samchain/econo-pairs-v1 huggingface dataset:
James McAndrews: Rising household borrowing Remarks by Mr James McAndrews, Executive Vice President and Director of Research of the Federal Reserve Bank of New York, before the CFA Society of Stamford, Stamford, Connecticut, 5 March 2014. *  *  *  Accompanying charts can be found at the end of the speech or on the Federal Reserve Bank of New York’ website. Good evening. It’s a pleasure to have the opportunity to speak with you today on the subject of the economy, and especially the household sector. As is always the case, my remarks reflect my own opinions, not those of the Federal Reserve Bank of New York, or the Federal Reserve System. National economic conditions From the end of the Great Recession in mid-2009 through mid-2013, real gross domestic product (GDP), or the aggregate value, after adjusting for inflation, of all the goods and services produced within the borders of the United States, grew at a rather tepid 2¼ percent annual rate. Then, in the second half of 2013, the pace of growth moved up a full percentage point to around 3¼ percent. Roughly half of this increase in the growth rate of real GDP stemmed from a strengthening of consumer spending. While I will discuss the factors behind this improvement in consumer spending in more detail in what follows, the main driver appears to be the substantial stabilization in household balance sheets that has occurred over the past few years.

3  See Atif Mian and Amir Sufi (2011), ‘‘House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis,’’ American Economic Review 101, 2132–56, and (2011), ‘‘What Explains High Unemployment? The Aggregate Demand Channel,’’ University of Chicago, unpublished paper. BIS central bankers’ speeches  3  reversal reduced the aggregate wealth of homeowners and, in the worst case, left many “underwater,” meaning that the amount of mortgage debt secured by their home exceeded its current value. This outcome is reflected in the dramatic decline in owners’ equity in household real estate, seen in Chart 3 (Result was a Huge Decline in Owners’ Equity in HH RE). It is interesting to note that while home prices rose during the boom, homeowner’s equity share remained constant. Thus, prior to the end of 2006, on average for each 1 percent increase in home prices, homeowners increased their mortgage debt by 1 percent (through higher balances on first mortgages, cash-out refinances, second mortgages, and home equity lines of credit). When house values began to fall, so did corporate equity values, which depressed household wealth further Chart 4 (Stock Market Wealth also Fell Sharply), limiting households’ options for reducing their debt burdens or sustaining their prior levels of consumption. Consequently, and in line with the logic of the research I discussed earlier, U.S. households decreased the cash flow available for consumption by paying down debt during the recession and early recovery.
I am sure that each of you will adequately deal with the money bit, but our collective minds and tools in financial studies that all of you have can do much to raise the understanding of the prospects and challenges for the financial system. 3 One decade ago, we had the global financial crisis (GFC). As Samuelson described it starkly: “what we know about the global financial crisis is that we do not know very much”. With the benefit of hindsight, vulnerabilities had indeed built up from: (a) Highly leveraged financial institutions; (b) Severe liquidity mismatches; (c) Fairly opaque over-the-counter derivatives markets that transmitted risks rapidly when liquidity suddenly dried up; as well as (d) Moral hazards associated with financial institutions that were deemed “too big to fail”. 4 Ten years on, a number of key regulatory reforms are being implemented in stages to address these vulnerabilities. 5 Take for example, the Basel III reforms after the GFC, a key work of the Basel Committee on Banking Supervision, of which I am a member of. Many of you may be familiar with its key elements to improve the quality and quantity of bank capital. The Basel III standards also seek to reduce excessive variability of banks’ risk-weighted assets. It has now incorporated macroprudential and liquidity risk elements. A new minimum leverage ratio is included. Global Systemically Important Banks are further subjected to even higher capital levels, more intense 1/5  BIS central bankers' speeches  supervision and resolution planning requirements.

11 Two weeks ago, at a forum of the International Conference of Banking Supervisors, Sir John Vickers (who oversaw the Vickers Report to reform the UK banking market) shared his views that the Basel III capital requirements are not stringent enough, and have not sufficiently reduced the likelihood of crises as intended. I am not saying that this is the view of the MAS. I am sure that many bankers will disagree. But the point is that this is an area which is deserving of greater discourse. 12 Evaluating the effects of the banking reforms will be a key exercise. One set of issues revolve around whether the reforms are having the intended outcomes or, on the other hand, whether there are unforeseen and undesirable effects. This will involve an assessment of banks’ behavioural responses, whether there are new forms of arbitrage strategies, and the spillover effects on the broader economy. Cross-border lending to developing economies 13  One example relates to the impact on cross-border lending to developing economies. 14 There are studies that indicate that some global banks have reduced their presence and activities in developing economies as part of their business review, and some have attributed this to the banking reforms. Establishing a clear, causal link between the declining trend in crossborder bank loans to developing economies and the post-crisis reforms will be helpful, if possible. 15 Such investigations can support the Basel Committee’s work on a full, timely and consistent implementation of the reforms globally.
If there is no risk premium, the uncovered interest rate parity relates interest income in the domestic economy with interest income in the foreign economy via the expected change in the exchange rate. For a better understanding we may use the example of our current situation. The one-year interest rate in the Eurozone is slightly above 4%, while the Czech one-year interest rate is less than 3%. In spite of this negative interest rate differential we still see many investors holding Czech crowndenominated assets. Why? Simply because financial market participants expect the Czech crown to appreciate in the future and thus compensate for the negative interest rate differential. Although the uncovered interest rate parity has been heavily criticised and disapproved as being practically non-functioning, it is used in macroeconomic models. Well, as an economic modeller you simply do not have any other option. The uncovered interest rate parity is directly implied by the profitmaximising behaviour of financial market participants. We probably all agree that the behaviour of financial market participants is led by profit maximisation (given the level of risk). At the same time, however, surely at least a few of you here in the audience would seriously argue that a relationship such as the uncovered interest rate parity does not hold in reality and that it is a purely theoretical concept. The uncovered interest rate parity is, however, implied by the profit-seeking mechanism.

The question is: how much is too much, to the point where it would allow banks to sustain flawed business models? Work is being carried out further on the interaction between the LCR and central bank facilities so as to ensure that the LCR responds appropriately to the provision and withdrawal of liquidity support by central banks. In this context, it has been proposed that central banks provide a “Committed Liquidity Facility” (CLF) to banks faced with a scarcity of HQLA. Under a CLF, the capacity to borrow from the central bank counts towards HQLA, with banks paying an upfront fee for a determined amount of CLF commitment. The CLF can potentially be useful not only in jurisdictions with a structural scarcity of HQLA, like for example Australia. The argument put forward is that banks in crisis times, wary of stigma effects, would not let their LCR ratio fall below 100 percent. A CLF, however, would allow banks to meet the LCR ratio at all times, although with time-varying reliance on privatemarket HQLA and on the CLF. One possibility would be for the central bank to encourage the drawdown of private-market HQLA by reducing the pricing of the CLF during crisis time. I would agree with Jeremy Stein13 that a CLF with an upfront fee is very different from counting central-bank eligible collateral as HQLA at no cost, which could weaken the incentive to borrow in markets and create excessive reliance on central bank funding. The  assets.
It goes without saying that macro-economic stability is our first line of defence. But, beyond that, a huge amount of work has been undertaken in a variety of international fora to develop codes and standards of best practice in a whole range of more specific areas relevant to improving the functioning of the international financial system. The IMF has produced codes of good practice on data dissemination, on transparency of monetary, financial and fiscal policies, and guidelines for public debt and reserves management. The main Basel Committee has put forward proposals for revising its capital accord designed to align regulatory capital requirements more closely with economic capital and has drawn up core principles for effective banking supervision. The Basel Committee on Payments and Settlement Systems has developed core principles for systemically important payments systems. The International Organisation of Securities Commissions has developed objectives and principles for securities regulation; the International Association of Insurance Supervisors have developed insurance core principles; and the OECD a set of principles on corporate governance. The International Accounting Standards Committee has developed international accounting standards; and the International Federation of Accountants international standards on auditing and audit practice and so the list goes on. The emphasis now has to be on implementation by national authorities with the help where necessary of the international community. And there needs to be increasing emphasis, too, on transparency and validation of progress towards implementation in individual countries in the context of IMF surveillance.

Pound sterling appreciated by more than 20 per cent between 1996 and 1998, reflecting solid growth in the UK economy from the mid-1990s. A currency that has exhibited wider swings than most is the New Zealand dollar. A sharp appreciation up to the mid-1990s was subsequently reversed. Over the past two years, this currency has moved in tandem with the Norwegian krone. The krone exchange rate is the price of our currency measured in terms of a foreign currency. Developments in other countries are just as important for the krone as developments in the Norwegian economy. Capital flows freely and flows can change rapidly. This can spill over to exchange rates and interest rates as well as output and employment. BIS Review 9/2003  1  Chart 2. Equity prices and long-term interest rates in the US Index  Per cent  1600  12  1200  9  800  6  10-year rates 3 (right-hand scale)  400  Standard & Poor's 500 (left-hand scale)  0  0 1990  1992  1994  1996  1998  2000  2002  Source: EcoWin  Currency swings are driven by cross-border capital movements. Capital flows were heavily influenced by investor focus on stock market returns until the downturn began. In the US, equity prices almost trebled between 1995 and 2000. Stock markets in other countries followed suit. Capital inflows into the stock market resulted in a strong dollar. However, expectations concerning corporate earnings were higher than later proved to be warranted.
8 Even those in a job, secure or otherwise, may not be working as much as they wish. Around three and a half million people, or almost 10% of the working population, say they would like to work longer hours (Chart 7). In 2007, that number was two and a half million. The number of extra hours these people would like to work – around 12 hours per week or 35% of the average working week – is also material. Even if these survey numbers overstate the actual number of extra hours people might wish to work, they leave a sizable fraction of the working population not unemployed, but under-employed. When it comes to the pay of those in work, the picture is also a subdued one. Chart 8 plots mean and median weekly earnings growth for full-time UK employees, in nominal and real terms. Nominal earnings today are around 7% higher than in 2009. But in real terms earnings are still around 5% below this peak. This is the longest period of flat or falling real wages since at least the middle of the 19th century. Although the recovery of the past few years has been jobs-rich, it has been notably pay-poor. Finally, let’s look at household wealth. As with employment, the headline gains here have been impressive, with aggregate net wealth increasing by almost £ trillion since 2009. Chart 9 breaks down these wealth gains by asset type – pensions, property, financial, physical.

Net savings by UK companies currently stand at around 1% of GDP. That means, when we look at household disposable income per head, we find it has essentially flat-lined since 2009 (Chart 4). Even as GDP has recovered, household incomes have essentially stagnated. Even the notion of the “average household” needs careful interpretation. Looking at a different “average” – the household in the centre of the distribution or median – suggests this flat-lining in disposable incomes may have pre-dated the crisis (Chart 4). Half of all UK households have seen no material recovery in their real disposable incomes since around 2005. Or, put more evocatively and provocatively, the majority of UK households have faced a “lost decade” of income. Next let’s look at employment. The aggregate numbers here are hugely impressive, with 2½ million new jobs created since 2010. The UK unemployment rate has fallen like a stone, from 8.5% in 2011 to around 5% currently. And the news gets better. Chart 5 breaks down these new jobs into full-time, part-time and self-employment. It is clear that the lion’s share of the jobs’ increase over the past few years is accounted for by rises in full-time work. This has been not just a jobs-rich recovery, but a full-time, jobs-rich recovery. Yet the nature of work may matter every bit as much as headline jobs numbers. Work is about more than just the money; it adds to life satisfaction and self-esteem and lowers anxiety and  4  4  Bernanke (2011).
But at the same time the Chancellor confirmed the Bank’s continuing responsibility for the stability of the financial system as a whole, so that in fact what this has done - as in relation to monetary policy - is to distinguish and clarify the respective roles: of the Bank, which now focuses upon systemic risk - and retains its lender of last resort role within parameters that are broadly defined by the legislation; of the FSA which oversees both the prudential and business conduct of all individual financial institutions, including the banks, with the emphasis on consumer protection; and the Treasury, which has ultimate responsibility for both these dimensions. The new arrangements make a good deal of sense in the UK context where traditional distinctions between banks and other types of financial institution have progressively eroded and where there has been a general movement towards greater consumer protection across a much broader front. But at the same time as clarifying our respective responsibilities, and providing in each case for transparency and separate accountability for the way in which they are carried out, the new legislation recognises the vital importance of close coordination between them and establishes a framework for that. It is early days to assess the effectiveness of these arrangements, but my impression is that so far they are working well.

In that commentary Exter first outlines the case for the new central bank being “non-political” and having “a considerable amount of independence” - essentially on the grounds that central banking “puts the government into the business life of a country at especially critical points, namely banking and other credit activities, capital markets, foreign exchange markets and the supply of currency”, and that it “embraces problems which are of an unusually technical nature”! But Exter goes on to recognise that “there are many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank must necessarily work in close harmony with the government”. Noting that many governments had learned to value the sort of independent and objective, detached, advice that central banks are able to give, Exter nevertheless acknowledges that “on matters of vital interest to the state it would be impossible for a central bank to adopt a policy contrary to the policy of the Government of the day”. His killer argument is that no central banker can help but be “acutely conscious of the fact that, since no Parliament can bind its successors, their independence is limited by the ultimate power of the Government to change the law”.
The Central Bank will be resolute in preserving this achievement of a low inflation environment going forward irrespective of domestic and international challenges that we may face in future. This is the prime reason why the Central Bank has embarked on a mission to upgrade the monetary policy framework with a view to strengthening the ability of the Central Bank to deliver sustained price stability amidst a rapidly evolving environment characterised by elevated uncertainty. During the year 2018, significant progress was made towards the transition to FIT in terms of initiating necessary amendments to the Monetary Law Act (MLA) with a view to establishing a strong Central Bank mandate, building effective fiscalmonetary coordination and further improving technical and institutional capacity. Let me elaborate on a few important areas in relation to the progress towards FIT. Last year, we highlighted the need and the importance of strengthening the existing mandate of the Central Bank to perform its key tasks related to price stability. It is widely accepted that a strong legal mandate is an essential prerequisite for the successful adoption of FIT as it is considered the linchpin that holds the entire framework together.

Meanwhile, at the most recent policy rate adjustment, we narrowed down the policy rate corridor to 100 basis points with a view to reducing the volatility in overnight interest rates. Looking ahead, we are in the process of exploring the feasibility of a single policy rate instead of the current corridor system to give clearer signals on the interest rates, reduce volatility in the call money rate and increase the transparency in the monetary implementation process. Also, the hair cut policy relating to the pricing of securities will be reviewed in line with international best practices to ensure smooth operations in the money market. We will be looking into expanding money market activities in a comprehensive manner by introducing new instruments such as Interest Rate Swaps (IRS) and nondeliverable forwards (NDF). In order to improve the competitiveness of the banking sector, the Central Bank is also planning to introduce a more cost reflective alternative benchmark interest rate, which will be based on the marginal cost of banks. Although we do not consider the exchange rate as an objective of monetary policy conduct, a market-based exchange rate remains key instrument to facilitate the inflation targeting framework. To this end, the Central Bank will continue to follow a more market-based exchange rate system, allowing the exchange rate to act as the shock absorber in the envisaged FIT framework. The FIT framework brings about a qualitative change in the pass-through of the 18  effects of currency deprecation onto the overall rate of inflation.
A clear articulation of the FOMC’s goals and an explanation of how it views its policy misses and plans to correct them help the public better anticipate the Fed’s policy actions. In turn, the public’s improved understanding of FOMC policy actions increases their efficacy by reducing uncertainty over future financial conditions and how those actions might evolve with changes in the economic environment. So, what we clearly need is a scorecard that communicates our accountability in a straightforward manner. Keeping score when there are two goals  I like to illustrate our balanced approach to achieving our dual-mandate goals with what I refer to as a bull’s-eye scorecard (chart 3). The bull’s-eye in the center illustrates where we would like to be. In this case, the goals are 2 percent inflation over the medium term and unemployment at its natural rate, taken here to be 5–1/4 percent, which is my long-run projection. The scorecard shows an equal weighting of policy misses around our inflation and unemployment objectives; that is, each circular ring is a collection of unemployment and inflation rates that should be equally uncomfortable for FOMC participants. 3 For example, it tells us how the 9 percent unemployment rate we faced back in September 2011 can be depicted in “inflation-loss equivalent units” by showing the inflation rate that gives an equivalent loss when unemployment is at its sustainable rate. The answer is 5–1/2 percent inflation!

In general insurance markets, distorted risk choices are guarded against by sharing the risk between insurer and insuree, ex-ante (through risk-based premia) or ex-post (through co-insurance devices). Deposit insurance regimes in some, but not all,  21  FSA (2009). 22  Bank of England (2008). 10  BIS Review 139/2009  countries have such features. In the UK, deposit insurance premia are not riskbased. Private risk incentives would be better aligned with the public good if the UK’s deposit insurance regime had such a feature. •  Time-consistent capital insurance: In historical terms, capital insurance to the banking system is the newest of the state support mechanisms for banks. Partly for that reason, its framework is least well advanced. Indeed, give or take, there is no framework at present. Whether one is needed will depend importantly on the levels of private capital held in future by the banking system – the degree of self-insurance. That debate has some distance still to travel. But there are complementary measures which could serve a similar purpose. For example, some academics have proposed private sector capital insurance schemes, funded ex-ante by levies on banks. 23 So too have some policymakers. 24 These schemes are similar in many respects with existing deposit insurance regimes. Like them, such schemes would ideally set risk-based premia and be pre-funded to ensure they were time-consistent. One potential benefit of private sector contingent capital proposals are that they allow a mutualisation of risk.