Savings and Loans
Why Has Japan's Massive Government Debt Not Wreaked Havoc (Yet)?
Charles Horioka, Takaaki Nomoto & Akiko Terada-Hagiwara
NBER Working Paper, October 2013
Abstract:
In this paper, we present data on trends over time in government debt financing in Japan since 2010 with emphasis on the importance of foreign holders and speculate about the determinants of those trends. We find that Japanese government securities were held primarily by domestic holders until recently because robust domestic saving (combined with strong home bias) made it possible for domestic investors to absorb most of the government debt but that foreign holdings of Japanese government securities have increased sharply in recent years, especially in the case of short-term government securities. We show that trends in foreign holdings of Japanese government securities can be explained by conventional economic factors such returns and risks and that the recent surge in foreign holdings of short-term Japanese government securities is attributable to foreign investors in search of a safe haven for their funds in the face of the Global Financial Crisis of 2008-09 precipitated by the Lehman crisis. Our analysis suggests that the surge in foreign holdings of Japanese government securities will subside (in fact, it already has), and this, combined with the projected decline in domestic saving (especially household saving) caused by population aging, will create increasing pressures for fiscal adjustment to reduce her massive government debt. Thus, Japan's massive government debt has not resulted in high economic costs in the past because of robust domestic saving and a temporary inflow of foreign capital caused by the Global Financial Crisis, but it may have substantial costs in the future as both of these factors become less applicable unless the government debt can be brought under control.
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Brian Bell & John Van Reenen
Economic Journal, forthcoming
Abstract:
We analyse the role of financial sector workers in the huge rise of the share of earnings going to those at the very top of the pay distribution in the UK. Rising bankers' bonuses accounted for two-thirds of the increase in the share of the top 1% after 1999. Surprisingly, bankers' share of earnings showed no decline between the peak of the financial boom in 2007 and 2011, three years after the global crisis began. Nor did bankers' relative employment position deteriorate over this period. We discuss proposed policy responses such as transparency, bonus "clawbacks", numerical bonus targets and tax.
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The Home Front: Rent Control and the Rapid Wartime Increase in Home Ownership
Daniel Fetter
NBER Working Paper, October 2013
Abstract:
The US home ownership rate rose by 10 percentage points between 1940 and 1945, about half the size of the net change over the 20th century, despite severe restrictions on construction during World War II. I present evidence that wartime rent control -- which covered over 80 percent of the 1940 U.S. rental housing stock -- played an important role in this shift, as suggested by Friedman and Stigler (1946). The empirical test exploits features of the central authority's method of imposing rent control, which generated variation in the size of rent reductions for cities that had seen similar increases in rents prior to control. Greater rent reductions were associated with greater increases in home ownership over the first half of the 1940's. This relationship does not appear to be driven by differential trends in housing demand or other unobserved factors potentially correlated with variation in rent reductions. The estimates suggest that rent control may explain 65 percent of the urban increase in home ownership over the first half of the 1940's.
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Housing, Mortgage Bailout Guarantees and the Macro Economy
Karsten Jeske, Dirk Krueger & Kurt Mitman
Journal of Monetary Economics, forthcoming
Abstract:
What are the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (e.g., Fannie Mae)? A model with heterogeneous, infinitely-lived households and competitive housing and mortgage markets is constructed to evaluate this question. Households can default on their mortgages via foreclosure. The bailout guarantee is a tax-financed mortgage interest rate subsidy. Eliminating this subsidy leads to a large decline in mortgage origination and increases aggregate welfare by 0.5% in consumption equivalent variation, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: it hurts low-income and low-asset households.
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Bank Failures and Output During the Great Depression
Jeffrey Miron & Natalia Rigol
NBER Working Paper, September 2013
Abstract:
In response to the Financial Crisis of 2008, macroeconomic policymakers employed a range of tools designed to prevent failures of large, complex financial institutions ("banks"). The Treasury and the Fed justified these actions by arguing that bank failures exacerbate output declines, rather than just reflecting output losses that have already occurred. This view is consistent with economic models based on credit market imperfections, but it is an empirical question as to whether the feedback from failures to output losses is substantial. This paper examines the relation between bank failures and output by re-considering Bernanke's (1983) analysis of the Great Depression. We find little indication that bank failures exerted a substantial or sustained impact on output during this period.
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Neil Bhutta & Glenn Canner
Federal Reserve Bulletin, forthcoming
Abstract:
This article describes mortgage lending activity in 2012 based on newly available data reported under the Home Mortgage Disclosure Act (HMDA). In addition, we present the results of a first look at a new data set composed of HMDA records matched to borrowers' credit records. Using the matched data, we compare borrowers' credit characteristics at loan origination, and subsequent payment performance, by various HMDA attributes such as income, minority status, and type of lender. Also, because the credit record data are longitudinal and follow individuals rather than just their mortgages, we are able to study long-term outcomes of mortgage borrowers beyond performance on their mortgage, such as whether credit scores recover after delinquency at a different pace for different demographic groups. We focus on loans made in 2006, which reflect lending activity at the height of the housing boom, and loans made in 2010, which reflect the subdued market conditions post crisis. Key findings include: (1) substantive differences in performance across racial and ethnic groups exist even after controlling for credit score, house price appreciation, and higher-priced loan status; (2) credit score recovery after mortgage delinquency, on average, is similar across racial and ethnic groups and takes over four years; and (3) loans originated in 2006 that are the focus of the Community Reinvestment Act (CRA) had a lower delinquency rate than the rate for all loans, inconsistent with the view that the CRA was a principal driver of the mortgage crisis.
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Regulating Consumer Financial Products: Evidence from Credit Cards
Sumit Agarwal et al.
NBER Working Paper, September 2013
Abstract:
We analyze the effectiveness of consumer financial regulation by considering the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act in the United States. Using a unique panel data set covering over 150 million credit card accounts, we find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 2.8% of average daily balances, with a decline of more than 10% for consumers with the lowest FICO scores. Consistent with a model of low fee salience and limited market competition, we find no evidence of an offsetting increase in interest charges or a reduction in access to credit. Taken together, we estimate that the CARD Act fee reductions have saved U.S. consumers $20.8 billion per year. We also analyze the CARD Act requirement to disclose the interest savings from paying off balances in 36 months rather than only making minimum payments. We find that this "nudge" increased the number of account holders making the 36-month payment value by 0.5 percentage points, with a similarly sized decrease in the number of account holders paying less than this amount.
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Bank deregulation and relative wages in finance
Hamid Boustanifar
Applied Economics Letters, Winter 2014, Pages 69-74
Abstract:
Rising wages in the finance industry have been a source of debate and are usually linked to financial deregulations. Exploiting the cross-state and over-time variation in the timing of US bank deregulations, this article investigates the causal impact of each type of deregulation on the relative wages in the finance industry. I document that relative wages in finance began to rise in the early 1980s in almost all states, including those that deregulated before 1970 and those that deregulated in the 1990s. Consistently, after controlling for aggregate macro shocks that affected all states, there is no evidence that relative finance wages increased more following any type of deregulation. If anything, I find a negative impact of bank branching deregulation on relative wages in finance. These results together with those found in the study by Philippon and Reshef (2012) call for a better understanding of the dynamics of wages in the finance industry.
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Insider Trading in the Derivatives Market (and What it Means for Everyone Else)
Yesha Yadav
Vanderbilt University Working Paper, August 2013
Abstract:
The prohibition against insider trading is becoming increasingly anachronistic in markets where derivatives like credit default swaps (CDS) operate. Lenders use these instruments to trade the credit risk of the loans they extend. By design, CDS appear to subvert insider trading laws, insofar as lenders rely on what looks like insider information to transfer or externalize the risk of a loan to another institution. At the same time, the harm caused by using insider information in CDS markets can depart radically from the harms envisioned under existing case law. In the traditional account of insider trading, shareholders systematically lose against informed insiders. However, with CDS trading, shareholders of the debtor company can emerge as winners where this company enjoys access to cheaper credit and lower funding costs. A thorough re-thinking of traditional theory is thus required, as well as a more robust, theoretical account of the efficiency and welfare implications of insider trading in a world animated by complex derivatives markets. This Article shows that trading on insider information in CDS can improve at least the informational, if not also the allocative efficiency of financial markets in ways traditional accounts have scarcely anticipated. However, in doing so, CDS markets reveal that this informational gain can render markets "too" efficient where they impound new information selectively and with such force that market stability itself can suffer. Collectively, these observations suggest a need to revisit the insider trading prohibition itself - and to explore whether consistency can (and should) be brought to supervisory approaches in U.S. equity and derivatives markets.
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Predatory Lending and the Subprime Crisis
Sumit Agarwal et al.
NBER Working Paper, October 2013
Abstract:
We measure the effect of an anti-predatory pilot program (Chicago, 2006) on mortgage default rates to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, risky borrowers and/or risky mortgage contracts triggered review sessions by housing counselors who shared their findings with the state regulator. The pilot cut market activity in half, largely through the exit of lenders specializing in risky loans and through decline in the share of subprime borrowers. Our results suggest that predatory lending practices contributed to high mortgage default rates among subprime borrowers, raising them by about a third.
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How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis
Deniz Anginer, Asli Demirguc-Kunt & Min Zhu
Journal of Banking & Finance, forthcoming
Abstract:
Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks which lead to excessive risk-taking. We examine the relation between deposit insurance and bank risk and systemic fragility in the years leading up to and during the recent financial crisis. We find that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. Our findings suggest that the "moral hazard effect" of deposit insurance dominates in good times while the "stabilization effect" of deposit insurance dominates in turbulent times. The overall effect of deposit insurance over the full sample we study remains negative since the destabilizing effect during normal times is greater in magnitude compared to the stabilizing effect during global turbulence. In addition, we find that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.
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Mandatory Mediation and the Renegotiation of Mortgage Contracts
Michael Collins & Carly Urban
Economic Journal, forthcoming
Abstract:
Scholars have studied the use of mediation a third party to facilitate the settlement of a dispute in a variety of settings. The theoretical literature asserts that mediated negotiation weakly dominates unmediated negotiation, increasing the flow of information between the principal and the agent. This paper tests these predictions using a mandatory mediation policy for mortgage contracts in default. Difference-in-differences estimates from three metropolitan statistical areas before and after at least one sub-jurisdiction imposed mandatory mediation show that mediation increased the flow of information, especially for selected sub-groups, as demonstrated by increasing rates of loan contract modifications.
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Buyer Brokerage: Experimental Evidence
Abdullah Sahin, C.F. Sirmans & Abdullah Yavas
Journal of Housing Economics, forthcoming
Abstract:
This paper offers an experimental investigation of two commission structures for buyer brokerage. One commission structure is the currently used structure in the industry where both the seller's broker and the buyer's broker each receive a percentage of the sales price as their compensation from the seller. In an alternative commission structure, while the seller's broker still receives a percentage of the sales price from the seller, the buyer's broker is compensated by the buyer and the compensation is inversely related to the sales price. We find that how the buyer's broker gets compensated has significant implications. While both commission structures yield a similar probability of reaching an agreement, the alternative commission structure yields a lower price and a longer time to reach an agreement. Furthermore, the alternative commission structure achieves a better alignment of the interests of the buyer and the buyer's broker without affecting the earnings of the players in the transaction. We also find that the improvement in the alignment of interests is more significant for female buyers than for male buyers. Furthermore, a higher listing price by the seller and a higher initial bid price by the buyer each lead to a significant increase in the negotiated price.
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Do large recessions reduce output permanently?
Mehdi Hosseinkouchack & Maik Wolters
Economics Letters, December 2013, Pages 516-519
Abstract:
We apply a recent quantile autoregression unit root test to US GDP. The test takes into account that the transmission of a shock might depend on the sign and the size of the shock. We find that positive and negative shocks including large recessionary shocks like the 2008/2009 crisis have permanent effects on output.
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Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments
Scott Baker & Nicholas Bloom
NBER Working Paper, September 2013
Abstract:
A growing body of evidence suggests that uncertainty is counter cyclical, rising sharply in recessions and falling in booms. But what is the causal relationship between uncertainty and growth? To identify this we construct cross country panel data on stock market levels and volatility as proxies for the first and second moments of business conditions. We then use natural disasters, terrorist attacks and unexpected political shocks as instruments for our stock market proxies of first and second moment shocks. We find that both the first and second moments are highly significant in explaining GDP growth, with second moment shocks accounting for at least a half of the variation in growth. Variations in higher moments of stock market returns appear to have little impact on growth.
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When and Why Usury Should be Prohibited
Robert Mayer
Journal of Business Ethics, September 2013, Pages 513-527
Abstract:
Usury ceilings seem indefensible. Their opponents insist these caps harm the consumers they are intended to help. Low ceilings are said to prevent the least advantaged agents from accessing legal credit and drive them into the black market, where prices are higher and collection methods are harsher. But in this paper, I challenge these arguments and show that the benefits of interest-rate limitations in the most expensive credit markets clearly outweigh the costs. The test case is payday lending. Deregulated pricing in this market produces negative externalities that justify usury restrictions. Unless prices are capped, the more solvent majority of borrowers is compelled to cross-subsidize the least solvent debtors, who have a high rate of default. Rationing the riskiest debtors out of this market by means of a moderate usury cap puts an end to this unfairness and produces fewer bad consequences than the advocates of deregulated pricing recognize. I argue that only an extreme principle like maximizing the minimum could justify a free market in payday credit.
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Can Simple Informational Nudges Increase Employee Participation in a 401(k) Plan?
Robert Clark, Jennifer Maki & Melinda Sandler Morrill
NBER Working Paper, October 2013
Abstract:
We report results from a field experiment in which a randomized subset of newly hired workers at a large financial institution received a flyer containing information about the employer's 401(k) plan and the value of contributions compounding over a career. Younger workers who received the flyer were significantly more likely to begin contributing to the plan relative to their peers in the control group. Many workers do not participate in their employers' supplemental retirement savings programs, even though these programs offer substantial tax advantages and immediate returns due to matching contributions. From a survey of new hires we find that many workers choose not to contribute to the plan because they have other financial priorities. However, some non-participants lack the financial literacy to appreciate the benefit. These findings indicate that simple informational interventions can nudge workers to participate in retirement saving plans and enhance individual well-being and retirement income security.
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Do FOMC forecasts add value to staff forecasts?
Michael Ellis & Dandan Liu
European Journal of Political Economy, December 2013, Pages 332-340
Abstract:
This paper compares the economic forecasts of members of the Board of Governors and presidents of the Federal Reserve Banks, and then investigates the value of each group's forecasts in supplementing the forecasts of the Board of Governors staff. We find that the presidents tend to forecast higher inflation and real GDP growth, and lower unemployment than the members of the Board of Governors. We also find the presidents' real GDP and unemployment rate forecasts add value to the real economy forecasts of the staff, while the governors' inflation forecasts add value to the staff's inflation forecasts.
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Corporate Demand for Insurance: New Evidence from the U.S. Terrorism and Property Markets
Erwann Michel-Kerjan, Paul Raschky & Howard Kunreuther
NBER Working Paper, October 2013
Abstract:
Since the passage of the Terrorism Risk Insurance Act of 2002, corporate terrorism insurance is sold as a separate policy from commercial property coverage. In this paper, we determine whether companies differ in their demand for property and terrorism insurance. Using a unique dataset of insurance policies purchased by large U.S. firms, combined with financial information of the corporate clients and of the insurance provider, we apply a two-stage least squares (2SLS) approach to obtain consistent estimates of premium elasticity of corporate demand for property and terrorism coverage. Our findings suggest that both are rather price inelastic and that corporate demand for terrorism insurance is significantly more price inelastic than demand for property insurance. We further find a negative relation between the solvency ratios of both property and terrorism risk coverage, with a stronger effect on the latter, indicating that companies use their ability to self-insure as a substitute for market insurance. Our results are robust to the application of alternative estimators as well as changes in the econometric specifications.
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The Effect of Property Taxes on Vacation Home Growth Rates: Evidence from Michigan
Erik Johnson & Randall Walsh
Regional Science and Urban Economics, September 2013, Pages 740-750
Abstract:
The Tiebout model assumes that individuals sort to the jurisdiction which best matches their fiscal preferences. However, there is a paucity of reliable estimates for the impact of tax changes on household mobility. We utilize a state mandated school finance reform and temporal differences in vacation home densities to provide a unique test of this fundamental Tiebout assumption. The results show that changes in property taxes explain a significant amount of the variation in vacation home growth; a 3-4 mil decrease in property tax rates is associated with an increase of approximately one vacation home per square kilometer.
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Douglas Smith et al.
Journal of Consumer Affairs, forthcoming
Abstract:
A representative sample of 1,000 US consumers reviewed their credit reports from the three major US credit bureaus with help from university research associates. Twenty-six percent of study participants claimed to find at least one potentially material error and filed formal disputes with the relevant bureau(s). For 78% of the 263 consumers who filed disputes (20% of participants overall) at least one bureau altered the credit report accordingly. Thirty-three percent of disputants (8.7% of participants) experienced a resulting increase of 10+ points in one or more of their FICOR scores; 21% of disputants (5.5% of study participants) had one or more scores cross a threshold that would typically result in more favorable terms of credit. Our findings suggest that credit-bureau data are accurate enough to facilitate efficient lending and creditors' management of accounts, but individual consumers need to be vigilant to protect themselves against potentially costly errors in their files.