By all accounts
Do labor markets discipline? Evidence from RMBS bankers
John Griffin, Samuel Kruger & Gonzalo Maturana
Journal of Financial Economics, forthcoming
Abstract:
This paper examines whether employees involved in residential mortgage-backed security (RMBS) securitization experienced internal and external labor market consequences relative to similar non-RMBS employees in the same banks and why. Senior RMBS bankers experienced similar levels of job retention, promotion, and external job opportunities. Even signers of RMBS deals with high loss and misreporting rates or deals implicated in lawsuits experienced no adverse internal or external labor market outcomes. These findings are likely not explained by targeted or delayed employee discipline, small legal fines, or protection due to pending litigation but are consistent with implicit upper-management approval of RMBS activities.
Price Competition in an Inflationary Environment
Peter Duersch & Thomas Eife
Journal of Monetary Economics, forthcoming
Abstract:
In an experimental study with price-setting firms we find that inflation significantly reduces real prices (by lowering price markups) and significantly raises welfare compared to the treatment with a constant overall price level. Money illusion and a reduced ability to collude in an environment with a constantly changing, i.e. increasing, price level drive this result. In a third treatment with deflation, collusion is somewhat reduced as well, but money illusion pushes prices up so that welfare is lower than under inflation.
The Federal Reserve Is Not Very Constrained by the Lower Bound on Nominal Interest Rates
Eric Swanson
NBER Working Paper, October 2018
Abstract:
I survey the literature on monetary policy at the zero lower bound (ZLB) and effective lower bound (ELB) to make three main points: First, the Federal Reserve’s forward guidance and large-scale asset purchases are effective monetary policy tools at the Z/ELB. Second, during the 2008–15 U.S. ZLB period, the Fed was not very constrained in its ability to influence medium- and longer-term interest rates and the economy. Third, the risks of the Fed being significantly constrained by the ELB in the future are typically greatly overstated. I conclude that the Federal Reserve is not very constrained by the lower bound on nominal interest rates.
The Value of Systemic Un-importance: The Case of MetLife
Christopher Naubert & Linda Tesar
Review of Finance, forthcoming
Abstract:
We use an event study approach to estimate the burden of the financial regulations associated with Systemically Important Financial Institution (SIFI) designation. On March 30, 2016, the U.S. District Court determined that MetLife’s SIFI designation was arbitrary and capricious because the Financial Stability Oversight Council (FSOC) failed to weigh the economic cost of the financial regulation on MetLife against the benefits of increased financial stability. We find significant positive abnormal returns for MetLife and AIG on the date of the ruling. We estimate that the lifting of the SIFI designation created $1.4 billion in corporate wealth for MetLife, suggesting that MetLife would be 3.4% more profitable as a non-SIFI. These gains fall short of the $8 billion stipulated by MetLife in its complaint. We also find significant abnormal returns to SIFI institutions on the day following the U.S. Presidential election.
The Social Ecology of Speculation: Community Organization and Non-occupancy Investment in the U.S. Housing Bubble
Adam Goldstein
American Sociological Review, December 2018, Pages 1108-1143
Abstract:
The housing boom of the mid-2000s saw the widespread popularization of non-occupant housing investment as an entrepreneurial activity within U.S. capitalism. In 2005, approximately one sixth of all mortgage-financed home purchases in the United States were for investment purposes. This article develops a sociological account that links the geographic distribution of popular investment to the social and institutional organization of communities. Regression analyses of 1,566 municipalities from 2000 to 2006 indicate that non-occupant investment (but not conventional owner-occupant investment) occurred at significantly greater rates in places where local development institutions were organized in accordance with laissez-faire principles to a greater degree, where economic activities in other domains were less locally embedded in place, and where greater residential instability produced more tenuous connections between residents and places. The magnitudes of these associations suggest that social organization and cultural-institutional conditions were at least as informative as variations in housing price appreciation in shaping the incidence of investor activity during the bubble. Social organization also moderated the behavioral effects of price appreciation. The article advances research on locally-embedded bases of economic action by examining how community environments provide more or less fertile ground for mass-participatory housing speculation and instrumental orientations toward places as exchange-values.
The implications of TARP: Evidence from bank performance and CEO pension benefits
Emeka Nwaeze, Qiao Xu & Qin Jennifer Yin
Journal of Accounting and Public Policy, forthcoming
Abstract:
This study examines the effect of compensation restrictions introduced by the Troubled Assets Relief Program (TARP) of 2008 on the performance of banks and their compensation structures. It documents significant performance improvement among TARP banks that experienced Chief Executive Officer (CEO) resignations after their banks accepted TARP funds. The improvement is most significant in the year following CEO resignation. In addition, TARP banks that kept their CEOs show a significant increase in CEO pensions post-TARP. TARP banks that did not experience CEO resignations, thus, appear to substitute pension increases for their CEOs to mitigate the TARP-induced decrease in conventional forms of compensation. Further analysis on all banks without CEO resignations shows that TARP banks have significantly higher increase in pension benefits post 2009 than banks that chose to decline TARP funds. The evidence shows that increased pension arrangements play a significant role in CEOs’ decisions to remain in their roles despite the constraints imposed by TARP.
Policy Externalities and Banking Integration
Michael Smolyansky
Journal of Financial Economics, forthcoming
Abstract:
Can policies directed at the banking sector in one jurisdiction spill over and affect real economic activity elsewhere? To investigate this question, I exploit changes in tax rates on bank profits across US states. Banks respond by reallocating small business lending to otherwise unaffected states. Moreover, counties in non-tax-changing states that have more exposure to treated banks experience greater changes in lending, which in turn impacts local employment. The findings demonstrate that policies aimed at the banking sector in one jurisdiction can impose externalities on other regions. Critically, financial linkages between regions serve as the transmission channel for these policy externalities.
More Amazon Effects: Online Competition and Pricing Behaviors
Alberto Cavallo
NBER Working Paper, October 2018
Abstract:
I study how online competition, with its algorithmic pricing technologies and the transparency of the Internet, can change the pricing behavior of large retailers and affect aggregate inflation dynamics. In particular, I show that online competition has raised both the frequency of price changes and the degree of uniform pricing across locations in the U.S. over the past 10 years. These changes make retail prices more sensitive to aggregate "nationwide" shocks, increasing the pass-through of both gas prices and nominal exchange rate fluctuations.
The Effect of FOMC Votes on Financial Markets
Carlos Madeira & João Madeira
Review of Economics and Statistics, forthcoming
Abstract:
This article shows that since votes of FOMC members have been included in press statements, stock prices increase after the announcement when votes are unanimous but fall when dissent (which typically is due to preference for higher interest rates) occurs. This pattern started prior to the 2007–2008 financial crisis. The differences in stock market reaction between unanimity and dissent remain even controlling for the stance of monetary policy and consecutive dissent. Statement semantics also do not seem to explain the documented effect. We find no differences between unanimity and dissent with respect to impact on market risk and Treasury securities.
Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
David Berger et al.
NBER Working Paper, October 2018
Abstract:
How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial household debt in fixed-rate prepayable mortgages means that this question cannot be answered by looking only at how far current rates are from zero. Using a household model of mortgage prepayment with endogenous mortgage pricing, wealth distributions and consumption matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that the ability to stimulate the economy by cutting rates depends not just on the level of current interest rates but also on their previous path: 1) Holding current rates constant, monetary policy is less effective if previous rates were low. 2) Monetary policy "reloads" stimulative power slowly after raising rates. 3) The strength of monetary policy via the mortgage prepayment channel has been amplified by the 30-year secular decline in mortgage rates. All three conclusions imply that even if the Fed raises rates substantially before the next recession arrives, it will likely have less ammunition available for stimulus than in recent recessions.
Collateral Shocks and Corporate Employment
Nuri Ersahin & Rustom Irani
Review of Finance, forthcoming
Abstract:
We analyze how firm-level shocks to collateral values influence employment outcomes among U.S. corporations. Using comprehensive employment data from the U.S. Census Bureau, we estimate that employment expenditures increase by $0.10 per $1 increase in firms’ real estate collateral values. These effects are stronger among financially constrained firms, and additional hiring is funded through debt issuance, consistent with a collateral channel. This relation holds among firms in tradable goods sectors, alleviating concerns about local demand shocks. Thus, through a collateral lending channel, fluctuations in the U.S. commercial real estate market are an important driver of corporate labor demand.
Minimum Payments and Debt Paydown in Consumer Credit Cards
Benjamin Keys & Jialan Wang
Journal of Financial Economics, forthcoming
Abstract:
Using a data set covering one quarter of the U.S. general-purpose credit card market, we document that 29% of accounts regularly make payments at or near the minimum payment. To explain the prevalence of low payment amounts, we exploit changes in issuers’ minimum payment formulas to quantify the explanatory power of two potential theories: liquidity constraints and anchoring. At least 22% of near-minimum payers (and 9% of all accounts) respond to the formula changes in a manner consistent with anchoring as opposed to liquidity constraints alone. Our results show that anchoring to a salient contractual term has a significant impact on household repayment decisions.