Ben Bernanke gave a speech in New York, transcript here, on the pre-crisis vulnerabilities in the financial sector, on the triggers for the crisis, and on the policy responses – what and why.  Clearly reasoned from economic models and closely related to the canonical (Bernanke the academic) understanding of the first part of the Great Depression.  The Federal Reserve’s actions where Bagehot’s rule in practice and are ultimately defended by saying “ . . .the responses to the failure or near failure of a number of systemically critical firms reflected the best of bad options.”


A fun research article here , covered by the Wall Street Journal here , describes Keynes’ performance as an investor.  He was nearly wiped out by the crash of 1929, but did very well thereafter.

Here is the Dallas Fed’s report that argues for breaking up the large banks in order to end “too big to fail.”  Very interesting reading.  My view (blogged about before) is that it is not enough to break up the large banks.  A sector that is critical and comprised of many small firms is not immune to the TBTF problem.  If banks all do a similar activity and are exposed to similar risks, then they all go under in response to the same losses in the same state of the world and the sector needs bailing out.  No firm is too big to fail, but if the sector just is too important to fail, then the concern is similar exposures as much as size.  That said, there is still an advantage to breakup, which is that the worst offenders can be allowed to fail, which may push the crowd back somewhat from the brink.


When I first showed up at Princeton as an Assistant Professor, Ben Bernanke was teaching WWS 512b (Macroeconomics for the Master’s program at the Woodrow Wilson School of Public and International Affairs) and I was to teach WWS512c (same course, mathematical version).   As I figured out what and how to teach policy macroeconomics for master’s students, I leaned on Ben, who I quickly realized was an exceptionally clear teacher.  Professor Bernanke is now Chairman Bernanke, but he is back to teaching macroeconomics.  He is lecturing at GWU, but really for the world as the class is on-line here.  I highly endorse these lectures: Ben is a clear teacher with an intellectual (non-partisan) approach to central banking; he was an expert in banking crises and got the U.S. through this latest one; he not only believe in the benefits of central bank transparency, but has moved the Fed to being much more transparent in many dimensions.



Here, in a readable but general document, is the Office of Financial Research’s strategic plan.

A huge amount depends on the talent that it can draw and the culture it can develop.

Did I, an economist, really say that about culture?  Huh. I guess it shows how little we know about what makes for an (in)effective regulatory agency.

In light of the recent GAO report, one question I have received is how public pension solvency dates would change if one assumes an “Ongoing” model instead of a “Termination” model. The Termination approach asks how long existing assets would last to cover liabilities that have already been promised. It assumes that future contributions will cover the cost of future benefit promises and will not be wiped out to fund legacy promises. This is the approach I took in a paper from 2010 that examined exhaustion dates. An Ongoing approach instead assumes that future contributions are available to make payments at the time and could be completely wiped out if necessary to pay legacy liabilities. Note that in many systems departing employees can ask for contribution refunds, so that it is not clear that all future employee contributions are fully available for legacy promises.

Fortunately, Alicia Munnell and coauthors have already analyzed and answered this question in the 2011 paper “Public Pension Funding In Practice,” Journal of Pension Economics and Finance 10: 247-268. The main table from Professor Munnell’s paper is as follows. It shows that under the Termination framework public pension plans nationwide have assets through 2025 assuming 8% returns and 2022 assuming 6% returns. Allowing future contributions to be wiped out to pay for legacy liabilities extends the solvency horizon on average by 4-5 years.

Another interesting graph from the paper is the following, constructed under the 8% return scenario.

It is interesting that even under the Ongoing framework, assets of more than half the plans (7%+29%+33%) are exhausted by 2029, 36% (7%+29%) are exhausted by 2024, and 7% are exhausted before 2020.

At the time of the Munnell study, assets in the sample plans were $2.7 trillion as of 2009, according to the study.  As of the last high-water mark for the stock market (June 2011), total state and local government retirement assets stood at $3.0 trillion according to the Fed Flow of Funds, which also corroborates the 2009 figure. It is telling that even a very strong market in which stocks have returned approximately 10% annually since 2009 have had such a relatively small effect on the situation.

The Administration produced its 2012 Economic Report of the President recently.  These reports are written by the economists at the Council of Economic Advisers and tend to employ solid economic arguments and use data correctly – not always and everywhere, but very well by Washington Think Tank standards.  The Chapter in this year’s Report entitled “Restoring Fiscal Responsibility” is a nice read in that it sets out the challenges and give some ideas as to how the Administration plans to address our fiscal imbalances.  The chapter is here.

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