{"id":367203,"date":"2010-02-26T10:15:48","date_gmt":"2010-02-26T15:15:48","guid":{"rendered":"http:\/\/blogs.wsj.com\/economics\/2010\/02\/26\/new-study-shows-money-has-tightened-despite-feds-efforts\/"},"modified":"2010-02-26T10:15:48","modified_gmt":"2010-02-26T15:15:48","slug":"new-study-shows-money-has-tightened-despite-fed%e2%80%99s-efforts","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/367203","title":{"rendered":"New Study Shows Money Has Tightened Despite Fed\u2019s Efforts"},"content":{"rendered":"

The Federal Reserve<\/strong> has pushed short-term interest rates to near zero, flooded the financial system with loans and committed to purchase more than $1.7 trillion of mortgage and Treasury securities to restart a financial system devastated by the debt crisis. After all that, however, financial conditions tightened a bit at the end of 2009, according to a new study produced by a collection of Wall Street and academic researchers.<\/p>\n

The reason is that even with exceptionally low interest rates, capital markets aren\u0092t humming and bank lending is weak. One example: Issuance of asset backed securities — which are securities backed by auto loans or credit card debt — was a scant $28.7 billion in the fourth quarter, down from $51.1 billion in the third quarter and $50.1 billion in the second. Levels of commercial paper — the short-term credit many companies used to fund themselves before the financial crisis — were also soft, with outstanding paper at $1.1 trillion at the end of January, compared to $1.3 trillion in September.<\/p>\n

In an unusual collaboration, the chief economists from Goldman Sachs<\/strong> and Deutsche Bank<\/strong> teamed up with economists at Princeton University<\/strong>, Columbia University<\/strong> and New York University<\/strong> to produce an index measuring financial conditions<\/a>. It is an important exercise because financial conditions help to drive economic growth, inflation and asset prices. When money is loose and easy, the economy tends to grow faster in the short-run, though inflation and asset price booms can build. Tight money, on the other hand, is like a lack of oxygen which can strangle growth.<\/p>\n

There are already more than a half dozen financial-conditions measures floating around Wall Street, academia and the Fed. Many of them focus on the price of money in the financial system — interest rates — and not the quantity of money. Economists Jan Hatzius<\/strong> (Goldman), Peter Hooper<\/strong> (Deutsche Banks), Frederic Mishkin<\/strong> (Columbia), Kermit Schoenholtz<\/strong> (NYU) and Mark Watson<\/strong> (Princeton) produced a new index the includes many different measures of the amount of money in the financial system, including issuance of asset backed securities and commercial paper and the short-term securities used by investment banks to fund themselves. They included 44 indicators in all. They are presenting the paper today at a gathering on monetary policy in New York<\/a> which will include several senior Fed officials.<\/p>\n

What they found is that after improving markedly in the first half of 2009 — thanks in large part to the Fed\u0092s money pumping exercises — financial conditions tightened again in the second half of the year, unusually so for the early stages of a recovery. \u0093The fact that financial conditions are still impaired, at least in some parts of the system, is consistent with the idea that the recovery is going to be a slow one,\u0094 Mr. Hatzius said. \u0093It is consistent with a fairly slow, U-shaped recovery.\u0094 It also suggests inflation and bubbles shouldn’t be a big worry in the U.S. — money is cheap but not easily accessible as it was during the boom.<\/p>\n

One of the most important drivers of the economists\u0092 financial conditions index was the asset-backed securities markets, where commercial real estate loans, car loans and many other kinds of bank loans were financed during the credit boom. Loans in this market are packaged into securities and sold to investors around the world. In 2006, issuance of asset backed securities — not include residential mortgage backed securities — topped $700 billion, according to the Securities Industry and Financial Markets Association<\/strong>. It was $168 billion last year<\/a>.<\/p>\n

The Federal Reserve has expended huge amounts of energy trying to restart this market, with the creation of a program called the Term Asset-backed Securities Loan Facility<\/strong>, or TALF, which provides cheap, nonrecourse funding to investors who buy these securities. Issuance of the securities perked up after the program was launched last March, but the market remains highly impaired. One problem: Many investors have become less trustful of credit ratings attached to the securities after the bust. Many individuals and firms also remain reluctant to take on more debt.<\/p>\n

A similar pattern is showing up in the \u0093repo\u0094 loan market, where many securities brokerages and banks funded themselves before the financial crisis hit. In this market, a financial firm uses its securities holdings as collateral for short-term loans, which help it to fund its activities. Panics in this market in 2008 helped to drive firms like Bear Stearns<\/strong> and Lehman Brothers<\/strong> to the brink. The market picked up a bit last year, but at $1.338 trillion in the third quarter<\/a>, was still less than three-fifths its size in 2007. That also held down the economists\u0092 index. Broader measures of money growth are also soft. M2, a measure of deposits in the banking system and money market funds, contracted at a 0.9% annual rate in the three months through January, according to Fed data<\/a>.<\/p>\n

\u0093It is still the aftermath of the bubble,\u0094 says Mr. Hatzius. \u0093The deleveraging still continues.\u0094<\/p>\n

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The Federal Reserve has pushed short-term interest rates to near zero, flooded the financial system with loans and committed to purchase more than $1.7 trillion of mortgage and Treasury securities to restart a financial system devastated by the debt crisis. After all that, however, financial conditions tightened a bit at the end of 2009, according […]<\/p>\n","protected":false},"author":850,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-367203","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/367203","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/850"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=367203"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/367203\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=367203"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=367203"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=367203"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}