Monetary Policy

Should the US Banking Crisis of 2023 Be a Footnote?

The 2023 banking crisis that took down four banks, including Silicon Valley Bank, by all appearances appears to have been resolved by public intervention. Yet, Viral Acharya and Raghuram Rajan argue, this leaves many of the underlying weaknesses that contributed to the bank failures unaddressed. Moreover, while the authorities’ temporary fixes have stopped the panic, the system will have to absorb more unrecognized losses over time.

The Economic Consequences of Political Pressure on the Federal Reserve

Politicians often interfere with central banks, but it is not clear how to measure such political pressure systematically and therefore difficult to quantify its economic consequences. In new research, Thomas Drechsel finds that political pressure strongly and persistently raises inflation and inflation expectations but has little impact on economic activity.

The Macroeconomic Implications of Falling Real Estate Prices

In this second article on real estate in the current high-interest-rate environment, Joseph L. Pagliari Jr. explores banks’ exposure to commercial real estate, who might help fill the credit void as bank funding dries up, how the work-from-home phenomenon impacts commercial real estate prices, particularly the office sector, and what risks large urban centers face with emptied office buildings.

Evaluating Concerns of Collapsing Commercial Real Estate Prices

There are concerns among bankers and economists that commercial real estate prices are at risk of decreasing substantially. Joseph L. Pagliari, Jr. explains how commercial real estate should be priced based on current and projected inflation and interest rates. A subsequent article will explore if concerns about bank and broader economic vulnerabilities to lower CRE prices.

Panic-driven Bank Runs and Public Communication

Using a household survey with information treatments conducted in the aftermath of the SVB’s collapse, we examine the potential for a large bank’s failure to trigger bank runs and the effectiveness of public communication in containing such a risk. We find that news about SVB’s collapse increases households’ propensity to withdraw bank deposits as people become more worried that their bank may fail and expect larger losses on deposits in case of bank failure. Communication by the Federal Reserve in support of the banking sector and information about FDIC deposit insurance can contain the risk of bank runs, while communication from politicians influences only their electoral base.

Inflation Paranoia and the Return of the New Consensus in Macroeconomics

Economists have proposed two main theories to explain the recent spike in prices. Progressives have attributed the rise in inflation to corporate greed and have suggested price controls in response. Other economists have turned back to the New Consensus in Macroeconomics that arose in the 1970s in response to steep inflation blamed on the large Keynesian fiscal expansion of the preceding decades. Matías Vernengo writes that neither camp has correctly diagnosed the problems with current inflation. Proponents of Greedflation overlook the price stability of the last few decades even as market concentration increased. On the other hand, advocates of the New Consensus similarly forget their history and the commodity shocks and price-wage spiral that were the real culprit for inflation in the 1970s.

How Trust in Institutions Impacts Monetary Policy

Social trust in democratic institutions affects the ability of those institutions to carry out policy. In new research, Rustam Jamilov shows how decreasing trust in the U.S. institutions has reduced the ability of the Federal Reserve to influence the economy in states that exhibit lower levels of trust.

The Banking Risks of Central Bank Digital Currencies

The implementation of central bank digital currencies as the primary medium of exchange would exacerbate the flaws of our current fiat system which encourage banks to overextend credit and create liabilities that they cannot redeem. This will worsen the already recurring cycles of financial crises, writes Vibhu Vikramaditya.

Resolving the Banking Crisis

Following up their recent analysis of risk in the banking system, DeMarzo, Jiang, Krishnamurthy, Matvos, Piskorski and Seru argue that banks should be required...

How To Really Fix Banking

Laurence Kotlikoff and Rick Miller argue that banking as we know it is dying. It’s time to arrange a smooth transition to limited purpose...

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