There is a time for everything, it says in Ecclesiastes, and a season for every activity. Now is the time for the European Central Bank to loosen its monetary policy.
With a liquidity facility providing 639 billion euros ($820 billion) to banks and an interest rate at 1 percent, one could argue that the ECB’s monetary policy could hardly be looser.READ MORE
A gentleman with a thick Georgia drawl once told me that he could explain the erosion of communism in China with two words: “AY-ur conditioning.”
The citizens of the People’s Republic, he said, looked at their compatriots in Hong Kong and decided that their lives would be much improved if they, too, could afford such modern conveniences.READ MORE
Ali Hortacsu & Chad Syverson
Business lore and business school classes are full of stories about vertical integration. They range from the classic tales of Carnegie Steel Co., Ford Motor Co.’s River Rouge complex, and General Motors Corp.’s 1926 acquisition of Fisher Body, to Boeing Co. (BA)’s recent decision to bring production of the 787 Dreamliner in-house after costly delays at its suppliers.
What these stories share is the notion that companies vertically integrate so they can ensure ready supplies of key inputs.READ MORE
“If you laid all the economists in the world end to end, they still wouldn’t reach a conclusion.” This old joke still works because it reflects a common belief that economists can’t agree on anything important. Yet the four of us are part of a project that we believe will demonstrate that this proposition is wrong.
Each week since late September, along with 37 other economists at top universities, we have been answering questions on major public policy issues. These include the predictability of the stock market, the best design for health insurance and the effect of China’s managed exchange rate. You can find our answers (and sign up to be notified of future poll results) here.READ MORE
John H. Cochrane
Steven N. Kaplan
Mitt Romney’s career as the co- founder of the successful private-equity firm Bain Capital LLC is coming under intense scrutiny and is portrayed in some quarters as a liability, or at best irrelevant to the presidency.
The opposite is true: The skills he acquired in that industry would be both relevant and valuable in the White House.READ MORE
Nicholas G. Polson & James G. Scott
The financial crisis and the meltdown in Europe have exposed the deficiencies of traditional asset- pricing models, particularly their inability to account for the effect of contagion from one market to another. The good news is that the length and the persistence of the turmoil have given researchers a trove of data to develop new predictive tools.
In our work, we developed an asset-pricing model to study these market disruptions, which incorporates random shocks to volatility that are correlated across markets. It provides a more accurate way to evaluate contagion, defined as the extent to which shocks from one market affect another over and above the level implied by the underlying asset-pricing model.READ MORE
Douglas J. Skinner
The recent disclosure of a longstanding accounting fraud at Olympus Corp. (7733) has drawn fresh attention to Japan’s corporate-governance practices, and raises important concerns for investors in companies there.
Based on what we know to date, Olympus sustained investment losses of at least $1.4 billion during the 1990s, and was able to cover up the shortfall until recently using various forms of “window dressing.” Although large accounting frauds occur periodically throughout the world, what is striking about Olympus is that the losses took so long to come to light. This raises troubling questions about Japan’s financial reporting and auditing practices, which are historically quite different from those in the U.S. and other Western countries.READ MORE
Atif Mian & Amir Sufi
The weakness in household balance sheets and the associated pullback in spending are directly responsible for the lion’s share of employment losses in the U.S. economy. This deficiency remains the most significant impediment to a robust recovery.
Our research suggests that 65 percent of the job losses from 2007 to 2009 came from the drop in household spending induced by the collapse in home prices and its effect on a highly levered household sector.READ MORE
Lubos Pastor & Pietro Veronesi
Politics are dominating financial markets. Day after day, prices react to news about what governments around the world have done or might do.
The markets were jubilant two weeks ago when European politicians announced a deal cutting Greece’s debt in half. U.S. stocks soared 3.4 percent on Oct. 27, while French and German stocks gained more than 5 percent. Early last week, equities gave back those gains when Greece’s prime minister, George Papandreou, announced his intention to hold a referendum on the bailout. When other Greek politicians voiced their opposition to that initiative, markets rejoiced again.READ MORE
Tobias J. Moskowitz
In the current economic and financial climate, investors seem to be struggling to find a new strategy that can yield consistent positive returns.
Yet, before seeking something new, there are two proven long-term approaches that investors might want to consider: value and momentum. What’s more, when combined, these strategies produce an even more potent investment vehicle and can be applied much more broadly across asset classes.READ MORE
Steven N. Kaplan
One school of thought holds that successful CEOs are team players, good listeners and humble. In the book “Good to Great,” Jim Collins called such people “Level 5” leaders.READ MORE
The euro area is burning and policy makers seem increasingly powerless to douse the flames. Meanwhile, we can only stand by and watch this nerve-wracking spectacle.
Yet the situation may not be utterly hopeless. In the last month or so, researchers have floated proposals for the creation of synthetic euro bonds that may offer a way out. The idea rests on three principles: No cross-subsidization between countries; safety; and the replacement of risky sovereign debt by synthetic bonds in European Central Bank repurchases.READ MORE
Lars Peter Hansen
Thomas J. Sargent and Christopher A. Sims richly deserve the Nobel Memorial Prize in Economic Sciences they were awarded this week for their seminal work in the fields of macroeconomics and time series econometrics.
I was fortunate to have a front-row seat to observe the development of their path-breaking research. As a graduate student at the University of Minnesota in the 1970s, I was a research assistant for both: Sims became my adviser, and Sargent was a member of my dissertation committee. Since then, Sims, who now teaches at Princeton University, has had a major influence on my research, and Sargent, at New York University, has been my longtime collaborator.READ MORE
Scott R. Baker, Nicholas Bloom & Steven J. Davis
The recovery from the recession of 2008-09 remains anemic. Job growth has stalled, unemployment stands above 9 percent, and there are renewed fears of another output drop.
A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised (see attached chart) shows U.S. policy uncertainty at historically high levels.READ MORE
Anil K Kashyap
One of the benefits of being an academic economist is that market participants and government officials will often tell you what they think in relatively frank terms.
Here is what I learned in dozens of meetings last week in Frankfurt, Madrid and London:READ MORE
John H. Cochrane
We seem to be surrounded by “bubbles” -- tech stocks, real estate, and now maybe sovereign debt.
You might expect that any textbook would have a precise definition of this phenomenon; some set of characteristics that distinguish sensible high prices in good times from prices that are “too high” or in a “bubble.” Alas, “bubbles” seem to be in the eye of the beholder.READ MORE
Hans-Helmut Kotz, Jan Pieter Krahnen & Christian Leuz
In recent weeks, euro bonds have gained traction in policy circles as the solution to the sovereign-debt crisis.
The proposed debt could be structured in different ways, but in all cases it would imply joint and severally issued obligations by the members of the euro zone and would fundamentally change the fiscal operations of the union.READ MORE
The political response to the European crisis so far has been denial and temporary patches. But policy makers are facing more than just a liquidity crunch; they also need to tackle a solvency crisis and possibly a structural one. One of the most pressing issues is addressing the over-leverage of the southern European nations.
Economic theory tells us that in situations of over- leverage there are multiple equilibrium points. If all parties expect a sovereign borrower to be able to pay, the market will refinance that creditor at low rates, ensuring it won’t default. Conversely, if lenders expect a default, it will happen. The enormous volatility we are witnessing is the result of the impossibility of knowing which of these outcomes will prevail.READ MORE
It is now believed that in the years preceding the recent financial turmoil, banks took excessive risks that weren’t disclosed, and regulators were only able to intervene after widespread panic had brought the system to its knees.
More transparency, it is argued, could have allowed the market to discipline such excessive risk-taking behavior. Yet there is evidence that, in many situations, greater disclosure may not be good corporate governance or even desirable.READ MORE