Posts Tagged ‘Federal Reserve Bank Of San Francisco’

Jobless Recovery - A brief overview

Tuesday, August 11th, 2009


This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The employment report of July, published on August 7, included several signs suggesting that the labor market is stabilizing. The next question is what comes after stabilization. Historically, payroll employment has posted gains within 12 months into a recovery/expansion and gathers significant momentum by the end of 24 months in all post-war business cycles with the exception of the 1991 and 2001 recoveries (see table 1). The January - July 1980 recession was a short recession followed by another recession in July 1981. The 1991 and 2001 recoveries have been coined as ‘jobless recoveries’ based on the nature of the growth of payroll employment and the changes in the jobless rate.

Table 1 Change in Payroll Employment from Trough of Business Cycle

table-1

The unemployment rate typically peaks after a recession; the computations in table 2 would be different in magnitude if the peak of the jobless rate were considered instead of the jobless rate that prevailed at the trough of the business cycle. However for purposes of comparison, table 2 is constructed around troughs of the business cycle. As shown in table 2, the unemployment rate declined at the end of twelve months in all post-war recoveries with the exception of the 1970, 1991, and 2001 recoveries. The 1991 and 2001 recoveries are marked with a prolonged increase of the unemployment rate even after 24 months of the official date of an economic recovery.

chart-1

Table 2 Change in Unemployment rate from Trough of Business Cycle

table-2

There is a growing consensus that the recovery this time around is most likely to be a jobless recovery. Research from the Federal Reserve Bank of San Francisco (Jobless Recovery Redux?) confirms this view. One of the reasons for the pessimism cited in this research is that involuntary part-time employment is high which implies that employers can extend hours of these part-time employees when the recovery occurs instead of increasing payrolls.’

chart-2

More importantly, the course of monetary policy in a jobless recovery will be a challenge given the Fed’s extraordinary easing in place. In the 1991 recovery, the Fed held the funds rate at 3.00% from September 1992 to February 1994. The unemployment rate had declined to 6.6% from a high of 7.8% when the Fed embarked on a tightening path. In the 2001 recovery phase, the Fed lowered the federal funds rate to 1.75% by December 2001 and eased further to 1.00% by June 2003. The federal funds rate held at 1.00% between June 2003 and June 2004. The Fed commenced tightening in June 2004 when the unemployment rate had dropped to 5.6% from a cycle high of 6.3%. This time around, the Fed may not be in a position to wait until the unemployment rate has dropped by a significant measure before it unwinds the programs put in place to stabilize the financial system. In addition, the Fed is sensitive to criticism pertaining to the delayed tightening in 2004. At the same time, the risk case now is that of tightening monetary policy later rather than sooner given the severity of the current crisis and its ramifications.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

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The Road to Depression

Monday, December 1st, 2008


Brad DelongBrad DeLong says two big mistakes made the crisis worse:


James Bradford DeLong (b. June 24, 1960, Boston) commonly known as Brad DeLong, is a professor of economics at the University of California, Berkeley and a former Deputy Assistant Secretary of the United States Department of the Treasury in the Clinton Administration. He is also a research associate of the National Bureau of Economic Research, and is a visiting scholar at the Federal Reserve Bank of San Francisco.



The Road to Depression, by Brad DeLong, Project Syndicate: For 15 months, the United States Federal Reserve, assisted by the financial regulators of the US Treasury, have been trying…,

above all, to avoid a deep depression.

They have also had three subsidiary objectives:

  • Keep as much economic activity as possible under private-sector control, in order to ensure that what is produced is what consumers really want.
  • Prevent the princes of Wall Street … from profiting from the systemic risk that they created.
  • Ensure that homeowners and small investors do not absorb too much loss, for their only “crime” was to accept bad risks, which they would not have done in a world of properly diversified portfolios.

Now it is clear that the Fed and the Treasury have lost the game. If a depression is to be avoided, it will have to be the work of other arms of the government, with other tools and powers.

The failure to contain the crisis will ultimately be traced, I think, to excessive concern with the first two subsidiary objectives: reining in Wall Street princes and keeping economic decision-making private. Had the Fed and the Treasury given those two objectives their proper - subsidiary - weight, I suspect that we would not now be in this mess…

The desire to prevent the princes of Wall Street from profiting from the crisis was reflected in the Fed-Treasury decision to let Lehman Brothers collapse… The logic behind that decision was that, previously in the crisis, equity shareholders had been severely punished…

But this was not true of bondholders and counterparties, who were paid in full. The Fed and Treasury feared that the lesson being taught in the last half of 2007 and the first half of 2008 was that the US government guaranteed all the debt and transactions of every bank and bank-like entity that was regarded as too big to fail. That, the Fed and the Treasury believed, could not be healthy.

Lenders to very large overleveraged institutions had to have some incentive to calculate the risks. But that required, at some point, allowing some bank to fail…

In retrospect, this was a major mistake. … With that guarantee broken by Lehman Brothers’ collapse, every financial institution immediately sought to acquire a much greater capital cushion…,

but found it impossible to do so.

The Lehman Brothers bankruptcy created an extraordinary and immediate demand for additional bank capital, which the private sector could not supply.

It was at this point that the Treasury made the second mistake. Because it tried to keep the private sector private, it sought to avoid partial or full nationalization of the components of the banking system deemed too big to fail. In retrospect, the Treasury should have identified all such entities and started buying common stock in them - whether they liked it or not - until the crisis passed.

Yes, this is what might be called “lemon socialism,” creating grave dangers for corporate control, posing a threat of large-scale corruption, and establishing a precedent for intervention that could be very dangerous down the road.

But would that have been worse than what we face now? The failure to sacrifice the subsidiary objective of keeping the private sector private meant that the Fed and the Treasury lost their opportunity to attain the principal objective of avoiding depression.

Of course, hindsight is always easy. But if depression is to be avoided, it will be through old-fashioned Keynesian fiscal policy: the government must take a direct hand in boosting spending and deciding what goods and services will be in demand.


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