Jeanne:
".. the existence of collateralised borrowing gives rise to an externality, i.e. a market imperfection that explains why the free-market equilibrium exhibits too much volatility and why government regulation is in fact desirable and can make everybody in the economy better off"
". When credit is collateralised, the interaction between debt accumulation and asset prices contributes to magnify the impact of booms and busts."
" Increases in borrowing and in collateral prices feed each other during booms.
In busts, the feedback turns negative, with credit constraints leading to
fire sales of assets and further tightening of credit."
". When credit is collateralised, the interaction between debt accumulation and asset prices contributes to magnify the impact of booms and busts."
" Increases in borrowing and in collateral prices feed each other during booms.
In busts, the feedback turns negative, with credit constraints leading to
fire sales of assets and further tightening of credit."
".. when borrowers in a given sector use an asset as collateral, then their borrowing capacity is an increasing function of the price of the asset. The price of the asset, in turn, is driven by the sector's demand for assets, which depends on their borrowing capacity. This introduces a mutual feedback loop between asset prices and credit flows: small financial shocks to the sector can lead to large simultaneous booms or busts in asset prices and credit flows "
Figure 1. Feedback loops
.gif)
".. the asset-debt loop entails systemic externalities that lead borrowers to undervalue the benefits of conserving liquidity as a precaution against busts. A borrower who holds more liquidity (or equivalently less debt) when the economy experiences a bust, relaxes not only his private collateral constraint but also the collateral constraints of all other borrowers because he does not have to fire-sell his asset holdings, thereby supporting the asset price."
"Since individual borrowers do not internalise this spill-over effect, they take on too much debt during good times. We find that it would be optimal for policymakers to impose countercyclical regulatory measures on leveraged borrowing to prevent borrowers from taking on socially excessive levels of debt"
". Macroprudential regulation should be tightened in booms as borrowers increase their leverage and as the vulnerability of the economy to a bust grows – and reduced in busts, when lenders recall their loans and leverage in the economy declines."
"The objective of such regulatory measures is to raise the private cost of borrowing to the social cost, i.e. to induce borrowers to internalise the negative externalities that they impose on the economy by borrowing excessively."
" It is therefore convenient to express the magnitude of the measure as a “Pigouvian tax,” i.e. a tax that captures the external costs that borrowers impose on the economy."
The optimal Pigouvian tax on debt in the US small and medium enterprise sector
". Macroprudential regulation should be tightened in booms as borrowers increase their leverage and as the vulnerability of the economy to a bust grows – and reduced in busts, when lenders recall their loans and leverage in the economy declines."
"The objective of such regulatory measures is to raise the private cost of borrowing to the social cost, i.e. to induce borrowers to internalise the negative externalities that they impose on the economy by borrowing excessively."
" It is therefore convenient to express the magnitude of the measure as a “Pigouvian tax,” i.e. a tax that captures the external costs that borrowers impose on the economy."
The optimal Pigouvian tax on debt in the US small and medium enterprise sector
sailing right along till ...
"In the calibration of our model to the US small-and-medium-sized enterprise sector, we found that the optimal macroprudential tax (or equivalent measure) on debt converges to 0.56% of the amount of debt outstanding over the course of a boom"
okay... but ........." By contrast"
", US Flow of Funds data over the past decade"
suggest that "..
large corporations large corporations large corporations large corporations
with
" access to corporate bond markets"
were less subject to systemic externalities
and did not require
the same type of macro-prudential measures."
boing !!!! not like the little among us eh
corporate bond markets versus what ...collateralized demand loans from banks ?
the playing field has a tilt
corporate bond markets won't implode ...is that can't or just ...likely won't
err based on a ten year look back from the great credit shock of fall 08
famous last words ?
"In the calibration of our model to the US small-and-medium-sized enterprise sector, we found that the optimal macroprudential tax (or equivalent measure) on debt converges to 0.56% of the amount of debt outstanding over the course of a boom"
okay... but ........." By contrast"
", US Flow of Funds data over the past decade"
suggest that "..
large corporations large corporations large corporations large corporations
with
" access to corporate bond markets"
were less subject to systemic externalities
and did not require
the same type of macro-prudential measures."
boing !!!! not like the little among us eh
corporate bond markets versus what ...collateralized demand loans from banks ?
the playing field has a tilt
corporate bond markets won't implode ...is that can't or just ...likely won't
err based on a ten year look back from the great credit shock of fall 08
famous last words ?
"The optimal tax should also be adapted to the maturity of debt.
Long-term debt makes the economy less vulnerable to busts than short-term debt,
lenders cannot immediately recall their loans when the value of collateral assets declines. "
"An important benefit of ex-ante prudential taxation during booms is that it avoids the moral hazard problems associated with bailouts. When borrowers expect to receive bailouts in the event of systemic crises, they have additional incentives to take on debt."
too big to fail throws a spanner in these works no ?
" If the financial regulators accumulate a bailout fund,
borrowers may increase their indebtedness in equal measure,
leading to a form of “bailout neutrality”"
===============================================
elsewhere a side kick writestoo big to fail throws a spanner in these works no ?
" If the financial regulators accumulate a bailout fund,
borrowers may increase their indebtedness in equal measure,
leading to a form of “bailout neutrality”"
===============================================
"individual market participants rationally take the prevailing level of asset prices
as given
and do not internalize that their fire sales in aggregate contribute to the asset price declines.
As a result of this externality, individual market participants take on excessive systemic risks.
Even though they may have access to a complete market to insure against systemic risk,
they insure to a socially inefficient extent
because when they trade off the costs and benefits of insurance,
they do not internalize the social benefits of insurance
in the form of mitigating the economy-wide fire sales."
By contrast, a policymaker has the capacity to internalize this externality
and make everybody better off
by inducing financial market participants to reduce their systemic risk-taking.
This in turn will lead to lower fire sales, smaller price declines and greater macroeconomic stability."
bail outs are off set
a bailout neutrality result, i.e.
market participants who have access to complete financial markets will employ these markets
to fully undo any expected government bailout"
" by simply increasing their exposure to those risks that they expect to be bailed out."
