Friday, February 22, 2013

Everything You Wanted to Know About the Safe Asset Debate

Can be found here

Update: one overlooked contributor in the above link is Steve H. Hanke. He has noted several times how Basel III is adversely affecting the supply of safe assets.

5 comments:

  1. "In short, the Fed’s zero interest-rate policy has exacerbated a credit crunch that has been holding back the economy. The only way out of this trap is for the Fed to abandon the conventional wisdom that zero-interest-rates stimulate the creation of credit. Suppose the Fed were to raise the Fed funds rate to, say, two percent. This would loosen the screws on interbank lending, and credit would begin to flow more readily to small and medium size enterprises. If this were to happen, we would see higher rates of growth in bank money, and thus in the total money supply"

    or it increases the cost of debt servicing making credit creation impossible and interbank lending collapses leading toward another financial crisis. Complete mishandlement there. He ignores the role of debt creation and servicing which destroys the whole post. We can't issue debt fast enough to offset the debt servicing.

    Interbank lending is already surging, it can't surge much more. Credit is already being created at .5% FFR(there is no 0 bound). The problems are innovation(especially in energy) slump reducing investment which led toward the debt surge in the first place. Minsky wrote about this expressively. The deleveraging phase is the deleveraging phase during the innovation slump. Even if we are developing new tech, they are way to much in the early phase sorta like the TV in 1928.......uh, yes, the TV was a idea invented in the 1920's! You get the picture.

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  2. Jeremie Cohen-SettonFebruary 23, 2013 at 10:53 PM

    Thanks David for my linking to our review. And I agree with you I overlooked the issue of regulation and the supply of safe assets.

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  3. Anonymous, I agree that raising rates right now is not optimal. In my view, the natural interest rate is still depressed. Hanke, though, shares my view of safe assets as money and has correctly noted that Basel III has affected the supply of safe assets.

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  4. Jeremie, no worries. Thanks for putting the list together. Will use it in my classes.

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  5. also missing from the excellent bruegel summary is a link to Ashwin's arguments about why we dont need any safe assets at macroresilience

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