Really great links - Panic of 2007 - Pass the parcel - Tax cuts - Marginal product of capital

Joseph Tracy, Executive Vice President, NY Fed - Panic of 2007 - "There are many parallels between the Panic of 1907 and the events of 2007. In both cases, credit intermediation had shifted outside of the core banking sector. An investment boom preceded each panic—the earlier in copper and the later in housing—with much of the credit being funded by sources outside of any existing liquidity protections. When the bubbles began to deflate and prices began to fall, loan defaults quickly developed precipitating funding runs on the institutions involved in extending this credit. What seemed like large liquidity buffers by individual firms were quickly drawn down. Funding withdrawals precipitated asset sales, which put further downward pressure on asset prices. The resulting credit contractions adversely affected the real economy, setting up an adverse feedback loop that exacerbated the initial losses.
        Given the parallels between the events of 1907 and 2007 and, more importantly, the similarities of the lessons learned from those episodes, I believe the most instructive name for our latest financial crisis is the "Panic of 2007." In the rest of my remarks, I will explore in greater detail the factors behind the panic, as well as the responses by the Federal Reserve.
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        If the lessons from the panics of 1907 and 2007 are incorporated into the reforms, we may well avoid the Panic of 2107."

Martin Wolf - This global game of ‘pass the parcel’ cannot end well - "Our adult game of pass the parcel is far more sophisticated: there are several games going on at once; and there are many parcels, some containing prizes; others containing penalties.
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        So here are four such games. The first is played within the financial sector: the aim of each player is to ensure that bad loans end up somewhere else, while collecting a fee for each sheet unwrapped along the way. The second game is played between finance and the rest of the private sector, the aim being to sell the latter as much service as possible, while ensuring that the losses end up with the customers. The third game is played between the financial sector and the state: its aim is to ensure that, if all else fails, the state ends up with these losses. Then, when the state has bailed it out, finance can win by shorting the states it has bankrupted. The fourth game is played among states. The aim is to ensure that other countries end up with any excess supply. Surplus countries win by serially bankrupting the private and then public sectors of trading partners. It might be called: “beggaring your neighbours, while feeling moral about it”. It is the game Germany is playing so well in the eurozone.
        What have these four games to do with the G20 summit? In a word, everything. The first game scattered toxic assets across the financial system. The second left the non-bank private sector with a debt overhang and deleveraging. The third duly damaged the finances of states. The fourth helped cause the crisis and is now an obstacle to recovery. Above all, these games are all linked to one another and so have to be changed together."

Gauti Eggertsson - What fiscal policy is effective at zero interest rates? - "Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; 2) temporary tax cuts directly aimed at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are special to an environment in which the interest rate is close to zero, as observed in large parts of the world today."

Tweet of the day - Garett Jones - "Marginal product of capital that matters is net, not gross. MPK-depreciation rate<0 likely true when K not very useful."