US Energy Policy

"This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks."
- Thomas Friedman


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Is the yield curve back to the 1950s-1960s?

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In recent years, the yield curve has flattened and shifted downwards. The flattening has received a lot of attention because it is viewed as a recessionary signal. In this article, we argue that the fact that the curve has shifted downwards as well as flattening indicates that the yield curve may have changed regime. This regime shift seems to have been caused by lower inflation expectations and lower risk premia. In an environment of lower inflation and lower risk premia, the yield curve may occasionally invert without signalling a recession as it did in 1966. 1. The recessionary signal Inversions of the yield curve have often been used to predict recessions. The 10-year to 3-month spread between US Treasury yields became briefly negative twice this year in March and the May (figure 1), spurring debate about whether this was signalling a forthcoming recession. The negative spread was mainly the result of a decrease of the 10-year yield – from 2.8 per cent on 1 March to 2.4 per cen...
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The long and uncertain road to exiting Quantitative Easing

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There is a rich literature on Quantitative Easing (QE) but less so on its unwinding. QE was initiated in 2001 in Japan, followed by the US in 2008 after the Global Financial Crisis, and there has been time to evaluate it, while there has not been any sustained unwinding of QE so far. The only episode that approaches an unwinding of QE is the so-called ‘Taper Tantrum’ in the United States in 2013, when Treasury yields surged on the news that the Federal Reserve would be slowing down its purchases of bonds. In this article, I survey the literature on QE and use the findings to discuss possible exit strategies. While there is little consensus among central bankers on the optimal exit strategy, what stands out is that the road to unwinding will probably be a long and uncertain one, and central banks may even keep large amount of government bonds permanently on their balance sheet. The channels of Quantitative Easing Quantitative easing is the process whereby a central bank purchas...
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Bernanke lectures - The Federal Reserve and the financial crisis

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In March, the Chairman of the Federal Reserve (ie the US Central Bank) gave a series of four lectures about the Federal Reserve system and the Financial Crisis to students of Georges Washington University. I have enclosed the videos of these classes. Dr. Bernanke, who is also a prominent academic researcher, is very skilled at explaining very complex problems with easy words. So, even non economists will find these lectures accessible and useful to understand the sequence of events that led to a global financial crisis and how the Federal Reserve responded to it. Let me give you a few extracts and comments that I found particularly worth highlighting: The three pillars of central bank action are: Monetary policy (setting interest rates) Provision of liquidity (lender of last resort) Financial regulation and supervision (shared with other agencies) "We did not foresee that declining house prices would trigger a financial crisis." This is an honest but clear ...
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