the money market mutual fund (MMMF) industry?...Reuters

The Fed as Inflation Targeter

By Kim Schoenholtz

Today, the U.S. Federal Open Market Committee (FOMC) announced a major update of its framework for setting monetary policy. While the FOMC emphasizes its 'dual mandate' (regarding inflation and employment), the new framework is fully consistent with an inflation-targeting central bank.

The key change was the announcement of an agreed quantitative longer-run goal for inflation...NYU Stern Economics Blog

Toward and Even More Transparent Fed

By Kim Schoenholtz

Monty Hall, of Let's Make a Deal fame, aimed for suspense, but he knew that a little transparency could add to the tension of a game show. So he told contestants what prize was behind the winning door, but not which door it was. As they selected among the three doors, anxious contestants provided titillation for TV voyeurs...NYU Stern Economics Blog

Not Even Close...

By Kim Schoenholtz

There is only one relevant question with respect to last week's summit in Europe on saving the euro: Is it enough to halt or reverse the run on the European banking system?...Huffington Post

Euro's Fall May Doom All

By Kim Schoenholtz

The eurozone financial system is at serious risk of collapse - which would mean calamity for the US system, too. But our government's not prepared...NY Post

What Alexander Hamilton Can Teach the Euro Zone

By Kim Schoenholtz

A finger in the dyke won't solve the Euro crisis.

The central banks' move last week to provide dollar liquidity for the world financial system was greeted by markets with euphoria. But it only underscores the seriousness of the threat of renewed financial paralysis emanating from the euro zone. A new financial seize-up could overwhelm Europe, the United States and many other countries...Politico