May 25, 2011
Recovery for Whom?
By Cindy Ivanac-Lillig
As many of you do, I often read and listen to analysts discuss the improving picture of the U.S. economy and how long it will take until we fully recover. However, there isn’t much differentiation made between what types of people are recovering and by how much. Many say that it is important to see the forest through the trees. But in this recovery, I am wondering if we should challenge ourselves to look more closely at the trees to see if something is different.
The Economic Policy Institute’s briefing paper, “The State of Working America’s Wealth,” points out that 3.6% of households (income > $250,000) own 53.7% of all common stock and the top 5% of households own about 80% of common stock. The paper goes on to point out the logical conclusion that the recent stock market recovery disproportionately helped the top 5% of households, as the bottom 95% did not have many assets invested in the stock market. When you consider that most of American household wealth comes from home equity and not the stock market, it becomes clear that this recession is not just about job loss, but about the majority of American households losing some of the only wealth they ever had – with little or no recovery to date. This strikes me as a glaringly unique characteristic of this recession and recovery. As we continue to discuss recovery and the impact of gas and food prices on the “U.S. consumer”—whoever that may be— let's keep in mind the lack of recovery most American households feel in terms of their wealth.
Check out the paper and let me know what you think…. If you happen to teach macroeconomics, let our readers know if and/or how you are tackling this recovery in your classroom.
May 12, 2011
Lights, Camera, Action: Monetary Policy and Communication
By Cindy Ivanac-Lillig
The first post-FOMC presser with Bernanke, April 27, 2011:
As a perpetual student of the FOMC process, I have come to appreciate the importance of communication in policy making. It is probably -- dare I say -- equally as important as the economic analysis that goes on in the FOMC boardroom. Press releases and external communication by the parties involved move markets, set expectations, and almost immediately affect how investment monies are allocated worldwide. The recent addition of the press conference to the FOMC process is not only a nod to the commitment of transparency, but also, in my opinion, another good vehicle to ensure clear communication to market players.
The European Central Bank (ECB) recently put out a paper entitled, “Central Bank Communication on Financial Stability.” It looked at how central banks’ communications affect the stability of their respective financial systems. The study looked at the impact of a particular tool many central banks use, the financial stability report (FSR). The Fed does not use this tool and was therefore not part of the study. None the less, across the 37 central banks included, the paper finds that FSRs seemed to homogenize market expectations, somewhat increasing financial stability. The paper finds that governors’ speeches and interviews did not have this calming effect. Rather in the case of optimistic speeches, market volatility actually increased.
The paper is an interesting read and highlights the difficulty of designing communication strategies that promote transparency and financial stability. It will be interesting to see how the new Fed press conference is viewed by capital markets and whether or not this new communication tool acts to reduce or increase market noise.
What do you think?