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An old economist joke goes like this. A person is walking along and says to an economist, look, there is a $20 bill on the sidewalk. The economist disputes it without looking, on grounds that if it were there, someone else would have already picked it up. It’s funny but it is also not far from describing a widely held view that financial asset

Last week the Dow Jones industrial average fell 4.2%, the steepest drop since March 2003. Financial shares took a beating on growing evidence that problems in the sub-prime mortgage market are spreading, making financing the corporate buy-outs that drove the market’s rally more difficult. Many financial market participants are of the view that

On Tuesday September 18, US central bank policy makers surprised financial market players by cutting the federal funds rate target by 0.5% to 4.75%. The key motivating factor behind the hefty cut in the federal funds rate target was an economic model that Fed Chairman Ben Bernanke developed while in academia. Bernanke is of the view that changes

Now that Alan Greenspan is no longer the Fed chairman, some financial commentators are daring to suggest that perhaps the present financial crisis is the result of the extremely low interest rate policy of Greenspan’s Fed between December 2000 to June 2004 that fueled the housing bubble. Is there are basis for believing this? Well, the federal

The currently observed turmoil in financial markets, which is believed to have been ignited by the collapse of the subprime mortgage market, has recently brought to prominence the ideas of Hyman Minsky (1919–1996), a prominent member of the post-Keynesian school of economics. Many commentators are of the view that Minsky’s framework of thinking

Last Tuesday, January 22, 2008, the US central bank lowered its federal funds rate target by a hefty 0.75% to 3.5%. The panicky decision to lower the fed funds rate target was made ahead of the Fed’s meeting at the end of this month. Last Tuesday’s cut by the Fed was the largest nonscheduled interest-rate cut in more than 20 years. We suspect that

In his testimony to the House of Representatives Budget Committee on January 17, 2008, Federal Reserve Chairman Ben Bernanke gave strong support for President Bush’s fiscal stimulus package to strengthen the economy. Among various tax measures the package also offers a direct tax relief for low- and moderate-income individuals. According to

The Federal Reserve is trying a range of new tricks to push new forms of lending as a means of preventing what they fear may otherwise be a major collapse in financial markets. What all these strategies have in common is an unwillingness to come to terms with the reality that the crisis is based on real factors and can’t be merely papered over

Since September 18 last year, the Fed has pushed a low interest rate policy. The federal funds rate target has been lowered from 5.25% to 2.25% currently. Despite this, liquidity conditions in credit markets have continued to deteriorate. The extra yield investors demand in return for holding corporate paper rather than risk free Treasury debt has

There are many factors behind the sharp increase in the oil price, but one is usually overlooked: it’s a bubble. Where bubbles appear in the market (think of housing and tech stocks, to name two in recent memory), you will find the hidden hand of monetary policy at work. This is an underlying issue that helps explain the price. Recognizing this