Archive for October 2009
Fed Chest-Thumping for Beginners
I generally avoid writing about monetary policy, since every economics course I’ve taken since college has been a micro course, and besides Simon is a macroeconomist, among other things. But since just about everyone in my RSS feed has been linking to Tim Duy’s recent article on the Fed, I thought I would try to put in context for all of us who don’t understand Fed-speak.
Duy takes as his starting point a series of statements by Fed governors and bank presidents indicating “hawkishness,” which in central banker jargon means caring primarily about inflation, not economic growth. (“Doves” are those who care more about economic growth and jobs, although, just like in the national security context, no one likes to be known as a dove. This itself is a disturbing use of language, since it implicitly justifies beating up on poor people, but let’s leave that for another day.)
Too Connected To Fail
Over on the Economist Roundtable, my colleague Daron Acemoglu makes several important points.
- We now have some financial institutions (and perhaps nonfinancial firms also) that have such strong and deep political connections, they will not be allowed to go bankrupt. This is a reality we must face.
- Assuming that we can address such a deep political problem with a tweak of our regulatory arrangements is a dangerous illusion. Read the rest of this entry »
The Economics of Models
Economic and financial models have come in for a lot of criticism in the context of the global financial crisis, much of it deserved. One of the primary targets is models that financial institutions widely used to (mis)estimate risk, such as Value-at-Risk (VaR) models for measuring risk exposures (which we’ve discussed elsewhere) or the Gaussian copula function for quantifying the risk of a pool of assets.
In September, the Subcommittee on Oversight and Investigations of the House Science and Technology Committee held a hearing on the role of risk models in the financial crisis and how they should be used by financial regulators, if at all. The hearing focused largely on VaR models, which attempt to quantify the amount that a trader (or an entire bank) stands to lose on a given day, with a certain confidence level. (For example, a one-day 1% VaR of $10 million means that on 99% of days you will lose less than $10 million.) Read the rest of this entry »
