A literalist approach to “supply-side” economic policy

Trying to get a sense of household risk preferences

According to one common view, monetary policy works by influencing household (and to a lesser extent business) preferences for investing, saving, borrowing, and spending. Bernanke’s stated justification for quantitative easing was that he could stimulate the economy by getting people to move money from their checking accounts into the stock market and from their money-market funds into car dealerships.

Risk preferences are not determined solely, or even primarily, by monetary policy. When times are good and you are confident in the future, you put more of your savings in long-duration, risky, illiquid assets like equities and housing. When times are bad, cash is king. Using data from the flow of funds, we can see how American households’ risk preferences have changed over time. The crisis has caused many people to retrench and solidify their balance sheets, yet it turns out that there could be a long way to go.

Explaining the fuss over equity capital requirements

Those who have been paying even peripheral attention to the debates over financial reform since the bailouts have doubtless heard about “capital requirements” and “equity capital” without necessarily knowing what those terms mean. In general, this ignorance is by design. The megabankers and their friends have deliberately confused the conversation by using incoherent phrases like “hold capital.” Their goal is to create the perception that a tradeoff exists between a bank’s resilience and its ability to make loans. There is none. So why do they press the point? It’s all about the bonuses: banks that are more resilient would not be able to pay managers and shareholders nearly as well as the banks we have now.

The November Employment Report

Earlier today, the Bureau of Labor Statistics payroll survey claimed that the U.S. added 120,000 jobs in November while the population survey claimed that the unemployment rate fell from 9.0% to 8.6%. Furthermore, the BLS revised its earlier estimates for job growth in September and October, adding an additional 127,000 jobs. This sounds like good news. Sadly, however, it is not. The gains in payrolls are still too meager to put a meaningful dent in the number of people without work. Likewise, the sharp drop in the headline unemployment rate is due more to a collapse in the number of people looking for work rather than actual growth in the number of people employed.

More fun with level-targeting

Yesterday I asked whether the fans of NGDP-targeting had thought through the full implications of their models. Today I will look at another sort of level-targeting recently proposed by a former Fed economist who now works at Citi.