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Tether’s smoke and mirrors

Published by Anonymous (not verified) on Tue, 18/05/2021 - 4:31am in

Tether has issued what it calls a “breakdown of its reserves”. It actually consists of two pie charts. Here they are:

Seriously, this is all Tether has seen fit to reveal.  Furthermore, the pie charts only purport to show the breakdown of Tether’s reserves on the 31st March 2021. We do not know whether Tether’s reserves still have the same composition now. 
Nonetheless, the crypto world took these charts as an indication that Tether was, if not fully cash-backed, at least mostly. “76% of its reserves are in cash or cash equivalents, whereas banks only have 10%!”, crowed several people.
In both the reserve report and the monthly attestation, Tether takes “reserves” to mean total consolidated assets. The monthly attestations from Moore Cayman essentially say: 
1. Tether’s total consolidated assets exceed its consolidated liabilities 2. Tether’s total consolidated liabilities exceed the quantity of tokens in issue 3. Therefore Tether’s reserves exceed the quantity of tokens in issue
Following this logic, “reserves” must equal total consolidated assets. 
If a bank produced an attestation like this as proof of reserve adequacy it would be marked zero out of ten and sent back to redo its homework. For a bank, “reserves” are narrowly defined as deposits at the central bank and vaulted currency. Unless it is a full-reserve bank – and these are rare breeds which tend not to live very long – reserves are some distance short of total consolidated assets, even in these days of QE-driven excess reserves. 
Clearly, if we want to compare Tether to banks, we need to use the same definition of reserves. But Tether doesn’t have central bank deposits or vaulted currency. What would be the equivalent for Tether?
To work this out, we need to understand why banks have reserves. Contrary to popular mythology, they have nothing to do with lending. Banks don’t lend out reserves. Reserves are the money that banks use to make payments. When your employer pays your wages into your bank account, your employer’s bank pays your bank an amount of reserves equal to your wages. When you pay your rent, your bank pays out an equal amount of reserves to your landlord’s bank. When you withdraw cash from an ATM, your bank loses an equal amount of reserves: when you pay cash in to the bank, your bank gains an equal quantity of reserves. 
Reserve requirements for regulated banks ensure that the illiquid and risky part of bank balance sheets doesn’t become so large that the bank’s ability to make payments is compromised. That was the purpose of the Fed’s iconic 10% reserve requirement, beloved of “money multiplier” aficionados. However, reserve requirements are now effectively obsolete: they have been superseded by the Basel committee’s “liquidity coverage ratio” and additional local regulation such as the Fed’s “living wills”, QE has forced banks to hold far more reserves than notional reserve requirements, and intraday central bank overdrafts ensure that banks can always obtain reserves to settle payments. The Fed abolished the 10% reserve requirement in March 2020. 
If a bank doesn’t have access to a central bank – for example if it is an unregulated “shadow bank” - then it must either keep enough actual cash on its books to settle all payments, or it must hold sufficient high-quality liquid assets to be able to obtain the cash it needs to settle all payments. If an unregulated bank doesn’t have enough cash on its books and is unable to get any more, it can’t make payments or allow depositors to withdraw money. In these days of electronic payments, “cash” does not necessarily mean physical currency. It is much more likely to mean money in insured deposit accounts at another bank. Shadow banks are the customers of regulated banks. 
Assets held for the purposes of obtaining cash at need must be highly liquid and stable in value: an asset that is illiquid or prone to sudden swings in value can’t be relied on to provide the cash needed to make payments. So, Treasury bills and, for US markets, agency MBS are regarded as safe liquid assets equivalent to reserves. Junk bonds are not. But in between these two extremes is a huge morass of bonds and commercial paper that might or might not be realisable in cash terms at need without catastrophic loss of value. So unless we know what the composition of an unregulated bank’s liquid assets are, we can’t be sure it can meet payment requests. 
And this is why comparing Tether to a regulated bank is wrong. If Tether is a bank at all, it is an unregulated shadow bank. It does not have access to central bank liquidity and it has no deposit insurance. So its “reserves” must include sufficient high-quality liquid assets to ensure that it can always obtain the cash needed to make payments. 
Normally, a stablecoin issuer should not have to make much in the way of payments. If people want to sell their stablecoin holdings, they can do so through exchanges. Only if people tried to redeem their stablecoins directly with Tether – for example, if exchanges suspended trading in the stablecoins - would Tether potentially have to make payments. So, Tether needs to hold sufficient safe liquid assets to ensure that it can meet redemption requests in the event of exchanges suspending trading. This need not mean holding much actual cash, but it would mean holding substantial quantities of safe liquid assets. 
However, this clause in Tether’s terms of service says that if Tether was unable to raise the cash to redeem stablecoins, it would either delay redemption or offer something other than actual fiat currency:

It’s worth remembering that in 2016, Tether’s sister exchange Bitfinex partially seized USD deposits to make good its losses from a hack, and gave depositors a new coin it had just invented instead. Tether’s terms of service appear to give it the legal right to do the same in the event of redemption requests that it can’t satisfy with fiat currency. Given this, there appears to be no particular reason for Tether to hold much in the way of safe liquid assets. 
The reserve statement shows that Tether’s asset base consists largely of commercial paper, fiduciary deposits and corporate debt. Tether’s General Counsel, Stuart Hoegner, insists that these are mostly investment grade, but there is no independent verification of his statement and he unfortunately was complicit in previous statements of Tether’s reserves that turned out to be fiction. But if Tether is simply going to refuse redemption requests or offer people tokens it has just invented instead of fiat currency, it wouldn’t matter if the entire asset base was junk, since it will never have any significant need for cash. 
So whether Tether’s "reserves" are cash equivalents doesn't matter. But what does matter is capital. 
For banks, funds and other financial institutions, capital is the difference between assets and liabilities. It is the cushion that can absorb losses from asset price falls, whether because of fire sales to raise cash for redemption requests or simply from adverse market movements or creditor defaults.

The accountant's attestations reveal that Tether has very little capital. The gap between assets and liabilities is paper-thin: on 31st March 2021 (pdf), for example, it was 0.36% of total consolidated assets, on a balance sheet of more than $40bn in size. Stablecoin holders are thus seriously exposed to the risk that asset values will fall sufficiently for the par peg to USD to break – what money market funds call “breaking the buck”. 
The money market fund Reserve Primary MMF broke the buck in 2008 due to significant losses from its holdings of Lehman paper. Its net asset value (NAV) only fell to 97 cents, but that was enough to trigger a rush for the exit. Reserve Primary became insolvent and was eventually wound up. 
Asset price falls could similarly result in Tether “breaking the buck”. But unlike Reserve Primary, stablecoin holders wouldn’t be able to get their money out if asset values fell. They would either have to try to sell their stablecoins on exchanges or sit tight and hope that asset values recovered. And this is why the composition of Tether’s asset base matters. All the noise about “reserves” entirely misses the point. It’s the risk of asset price falls that is the real problem for holders of Tether stablecoins, not lack of cash for redemptions.  
Tether’s asset base consists almost entirely of assets that are exposed to the risk of default, illiquidity and sudden price falls. We don’t know how serious this risk is, but it’s reasonable to assume that the worse the rating of the assets, the greater the likelihood that the par peg will break. As the whole point of a stablecoin is the par peg, “breaking the buck” would be a massive deal for Tether. It might not render it insolvent, but it would make it pointless. 
It wouldn't even be necessary for asset prices actually to fall for the par peg to break. If punters thought Tether’s assets were significantly exposed to losses, the stablecoins would trade at a discount to par sufficient to compensate stablecoin holders for the risk of not getting all their money back. The higher the risk, the deeper the discount.
So when Tether sceptics cast doubt on the soundness of Tether’s debt assets, particularly its commercial paper, they put pressure on the par peg. And if Tether could not effectively counter their allegations, the peg would break – permanently. It’s hardly surprising therefore that Tether’s General Counsel has now stated publicly that Tether’s commercial paper and fiduciary deposits are “mostly” at least A2 rated. 
But the mystery is why Tether is so reluctant to publish full details of its asset composition. Surely, the best way to prevent the par peg breaking is to provide solid evidence that the asset base is safe and liquid? An unsupported assertion from a lawyer with a tarnished reputation is hardly reassuring. Why don't they simply reveal their asset composition? And why are they running with so little capital?
Smoke and mirrors may maintain the peg for a while, but people won’t be fooled forever. If Tether is serious about delivering “unrivalled transparency”, it should publish the composition of its assets in sufficient detail to eliminate all doubts about their safety and liquidity. And if it wants the par peg to hold under all circumstances, it must significantly increase its capital. If it won’t do either of these, then eventually the mirror will crack, the peg will break and Tether will be doomed. 

Related reading:
Caveat Depositor: How Safe Is Your Stablecoin? - Coindesk
Tether says its reserves are backed by cash to the tune of....2.9% - FT Alphaville
The Lady of Shalott - Tennyson
Image: The Lady of Shalott, painting by William Holman Hunt. 

Banks lobby hard for government money

Published by Anonymous (not verified) on Mon, 17/05/2021 - 9:30pm in

There is an informative chart produced by Positive Money in one of their recent articles, showing the number of Treasury officials’ meetings with lobbyists by sector: Banking had more than 17% of all meetings, or more than 25% if you include the corporations (‘companies’) many of which are financial (Greensill is a good example), while... Read more

The working and shirking classes…

Published by Anonymous (not verified) on Sat, 08/05/2021 - 8:20pm in

I thought this ‘i’ article well observed: Rather, it is symptomatic of a much more deep-rooted change in Britain, with rising numbers of home-owning aspirational voters in originally industrial areas. It is symptomatic of the detoxification of the Conservatives, with the passing decades reducing the number of people who remember the depth of hatred of... Read more

David and Goliath

Published by Anonymous (not verified) on Fri, 07/05/2021 - 11:44pm in

Yesterday, someone who had been watching one of my (all too frequent) Twitter arguments about money made this comment: 

The "unknown person with few followers" was my protagonist. And the blue tick "classical expert" was me. I am Goliath. 

But ten years ago, I was David. Armed only with Blogger and Twitter, and my knowledge of banking and finance, I set out to slay the financial Philistines that rampaged across the internet in the aftermath of the 2008 financial crisis. I published my first Coppola Comment post on 20th February, 2011. It throws slingshots at a media pundit who had written an article about short selling, on which he was far from expert. You can still read it, if you like. 

My early posts were rough and ready, and my terminology is at times excruciatingly loose, but I was sure of my subject. I understood British banking and financial markets well, though I had left RBS nearly ten years before. It was evident to me that the 2008 financial crisis in the UK was one of retail banking, not investment banking. The banks that failed, with one notable exception, were retail banks that had over-extended themselves in property and commercial lending, and in some cases had also invested in toxic securities as part of their treasury function. The European banks that failed in the crisis were similarly over-leveraged and riddled with non-performing loans and toxic securities. I was critical of regulators, central banks, the banks themselves, and above all the self-appointed pundits promoting bank breakups and ring-fencing, neither of which I considered an appropriate response to the crisis. 

Now, re-reading what I said ten years ago, I wince at my writing style but nod my head at the message. Banks did have insufficient capital and inadequate liquidity, central banks were too slow and too limited in their response to the crisis, and regulators were asleep at the wheel. Now that banks have better capital and more liquidity, regulators have tighter control of their activities (perhaps even too tight), and central banks are more active in markets, ring-fencing has turned out to be pointless. Banks pretty much broke themselves up to meet tougher capital requirements. There's not much left of British and European investment banking now.  

But the financial crisis originated in the American mortgage market. The Philistines talked as if all mortgage markets were the same, but in fact the American market is unique in the world. And it is the unique structure of this market that enabled an American crisis to propagate itself across the world. 

I knew what adjustable-rate mortgages were - after all, the entire UK mortgage market consists of adjustable-rate mortgages - and I knew what a subprime mortgage was like, having had one myself (my first mortgage was 100% LTV). But I was amazed to discover that most American mortgages are fixed-rate for 25 or 30 years. Adjustable-rate mortgages were inevitably subprime, because people took out adjustable-rate mortgages if they weren't creditworthy enough to qualify for prime fixed-rate mortgages. These people were generally on lower incomes and therefore more sensitive to interest rate rises than the average borrower, and yet the average borrower was protected from interest rate rises while they were fully exposed to them. It was a mind-blowingly stupid market structure. 

Furthermore, the US was exporting its mortgage interest rate risk. Whereas in Britain and Europe mortgage lenders generally keep mortgages on their books, American mortgage lenders (known as "originators") sold on the loans: prime mortgages (and in the mid-2000s some subprime too) went to the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, while adjustable-rate subprime mortgages went to investment banks. GSEs and investment banks alike issued securities backed by these mortgages and sold them to international investors. "Tranching" and the use of structured instruments such as collateralized debt obligations (CDOs) made it possible for many securities to be sold as safe assets even if they were backed by subprime mortgages. And derivatives such as credit default swaps helped to distribute US mortgage default risk out to the far reaches of the capital markets universe. 

I understood securitisation and derivatives. My MBA dissertation is about derivatives, and I spent quite a bit of my banking career devising systems for managing derivative exposures and structured products. I didn't know the Gaussian copula equation used to price CDOs, but I was familiar with the related Black-Scholes equation for derivatives pricing. But I had never seen systematic securitisation before, and I didn't know how tranching worked, though I understood capital structures. So I had a steep learning curve in those early months. But I did the research, and I found out how it worked. And then I wrote about it. You can still read my "sausage factories" explanation of how securitisation and tranching spread an American subprime mortgage crisis to the whole world. 

I was not the only David taking aim at the Goliaths of conventional finance and economics at that time. Writers such as Cullen Roche and Edward Harrison, and heterodox economists such as Steve Keen and Ann Pettifor, were as determined as I was to correct the widespread misunderstanding of so-called "fractional reserve" banking that had resulted in central bankers failing to understand the risks posed by rising leverage in the banking system. 

It quickly became apparent that central bankers and economists not only didn't understand how banks could crash the world, they didn't understand their own tools either. They simply did not know how money is created in a modern economy. They thought quantitative easing (QE) must be used sparingly to avoid triggering runaway inflation, because banks would lend out all those new reserves at 10 times leverage, wouldn't they? 

But banks don't lend out reserves. And they don't "lend out 90% of deposits keeping 10% in reserve", either. They lend, creating new deposits in the process, then borrow reserves if they need them to settle the drawdown of those deposits. The new deposits add to the total amount of money in circulation - to be clear, because of the way we measure money, they do so before they are drawn, not as a result of being drawn. So bank lending creates new money. 

When bank lending is out of control, so too is money creation. And when there is a liquid interbank market, reserve availability does not constrain lending, because banks can always borrow what they need: central banks that are using the interbank lending rate as their principal inflation control tool will always ensure there are sufficient reserves for banks to borrow, since if they do not, they will lose control of inflation. 

Furthermore, when lending is mainly against property, it does not raise consumer price inflation: people are borrowing to buy property, not to spend on consumer goods. So while banks were lending more and more, driving up property prices to the skies, central banks that were only watching the consumer price index were unconcerned. 

Thus, prior to the crisis, bank lending was unconstrained by reserves or regulation. And although their loans were undercollateralized, their borrowers skint and their capital paper-thin, they thoujght they were safe, because the value of the collateral against which they were lending was constantly rising. Central bankers also thought they were safe, because inflation was low and stable. And governments thought they were safe, because the economy was growing strongly and tax receipts were rising. When the whole house of cards collapsed, everyone scratched their heads and muttered, "how did that happen?" 

After the crisis, banks didn't want to lend, to each other or anyone else. Their balance sheets were overleveraged and stuffed with non-performing loans. They were under pressure from regulators to reduce their risks and clean up their underwriting standards. So, far from banks increasing lending in response to QE, they actually reduced lending despite QE. The "second bailout for banks" headline that is famously etched on Bitcoin's genesis block is a reference to the desperate measures considered by the UK's then Chancellor of the Exchequer, Alistair Darling, to try to get damaged banks to start lending again. 

So when central banks provided banks with copious quantities of new reserves in the expectation that they would lend them out, banks simply ended up with far more reserves than they knew what to do with. They gratefully parked their excess reserves at central banks for a few basis points in interest, thus ensuring that the few banks that did need to borrow reserves had to do so at a positive interest rate. "Banks are being paid not to lend," muttered mainstream economists. But as many of us pointed out, had central banks not paid interest on excess reserves, the main policy rate would have fallen below zero. At that time, no-one wanted to experiment with negative rates. So it's not so much that banks were being paid not to lend, it's more that they were being paid to lend to each other to prevent the main policy rate from turning negative. 

The terrm "fractional reserve lending" is thus extremely misleading. Banks lend, creating money in the process: as a consequence of the lending and drawdown process, banks end up with fewer reserves than they have deposits. In this era of excess reserves and Basel liquidity regulations. reserve requirements intended to ensure that banks always have sufficient reserves to meet normal daily deposit withdrawal requests are redundant: in March 2020, the Fed abolished its iconic10% reserve requirement, the source of the "10% reserve" of the money multiplier model. 

It is capital, not reserves, that constrains lending. Reinforcing this message, and explaining how bank lending really works, has formed a large part of my writing over the last decade. 

But even now, the same old nonsense about fractional reserve banking and money multipliers is still circulating. Ordinary people repeat it to me because they've seen it on Facebook. Teenagers too young too remember the financial crisis pontificate about it with extraordinary assurance because they remember it from their high school economics classes or because some crypto bro on twitter told them about it. People tweet blogposts they've written using the failed money multiplier model to explain how banks work. Old economic models never die, they just hide in the dark corners of the internet and in economics textbooks.   

And it's not just nonsense about banks that is still being spread. Nonsense about money is, more widely. QE is still being called "money printing", including by mainstream media journalists and pundits who should know better. People are alleging that central banks are directly financing government deficits, even though this is illegal in most Western countries. And the goldbugs I spent so much of my time arguing with all those years ago are back in force, promoting their deflationary hard-money regimes and descriibing the fiat money creation that is currently keeping people alive as "immoral". To me, failing to give people the money they need to keep them alive is immoral. Better some inflation than poverty and starvation. 

Anyway, I've heard all this inflation scaremongering before. It was wrong ten years ago and it is equally wrong now. QE does not cause inflation, and nor do government deficits when the economy is in a slump. We are living through an era of "QE for the People" right now, and there is no significant inflation. There will probably be a short burst of inflation as the economy reopens, because the damaged supply side will take a while to catch up with resurgent demand, but neither the exceptional government spending during this time nor the monetary policy that supported it will cause runaway inflation. 

We are doing now what we should have done after the financial crisis. It is vital that the inflation hawks, bond vigilantes and goldbugs aren't allowed to derail this train as they did the last one. The consequences if they do are too ghastly to contemplate.

And so I find myself, once again, fighting against the spread of nonsense about banking and finance on the internet. But to the new kids on the block, I am part of the establishment that they blame for their troubles. They insist that central banks will cause inflation with all this "money printing", and when I say "it doesn't work like that", they tell me I don't understand how money works. They have never read my work, and they don't want to: they only know that I am a blue tick and a "classical expert". To them, I am a dinosaur, and when the cryptocurrency asteroid strikes, I will die. I have become Goliath, to be slain, not listened to. 

The price David paid for slaying Goliath is that he became the new Goliath. Did King David ever long to be back on that hillside tending his sheep? These days, I would rather be in the garden tending my plants than wielding a slingshot against a new tide of internet Philistines. 

Someone even suggested yesterday that if I wanted to talk sensibly about money I should write a blog. I laughed hollowly and pointed them to this blog. But there are a lot of posts on this site, and it's not very well organised. Blogposts, like Twitter, are ephemeral: once the occasion has passed, it can be hard to find them again. So maybe I need to organise my old posts into an indexed archive. Or maybe I should turn them into a few e-books. What do you think?

More importantly, Blogger is an old and tired platform, It's increasingly unpleasant to use: I have to manipulate the HTML to make the posts look half decent. I had to add code to comply with GDPR, but as a result my own domain,, can't be found on search engines now, though individual blogposts can. And Blogger is withdrawing the subscribe by email facility in July 2021. It's almost as if Google doesn't want to maintain a CMS for casual bloggers any more. So I am thinking of shutting down this site. Not to throw away what I have done in the last decade, but to draw a line under it and move on, at least to a better platform. 

The last ten years have been a blast. I have learned an immense amount, and achieved more than I ever imagined possible. I am no longer the singing teacher from Kent who knew a bit about banking and was surprised to find she could write. I'm a professional writer, a published author and an acknowledged expert on banking, finance and monetary economics. In a way, I really have become Goliath. I am proud of that, and immensely grateful to all the people who have helped me along the way. 

But I am also still David. I still scrape a living from freelance writing, singing and teaching: senior jobs in central banking, thinktanks and financial publications have entirely passed me by. And I still want to slay the resurgent Goliaths. Indeed, I'm currently writing a book called "The Absolute Essentials of Banking", because even now, more than a decade after the financial crisis, people still don't understand how banks work. And I continue to wield my slingshot on the internet, even though I really prefer being in the garden. Some things are too important to give up. 

Related reading:

David and Goliath, 1 Samuel 17 - Bible Gateway

How COVID-19 Affected First-Time Homebuyers

Published by Anonymous (not verified) on Mon, 12/04/2021 - 9:00pm in

Donghoon Lee and Joseph Tracy

How COVID-19 Affected First-Time Homebuyers

Efforts in the spring of 2020 to contain the spread of COVID-19 resulted in a sharp contraction in U.S. economic growth and an unprecedented, rapid rise in unemployment. While the first wave of the pandemic slowed the spring housing market, home sales rebounded sharply over the rest of the year, with strong gains in house prices. Given the rising house prices and continuing high unemployment, concerns arose that COVID-19 may have negatively affected first-time homebuyers. Using a new and more accurate measure of first-time homebuyers, we find that these buyers have not been adversely affected by the pandemic. At the same time, gains from lower mortgage rates have gone to existing homeowners and not to households purchasing their first home.

The strong performance of the housing market during 2020 is reflected both in terms of the volume of home purchases as well as the growth in house prices. The chart below shows total purchase mortgages by year, broken down into first-time homebuyers (FTBs) and repeat buyers. The data are based on new mortgage liens on household credit files, and so will not reflect any “all cash” home purchases.

How COVID-19 Affected First-Time Homebuyers

The annual pace of new purchase mortgages has been trending higher since 2011. This growth accelerated in 2020, with purchase mortgage volume increasing 10.5 percent, compared to 6.0 percent in 2019. Similarly, house prices rose 9.2 percent in 2020 compared to 3.6 percent in 2019, according to CoreLogic, reflecting strong demand and relatively low inventories.

Using a large representative sample of U.S. household credit files, we can identify a FTB as the first instance of a mortgage lien on a household’s credit file. The share of new purchase mortgages taken out by FTBs each year is shown in the chart below.

How COVID-19 Affected First-Time Homebuyers

We find that in 2019, prior to the COVID-19 outbreak, the share of FTBs among all purchase mortgages (excluding all-cash purchases) was 48.2 percent. In 2020, the FTB share increased to 48.8 percent, as opposed to the decline based on NAR survey data. This slight increase is also in sharp contrast to the 8.5 percentage point decline in the FTB share following the financial crisis. The FTB share has been trending up since 2013 and is now essentially back to its level in 2000.

Meanwhile, rising house prices pushed up mortgage balances for both FTBs and repeat buyers. The chart below shows the average mortgage balance over time for the two types of buyers.


The average mortgage origination balance for FTBs increased by 10.2 percent in 2020, more than triple the pace of 3.2 percent in 2019. Similarly, mortgage balances for repeat buyers increased by 12.1 percent in 2020 after remaining relatively flat in 2019 (an increase of only 0.8 percent).

Rising house prices and a weak labor market might be expected to create affordability problems for FTBs, leading to a lower FTB share in 2020. Why did this not occur? Were FTBs in 2020 relatively older and thus had higher incomes and more time to save for a down payment? The next chart provides data on the average age of FTBs and repeat buyers.

How COVID-19 Affected First-Time Homebuyers

Instead of rising, the average age of FTBs actually declined slightly, to 36.1 years in 2020 from 36.5 years in 2019.

The monthly payments on a house depend on both the mortgage balance and the mortgage rate. S&P Global reports that the average rate on a thirty-year fixed-rate mortgage fell from 4.75 percent in 2019 to 3.77 percent in 2020. For FTBs, this decline in mortgage rates completely offset the rise in house prices (and consequently mortgage balances). Based on our credit panel data, the average scheduled monthly payment for a FTB declined slightly from $1,625 in 2019 to $1,598 in 2020.

In addition to being able to afford the monthly principal and interest payments on a home, a FTB must also accumulate sufficient savings to make a down payment. Higher house prices can make saving enough for a down payment even more challenging for FTBs. However, if households invested their down-payment savings in broad equity market indices, their after-tax return in 2020 would have exceeded the rise in house prices. Generous pandemic stimulus checks and automatic forbearance on federal student loans could possibly have helped FTBs save for a down payment as well.

If FTBs were facing difficulties in making a down payment as house prices increased, they could either have tried to make a smaller-percentage down payment or have sought down-payment assistance. CoreLogic provided us with average down-payment percentages for FTBs (using the official definition for FTB of not owning a home in the last three years). In 2019, the down payment for FTBs was 8.9 percent, on average. In response to rising house prices, this percentage declined slightly in 2020, to 8.6 percent.1

Borrowers using Federal Housing Administration (FHA)-backed mortgages can use down-payment assistance (DPA) to reduce the burden of saving for a home. However, the FHA does not break out DPA use by FTBs and non-FTBs, although FTBs represent 70 percent of FHA purchase mortgages in 2020, based on our data. The use of FHA DPA increased slightly from 39.3 percent in 2019 to 39.8 percent in 2020.2 Both the lower down-payment percentages and higher use of DPA indicate that some FTBs faced challenges in purchasing a home in 2020 but that credit markets were able to accommodate them.

Summing Up

The COVID-19 health crisis sent the economy into a sharp recession, resulting in an unprecedented increase in unemployment. At the same time, low inventories and strong demand led to faster gains in house prices. Despite these challenges, the share of FTBs actually increased slightly in 2020. The decline in mortgage rates offset rising house prices to keep monthly payments roughly unchanged. This result illustrates that in a market with low inventory and strong demand, the benefit from lower mortgage rates goes to sellers and not first-time buyers.

(1) We thank Frank Nothaft of CoreLogic for providing these tabulations.

(2) Table B-10, page 98.

Donghoon LeeDonghoon Lee is an officer in the Federal Reserve Bank of New York’s Research and Statistics Group.

Joseph TracyJoseph Tracy is an executive vice president and senior advisor to the president of the Federal Reserve Bank of Dallas.

How to cite this post:

Donghoon Lee and Joseph Tracy, “How COVID-19 Affected First-Time Homebuyers,” Federal Reserve Bank of New York Liberty Street Economics, April 12, 2021,


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Bankers’ currency and Conservative deceptions

Published by Anonymous (not verified) on Wed, 07/04/2021 - 2:20am in

I enjoyed Jim Osborne‘s comment mentioning what he called “bankers’ currency”. Clearly bankers’ currency is what all currency now is. The only ‘recent’ example of currency that was not (but was in fact the Treasury’s rather than the bankers’) is the short-lived Bradbury’s. It showed that we do not actually need the bankers to produce... Read more

Do People View Housing as a Good Investment and Why?

Published by Anonymous (not verified) on Tue, 06/04/2021 - 1:00am in

Andrew Haughwout, Haoyang Liu, Dean Parker, and Xiaohan Zhang


Housing represents the largest asset owned by most households and is a major means of wealth accumulation, particularly for the middle class. Yet there is limited understanding of how households view housing as an investment relative to financial assets, in part because of their differences beyond the usual risk and return trade-off. Housing offers households an accessible source of leverage and a commitment device for saving through an amortization schedule. For an owner-occupied residence, it also provides stability and hedges for rising housing costs. On the other hand, housing is much less liquid than financial assets and it also requires more time to manage. In this post, we use data from our just released SCE Housing Survey to answer several questions about how households view this choice: Do households view housing as a good investment choice in comparison to financial assets, such as stocks? Are there cross-sectional differences in preferences for housing as an investment? What are the factors households consider when making an investment choice between housing and financial assets?

Exploring Survey Data

We study these questions using a novel survey on households' preferences for housing as an investment relative to investing in the stock market, and rationales behind their choices. In our survey, respondents are prompted to advise a couple in their early 30s from their zip code, after receiving a gift the size of a down payment, whether to invest in housing or the U.S. stock market. The question is framed in two ways, one asks if the young couple should buy a primary residence or invest in the stock market, and a second assumes the couple already has a primary home and asks whether they should consider buying a rental property or investing in stocks. Each respondent randomly receives one of the two framings. After reporting their recommendations, respondents are asked to select reasons behind their answers from a menu of reasons including, for example, stocks having higher returns, housing with lower volatility, commitment device for savings, or they can supply their own reasons. These survey questions were run in February 2020 (largely before the COVID-19 outbreak in the U.S.), October 2020, and February 2021. We report the following results:

Households View Housing as a Good Investment

The chart below plots the shares of household recommendations over time. We can see that in general, households view housing as a good investment in comparison to the stock market. When asked to choose between investing in a rental property or the overall stock market, more than 50 percent of the households recommended housing in all three administrations of the survey. In the primary residence versus stock market framing, preference for housing is even stronger with more than 90 percent of the survey respondents choosing housing. One interesting pattern is that the preference for housing dipped in October 2020 and returned back to the pre-COVID level by February 2021. Using reasons cited for these choices, we found that this shift away from housing in October 2020 wasn’t driven by lower home price expectations, but reflects other reasons. For example, investors were more worried about the risk of vacant rental units. For buying a primary residence, our survey respondents put less value on the stability provided by an owner-occupied home after the COVID-19 outbreak, potentially because of concerns about making mortgage payments or shortened expected tenure to stay at the current home.

Do People View Housing as a Good Investment and Why?

Cross-Sectional Differences in Viewing Housing as an Investment

We next examine important cross-sectional variation in households’ views of housing as an investment. Two strong predictors for investment recommendations are gender and education. For this analysis, we focus on the rental housing versus stocks framing. The next chart shows that women and non-college graduates have a stronger preference for housing than others do. For the gender gap, part of the explanation is that men in our sample are more risk-taking than women and are more willing to invest in the stock market, where returns are perceived as more volatile. For the education gap, college graduates tend to expect higher returns in the stock market than in housing and cite “time to manage a rental property” as one reason for choosing the stock market. We also note that these gender and education gaps were substantially reduced in the October 2020 survey, as women and non-college graduates temporarily shifted away from housing. In future work, we intend to study factors behind the gender and education gaps in preference for housing, and why they were temporarily reduced during the COVID-19 outbreak.

Do People View Housing as a Good Investment and Why?

Reasons for Choosing Housing

Turning to reasons cited by the survey respondents for choosing housing, the next chart shows the percentage of respondents selecting each reason for recommending a primary residence over investing in the stock market. Respondents can select multiple reasons. We can see that there is a reasonable share of respondents choosing each of the reasons. “Desired Living Environment and Provides Stability” and “Housing Prices Less Volatile” are among the most commonly selected. Compared to the 2020 responses, in 2021 more survey respondents selected higher house prices and lower volatility, and fewer respondents selected any of the other reasons, including for example, saving from rent, stability, locking in housing costs, and the amortization schedule as a commitment device for saving.

Do People View Housing as a Good Investment and Why?


Housing is an important asset class for middle-class households. Using a novel survey fielded before and during the COVID-19 outbreak, we show that investors view housing—both rental properties and primary residences—as a good investment relative to the aggregate stock market. There are important variations in preferences for housing, with women and non-college graduates being more likely to recommend housing. Relative to before the COVID-19 outbreak, more households now cite higher returns and lower volatility as reasons to buy a primary residence.

Chart data

Haughwout_andrewAndrew Haughwout is a senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Liu_haoyangHaoyang Liu is an economist in the Bank’s Research and Statistics Group.

Dean Parker is a senior research analyst in the Bank’s Research and Statistics Group.

Xiaohan Zhang is an assistant professor at California State University-Los Angeles.

How to cite this post:

Andrew Haughwout, Haoyang Liu, Dean Parker, and Xiaohan Zhang, “Do People View Housing as a Good Investment and Why?,” Federal Reserve Bank of New York Liberty Street Economics, April 5, 2021,

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The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

“Excess Savings” Are Not Excessive

Published by Anonymous (not verified) on Mon, 05/04/2021 - 9:00pm in

Florin Bilbiie, Gauti Eggertsson, Giorgio Primiceri, and Andrea Tambalotti


How will the U.S. economy emerge from the ongoing COVID-19 pandemic? Will it struggle to return to prior levels of employment and activity, or will it come roaring back as soon as vaccinations are widespread and Americans feel comfortable travelling and eating out? Part of the answer to these questions hinges on what will happen to the large amount of “excess savings” that U.S. households have accumulated since last March. According to most estimates, these savings are around $1.6 trillion and counting. Some economists have expressed the concern that, if a considerable fraction of these accumulated funds is spent as soon as the economy re-opens, the ensuing rush of demand might be destabilizing. This post argues that these savings are not that excessive, when considered against the backdrop of the unprecedented government interventions adopted over the past year in support of households and that they are unlikely to generate a surge in demand post-pandemic.

Calculating excess savings is simple: they are the cumulative amount by which personal saving during the pandemic has exceeded a counterfactual path without COVID-19. As shown in blue in the chart below, personal saving has been elevated since last March. The red line represents one plausible counterfactual scenario, in which the saving rate out of disposable income is constant at its pre-pandemic level (7.3 percent), while disposable personal income grows at its average rate over the previous twenty years (3.5 percent). Excess savings are the area between the two lines. According to this calculation, they amounted to $1.6 trillion as of December 2020. Different plausible assumptions on the counterfactual evolution of personal saving in the absence of the pandemic lead to relatively small differences in this headline number.

“Excess Savings” Are Not Excessive

Where do these excess savings come from? Three contributing factors are clear. First, many Americans have thankfully kept their jobs and incomes over the past year. However, they have not spent nearly as much as they would have otherwise, because they are not dining out or going on vacation due to the pandemic. Increased purchases of furniture, electronics, and other goods have compensated only in part for this reduced spending on services. As a result, overall consumption has fallen for many households, even if their income is more or less intact. Second, starting with the emergency response approved in early March and the subsequent CARES Act, the government has stepped in to replace some of the lost income, especially for workers in the sectors hardest hit by the pandemic. Some of this income support was spent to keep food on the table and a roof over the heads of many families, but not all of it was. Third, it is possible that households decided to save more than usual as a precautionary measure, given the great uncertainty about their jobs and the overall health of the economy going forward.

Regardless of the precise reasons, there is no doubt that households saved more in the past year than they would have in a world without the pandemic. But is there anything “excessive” about the savings that they have thus accumulated? Are these moneys significantly different from the other $130 trillion in net worth that U.S. households already own, in a way that might lead them to be spent faster than other components of wealth? There are at least three reasons to think that the answer to this question is no.

Excess savings are the accounting counterpart of “extra” government debt. According to the principles of national income accounting, the flow of private saving (by households and businesses) must be channeled to one of three uses. It can finance investment, be lent abroad, or lent to the government. In 2020, the U.S. government spent roughly $2 trillion to fight the COVID-19 recession, most of it financed with debt. The $1.6 trillion in “excess savings” is the accounting counterpart of this increase in government borrowing.

As is often the case with accounting identities, this observation has limited economic implications. It does not reveal why households accumulated the “excess savings,” nor whether they will spend them once the economy fully re-opens. Nonetheless, it helps us to consider them under a different light—not as “extra” resources ready to be spent, but as the flip side of the extraordinary fiscal effort to fight the COVID-19 pandemic.

Excess savings are mostly held by…savers. One reason why many economists do not associate the exceptional increase in government debt over the past year with an imminent explosion in aggregate demand—even though they might worry about it for a host of other reasons—is the idea that government debt is money that citizens owe to themselves. As such, it would not represent “net wealth” that is ready to be spent. In economics jargon, this idea is known as Ricardian Equivalence. According to this proposition, public transfers financed with government debt do not affect consumption because households save them to pay for the increase in taxes that will eventually be necessary to repay that debt. If Ricardian Equivalence held, the marginal propensity to consume out of debt-financed transfers would be zero, and the resulting savings would never be spent.

Ricardian Equivalence is the kind of theoretical benchmark that economists love, but it clearly does not hold in practice. In fact, many U.S. families did spend a significant share of the checks and other income support that they received during the pandemic. According to available estimates, this share is around one-third on average. The rest was used to pay down debt (also about one-third) or otherwise saved. It is hard to know exactly who holds these savings, but it seems reasonable to assume that they are individuals and families with a bit of a buffer in their budgets—and whose consumption decisions are therefore less sensitive to their immediate economic circumstances. This is presumably what allowed them to save part of the support they received. According to economic theory, these savers are more likely to be Ricardian, and hence to continue holding on to these savings. Of course, their economic circumstances might change in the future and they might find themselves in need to spend those accumulated resources, but the end of the pandemic in itself is unlikely to turn them from savers to immediate spenders. If anything, fewer households should face financial hardship as aggregate conditions improve.

Excess savings are unlikely to unleash pent-up demand for services. One caveat to the previous reasoning is that some of the “excess savings” might be due to a dearth of spending opportunities in the sectors of the economy most affected by the virus, such as travel and entertainment. If this is true, some of that lost spending could materialize once those sectors fully re-open.

How large is this “pent-up” demand for services likely to be? On the one hand, there is little doubt that many consumers will enjoy a few extra restaurant meals and perhaps splurge on a nicer vacation after such a long period without them. On the other hand, there is a limit to how many extra restaurant meals and vacations people will be able to enjoy. To have a sense of how much of this pent-up demand might be activated by the “excess savings” accumulated during the pandemic, recall that available estimates of the propensity to consume out of the CARES Act transfers is about one-third. This means that the average household spent about 33 cents out of each dollar received in direct payments. As it turns out, this estimate is in line with those based on previous transfers of this kind, such as the Economic Stimulus Payments of 2008. Therefore, the pandemic does not seem to have substantially limited households’ ability to spend the support that they received.

The bottom line from these three sets of considerations is that, although large by historical standards, the savings accumulated by U.S. households during the pandemic do not appear to be “excessive” when set against the extraordinary need of many American families and the unprecedented government intervention to support them. It is certainly possible that some of these savings will pay for extra travel and entertainment once the COVID-19 nightmare is behind us, but our conclusion is that the resulting boost to expenditures will be limited. This conclusion does not rule out a strong economic recovery from the virus shock. It only implies that spending out of excess savings won’t be one of its major drivers.

Florin Bilbiie is a professor of economics at the University of Lausanne, Switzerland.

Gauti Eggertsson is a professor of economics at Brown University.

Giorgio Primiceri is a professor of economics at Northwestern University.

Andrea TambalottiAndrea Tambalotti is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:

Florin Bilbiie, Gauti Eggertsson, Giorgio Primiceri, and Andrea Tambalotti, “’Excess Savings’ Are Not Excessive,” Federal Reserve Bank of New York Liberty Street Economics, April 5, 2021,


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Students of Colour Object to Oxford Music Curriculum Because of Slavery

Published by Anonymous (not verified) on Tue, 30/03/2021 - 2:19am in

The Telegraph ran a story yesterday claiming that they’d received documents showing that Oxford University was considering changing their classical music course. This was because, following Black Lives Matter protests, students of colour at the university had complained that they were left very distressed by the course on European music from Machaut to Beethoven, because this was the period when the transatlantic slave trade was developing. They also made the same complaint about western music notation.

Now this comes from the Torygraph, part of Britain’s exemplary right-wing press, who are known for their rigorous commitment to journalistic truth and integrity, ho, ho. So you wonder if it true, or is the product of some Tory hack’s fevered imagination, like many of the stories about the Labour party produced by Guido Fawkes. Is this all made up to discredit Black Lives Matter?

Thinking about the issue, it seems very much to me that the problem isn’t the curriculum’s links to colonialism, but an attitude of entitlement and the cultural prejudices of the rich and monumentally uninformed.

Let’s deal with their objection that western musical notation developed during the time of the Black slave trade. As the Torygraph pointed out, it didn’t. It developed before the transatlantic slave trade from the church’s Gregorian Chant. This is absolutely true. The origin of the western musical tradition is in the music written for church services. This soon expanded to take in secular subjects, such as the courtly lyrics of the troubadours, the celebration of kings and princes, drinking, war, and just about every aspect of life. As a genre, the emergence of western classical music has nothing to do with the slave trade. Machaut, the French composer mentioned as the beginning of that part of the Oxford music course, lived in the 12th century, three centuries or so before the development of the transatlantic slave trade in the 15th. The modern system of musical notation was also developed in that century by Guido d’Arezzo. The scale, Do Re Mi Fa Sol La Te Do, comes from the initial syllables of a line in the Latin Mass. And whoever thinks that Beethoven is connected to the slave trade is clean out of their tiny mind. Beethoven, I think, was a German liberal with a profound sympathy for the ideals of the French Revolution. His Eroica was originally dedicated to Napoleon, until the Corsican bandit invaded Austria. His Ode to Joy looks forward to a world where nations live together in peace and fraternity. Furthermore, it’s also been suggested that he may have had Black ancestry. Either way, I doubt very much that he had any sympathy for slavery or any other form of human servitude whatsoever.

The complaint about that part of the music course is just so wrong, that I do wonder about the motives of the people making these complaints. Assuming they exist, and that the complaints are genuine. Because the complaints are so wrong, and so ignorant, that either the complaint is some kind of mickey-take, or else the people making them are simply monumentally stupid and lazy. For example, what kind of individual, who seriously wants to learn music, objects to learning the notation? Yes, people can and do play by ear, and many non-western musical traditions don’t have a system of notation. But if you seriously want to play music, and certainly if you’re studying it an advanced level, then understanding its notation is very much a basic requirement. This includes not only classical music, but also Jazz, rock and pop. Much of this is composed through improvisation and jam sessions by the musicians themselves, and its form of reproduction is primarily through records rather than print. But nevertheless, they’re also published as sheet music. I’ve got several books of pop, rock and Jazz music on my shelves. They’re published as sheet music as people not only want to listen to some of these great pieces, but also play them for themselves.

So basic is an understanding of written music as well as the development of western music from the Middle Ages onwards, that I really do wonder if the people behind these complaints actually want to study music, or do so to the extent that they have to do some serious work that might stretch them. It doesn’t look like they do to me. I also wonder why, if they consider western music so intimately linked to colonialism and slavery that it causes them distress, that, if they’re foreign, they wanted to come to Europe to study it.

It’s therefore occurred to me that, if the complaints are real, the people doing the complaining may not actually want to study the subject. They just want the cachet of studying at Oxford. Years ago I read a history of Japan, which warned about giving in to the insularism and xenophobia of many Japanese. The Japanese highly value an education at Oxbridge and/ or the British public schools (God help them!) but they don’t like mixing with non-Japanese. Thus one or the other of Oxford or Cambridge was building a separate college to accommodate Japanese students so they wouldn’t have the inconvenience of mixing with people of other nationalities. Perhaps something similar is the case here? Do they want the prestige that goes with an Oxford education, but have their own racist prejudices about European culture and music?

If this is the case, then it’s a scandal. It’s a scandal because education at one of Britain’s leading universities is being dumbed down for these morons. It’s a scandal because it cheapens the real problems of Britain’s Black community, which were behind many of the Black Lives Matter protests. For example, there’s a programme on the Beeb this evening investigating the reasons Black British mothers are four times more likely to die in childbirth than Whites. It’s a scandal because there are doubtless plenty of kids of all colours in the UK, who would just love to study music at Oxford and have a genuine love of classic music. There’s a campaign at the moment to get more Black and Asians into orchestras. It’s been found that people from these ethnicities are seriously underrepresented. Hence there’s an orchestra, Chinikwe!, purely for non-Whites, in order to produce more Black and Asian orchestral musicians. This has also followed attempts to recover the works of Black classical composers. Back in the 1990s one of the French labels issued a CD of harpsichord pieces written by Black composers. Earlier this year, Radio 3 also played the music of Black classical composers. The best known Black British classical composer, I’m sure, is Samuel Coleridge-Taylor, who lived from 1875 to 1912. His father came from Sierra Leone while his mother was British. He was the composer of Hiawatha’s Wedding Feast, based on Longfellow’s poem, which is still performed by choral societies up and down the country. And yes, it’s written in western musical notation. But these attempts to encourage the performance of classical, orchestral music by Black and Asian performers, and to restore and include Black and Asian classical composers in the western musical tradition, has also been effectively spurned by what seems to be rich, entitled, lazy brats.

The fault therefore seems not to lie with the Oxford music course or with Black Lives Matter, but with an admissions policy that favours the wealthy, even when they are racist and xenophobic, over those from poorer backgrounds, who are genuinely dedicated and talented. If, on the other hand, the people making those complaints seriously believe them, then the response should be to educate them to dispel their prejudices, not accommodate them.

Banks exist to create IOUs

Published by Anonymous (not verified) on Thu, 25/03/2021 - 8:56am in

That is literally what banks are for. If that is why banks exist, then the next question has to be who are they creating these IOUs for? This is important because those IOUs created by the money issuing authority are of little consequence. It can issue more of them or indeed accept back IOUs at... Read more