Tuesday, January 10, 2017

Crisis 2008 not about real toxic derivatives but rather spooked markets

"We examine the payoff performance, up to the end of 2013, of non-agency residential mortgage-backed securities (RMBS), issued up to 2008. For our analysis, we have created a new and detailed data set on the universe of non-agency residential mortgage backed securities, per carefully assembling source data from Bloomberg and other sources. We compare these payoffs to their ex-ante ratings as well as other characteristics. We establish five facts. First, the bulk of these securities was rated AAA. Second, AAA securities did ok: on average, their total cumulated losses up to 2013 are under six percent. Third, the subprime AAA-rated RMBS did particularly well. Fourth, the bulk of the losses were concentrated on a small share of all securities. Fifth, later vintages did worse than earlier vintages. Together, these facts call into question the conventional narrative, that improper ratings of RMBS were a major factor in the financial crisis of 2008."

Monday, January 9, 2017

maximum employment, stable prices and moderate long-term interest rates.

The CB troika
Maximum stable  moderate
Each has one noun attached to it in the " law " governing the FED

However ...

Fed boards see to it
These modifiers are  all in the wrong places

But we can re scramble the three  around and get closer

Maximum employment ?

means employment rates consistent with moderate wage rate change

Stable prices ?

means  moderate and stable product price inflation

Moderate long term interest rates ?

That's a stumper

Long rate goals are not moderate steady or maximum

They're instrumental

NBER quality punditation "In an interconnected world, national economic policies regularly lead to large international spillover effects, which frequently trigger calls for international policy cooperation. However, the premise of successful cooperation is that there is a Pareto inefficiency, i.e. if there is scope to make some nations better off without hurting others. This paper presents a first welfare theorem for open economies that defines an efficient benchmark and spells out the conditions that need to be violated to generate inefficiency and scope for cooperation. These are: (i) policymakers act competitively in the international market, (ii) policymakers have sufficient external policy instruments and (iii) international markets are free of imperfections. Our theorem holds even if each economy suffers from a wide range of domestic market imperfections and targeting problems. We provide examples of current account intervention, monetary policy, fiscal policy, macroprudential policy/capital controls, and exchange rate management and show that the resulting spillovers are consistent with Pareto efficiency, but only if the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated."

None of these conditions are met most of the time !

i) policymakers act competitively in the international market

 (ii) policymakers have sufficient external policy instruments 

 (iii) international markets are free of imperfections.

A know it all: "declining job market ‘dynamism’ is not driven by restrictions on labor supply like occupational licensing, but rather by slack labor demand—the classic symptom of monopsony power."

Saturday, January 7, 2017

Hicks poison from PK

"Now, suppose you’re considering the effects of policies that will, other things equal, raise or lower aggregate demand — that is, shift the IS curve. In normal circumstances, where the IS curve intersects an upward-sloping LM, such shifts have limited effects on output and employment, because they’re offset by changes in interest rates: fiscal expansion leads to crowding out, austerity to crowding in, and multipliers are low."

Note austerity leads to ....crowding in ! 

Shades of early Billy C -benson -  booby Rubin  bilge  

Vickrey fanatics must crush this absurd hicks interest rate school of normal wates macro navigation 

We've known since Kalecki 
interest rates are the bunk as aggregate demand managers 

The past 2 US dollar Forex surges hurt industrial Trade ..hurt low ed union wage workers

Money line

"workers with low education levels, but high wages, tend to do very badly during these periods of RER shocks." 

"With the recent strength in the dollar, and the coming Trump fiscal stimulus and possible border tax adjustment, there is heightened interest in understanding what the consequences of RER movements will be for the manufacturing sectors and its workers (see here). In a past column, Campbell told the story of how, in the late 1990s, the rising value of the US dollar and the rise of China created a “perfect storm” of shocks to hit the US manufacturing sector. Sectors which were more exposed to these shocks suffered declines in output, employment, productivity, and investment. The magnitude of the shock was large enough to explain at least a large share of the “surprisingly sudden” collapse in US manufacturing employment in the early 2000s, in support of the Bernanke hypothesis on the origins of “secular stagnation”. In addition, the losses from a temporary overvaluation appear to be highly persistent, evidence for what economists call “hysteresis”.
But, this analysis was conducted in terms of sector-level outcomes. What happens to individual workers in sectors more exposed to these trade shocks when the RER appreciates? Did the two large dollar appreciation periods (the mid-1980s and the late 1990s/early 2000s) have a differential impact on poor workers? To answer these questions, weconsidered evidence from the Current Population Survey’s (CPS) Merged Outgoing Rotation Group (MORG). The advantage of this data set is that workers are interviewed about their employment status and wages in consecutive years, so that the impact on individual workers can be measured. We use essentially the same identification strategy employed by Klein, Schuh, and Triest (2003), Campbell (2016b), and others by comparing workers in sectors initially more exposed to trade shocks vs. those in sectors less exposed when the RER appreciates. This identification strategy benefits from the fact that in the US from 1979 to 2010, there are two periods of large exchange rate appreciations, which were both associated with large structural trade deficits.
Figure 1: The Two Large RER/Trade Shocks
Notes: WARULC = Weighted Average Relative Unit Labor Costs, a measure of the real exchange rate. This measure was introduced by Campbell (2016a) to solve several problems in the IMF’s RULC index (which didn’t include China, among other flaws). Campbell found that WARULC has more out-of-sample predictive power than the IMF’s RULC index.
Figure 1 shows that, during the 1980s, US unit labor costs appreciated about 50% relative to RULCs in other countries, and in the 1996-2001 period, nearly 40%. This large change in relative prices should theoretically leave a mark on the economy, particularly in sectors more exposed to trade. The 1980s period is probably the cleanest experiment, as the cause of the appreciation was likely the election of Ronald Reagan and subsequent large fiscal stimulus, which led monetary policy in the US to be tight relative to trading partners. These events are all likely to be exogenous from the perspective of the subsequent decline in more open manufacturing sectors, particularly as more open sectors actually appear to be a bit less capital-intensive and also slightly less sensitive to interest rate movements than manufacturing sectors in general. (“Open sectors” here are defined as a weighted average of import penetration and the export share of shipments. Open sectors are defined in the paper at an average lag of 5 years.)
We find that workers in sectors more exposed to RER shocks are indeed less likely to be employed, and more likely to be either unemployed or to have exited the labor force altogether one year later. Over the period 1997 to 2004, a worker in a sector in the 90th percentile of openness would have been a cumulative 11% less more likely to be non-employed when surveyed relative to a worker from a sector in the 10th percentile of openness. Perhaps surprisingly, we do not find any impact on wages conditional on being employed. There is a differential negative impact on workers with less than a college education, who experience declines in wages. However, we also don’t find a negative differential impact for lower wage workers. We reconcile these seemingly conflicting results by showing that workers with low education levels, but high wages, tend to do very badly during these periods of RER shocks.
On the whole, our findings also support the thesis from the papers (such as Klein, Schuh, and Triest 2003, and Campbell 2016b) which argue that RER movements have relatively large impacts on more open sectors using data from the Annual Survey of Manufactures. (In our view, despite the paucity of replication and robustness studies published in journals, getting at the truth is actually very difficult, and so confirming results using datasets collected via different means is in fact helpful.) In addition, our results suggest that the two large trade shocks did not seem to have a large differential impact on low-wage workers.
Will these results hold out-of-sample in the period since 2014, as the dollar experiences a third period of overvaluation? Clearly, the trade policy environment is about to change dramatically, making it difficult to say. But if Trump’s policies continue to put upward pressure on the dollar, this will cause stress on the manufacturing sector and its workers. Whether this will result in a third manufacturing employment collapse (on a structural basis) is another question. In Germany, for example, corporate boards by law represent both workers and shareholders, and it is likely that the elasticity of employment with respect to the exchange rate is also lower (for example, see Moser et al. 2010). Thus it is not inevitable that RER/trade shocks must result in extreme hardship for manufacturing workers. Policies that limit hardship on workers and yet allow everyone to enjoy the benefits of free trade are probably a more stable political equilibrium than lurches from free trade to crude protectionism.

Trump fiscal thrust

Pk sings the downer blues "So, the probable outlook is for not too great growth and deindustrialization. Not quite what people expect."


"Trump deficits won’t actually do much to boost growth, 
rates will rise and there will be lots of crowding out. 

a strong dollar and bigger trade deficit, like Reagan’s morning after Morning in America."

Crowding out ? De industrialization ? 

Yikes !

Notice The fed plays ogre here by sadistically raising rates that lift forex and increase the trade gap 
Even as the higher borrowing costs  and forex smothers investment in additional domestic output capacity 

But why assume a baleful Fed ? 

Wage push inflation ..commodity bottle necks ....etc etc 

Pk just loves that team of frauds among frauds with their sanctimonious 
Phillips curve ish modeling toys 

They worship 
 a devilish  wage rate accelerator lurking beneath 5% ...or around 4 % UE 
regardless of EPOPs 
Ability to increase inflow of job seekers as prospect brighten 

We just might  hang  in the mid 4's while employment grows rapidly 
If the fed doesn't or can't squelch 
the demand impact of a trump deficit surge 

Given about 4 points of slack in the present EPOP 
We got the latent output potential