tag:blogger.com,1999:blog-59249242024-03-14T13:09:19.372-04:00Dollars and JensThe brothers Jens talk finance, economics, and the like.Stevenhttp://www.blogger.com/profile/06090531523789747157noreply@blogger.comBlogger1038125tag:blogger.com,1999:blog-5924924.post-92223913598253145852023-03-25T19:18:00.002-04:002023-03-25T19:18:09.831-04:00Swiss coco<p>
Financial and economic wealth are largely a function of expectations. A factory is valuable because I expect that it will help produce something that people want; a house is valuable because I expect that it will be a place people want to live. If people suddenly stop wanting to buy what the factory produces — or if they stop wanting to live in that house — then the factory or house loses its value, even if it is physically unchanged.
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The size of a bank's liabilities to depositors is pretty clear in dollar terms, at least in principle; the bank owes a precise amount of dollars to depositors, and it owes it to them now.
In a practical sense the liability is somewhat lower; the depositors won't all ask for their money right away, even if the bank charges fees. If the bank pays a low enough interest rate and charges fees, then, even with the costs of maintaining the bank accounts, the deposits provide the bank with a cheap source of funding that, in a true economic sense, reduces the size of the liability.
Even in that sense, though, the true economic size of the deposits owed to customers is probably not a lot lower than the nominal size.
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The asset side of the bank is murkier. If the bank has made a ten-year loan, the value of being entitled to that money depends on how things go over the next ten years; it depends on the ability of the bank to fund itself more cheaply than the interest rate on the loan,<a href="#230325-1" name="r230325-1">[1]</a> and it depends on the ability (and sometimes willingness) of the borrower to actually pay it. The bank may even have investments in companies or real estate, and their value depends on the ability of those assets to provide things people want in the future. There are accounting rules about how we're supposed to guess at the value of these things, but these are merely conventional guesses.
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These accounting guesses have some real force insofar as banking regulators impose solvency requirements on banks; the regulators want the bank's assets to be worth more than the liabilities, and use accounting guesses for at least some of those requirements.<a href="#230325-2" name="r230325-2">[2]</a> The regulator's primary purpose is to protect the payment system, and particularly to protect the depositors' ability to get and use their deposits. The solvency requirements serve this in two ways: in the short run, if a bank is low on actual cash but has a lot of assets, it can sell assets or put assets up as collateral to borrow money to give to depositors. To the extent that this is our primary concern, the value of the assets should be reckoned based on the amount of money that could be acquired somewhat quickly by selling or borrowing against them. The primary purpose of the solvency requirement, however, is long-run: if the cash flows from the assets are anticipated to be reliably lower than the cash flows being paid on the liabilities, then eventually the bank will run out of cash, even if the depositors don't do anything weird. A regulation that is only worried about this concern is only worried about cash flows, not how much the asset could be sold for today.
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There is an important sense in which, if the market value of your assets is lower than your liabilities, the market is saying that its best guess is that your cash flows in will not ultimately keep up with your cash flows out, but there is a fair amount of wiggle-room here. Market prices of assets bounce around a bit, and if the assets of a bank have gone down in the past three months, the bankers could well say, well, perhaps they will go back up in the next three months. Within certain constraints, the ability of the bank to hold onto cheap deposits does become important; even if the markets imply that funding costs over the life of the asset will eat up cash flows, if the bank can effectively borrow from depositors more cheaply, it may be able to survive. There are accounting rules that codify in certain ways how banks can get away with this; in particular, they can declare that they don't intend to sell certain assets, and if the market price changes they can ignore that change.<a href="#230325-3" name="r230325-3">[3]</a> To some degree this feels like wishful thinking to me, but there's an element of wishful thinking in a well-capitalized bank as well; in one case you're hoping that the market is right, and that the cash flows in will be larger than the cash flows out, while in the other case you're hoping that the market is wrong. Even if we made banks use the market value for all of their assets,<a href="#230325-4" name="r230325-4">[4]</a> the difference between a bank that is solvent and one that is insolvent is not a crisp one; there is a continuum, which is just one reason that the requirement is not just that assets exceed liabilities, but that they do so by some margin.
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One new way to evade insolvency was introduced after the 2007–2009 financial crisis: the contingent convertible bond. "Bond" here is something of a misnomer, but they look like bonds in that they typically pay out a fixed interest rate and can be called in after a period of time, much like paying off a bond. Their key feature, though, is that they don't pay out if the bank's assets don't exceed the bank's liabilities by more than a certain specified margin. These "cocos" are designed to be liabilities as long as the bank can afford them, but to go away if liabilities are too large as a fraction of assets; if assets lose value, the cocos take the hit, and the depositors and other claimants on the bank are protected.
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Different cocos work in different ways, perhaps in part with different purposes in mind. Most notably, some of them convert into stock or something similar when the asset-to-liability ratio gets too low. (These are the ones that are best called "contingent convertible bonds", though the term "coco" includes other securities that work rather differently.) Some of them convert into ... nothing. They go away. In each of these cases, though, they cease being liabilities, and thereby help restore the asset-to-liability ratio. If their purpose is to deal with <em>long</em>-term sustainability, rather than <em>short</em>-term sustainability (which is the purpose of <em>liquidity</em> regulations rather than <em>capital</em> regulations), then what matters about these things is their cash flow. A lot of them <em>don't</em> convert; they stop paying interest while the bank is in violation of its asset-to-liability requirements, but continue to sit around waiting to pay out again if the bank's situation improves. If the problem is a temporary market dip, or the bank has enough going-concern value that it can ultimately make it, these bonds don't get wiped out; they will lose some value when things look dicey, but it does relatively little harm to let them sit there dormant if the bank gets into trouble, only coming back if the bank's problems turn out to be temporary. It makes a lot of sense to me that they would largely work this way. Even from a short-term standpoint, a bond that works this way is a relatively small encumberance to selling or borrowing against assets, as the liability in practice remains small as long as there's much question of the bank's being able to repay secured loans.
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The big exception, though — the point at which it seems like you have to make the coco's impairment final — is when the bank is being sold, especially if it's being sold as a matter of distress. In theory it might make a kind of sense to have the cocos paid off based on a sort of option value, but I can see why, as a practical matter, you might prefer that they be redeemed at par or zero. There's no longer an actual bank here (whose assets and liabilities could be assessed), so the best you could imagine is that it somehow continues to hedge the value of the assets the bank had when it was sold. Prospective buyers may well be averse to carrying around this strange option, and if the assets of the old bank are being folded into those of the purchasing bank, determining whether they recovered or not becomes onerous. Situations like this are usually messy and difficult as things are, and the value of being able to write this liability to zero in these situations seems compelling.
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A week ago, the largest bank in Switzerland (UBS) acquired the second-largest bank in Switzerland (Credit Suisse). Both banks did the deal under duress from their primary regulator; Credit Suisse was on the brink of failure, but wanted to keep trying to recover, while UBS saw the balance sheet of Credit Suisse as unsafe at any price. Credit Suisse had some cocos that explicitly provided that they could be converted into nothing in a situation like this, and a lot of the holders of the cocos were disappointed to learn this. Cocos issued by banks in the European Union tend not to have such a provision. The Swiss cocos, indeed, had the provision that they would convert into nothing if the asset-to-liability ratio, as determined by accountants, were breached, even if the bank continued as a going concern. In actual fact, it is clear that UBS (and other potential suitors) thought that Credit Suisse's assets were worth a lot less than their accounting value; perhaps they should have been written down shortly before the takeover, anyway. After the fact, the fact that it was in the provisions of the bond (and was well within the spirit of how the bonds were intended to behave) means, of course, that they could do this; my assertion in this post is that such bonds <em>should</em> be written to be zero-able in this sort of situation, but that, outside of such forced-sale situations, the way the rest of Europe does things — with payments suspended, but the bond still sitting there, dormant, to potentially claim upside surprises if the bank recovers — makes more sense to me.
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<a name="230325-1" href="#r230325-1">[1]</a> This is especially important if the loan is a fixed-rate loan, i.e. the amount of dollars that are to be paid along the way is set when the loan is made. A lot of business loans have interest rates that adjust with time, which reduces this problem.<br/>
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<a name="230325-2" href="#r230325-2">[2]</a> There are in fact a number of requirements, and especially large banks these days are in trouble with the regulator if traditional accounting measures of assets aren't enough above liabilities, but also if <em>other</em> measures of assets aren't enough above other measures of liabilities.<br/>
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<a name="230325-3" href="#r230325-3">[3]</a> Again, this doesn't apply to all of the requirements that the largest banks face.<br/>
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<a name="230325-4" href="#r230325-4">[4]</a> And, to be clear, banks often have some assets that don't really have clear market values; if nothing else, traditional banks have office furniture, and any guess as to how much it could be sold or pawned for in an emergency is going to be pretty imprecise.
dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-7725014738452560262022-04-03T20:13:00.001-04:002022-04-03T20:13:11.528-04:00price controls and rationing<p> There's been inflation, and there have been calls for price controls, and so I've been reading a bit about price controls in history. Pretty much every time price controls with substantial bite<a href="#220403-1" name="r220403-1">[1]</a> are implemented, you get shortages and black markets; additionally, I had failed to consider how expensive enforcement costs frequently are. Usually the government gives up on price controls fairly quickly as it becomes clear that the problems created are worse than any mitigation; exceptions seem to be in cases where there is some other form of rationing taking place, typically in war time.</p><p>There may be a semantic argument whether rationing avoids shortages or repackages them, and they certainly don't avoid the black markets or enforcement costs, but they do create a little bit more reliability; sometimes consumers are unable to buy as much as the rationing system entitles them to, but it will be less common that they will be unable to buy anything than it will if there is not rationing and similar price controls are enforced. This made me wonder whether, if price controls did gain political popularity now, we could mitigate some of their effects by implementing a rationing program as well. After a bit more thought, though, it occured to me that this is a bit redundant; if you impose and enforce a rationing program, that should bring down market demand and reduce prices. If the rationing is tight enough to bring prices to where you would "control" them, the control becomes superfluous; if it is not, then it isn't enough to restore the sort of reliability being sought with the controls in place, either.</p><p>As a political matter, perhaps the price controls would not be superfluous; the price controls may be the popular part, at least to the extent that people don't realize that it will amount to stochastic rationing. The implementation cost, even if greater than many people appreciate, may also be less than that of a rationing system, and it would certainly tend not to fall directly on individual consumers to the same degree; carrying around ration coupons would be less convenient than heading to the store and seeing what they have in stock. It would, however, keep prices "controlled" while substantially mitigating the biggest problem simple dictated price controls present — and you wouldn't even need the price controls themselves to do it.</p>
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<a name="220403-1" href="#r220403-1">[1]</a> If the price is set at $5, and the market price would be $5.10, effects will naturally be minimal; if the price is set at $5 and the market price would be $20, but only for a couple of weeks, some of the effects won't have time to develop. I'm mostly considering settings where the price is kept well away from the free price for a substantial period of time.
dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-80354069529907980432020-04-25T19:26:00.000-04:002020-04-25T19:26:27.233-04:00reopening the economyMost of the cost-benefit analysis I've seen of non-medical measures to reduce the contagion of covid have been treating them as an all-or-nothing deal.<a href="#200425-1" name="r200425-1">[1]</a> I want to think more granularly: independent of why a particular level of contact takes place, consider the incremental cost of a small change in contact. What are the costs of higher contact?<br />
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And the answer leans heavily on the nature of exponential processes, with which people may be more familiar than a month and a half ago. First, note that the reproduction number of the virus depends on the amount of time an infected person is contagious, in addition to other stuff.<a href="#200425-2" name="r200425-2">[2]</a> In the fastest exponential growth phase of this disease, cases seemed to increase by a factor of the basic reproduction number about twice per week; I'm going to use "half a week" as the effective infectious time here. Okay, then, consider some scenario as a baseline, and let's consider a small change from it. If we eliminate 1% of contacts in a half-week period, and other than that half-week change nothing — go back to the baseline — then in expectation we should have 1% fewer people infected than we would otherwise. Forever. Whatever your exponential growth and decrease do after that period, that 1% is locked in. <a href="#200425-3" name="r200425-3">[3]</a><br />
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Let's suppose the optimal number of QALY that we expect to lose from covid is 2 million; this proceeds from an estimate I've seen of 8.6 per fatality (because they skew older), a guess that we're aiming at close to 100,000 deaths, and a rough factor of a bit over 2 to account for morbidity injuries to patients who recover. Let's call that $400 billion. Note that, as opponents of shut-downs like to observe, this is much smaller than the economic costs incurred from shut-downs, but note, as they do not like to observe,<i> that that fact is basically irrelevant</i> because the correct comparison is how much worse things would be, health-wise, if we relax restrictions, compared to how much better the economy would be doing.<a href="#200425-4" name="r200425-4">[4]</a> So if opening up restaurants of a certain type in a certain manner increases "contacts" by 1%, the cost isn't $4 billion — it's $8 billion<i> per week</i>. In recent years, the United States economy has produced about $400 billion per week, so if those contacts represent more than 2% of the US productive economy, we should do them; if they represent less, they aren't worth the added health risks.<br />
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That first $400 billion number is very rough; you could reasonably suppose that the mortality/morbidity cost is $700 billion or $250 billion. The other numbers are more reasonably precise, though, and the primary point I want to make is that the<i> optimal</i> response will be one with a lot more economic costs than health outcome costs.<br />
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<hr/><a name="200425-1" href="#r200425-1">[1]</a> The most egregious versions seem to assume, in fact, that if there is no government response, individuals will blithely behave as usual; in fact, restaurant attendance seems to have dropped about 70% before government action took place, so many of the costs and benefits of "closing down the economy" are independent of government policy actions. It won't matter whether changes considered here are driven by policy or not.<br/><br />
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<a name="200425-2" href="#r200425-2">[2]</a> If you're more infectious at some times than others, we're going to end up with an average of sorts.<br/><br />
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<a name="200425-3" href="#r200425-3">[3]</a> This supposes that we aren't going to end up acquiring herd immunity by burning through a large fraction of the population. If that is in fact what we're going to do, then things change a lot; in fact, the benefit of shutting down is very small once we keep the disease from overwhelming the health care system, and possibly even then if treatment doesn't actually do very much good.<br/><br />
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<a name="200425-4" href="#r200425-4">[4]</a> The ratio between "cost/benefit" and "change in cost/change in benefit" is what we call, in economics, an "elasticity", and in most contexts it's on the order of 1 or 2, but boy is it not in this context.<br />
dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-58361393845666092032020-04-01T11:53:00.002-04:002020-04-01T11:53:43.833-04:00total stimulus<div class="separator" style="clear: both; text-align: center;"><a href="https://i.imgur.com/gNefvUG.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://i.imgur.com/gNefvUG.png" data-original-height="800" data-original-width="600" height="320" width="240" /></a></div>The recent COVID relief bill that passed congress has been reported, variously, as being $2.2 trillion in size, or, in some cases, as being $6 trillion, as part of the money is to be leveraged by borrowing $4 trillion from the federal reserve. There are various people who want to report a big number — journalists like a big number in a headline because it gets attention, some politicians like it because it looks like they're doing a lot, and some populist opponents of the bill trumpet it as an enormity, another massive debt that we are thrusting on the shoulders of future generations.<br />
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I view it as a bunch of numbers that are added together.<br />
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There are three different kinds of things in the bill, and I would really like to see them broken out separately. Now, there are two kinds of people these days: people with more free time than a month ago, and people with less. I'm in the latter camp, so this will not be particularly researched or detailed, but here's a taxonomy of dollar figures:<br />
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<ul><li> Actual spending. This consists of the dollars that are allocated to specific institutions for specific purposes, especially to specific departments of the government. That "especially" betrays a little bit of fuzziness here, but I would say that money earmarked to Gallaudet counts as spending, and money given to states with no strings attached does not. That, instead, goes under</li>
<li> Cash transfers. In many contexts transfer payments are treated as negative taxes; if an individual receives $1200 from the government for providing a service and then spends the $1200 at a grocery store, both transactions count toward GDP (the first as "government spending" and the second as "consumption"), but if the individual receives it as a social security payment or as a COVID relief payment, then the transfer itself is not a part of GDP. It affects the deficit the same, but to the extent that it influences economic decisions, it does so much less directly. The bill includes the headline transfers to individuals, but also a lot to recently unemployed people through the unemployment insurance system, and also some to states (at least as I understand it). It does not (again, as I understand it) include cash transfers to businesses, who instead get</li>
<li> Loans. Now, if I give a company a loan that I know I'm never getting back, that's a cash transfer. Some of the loans to companies can be forgiven; those look like an attempt to give unemployment insurance payments to workers without their having to actually be laid off first. I'm a bit skeptical of this way of doing things; the unemployment insurance provisions of the bill already ensure that furloughed employees are now eligible for unemployment insurance payments nationwide, which seems to me to be the more natural way to accomplish what this seems to aim to accomplish, which is to maintain spending power for these employees without severing their connection to an employer who, it is hoped, will take them back in a couple of months. Many of the other loans, however, are straight loans; these may be viewed as grants to the extent that the recipients would have to pay more for them in a free market, but the extent of the grant is much lower than the headline number even by that reckoning, and the loans to financial institutions made in the financial crisis ended up being profitable for the US government and the federal reserve, so that they actually reduced (very slightly!) the national debt.</li>
</ul>Finally, I'll note that I've largely joined some prominent economists in avoiding calling it a "stimulus" bill; to the extent that it has similar goals to a stimulus bill, it actually feels more to me like a monetary stimulus than a fiscal stimulus. The loans in particular have that feel; they're intended not to affect wealth distribution, but to get literal cash to economic agents who suddenly need more cash than they had provisioned for. This is less true, but still<i> fairly</i> true, of the cash being handed out to individuals; of course, this does involve some wealth redistribution, but the scale of the cash payments is a couple of weeks' spending for many people without savings, or a modest increase in savings for those who suddenly wish they'd been saving more; it is on the scale of short-term spending needs, not on the scale of life-time income or wealth, and is much more attuned to alleviating<i> financing</i> constraints than<i> solvency</i> constraints on economic decision-makers.<div><br />
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</div>dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-46748673516753353382018-07-11T10:57:00.000-04:002018-07-11T10:57:11.143-04:00Roth vs. traditional retirement plansI have a lot of work I should be doing, but <a href="https://twocents.lifehacker.com/why-a-roth-401-k-is-almost-always-better-than-a-trad-1827477812">someone is wrong on the internet</a>:<br />
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The chart makes a lot of assumptions, including that each investor contributes $1,000 to either the Roth or traditional IRA, that they are in the 25 percent tax bracket and that there is a seven percent annualized return. And in almost every case, the Roth does better than the traditional, even for older workers.</blockquote>
Okay, this is correct: if you give up $1,000 per year now to put into a retirement account that won't be taxed in the future, you will have more retirement savings than if you give up $750 per year now to put $1,000 into a retirement account that will be taxed in the future, at least if you assume the growth rate of the money exceeds the rate at which you discount your marginal consumption spending. (And boy do they seem to assume that, but that's a harder quibble than the apples-to-oranges comparison they're making here.)<br />
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They would be on somewhat firmer ground if, instead of supposing each investor contributed $1,000, they supposed that each investor contributed $5,500: because the dollar amounts of the contribution caps are the same, the effective cap on the Roth is higher than the traditional IRA: you can forego up to $5,500 to a Roth, versus (using the 25% rate) $4,125 for a traditional IRA. Similarly, if you're going to max out a 401(k), even if you think your tax rate in retirement will be somewhat lower than it is now, it may be worth paying the extra taxes now to avoid not just taxes in retirement but compounding taxes along the way. Furthermore, if you are likely to save more money using one kind of account than the other (perhaps because of the salience of taxes), there may be behavioral reasons to use the one that will incline you toward better behavior. If you aren't hitting the caps, though, and you think your tax rate in retirement will be lower than today's, and you compare apples to apples, the Roth is your better bet.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-32182042845746563992017-02-09T10:27:00.000-05:002017-02-09T10:27:01.050-05:00game theoryThis might be in part because I'm teaching game theory this semester, but I look at <a href="http://www.nber.org/papers/w22897">this working paper suggesting that investment has gone down in industries that have become less competitive</a>, and I'm struck by the idea that not only does the optimal level of capital go down if a tacit cartel forms (as production goes down), but that publicly maintaining a low level of capital could be useful in keeping a tacit cartel together; underinvesting is a commitment device, making it hard and costly to ramp up production should there be an otherwise profitable opportunity to deviate from the arrangement.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-32356294006108374542016-06-10T09:53:00.003-04:002016-06-10T09:53:17.490-04:00floatIf you don't read Matt Levine, I don't understand why not; if you do, then you probably have some awareness of Saudi Arabia's build-up to doing an IPO on its massive state oil company, even if you haven't yet read today's column.<br />
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<a href="http://www.bloomberg.com/view/articles/2016-06-10/relationships-fees-and-genius">A $150 billion initial public offering would be by far the biggest ever;</a> Bloomberg's league tables show about $176 billion in total global equity offerings so far in 2016. And if Saudi Arabia is selling oil shares, who is buying? "There is no guarantee there will be sufficient demand from investors to soak up all the shares," and messing this one up would be many times more embarrassing than messing up, say, the Facebook IPO.</blockquote>
Note that the $150 billion figure itself is only for 5% of the company; the expectation is that Saudi Arabia could retain a 95% share and get $150 billion for the rest of it. The purpose of the funds is diversification; the plan is to take the $150 billion and turn around and invest it in like Baidu or niobium mines or Caterpillar or something.<br />
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I expect that the plan would also be to later sell more of the company, and I kind of wonder whether they picked 5% because $150 billion is the very largest initial deal they think could get pulled off. I kind of think, though, that they ought to halve it, or maybe even go to 1% or something. You really only need it to be large enough to create a liquid market in the shares, at which point you can sell more shares into that market later or even directly swap shares for other investments. You want the initial float to be big enough that you can do those later deals (and maybe $30 billion would leave the market too thin to absorb what you're planning to do later), but it seems like trying to find that much cash among IPO investors when you're not really looking for cash so much as to create your own currency (viz. the shares with which you will purchase other investments) creates a difficulty that at least in principle could be avoided.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-76892918323848280452015-12-17T12:15:00.000-05:002015-12-17T12:15:16.711-05:00FOMC plumbingThe FOMC yesterday asserted that it will be raising interest rates today. I mean, probably they will; the first place to watch the progress of the implementation is <a href="https://apps.newyorkfed.org/markets/autorates/temp">where they post gross statistics of the reverse repo facility;</a> I think the auction ends around 1:15 Eastern Time, and don't know how long it will take for the results to be posted there. What everyone then wants to see is whether the actual <a href="https://apps.newyorkfed.org/markets/autorates/fed%20funds">Fed Funds rate overnight</a> falls in that target 25–50 bp range, and, if not, how far on which side. Tomorrow's reverse repo operations will be that much more interesting if they miss the range tonight.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-27369105640588679252015-10-15T12:29:00.001-04:002015-10-15T12:29:11.526-04:00positive interest ratesTraditionally the reason a central bank raises interest rates is to reduce financing activity that supports "aggregate demand" that might lead to inflation. Inflation and its expectations seem to be low — <a href="https://research.stlouisfed.org/fred2/series/T10YIE">below the official 2% target for quite a while</a> — which makes me at least cautious about this, and yet I support an interest rate hike at the next FOMC meeting. Here is a smattering of reasons why:<br />
<ul>
<li>The most important reason is "to make sure we can". The balance sheets of the fed and its member banks look very different from any time before five years ago, so the Fed expects to use different policy tools to raise interest rates than it has in the past; it has been doing little trial experiments, but a deliberate, sustained increase in interest rates using those tools would be different. I would like to see 50bp worth of increases when they still seem optional as an opportunity to see what actually happens and adapting while raising rates a lot is not yet urgent.</li>
<li>Interest rates have been near zero for 7 years, and the behavior of market participants has adapted to it. Most specifically, there were concerns when rates were first pushed down that money market funds would break — traditionally they have covered their expenses by taking 10–20 bp from the fund returns, and since money market funds aren't supposed to go down, they would have to shut down if they couldn't get enough nominal returns on invested funds to cover their expenses. They have shrunk and to some extent shifted from commercial paper to repo transactions as corporate issuers have extended the duration of their liabilities and worried more about their liquidity positions; I don't know how things might change again if interest rates were 50–75 bp instead of 0–25 bp, but again I would like for the markets to be given a chance to adapt to low but distinctly positive interest rates well before rates have to go higher.</li>
<li>There are classic problems with financial market participants "reaching for yield" when interest rates are low, and I worry somewhat that there are pockets of investors who have exposed themselves to too much risk, possibly employing cheap leverage as part of it. This, more than the previous points, is more linear in the amount of rates, such that a 50bp move would have a small effect on it, but it, too, is likely to be a greater problem if rates have to rise quickly than if they can be raised slowly.</li>
<li>More in the nature of rebuttal than of affirmative argument, I would like to emphasize that a target interest rate of 50 bp would still be very low: <blockquote class="twitter-tweet" lang="en">
<div dir="ltr" lang="en">
What interest rate target would a panel of economists 10 years ago have expected with 5.1% unemployment, >1% inflation, getting stronger?</div>
— Dean Jens (@deanjens) <a href="https://twitter.com/deanjens/status/643045584581066752">September 13, 2015</a></blockquote>
<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script><br />
It's not as though one or two small hikes would constitute a contractionary policy, which is the impression one sometimes gets from the most ardent opponents of a hike.<br />
</li>
</ul>
The recurring theme is mostly that moving away from zero when we aren't in a hurry to raise rates leaves more flexibility to handle the unexpected than raising rates when we are in a hurry would. It should be clear from the reasons that I'm not proposing or expecting that we begin an unbroken string of 25 bp hikes at each meeting for the next two years; if we had two such hikes and saw a slight uptick in inflation and the participation rate, I would support holding rates there for a while until we got a stronger signal that more sustained inflation was coming, even if it might allow some corners of the market to collect risky securities at unsafe leverage.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-17521363407577948222015-09-11T10:10:00.001-04:002015-09-11T10:13:31.378-04:00options and hedge fundsThe original idea of "hedge" funds is that they're hedged; it's not exactly that they're "market neutral", though it can be that, and many of them claim to be. (I expect somebody has gone back and looked at the correlation of the performance of some hedge funds for which they were able to get data and the performance of, say, the S&P 500, but I have no idea whether they actually got a result that was more or less zero or not.) Hedge-fund performance, though, is often compared to the S&P 500, and I imagine the average hedge-fund investor might be slightly miffed over long periods of time not to beat the S&P 500, though over three to five years in a strong bull market the more sophisticated ones might not be. In any case, what the relevant comparison is is a crucial part of the description of a particular hedge fund; in a bear market, a fund trying to beat the S&P 500 is doing better than a fund with the same performance that is supposed to be market neutral, while if they have the same performance during a bull market, the latter is doing better.<br />
<div>
<br /></div>
<div>
Over some time frame, though — I have an intuitive sense it's 3 to 5 years, but wouldn't be shocked if that were very wrong — if you were to buy an option (with a running rather than up-front payment) on a basket option paying the best of the S&P 500 (or some broader index), treasury bills, and some long bond index, the market-implied price on that option is going to be on the order of 100bp or something — in particular, is going to be low enough that no hedge fund would want to admit being unable to generate that much in excess return. If you were going to do this, you might need to have even stricter than usual redemption rules to avoid adverse selection problems, but perhaps a "no-regret target hedge fund" would be attractive to some group of hedge fund investors.<br />
<br />
(As a practical matter, it occurs to me that perhaps the "long bond index" should be "whatever we can hedge with CBOT bond futures", which is to say cheapest-to-deliver 15+y treasury bonds, which maybe aren't much of an index. I imagine the hedge fund would largely view generating alpha and synthetically constructing the option as separate tasks.)</div>
dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.com0tag:blogger.com,1999:blog-5924924.post-79788133726548956852015-08-25T11:34:00.002-04:002015-08-25T11:34:34.356-04:00finance: prices and fluctuationsThe stock market has been doing something, and if you care you can go read about that elsewhere, but it has led to some discussion of why prices of financial assets bob around at times, and even the relatively informed discussion seems a bit narrow-minded. My own research, such as it is, is based on value that assets gain from liquidity or other effects related to heterogeneous agents, but this post is going to eschew even that, working simply from the basic Lucas asset pricing model that everyone knows and loves:<br />
<blockquote>
Price = total expected discounted dividends</blockquote>
Robert Shiller somewhat famously (in certain circles) observed several decades ago that dividends are much less volatile than price, and concluded that markets are irrational. (This summary is only slightly unfair to him, and, to be clear, I agree with him that markets aren't perfectly rational, but that's quite a leap from the evidence he provided.) When I first saw that, my thought was, "it's not the dividends that are fluctuating; it's the expectations". It turns out that many — I perhaps overly associate this with John Cochrane, and have been convinced myself now to join their camp — believe that fluctuations in price are driven by that term in between: discounted.<br />
<br />
From this last point of view, then, a drop in the stock market is a reflection primarily of investors demanding a higher return than they were demanding before. One of the reasons for demanding higher returns is higher perceived risk, which can get recursive for agents with short time horizons: if that risk isn't a risk that dividends will be weaker than expected in the distant future, but a risk that other people will be demanding higher returns when you're looking to cash out your position, then it's hard not to imagine that there are likely to be multiple equilibria. Another reason for demanding a higher return, though, is that it is expected that new investment options will become more attractive in the near future; this especially might mean that the Federal Reserve is expected to raise interest rates, such that short-term bond investments will be more attractive than they have been in the last seven years.<br />
<br />
I will note that long-term bonds tend to go up (their demanded yield down) on days when stocks go down and vice versa — expected risk-free returns in general can't be driving day-to-day moves in both bond markets and stock markets, so your very short term fluctuations, insofar as they're "rational", must involve some changes in expectations, risk premia, etc. In general the arguments for market efficiency work better the longer the time-frame, and daily movements are going to be driven almost entirely by entities that respond to market fluctuations on a daily basis. If you're wondering why the stock market has been expensive, compared to its recent earnings and historical price to earnings ratios, you can't ignore the yields available in the bond market, and if you think bond prices are going to come down in the next couple of years, you should probably be expecting stock prices to at least stop their climb.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-28422225264137899602015-08-04T10:57:00.002-04:002015-08-04T10:57:13.202-04:00economic statistics in the newsLast year on another blog I briefly recorded <a href="http://deansdough.blogspot.com/2014/08/productivity-and-labor-compensation.html">why labor compensation series oranges seem to lag productivity series apples</a>, and this sort of statistic has been picked up on by one of the major presidential candidates, and so is worth noting again. I've seen a couple of other statistics (one related to that one) that are construed to mean something they probably don't, and would like to briefly note them here.<br />
<br />
The one that's related to the wages/productivity statistic is "labor share of income", which classically was strikingly regular at 2/3; the official NIPA figure has, over the past several years in particular, come down from about 62.5% to about 58.5%. This figure is the ratio between labor expenses, as measured by NIPA, and <a href="https://dl.dropboxusercontent.com/u/17531726/gdp.html">GDP</a>. Suppose a company produces a textile item that it sells for $4; it pays $1 for the raw input (cloth, etc.), $1 per item for machinery (which wears down and occasionally has to be refurbished or replaced), $1 per item for labor expenses, and the owner receives $1 per item in profit. This shows up as $3 of GDP—the cost of machinery is <em>not</em> (I think this would surprise many educated people) deducted, and on an economy-wide scale is basically double-counted—and $1 of income to labor, where a better measure might record $2 on the GDP side of the ledger and $1 to labor income. If the company is small enough, though, that the owner does all of the work—hiring no employees—and is unincorporated, then this counts as $3 to GDP and <em>nothing</em> to labor income—"proprietor's income" is a different category that, in order to get to 58.5%, must be excluded. It can be hard to tell which portion of "proprietor's income" should be counted as income to labor and which as income to capital (which is why it's given its own category in the first place); if you employ the crude solution of excluding proprietor's income and capital depreciation from GDP, it turns out that the ratio of labor income to Net Domestic Product Excluding Proprietor's Income has continued to bounce around between 67% and 69% for a long time. From an economist's standpoint, it is interesting that self-employment has increased, and that the capital used in production has shifted toward things like software that depreciate more quickly, but it should be noted that the changes in the NIPA labor-income to GDP ratio do not really reflect a change in the amount of actual economic income from production that is going to workers.<br />
<br />
Another ratio I've seen is the debt to GDP ratio of, in particular, Greece; it has increased from about 130% to about 170% since the first default a few years ago. This has been suggested to indicate that even the creditors would be better off if they had allowed less austerity on the part of Greece. The only way to make even logical sense of that is to suppose that maintaining a constant debt to GDP ratio would have been a reasonable counterfactual; it does not seem plausible to me that any amount of "stimulus" would have led Greek GDP, measured in any moderately consistent (credible or not) way, to be 17/13 times what it actually is. Even if you trust the official GDP figure as much as you do its American counterpart, it's not clear that even that late starting point for the GDP figure was "sustainable", and of course the problems with Greek official statistics are well-known. What I want to call more attention to, though, is that numerator, and the form of default that is most popular among sovereign debtors, especially those trying to pretend that they aren't <em>really</em> defaulting, which is called "terming out"; the nominal size of the debt (in whatever its unit of account) is held fixed, but the payment dates are pushed into the future, with no interest accruing for the extra time the debt is owed. This is, of course, nonsense; the change of terms associated with the first default was widely viewed as effectively being about a 30% haircut to bond holders, who mostly sold at those reduced prices to European governmental institutions. The way debt is accounted, though, this 30% actual haircut made no change to the official amount of Greek debt outstanding; the numerator in that debt-to-GDP figure did not change from an accounting standpoint (because it was specifically engineered not to change from an accounting standpoint), but it did drop from a true economic standpoint.<br />
<br />
Puerto Rico seems to have about a 90% ratio; I'd be interested in seeing ratios computed for both Greece and Puerto Rico in terms of cashflows discounted by a risk-free interest rate, viz. what would the present value of their bonds be if we were sure they wouldn't default? If you're trying to figure out whether a debtor could possibly avoid default, that seems like a useful measuring stick, and it has the virtue of changing when you change the real economics of the bonds. (It would surely raise all of the debt-to-GDP figures, but in particular for Greece would raise the 130% by a larger factor than the 170%.)dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.com0tag:blogger.com,1999:blog-5924924.post-16161004459702426942015-06-15T10:21:00.003-04:002015-06-15T10:21:33.651-04:00stock buybacks and corporate investmentSo <a href="http://www.bloombergview.com/articles/2015-06-15/senators-think-stock-buybacks-might-be-manipulative">some Senators think corporate stock buy-backs constitute market manipulation</a>, which is weird, so there's a lot one could potentially address there, but once again I find a particular bit of minutia interesting and fixate on <br />
<blockquote>
A growing body of research suggests that the vast amounts U.S. corporations have spent to repurchase their own stock is a chief cause of the stagnation of American wages and investment, and could be a potential source of long-term national decline.</blockquote>
Levine's response is that if you return the money to shareholders, they're probably not just letting it sit there, and that they might be better at identifying investment opportunities than the corporations earning the money, especially if those opportunities are in industries other than where corporations are especially profitable, but also especially for those corporations that are inclined to return money to the shareholders. I've heavily interpreted and added to Levine's argument, but that last bit leads into my response, which is that the causality that she's implying is not intuitive.<br />
<br />
Now perhaps the research to which she's referring does make that causal case; one can imagine that if some external force induced companies to return cash to investors, that would naturally reduce the amount of money they have available to invest in their own operations. The usual story, though, is that a lot of companies are returning cash to shareholders because they can't find useful internal investments; it seems worth noting that the usual biases and conflicts of interest of management are to be too quick to invest in unpromising projects instead of disgorging cash, so it would lend them credibility if they're buying out shareholders instead. The Senator's story would suggest that the buybacks leave too little cash for responsible investment, while the conventional story indicates that the buybacks are being caused by companies' having a lot of cash, so I will note that corporate cash holdings are notoriously high right now; there are unrelated reasons why one would expect cash to be higher (and debt to be lower) in equilibrium than a few years ago, but this data point at least seems much more consistent with a story of "we have a huge amount of cash and nothing useful to do with it internally, so we'll give some of it to shareholders and sit on a less huge amount of cash" than "we don't have enough cash to spend more on R&D, because we gave too much back to investors."dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-15528298378458421832015-05-28T16:23:00.001-04:002015-06-01T13:15:54.003-04:00stock market valuationsI feel like, perhaps especially after that last post, I should say something about "Is the stock market overvalued?", which seems to be a popular question. As usual, insofar as the question is well-formed, the answer is "I don't know", but that's not a fun answer, so, without making too long a post, my answer instead is "The bond market is overvalued." I (obviously?) don't really know that, either, but if you're comparing stock prices to some sort of flow (dividends, earnings, etc.), the appropriate ratio is surely something that changes with time in a way that should correlate with interest rates, and the estimates I've seen lately of "the equity risk premium" are all higher than historical norms — which is to say (very crudely) that stocks are undervalued relative to bonds relative to their historical relationship. In perhaps more basic terms, if you're looking to sell stocks because you think they're overvalued — not, insofar as it can be made distinct, because you think they're especially risky — then your alternative is basically cash.<br />
<br />
I'll add a couple of links here:<br />
<ul><li><a href="http://www.vox.com/2015/5/28/8679725/bubbles-interest-rates">Vox makes more or less the same point</a></li>
<li><a href="http://aswathdamodaran.blogspot.com/2015/05/valuing-pricing-cash.html">If you adjust for corporate cash holdings,</a> market P/E ratios are much lower than the naive calculation.</li>
<li><a href="http://www.newyorkfed.org/research/staff_reports/sr714.pdf">A pdf from the New York Fed</a> indicating that the equity risk premium is high. The actual value they give is higher than most other sites, but <a href="http://aswathdamodaran.blogspot.com/2013/05/equity-risk-premiums-erp-and-stocks.html">Damodaran</a> also suggests the ERP is on the high end of normal.</li>
<li>I will acknowledge that the ratio of corporate earnings to GDP is high, and seems likely to revert to lower values as the labor market (finally) tightens.</li>
<li><b>Added June 1:</b> <a href="http://www.bloomberg.com/news/articles/2015-06-01/goldman-sachs-asked-two-of-the-world-s-best-known-economists-if-u-s-stocks-are-in-a-bubble">Siegel and Shiller</a> have their usual opinions.</li>
</ul><br />
I spent more time on this post than I meant to.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-18338358181138297072015-05-26T11:52:00.003-04:002015-05-26T11:52:32.424-04:00the modern stock marketThere's <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580002">a paper on SSRN about the modern stock market</a> with its high-frequency traders and dark pools and so on, and I recommend it. I'd like to offer a couple remarks on some small bits of it:<ul><li>They give an example of a high-frequency trader placing orders to sell a stock on multiple exchanges at the same time; when one of the orders executes, it cancels the other. A large trader, with less speed, attempts to lift both offers, and finds that it can't. I have trouble intuiting that I should be sympathetic to the poor buyer here; it seems to me that one very appropriate response to market fragmentation is to get very fast access, post the same order at multiple venues, and sell wherever it sells first. Certainly the HFT is running the risk that the offers will be executed at both venues before even it can respond, and I wouldn't be especially broken-hearted for it if that happened, but it seems perfectly reasonable for it to do this when it can. It's worth noting that the authors' proposed regulatory change to address controversial behavior by HFTs — not to let agents have order-book information until the official NBBO has been updated and disseminated — would not impair this behavior unless they are also delaying execution transmission (or unless that takes longer anyway to go out than inside quote information does); you couldn't cancel your order in response to <em>somebody else's</em> execution on the other exchange, but you could still manage your own attempts to sell a quantity wherever you can without undue risk of executing more than you intended.</li><li>The "maker-taker" fees seem a bit fraudulent in conjunction with the NMS rules and fiduciary duty rules for brokers. If a bid sitting at a venue at 45.00 will actually result in the buyer's receiving $45.002 per share executed, and the seller's paying $45.0025, it feels wrong to me for the tape to reflect an execution at $45.00; it doesn't feel quite as fraudulent to me for the "best bid" to be disseminated as $45.00 (I'm used to the idea that commissions are in addition to the quoted price), though possibly it should. If another venue is "paying for order flow" — I'm not talking here about the Citadels "internalizing" executable orders, but the practice that elsewhere seems to be called "customer priority" — and a bid resting at $45.00 means the seller pays a net of $44.999, calling that $45.00 again feels more fraudulent, and an agent required to route an order to the "national best bid" shouldn't seem to be able to call that a tie. This little irregularity also makes me wonder whether any high-frequency shops try to make much of their net revenue from payments for liquidity provision by e.g. having an order to buy at $45 on the platform where that would net $45.002 and responding to an execution by trying immediately to hit a bid at $45 on the platform that pays for marketable orders. It might be that the fraction of a tick per share would be insufficient to compensate them for the risks, especially in light of other opportunities for profit.</li><li>There's some level on which I regard a lot of the controversial actions of the high-frequency traders as tying the different exchanges together into more of a true national market, and I view the objections to them as a mixture of denial and regret that the pretense of a single market is being blown.</li><li>More broadly, I'm not sure the model of "informed" vs. "uninformed" traders is never misleading. I don't know whether there's work on what the environment of the no-trade theorems looks like when agents have different stochastic discount factors, but I'd like a little bit of a deeper understanding of ex-ante gains from trade in which it is common knowledge that some agents have different information from others. The general dynamic that traders motivated by needs for liquidity and traders motivated by superior information will both want to look like the former is presumably true, but where efficiency is being evaluated in terms of providing returns to cultivating information it seems like nuance here might be important — that in an important sense the liquidity traders may not lose as much from trading with informed counterparties as is being supposed in their models, and that conversely the informed buyers will ultimately be interested in having a liquid market into which to sell as well.</li></ul>dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-25460722203475055282014-12-09T10:29:00.001-05:002014-12-09T10:32:55.877-05:00units<p>I started my adult life in physics, and have now come to economics by way of finance; one of the differences between how economics is practiced and how physics is practiced is that economics frequently suppresses "units"; especially in introductory economics, supply and demand curves are frequently specified with quantity and price in some implicit units and coefficients of e.g. "5" where a physicist would say "5 $/widget<sup>2</sup>". In practical contexts, this is most pervasive in economic and financial contexts when the implicit unit is time; "year" frequently is 1. Otherwise smart people seem occasionally to forget that interest rates have an implicit time unit in them; bonds are yielding 3%<em>per year</em>.</p><p>This brings me to the term "basis point". You can go to websites (or at least comments sections of blogs) about linguistics and watch people fight about what words really mean, or which uses are inappropriate; finance specialists will have that argument about the term "basis point" perhaps more than any other term, but the permitted uses seem to be "nested", in that you won't usually encounter two people where one says A is acceptable and B isn't while the other allows for B but not A; when two people disagree about the proper use, usually one has a strictly narrower use than the other. The basic definition, though, is that a basis point is the reciprocal of 10,000 years, i.e. .01% per year.</p><p>The term "basis" is frequently used in finance to refer to a difference between two things, especially two things that are similar or related; the "basis" is then the extent to which they are different. If you buy oil futures because you need to buy jet fuel in the future and you want to hedge your risk, "basis risk" is the risk that the price of oil and the price of jet fuel don't actually move in lockstep. The term "basis point" was originally used in the context of different interest rates; an interest rate of 3.43% per year is 1bp less than an interest rate of 3.44% per year. There are some people who insist that any use of "basis point" other than in referring to differences or change in interest rates is wrong. Some people are willing to use it for anything related to interest rates, convenience yields, or other interest-rate-like objects. Any use of "basis point" that satisfies the definition I gave seems fine to me; if you want to talk about the growth rate of GDP in terms of basis points, that seems entirely cromulent to me.</p><p>The point at which I start to object is where the units are changed, which is mostly to say when people start multiplying it by "year" without telling you that. The employment-to-population ratio, for example, was .5923 in October and .5919 in November, according to <a href="http://www.bls.gov/news.release/empsit.a.htm">the latest BLS report</a>; there are people who would tell you that it dropped by 4 basis points. Note that, in this context, even if one were attempting to specify a rate, this is a change from one <em>month</em> to the next; to say that it dropped at a "rate of 50bp" is more in tune with the initial definition, and more likely to confuse people.</p><p>This morning I see in <a href="http://www.bloombergview.com/articles/2014-12-09/levine-on-wall-street-credit-ratings-and-webcam-advisers">Matt Levine's linkwrap</a> that Vanguard is looking to launch an advisory service</p><blockquote>for a fee of 30 basis points per year instead of "an industry average of more than 1 per cent"</blockquote><p>where I would contend "per year" should be moved from its current location to the end of the blockquote; they seek a fee of 30bp, as compared to 1 per cent per year.</p><p>I should perhaps note here that, as far as I know, I am the only person who has a problem with "basis point" meaning 1/100 of one percentage point but is fine with using it to express growth rates. If there are others, I wouldn't be surprised if they got into finance through physics, or some other field that uses a lot of dimensional analysis; it is, from my background, simply "obvious" that one system of usage is self-consistent and the other is not.</p><p>Allow me to move on from "basis point" but not from picking on Matt Levine who, as far as I've been able to tell, has adopted from FDIC regulators the practice of referring to a regulatory rule about "leveraged loans" as applying to loans to companies with debt that is "at least six times EBITDA". (I suspect Levine has no problem with this, but he doesn't seem to have originated it.) EBITDA is a flow, and debt is a stock; the ratio of debt to EBITDA again has units of time. What they all mean is "six years' worth of EBITDA"; if you have quarterly<a href="#dWj141209">*</a> EBITDA, multiply by 24 to get the debt limit. The national debt/GDP ratio is almost always given in years, but with the "years" unspoken; one often sees an outsized importance given to "100%", i.e. debt equal to one year's GDP, and while some of the people who see that as an important milestone may simply see that as a psychologically significant number in a broad plausibly economically relevant range, I read some commentary that seems to think it's important because, come on, <em>all</em> of your GDP is debt, or something — which loses even its superficial coherence if you change units.</p><p>This, ultimately, is where it matters — when it screws up people's conceptual understanding of what's going on. If you're attentive to which numbers are stock and which are flows, and you make sure to annualize anything that needs annualizing and develop an intuition around annualized numbers, various semantic conventions that seem unnecessarily confusing to me are just language, and <a href="http://en.wikipedia.org/wiki/Linguistic_relativity">probably</a> is a perfectly good choice among ultimately arbitrary coding rules.</p><a name="dWj141209">*</a> "Quarter", of course, is a unit of time equal to a quarter of a year, in the same pattern of "year=1".dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-82306827305947628962014-09-17T10:46:00.002-04:002014-09-17T10:46:57.258-04:00FOMCNote that the FOMC has been meeting, and will be releasing a statement around 2PM EDT (I think); <a href="https://dl.dropboxusercontent.com/u/17531726/fed.html">my fed statement comparison page</a> should be updated shortly after that — within 40 seconds or so, if my script works properly; let's say the odds of that happening are 1 in 3. At 2:30 EDT <a href="http://www.ustream.tv/federalreserve">Fed chairman Yellen will speak, and you can watch live</a> as she then proceeds to field asinine questions from the financial press.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-14365530494258838452014-08-02T13:15:00.001-04:002014-08-02T13:15:27.621-04:00FOMCI did update <a href="https://dl.dropboxusercontent.com/u/17531726/fed.html">my webpage comparing the new FOMC statement to the old one</a> on Wednesday; in response to a comment from my brother a long time ago that he sometimes looked at it but mostly skipped the old text, just reading the current statement, I have just now added buttons to the top of the page to allow you to remove the old text. (At some point perhaps I'll write my own javascript to make it a little bit more right for what I would want it to do, but using someone else's code is faster and easier.)dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-53399477287166051452014-06-18T14:44:00.003-04:002014-06-18T14:44:49.881-04:00FOMC<a href="https://dl.dropboxusercontent.com/u/17531726/fed.html">The Fed statement was basically unchanged</a>. The tools I use to generate the comparison have changed.dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-2298577825008916372014-05-01T09:42:00.002-04:002014-05-01T09:42:45.487-04:00FOMC statement<br />
<a href="http://www.federalreserve.gov/newsevents/press/monetary/20140430a.htm">The FOMC statement</a>, as revised:<blockquote><p>Information received since the Federal Open Market Committee met in <strike>January</strike> <b>March</b> indicates that growth in economic activity <strike>slowed</strike> <b>has picked up recently, after having slowed sharply</b> during the winter <strike>months, in part reflecting</strike> <b>in part because of</b> adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending <strike>and business</strike> <b>appears to be rising more quickly. Business</b> fixed investment <strike>continued to advance</strike> <b>edged down</b>, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. <p>Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term. <p>The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in <strike>April</strike> <b>May</b>, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $ <strike>25</strike> <b>20</b> billion per month rather than $ <strike>30</strike> <b>25</b> billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $ <strike>30</strike> <b>25</b> billion per month rather than $ <strike>35</strike> <b>30</b> billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate. <p>The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. <p>To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. <p>When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. <p><strike>With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements. <p></strike>Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; <b>Narayana Kocherlakota; </b>Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo. <p><strike>Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee's commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity. <p></strike> <b> </b><p></blockquote>dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-32674058768107303532014-03-19T14:14:00.002-04:002014-03-19T14:14:58.968-04:00FOMC<br />
<a href="http://www.federalreserve.gov/newsevents/press/monetary/20140319a.htm">The FOMC statement</a>, as revised:<blockquote><p>Information received since the Federal Open Market Committee met in <strike>December</strike> <b>January</b> indicates that growth in economic activity <strike>picked up in recent quarters</strike> <b>slowed during the winter months, in part reflecting adverse weather conditions</b>. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate <strike>declined but</strike> <b>, however,</b> remains elevated. Household spending and business fixed investment <strike>advanced more quickly in recent months</strike> <b>continued to advance</b>, while the recovery in the housing sector <strike>slowed somewhat</strike> <b>remained slow</b>. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. <p>Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and <strike>the unemployment rate will gradually decline toward levels</strike> <b>labor market conditions will continue to improve gradually, moving toward those</b> the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as<strike> having become more</strike> nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term. <p><strike>Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing</strike> <b>The Committee currently judges that there is sufficient</b> underlying strength in the broader economy<b> to support ongoing improvement in labor market conditions</b>. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions<b> since the inception of the current asset purchase program</b>, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in <strike>February</strike> <b>April</b>, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $ <strike>30</strike> <b>25</b> billion per month rather than $ <strike>35</strike> <b>30</b> billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $ <strike>35</strike> <b>30</b> billion per month rather than $ <strike>40</strike> <b>35</b> billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate. <p>The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other <strike> </strike>policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. <p>To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy <strike>will remain appropriate <font color="#008000">for a considerable time after the asset purchase program ends</font> and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low<font color="#00b700"> target range for the federal funds rate</font> of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored</strike> <b>remains appropriate</b>. In determining how long to maintain <strike>a highly accommodative stance of monetary policy</strike> <b>the current 0 to 1/4 percent<font color="#00b700"> target range for the federal funds rate</font></b>, the Committee will <strike>also consider other</strike> <b>assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of</b> information, including<strike> additional</strike> measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current<font color="#00b700"> target range for the federal funds rate</font> <strike>well past the time that the unemployment rate declines below 6-1/2 percent</strike> <b><font color="#008000">for a considerable time after the asset purchase program ends</font></b>, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal<b>, and provided that longer-term inflation expectations remain well anchored</b>.<b> </b><b><p></b> When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. <b>The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. <p>With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements. </b> <p>Voting for the FOMC monetary policy action were: <strike>Ben S. Bernanke, Chairman</strike> <b>Janet L. Yellen, Chair</b>; William C. Dudley, Vice Chairman; Richard W. Fisher<strike>; Narayana Kocherlakota</strike>; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; <b>and </b>Daniel K. Tarullo<strike>; and Janet L. Yellen</strike>. <strike> </strike> <b> <p>Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee's commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity. <p></b><p><p><pre>Possibly moved phrases:
<font color="#008000">for a considerable time after the asset purchase program ends</font><br/><font color="#00b700"> target range for the federal funds rate</font><br/></pre></p></blockquote>dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-11283855215788418172014-01-29T16:01:00.003-05:002014-01-29T16:01:47.575-05:00FOMC<br />
<a href="http://www.federalreserve.gov/newsevents/press/monetary/20140129a.htm">The FOMC statement</a>, as revised:<br />
<blockquote>
Information received since the Federal Open Market Committee met in <strike>October</strike> <b>December</b> indicates that <strike>economic activity is expanding at a moderate pace</strike> <b>growth in economic activity picked up in recent quarters</b>. Labor market <strike>conditions have shown</strike> <b>indicators were mixed but on balance showed</b> further improvement <strike>; the</strike> <b>. The</b> unemployment rate<strike> has</strike> declined but remains elevated. Household spending and business fixed investment advanced<b> more quickly in recent months</b>, while the recovery in the housing sector slowed somewhat<strike> in recent months</strike>. Fiscal policy is restraining economic growth, although the extent of restraint <strike>may be</strike> <b>is</b> diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. <br />
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic <strike>growth will pick up from its recent</strike> <b>activity will expand at a moderate</b> pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term. <br />
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee <strike>sees</strike> <b>continues to see</b> the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to <strike>modestly reduce</strike> <b>make a further measured reduction in</b> the pace of its asset purchases. Beginning in <strike>January</strike> <b>February</b>, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $ <strike>35</strike> <b>30</b> billion per month rather than $ <strike>40</strike> <b>35</b> billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $ <strike>40</strike> <b>35</b> billion per month rather than $ <strike>45</strike> <b>40</b> billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate. <br />
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other <b> </b>policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. <br />
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee <strike>now anticipates</strike> <b>continues to anticipate</b>, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. <br />
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; <strike>James Bullard; Charles L. Evans; Esther L. George</strike> <b>Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser</b>; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. <strike>Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate. </strike> <b> </b><br />
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dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-61960114858687550522014-01-14T14:30:00.001-05:002014-01-14T14:30:08.025-05:00mininum wage econometrics is hard<a href="http://www.forbes.com/sites/modeledbehavior/2014/01/13/why-do-economists-disagree-so-much-about-the-minimum-wage/">This is nominally about the minimum wage, but I encourage reading it in a more broadly epistemological cast of mind</a> — this is work with which I was previously familiar, but it's well-described here. The upshot is that, with noisy data and confounding factors, blunt attempts to control for the confounds may well "control for" most of the signal as well, leaving mostly noise — <em>only</em> noise if you try to average out the noise in the wrong way.<br />
<br />
More narrowly, the recent evidence suggests a way out of an interesting paradox in some of Card's work on the response of labor markets to presumably exogenous shocks:<br />
<ul><li>A paper looking at <a href="http://en.wikipedia.org/wiki/Mariel_boatlift">a large influx of immigrants to Miami in 1980</a> found no effect on local wages; in traditional terms, this suggests that labor demand is extremely elastic.</li>
<li>In a famous paper using data from New Jersey and eastern Pennsylvania before and after an increase in the state minimum wage, he suggested that the increase in state minimum wage had in fact <em>increased</em> employment in low labor jobs.</li>
<li>A later paper by Card, with more data from different time points, suggested that the data series for New Jersey and eastern Pennsylvania are both noisy enough and weakly enough correlated over shortish periods of time that any statistical significance in the previous study was illusory; to the extent that we call this "there is no net effect on employment from raising the minimum wage", again forcing it into a comparative statics supply-and-demand framework, this suggests that labor demand is extremely <em>in</em>elastic.</li>
</ul>All of this — the elastic (short-term) response to an increase in supply, the inelastic (short-term) response to a minimum price, and the weak (short-term) coupling between series that might be expected to be similar — makes a fair amount of sense in <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2010/press.html">the modern search-theoretic models of labor</a> that capture the fact that (most) people don't get up each morning, immediately congizant of which employer is willing to pay the most money for their labor that day, and go to work for that employer; instead there's a lot of what you might elsewhere call "repeat business". It appears that the main effect of higher minimum wages is, in fact, to reduce <em>growth</em> in employment, and that it takes a while for differences in <em>levels</em> to show up; moreover, if you "correct for" the difference in job growth between different jurisdictions, you can swamp much of the effect, even if you take some care not to.<br />
<br />
If you believe in a strong income effect among minimum wage employees, perhaps the right thing to do, then, is to raise the minimum wage when it is expected that job market conditions will, for other reasons, be improving over the next year or two; you provide a boost in income now, and create slack in the job market in the future. (This suggestion is meant to be a bit cheeky; even to the extent that I think these partial-equilibrium Keynesian arguments are correct, and that welfare losses from the business cycle are sizable compared to <a href="http://en.wikipedia.org/wiki/Deadweight_loss#Harberger.27s_triangle">microeconomic deadweight losses</a>, I'm skeptical that policy can be timed well; cf. <a href="http://www.aei-ideas.org/2012/08/a-big-version-of-the-biggest-chart-in-american-politics/080312jobschart-3/">the famous projections of the unemployment rate with and without the 2009 stimulus</a>.)dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-18213347239222360952013-12-18T16:47:00.003-05:002013-12-18T16:48:05.467-05:00FOMCThis was up <a href="https://dl.dropboxusercontent.com/u/17531726/fed.html">at Dropbox</a> 2 and a half hours ago, but I'll post it here as well:<br />
<a href="http://www.federalreserve.gov/newsevents/press/monetary/20131218a.htm">The FOMC statement</a>, as revised:<br />
<blockquote>
Information received since the Federal Open Market Committee met in <strike>September generally suggests</strike> <b>October indicates</b> that economic activity <strike>has continued to expand</strike> <b>is expanding</b> at a moderate pace. <strike>Indicators of labor</strike> <b>Labor</b> market conditions have shown <strike>some further improvement, but</strike> <b>further improvement;</b> the unemployment rate<b> has declined but</b> remains elevated. <strike>Available data suggest that household</strike> <b>Household</b> spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth<b>, although the extent of restraint may be diminishing</b>. <strike>Apart from fluctuations due to changes in energy prices, inflation</strike> <b> Inflation</b> has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. <br />
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the <strike>downside </strike>risks to the outlook for the economy and the labor market as having <strike>diminished, on net, since last fall</strike> <b>become more nearly balanced</b>. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, <strike>but it anticipates</strike> <b>and it is monitoring inflation developments carefully for evidence</b> that inflation will move back toward its objective over the medium term. <br />
Taking into account the extent of federal fiscal retrenchment <strike>over the past year</strike> <b>since the inception of its current asset purchase program</b>, the Committee sees the improvement in economic activity and labor market conditions <strike>since it began its asset purchase program</strike> <b>over that period</b> as consistent with growing underlying strength in the broader economy. <strike>However</strike> <b>In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions</b>, the Committee decided to <strike>await more evidence that progress will be sustained before adjusting</strike> <b>modestly reduce</b> the pace of its <strike>purchases</strike> <b>asset purchases</b>. <strike>Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed</strike> <b> Beginning in January, the Committee will add to its holdings of agency mortgage-backed<span style="color: #00b700;"> securities at a pace of</span> $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury</b><span style="color: #00b700;"> securities at a pace of</span> $40 billion per month <strike>and longer-term Treasury<span style="color: #00b700;"> securities at a pace of</span></strike> <b>rather than</b> $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. <strike>Taken together, these actions</strike> <b>The Committee's sizable and still-increasing holdings of longer-term securities</b> should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate. <br />
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. <strike>In judging when to moderate<span style="color: #005e00;"> the pace of asset purchases</span>, the Committee will, at its coming meetings, assess whether</strike> <b>If</b> incoming information <strike>continues to support</strike> <b>broadly supports</b> the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective<b>, the Committee will likely reduce<span style="color: #005e00;"> the pace of asset purchases</span> in further measured steps at future meetings</b>. <strike>Asset</strike> <b> However, asset</b> purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's <strike>economic outlook</strike> <b>outlook for the labor market and inflation</b> as well as its assessment of the likely efficacy and costs of such purchases. <br />
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. <strike>In particular, the Committee decided to keep the</strike> <b>The Committee also reaffirmed its expectation that the current exceptionally low</b> target<span style="color: green;"> range for the federal funds rate</span> <strike>at</strike> <b>of</b> 0 to 1/4 percent<strike> and currently anticipates that this exceptionally low<span style="color: green;"> range for the federal funds rate</span></strike> will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. <b>The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target<span style="color: green;"> range for the federal funds rate</span> well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. </b>When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. <br />
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; <b>Esther L. George; </b>Jerome H. Powell<strike>; Eric S. Rosengren</strike>; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was <strike>Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations</strike> <b>Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate</b>. <strike> </strike> <b> </b><br />
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<pre>Possibly moved phrases:
<span style="color: green;"> range for the federal funds rate</span>
<span style="color: #00b700;"> securities at a pace of</span>
<span style="color: #005e00;"> the pace of asset purchases</span></pre>
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</blockquote>
dWjhttp://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-5924924.post-35583605567872768302013-10-30T14:16:00.000-04:002013-10-30T14:16:01.382-04:00Fed statement comparison<a href="http://www.federalreserve.gov/newsevents/press/monetary/20131030a.htm">The FOMC statement</a>, as revised:<br />
<blockquote>
Information received since the Federal Open Market Committee met in <strike>July</strike> <b>September generally</b> suggests that economic activity has <strike>been expanding</strike> <b>continued to expand</b> at a moderate pace. <strike>Some indicators</strike> <b>Indicators</b> of labor market conditions have shown <strike>further improvement in recent months</strike> <b>some further improvement</b>, but the unemployment rate remains elevated. <strike>Household</strike> <b>Available data suggest that household</b> spending and business fixed investment advanced, <strike>and</strike> <b>while the recovery in</b> the housing sector <strike>has been strengthening, but mortgage rates have risen further and fiscal</strike> <b>slowed somewhat in recent months. Fiscal</b> policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. <br />
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall<strike>, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market</strike>. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. <br />
Taking into account the extent of federal fiscal retrenchment<b> over the past year</b>, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program<strike> a year ago</strike> as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate. <br />
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases. <br />
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. <br />
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. <br />
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