Connectedness and Contagion – Protecting the Financial System from Panics
By: Hal S. Scott – Harvard University
In this book, Hal Scott argues that it is not connectedness but contagion that is the most significant element of systemic risk facing the financial system. Contagion is an indiscriminate run by short-term creditors of financial institutions that can render otherwise solvent institutions insolvent. It poses a serious risk because, as Scott explains, our financial system still depends on approximately $7.4 to $8.2 trillion of runnable and uninsured short-term liabilities, 60 percent of which are held by nonbanks.
Scott argues that efforts by the Federal Reserve, the FDIC, and the Treasury to stop the contagion that exploded after the bankruptcy of Lehman Brothers lessened the economic damage. And yet Congress, spurred by the public’s aversion to bailouts, has dramatically weakened the power of the government to respond to contagion, including limitations on the Fed’s powers as a lender of last resort. Offering uniquely detailed forensic analyses of the Lehman Brothers and AIG failures, and suggesting alternative regulatory approaches, Scott makes the case that we need to restore and strengthen our weapons for fighting contagion.
Anyone with good sense should want to consider Hal Scott’s thoughtful analysis of our policy response to the last financial crisis. Agree or disagree, Scott’s views deserve careful consideration in the debates over financial stability that are sure to come.
Lawrence H. Summers, Harvard University
Validation of Risk Management Models for Financial Institutions Theory and Practice
Edited by: David Lynch, Iftekhar Hasan, Akhtar Siddique, – Federal Reserve Board of Governors, Fordham University, Office of the Comptroller of the Currency
Financial models are an inescapable feature of modern financial markets. Yet it was over reliance on these models and the failure to test them properly that is now widely recognized as one of the main causes of the financial crisis of 2007–2011. Since this crisis, there has been an increase in the amount of scrutiny and testing applied to such models, and validation has become an essential part of model risk management at financial institutions. The book covers all of the major risk areas that a financial institution is exposed to and uses models for, including market risk, interest rate risk, retail credit risk, wholesale credit risk, compliance risk, and investment management. The book discusses current practices and pitfalls that model risk users need to be aware of and identifies areas where validation can be advanced in the future. This provides the first unified framework for validating risk management models.
How Monetary Policy Got Behind the Curve—and How to Get Back
Edited by: Michael D. Bordo, John H. Cochrane, John B. Taylor – Rutgers University, Hoover Institution
With the inflation rate in the United States and many other countries on the rise for over a year and nearing double digits, the Hoover Institution hosted its 2022 conference on monetary policy. Policy makers, market participants, and academic researchers gathered to discuss the situation. Many agreed that low interest rates and high money growth were inappropriate given the high inflation rate and evidence that the United States has recovered from the deep recession induced by the pandemic and its policy response in 2020. The thoughtful papers and the thorough discussions in this volume of conference proceedings illustrate the debate about the reasons for this mismatch, as well as how to get back on track. They reflect a range of opinions and perspectives, including examination of the fiscal shock resulting from the COVID pandemic and the related borrowing and spending; emphasis on the value of adherence to rules versus discretion in setting Fed policy; lessons from history in the spikes in federal expenditures during times of war (including the pandemic) and in the timing of the Fed’s use of its policy instruments; the role of central banks in the emerging inflation crisis; and strategies toward disinflation.
Limitless – THE FEDERAL RESERVE TAKES ON A NEW AGE OF CRISIS
By: Jeanna Smialek – New York Times
The marble halls of the Federal Reserve have always held secrets; for decades the Fed did the utmost to preserve its room to maneuver, operating behind the scenes as much as possible. Yet over the past two decades, this elite world of bankers and economists speaking a language that only monetary experts could understand has been forced to change its ways. Amid rising inequality, weakening global economic prospects, and a pandemic, the central bank has entered into a new era of transparency and activism that has changed its role in modern society in subtle but remarkable ways.
Limitless tells the inside story of this deeply impactful transformation, and what it means for ordinary Americans. Focusing on characters such as the Fed chairman Jerome Powell; the Vice Chair for Supervision Randal Quarles; Vice Chair Lael Brainard; the Minneapolis Fed president Neel Kashkari; and the long-ago Fed Chair Marriner S. Eccles—and driven by the rising tension between Main Street and Wall Street—this is a page-turning account of the modern Fed’s inner workings during a crucial inflection point in history.
In this engaging and highly-readable-book, Jeanna Smialek provides penetrating insights on a matter that affects us all: the Federal Reserve’s evolution in the face of a fluid global economy, fragile finance, and a changing America. Through the eyes of Marriner Eccles, a giant in Fed history, Smialek reminds us that central banking rests on a delicate mix of historical foundation and continuous experimentation. This book is about much more than the Fed’s tricky trade-offs between Main Street and Wall Street, accountability and independence. It is a must-read book for all those wishing to understand how an often-mysterious institution has ended up having such a disproportionate impact on so many economic, financial, political and social matters.
Mohamed A. El-Erian, Cambridge University
