Monday, October 31, 2022

Interesting new book: Immersion: The Science of the Extraordinary and the Source of Happiness

It is by economist Paul Zak.

Click here to go to the Amazon listing. Here is the description (which does not come close to doing the book justice):

"No one raves about boring movies, bland customer service experiences, or sleep-inducing classes. The world is rapidly transforming into an experience economy as people increasingly crave extraordinary experiences.

Experience designers, marketers, entertainment producers, and retailers have long sought to fill this craving. Now, there’s a scientific formula to consistently create extraordinary experiences. The data shows that those who use this formula increase the impact of experiences tenfold.

Creating the extraordinary used to be extraordinarily hard. Immersion offers a framework for transforming nearly any situation from ordinary to extraordinary. Based on twenty years of neuroscience research from his lab and innumerable client applications, Dr. Paul J. Zak explains why brains crave the extraordinary. Clear instructions and examples show readers exactly how to create amazing experiences for customers, prospects, employees, audiences, and learners.

You can guess if your experience will be extraordinary—or you can apply the insights from Immersion to ensure it is."

Dr. Zak and his colleagues have created scientific tools for understanding what is going on in the unconscious brain. Immersion means that a story, movie or commercial gets your attention and emotionally resonates with you. This leads to action such as buying products or donating to charity.

His devices can tell when viewers are immersed in a story or commercial and why based on what is going on in their brains. Very often we don't consciously know what is immersing us. Typical surveys that ask if you liked a movie or commercial do not correlate well with sales. But what Zak finds does and he can advise companies on how to achieve this immersion or alter their movie trailers or commercials to achieve greater sales.

Related posts: 

Adam Smith vs. Bart Simpson (yes, it is about Paul Zak) (2011)

Adam Smith, Marriage Counselor (2011)

Great New Book On Neuroscience By Economist Paul Zak. It is called The Moral Molecule: The Source of Love and Prosperity (2012)  

What Do Wall Street Traders Need Just The Right Amount Of? (2012)

Can The Way You Tell A Story Affect How Willing People Will Be To Donate Money To Charity? (2015) 

Does drinking after work work? (that is, does it lead to higher salaries) (2021)

Saturday, October 29, 2022

Walgreens Turns to Prescription-Filling Robots to Free Up Pharmacists

Chain says automated drug-filling centers cut pharmacist workloads by 25% and ease pressure on understaffed stores

By Sharon Terlep of The WSJ

There are different types of unemployment (seasonal, frictional, structural and cyclical).

Structural-unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs.

One example of this is when you are replaced by a machine. Another example is when there is a fall in demand for your product, so you get laid off, like with typewriters since people now use computers. A third example is geographical, when the jobs are not in your region of the country.

But sometimes machines or robots help the workers.


"Walgreens WBA 2.55%increase; green up pointing triangle Boots Alliance Inc. is turning to robots to ease workloads at drugstores as it grapples with a nationwide shortage of pharmacists and pharmacist technicians. 

The nation’s second-largest pharmacy chain is setting up a network of automated, centralized drug-filling centers that could fill a city block. Rows of yellow robotic arms bend and rotate as they sort and bottle multicolored pills, sending them down conveyor belts. The company says the setup cuts pharmacist workloads by at least 25% and will save Walgreens more than $1 billion a year.

The ultimate goal: give pharmacists more time to provide medical services such as vaccinations, patient outreach and prescribing of some medications."

"The centers employ anywhere from dozens to hundreds of workers, who oversee the process or handle prescriptions for medications that can’t be filled by robot, such as inhalers used to treat asthma.

Prescriptions that are time-sensitive or for controlled substances are still filled by pharmacists in stores. Those filled at the automated centers are delivered to stores by AmerisourceBergen Corp.’s wholesale distribution unit alongside shipments of medications that are sorted and filled in stores. 

More drugstores, including smaller chains and independent pharmacies, are looking to automate and centralize drug fulfillment"

Related posts:

Answering the Call of Automation: How the Labor Market Adjusted to the Mechanization of Telephone Operation (2022)

Many Jobs Lost During the Coronavirus Pandemic Just Aren’t Coming Back (2021)

Can computers write poetry?Could they replace poets? (2020)

Will computer programs replace newspaper columnists?  (2020)

McDonald’s Tests Robot Fryers and Voice-Activated Drive-Throughs: Burger giant wants to speed service as competition for fast-food diners mounts (2019)

Is Walmart adding robots to replace workers or because it is hard to find workers? (2019)

Robot Journalists-A Case Of Structural Unemployment? (2010)

Structural Unemployment In The News-Computers Can Now Tell Jokes  (2013)

WHAT do you get when you cross a fragrance with an actor?

Answer: a smell Gibson.

Robot jockeys in camel races (2014)

Are Computer Programs Replacing Journalists? (2015)

Automation Can Actually Create More Jobs  (2016)

The Robots Are Coming And It Might Not Be A Case of Structural Unemployment  (2018)

Broncos to debut beer-pouring robot at upcoming game (2018)

Robots Are Ready to Shake (and Stir) Up Bars (2018)

Is Covid causing some structural unemployment? (2020)

Is Covid causing some structural unemployment? (Part 2)

Warehouses Look to Robots to Fill Labor Gaps, Speed Deliveries  (2021)

Is unemployment still high because of structural unemployment?    (2021)

The Pizza Delivery Guy Will Be a Robot at Many Campuses This Fall  (2021)

Thursday, October 27, 2022

Home sale prices, apartment demand and the price of subsitutes

See Rents Drop for First Time in Two Years After Climbing to Records: Nationwide, rents declined on a monthly basis in August amid new apartment construction and weaker consumer sentiment by Will Parker of The WSJ. 

One of the shift factors for demand is the price of a substitute. Substitutes are two different goods that can both be used for the same purpose. As this article says, the increase in home prices helped cause the demand for apartments to increase.


There was a "23% overall increase in rent since August 2020" [thru Aug. 2022].

"As more households feel priced out of the sales market because of rising mortgage rates and near-record sales prices, overall demand for rentals is unlikely to fall drastically, said Orphe Divounguy, an economist at Zillow Group. 

Yet many economists say the rental market is likely to see more declines in the coming months. Prices typically dip during the fall and winter. CoStar predicts that by the end of September, rent will have declined for the second straight month. 

Other analysts said they expect rents to decline on a monthly basis or remain flat through at least the end of this year. That would stand in contrast to the same period in 2021, when rents continued to climb. 

Rent growth climbed quickly to records over the past two years, a streak some analysts have attributed to an explosion of pent-up apartment demand caused by early pandemic lockdowns. The boom in home-sale prices, which priced some people out of buying, also boosted rental demand. 

Now, rent is moderating for a combination of factors, analysts said, including an increase in new apartment construction along with weakening consumer sentiment that might be discouraging people from signing more expensive apartment leases."

Tuesday, October 25, 2022

Both numeracy and literacy were invented in the service of finance and commerce

That comes from a book review in the NY Times. See Finance Is the Master Technology — and It’s Funded the World by Felix Martin.

The book reviewed is Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann. He is a Professor of Finance and Management Studies at Yale University. Excerpts:

"finance is a “technology of civilization” — a way of thinking about and doing things that has been the central facilitator of the material, artistic and cultural accomplishments that we call civilized life. Indeed finance, Goetzmann argues, is a sort of master technology, from which an astonishing range of our most basic habits of mind derives."

"Autarkic subsistence farming had to be replaced by specialization, the division of labor and coordination on a massive scale. The innovation developed by the clerical bureaucracies to enable this transition was the invention of financial accounting. And it was only as part of this new financial system that writing and abstract numbers — those epochal inventions that so clearly transformed the subsequent history of humanity in so many other fields — were invented."

"finance is responsible for our modern conception of time. Pre-monetary society operated on sacred time, with the day divided up by ecclesiastical offices or prayer times, and the year into high days and holy days that reflected the cycle of the seasons or the phases of the moon. Financial reasoning and, in particular, the calculation of compound interest demanded a more regimented scheme arbitrated by objective mathematical rules rather than clerical authority."

"“financial technology is a time machine” — a set of ideas and practices that enable us to shift economic value backward and forward through time."

"the ancient Sumerians introduced a 360-day year in order to make calculating interest easier.'

"Modern ideas of probability and risk, of ethics and morality, and of appropriate models of commercial and even political organization — all were forged in the furnaces of finance,"

"“Like other technologies,” he writes, finance “developed through innovations that improved efficiency. It is not intrinsically good or bad.”"

"One does not have to be a hard-core Marxist to entertain the idea that finance is not, and did not evolve as, a neutral tool to improve the operation of the free market — itself an ethically colorless state of nature in human relations. This alternative view is in perfect agreement that finance is indeed one of the most powerful tools for the organization of human activity ever invented. But it holds that it arose historically, and continues to be used today, to codify and enforce relationships built on power and luck as much as to facilitate voluntary and rational decision-making."

Related post:

World's oldest writing not poetry but a shopping receipt

Monday, October 24, 2022

Did U.S. government officials make money buying and selling stocks based on their inside information about Covid policy?

Last month I did a post called Looks Like Some Pretty Good Capitalists Run The Congress. It was about how well did in their investments in stocks. I also mentioned how Congressmen in the early 1790s voted on the "Funding and Assumption Act" based on how much money they would receive if that bill passed. There were numbers to back that up.

The WSJ last week had two articles about stocks and Covid policy. The first is As Covid Hit, Washington Officials Traded Stocks With Exquisite Timing: Some sold in January 2020 when the government began mobilizing against the threat. Others bought shares as a market-rescue plan was taking shape by Rebecca Ballhaus, Joe Palazzolo, Brody Mullins, Chad Day and John West. Excerpts:

"Federal officials working on the government response to Covid-19 made well-timed financial trades when the pandemic began—both as the markets plunged and as they rallied—a Wall Street Journal investigation found.

In January 2020, the U.S. public was largely unaware of the threat posed by the virus spreading in China, but health officials were on high alert and girding for a crisis.

A deputy to top health official Anthony Fauci reported 10 sales of mutual funds and stocks totaling between $157,000 and $480,000 that month. Collectively, officials at another health agency, Health and Human Services, reported 60% more sales of stocks and funds in January than the average over the previous 12 months, driven by a handful of particularly active traders.

By March, agencies across the government were working on wide-reaching measures to prop the economy and markets. Then-Transportation Secretary Elaine Chao purchased more than $600,000 in two stock funds while her agency was involved in the pandemic response and her husband, Republican Sen. Mitch McConnell, was leading negotiations over a giant, market-boosting stimulus bill.

And as the government was devising a loan package aimed specifically at helping companies including Boeing Co. and General Electric Co., a Treasury Department official involved in administering the aid acquired shares of both companies.

Federal officials owned millions of dollars of stock in industries most affected by the pandemic and the government’s response. About 240 officials at health agencies and at the Pentagon, a key player in the vaccine rollout, reported owning a total of between $9 million and $28 million in stocks of drug, manufacturing and biotechnology companies that won federal contracts related to Covid-19 in 2020 and 2021, the Journal’s analysis found.

Nearly 400 officials across 50 agencies reported owning stocks in airline, resort, hotel, restaurant and cruise companies in early 2020, the review found.

By March, every major agency was drawn into the pandemic response. That month was the most active for trading by officials across the federal government, including at HHS, in the Journal’s analysis of financial disclosure forms for about 12,000 officials spanning 2016 to 2021. Federal officials reported more than 11,600 trades that month, 44% more than in any other month in the analysis."

"Agency ethics officials rarely have a complete picture of what employees are working on or privy to, especially during a fast-moving, governmentwide mobilization in response to a national emergency.

Most agencies’ ethics rules focus on what kinds of stocks officials can trade, not when they can trade. And there are no restrictions on federal officials’ investing in diversified mutual funds, which were more volatile than usual early in the pandemic. Ethics officials certified that the employees identified by the Journal were in compliance with these rules."

"On Jan. 24, four days after the CDC publicly reported the first confirmed U.S. Covid-19 infection, Hugh Auchincloss, principal deputy director at the NIH’s National Institute of Allergy and Infectious Diseases, summed up the state of his agency in an email: “New coronavirus all the time.”

That same day, while the stock market remained lofty, Dr. Auchincloss reported selling $15,001 to $50,000 of a stock mutual fund. Days later he sold two more mutual funds and a stock, Chevron Corp., according to his financial disclosures, which give wide dollar ranges. That was just the beginning."

"Among officials involved in the CDC’s early pandemic response was Stephen Redd, a veteran epidemiologist serving as deputy director for Public Health Service and Implementation Science at the agency. His role involved collecting information about the state of the virus and the federal response in order to brief lawmakers.

The CDC had a clear view of the virus’s threat by the end of January, Dr. Redd later told a student interviewer in Atlanta. “It was easy to see it was going to be a really big problem,” he said.

Dr. Redd disclosed sales of between $95,004 and $250,000 in stocks and bonds in January. He reported the sale in February of $100,001 to $250,000 of bonds, along with purchases of between $2,002 and $30,000 of short-term bond funds, a low-risk investment."

"On Feb. 28, Fed Chairman Jerome Powell signaled in a written statement that the central bank was prepared to cut interest rates, a stimulatory move aimed at quelling the economic disruption.

In the seven days preceding that statement, officials at the Treasury and Fed reported more than twice as many trades as they made during the same seven days of 2019."

"Two Fed bank presidents resigned last year after they disclosed a series of investments during Fed market interventions in response to Covid-19. The central bank in February 2022 prohibited its top officials from buying individual stocks and sector funds and barred trading during periods of “heightened financial market stress.”"

"That same day [March 16], Ms. Chao, the transportation secretary, made three purchases in stock funds that track the S&P 500 and the U.S. stock market broadly, totaling between $600,003 and $1.2 million, according to her financial disclosures."

"By the end of the month, her investment in the S&P fund had gained 8%. By the end of the year, it was up 57%, according to its net asset value."

"At around the same time, a Treasury official later involved in administering the stimulus package made a series of well-timed trades.

Early on, the Trump administration made it clear it wouldn’t leave Boeing or the rest of the aviation and airline sector hanging, as the travel industry was thrown into turmoil. “We have to protect Boeing,” Mr. Trump said March 17. “We’ll be helping Boeing.”

The Treasury Department publicly detailed what it wanted to see in the stimulus legislation on March 18, including $50 billion in loans for airlines and $450 billion for “severely distressed sectors” and small businesses.

Two days later, Treasury domestic finance counselor Jeff Goettman reported purchases of 15 stocks, including Boeing and General Electric, totaling between $29,015 and $260,000, according to his financial disclosure.

Boeing was in close contact with Treasury officials as it lobbied the administration and Congress for federal aid.

Days after Mr. Goettman’s stock purchases, lawmakers inserted a $17 billion provision for companies deemed essential to national security, which congressional officials said at the time was partly designed to help Boeing."

"Mr. Goettman convened the group that administered the legislation’s $80 billion for airlines"

"A week after Mr. Goettman’s March 20 stock purchases, Boeing’s shares were up 70%, and GE’s were up 17%."

The other article is The $1 Million Amazon Conflict: Washington’s Ethics Czars Struggle to Enforce Stock-Trading Laws: The U.S. has rules limiting federal officials’ stock-market investing. They can be waived by Rebecca Ballhaus, Joe Palazzolo and Brody Mullins. Excerpts:

"The U.S. has a law aimed at preventing the nation’s thousands of obscure but powerful federal officials from using their influence on regulations, policies and investigations to benefit themselves.

With penalties up to $50,000 and five years in prison, the law is supposed to ensure that officials in the executive branch don’t work on any matter that could affect their personal finances."

"It doesn’t. It has exceptions. Violations often go unpunished. When a problematic holding is identified, if the official resists selling it, the rules often are waived. The result is a system that largely relies on government employees to police their own stock investing.

A Wall Street Journal investigation revealed how more than 2,600 federal officials invested in companies that stood to benefit from their agencies’ work from 2016 through 2021. The Journal reviewed annual financial disclosure reports filed for those years by about 12,000 senior executive-branch officials at 50 federal agencies, from career employees to political staff to presidential appointees.

The investigation found that some federal officials received waivers from conflict-of-interest rules because they were considered too important in a particular job. In other cases, officials were permitted to keep holdings because they weren’t large enough to be a problem under the law. Owning $15,000 or less in a stock isn’t considered a conflict.

The Federal Energy Regulatory Commission allowed an official who reported a financial interest of between $50,001 and $100,000 in a hydroelectric company to work as director of the agency’s hydropower administration and compliance division."

"Under federal law, agencies can grant waivers from the conflict-of-interest rules if an ethics official determines that an investment is “too remote or too inconsequential to affect the integrity of the services of the Government officers or employees.”"

Friday, October 21, 2022

The Invisible Hand Increases Trust, Cooperation, and Universal Moral Action

From Alex Tabarrok of The Marginal Revolution blog.

"Montesquieu famously noted that

Commerce is a cure for the most destructive prejudices; for it is almost a general rule, that wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.

and Voltaire said of the London Stock Exchange:

Go into the London Stock Exchange – a more respectable place than many a court – and you will see representatives from all nations gathered together for the utility of men. Here Jew, Mohammedan and Christian deal with each other as though they were all of the same faith, and only apply the word infidel to people who go bankrupt. Here the Presbyterian trusts the Anabaptist and the Anglican accepts a promise from the Quaker. On leaving these peaceful and free assemblies some go to the Synagogue and others for a drink, this one goes to be baptized in a great bath in the name of Father, Son and Holy Ghost, that one has his son’s foreskin cut and has some Hebrew words he doesn’t understand mumbled over the child, others go to heir church and await the inspiration of God with their hats on, and everybody is happy.

Commerce makes people traders and by and large traders must be benevolent, agreeable and willing to bargain and compromise with people of different sects, religions and beliefs. Contrary to what one naively might expect, people with more exposure to markets behave more cooperatively and in less nakedly self-interested ways. Similarly, in a letter-return experiment in Italy, Baldassarri finds that market integration increases pro-social behavior towards in and outgroups:

In areas where market exchange is dominant, letter-return rates are high. Moreover, prosocial behavior toward ingroup and outgroup members moves hand in hand, thus suggesting that norms of solidarity extend beyond group boundaries.

Also, contrary to what you may have read about the mythical Wall Street game versus Community game, priming people in the lab with phrases evocative of markets and trade, increases trust.

In a new paper, Gustav Agneman and Esther Chevrot-Bianco test the idea that markets generate more universal behavior. They run their tests in villages in Greenland where some people buy and sell in markets for their primary living while others in the same village still rely for a substantial part of their subsistence on hunting, fishing and personal exchange. They use a dice game in which players report the number of a roll with higher numbers being better for the player. Only the player knows their true roll and there is no way to detect cheaters on an individual basis. In some variants, other people (in-group or out-group) benefit when players report lower numbers. The upshot is that people exposed to market institutions are honest while traditional people cheat. Cheating is only ameliorated in the traditional group when cheating comes at the expense of an in-group (fellow-villager) but not when it comes at the expense of an out-grou member. More generally the authors summarize:

…We conduct rule-breaking experiments in 13 villages across Greenland (N=543), where stark contrasts in market participation within villages allow us to examine the relationship between market participation and moral decision-making holding village-level factors constant. First, we document a robust positive association between market participation and moral behaviour towards anonymous others. Second, market-integrated participants display universalism in moral decision-making, whereas non-market participants make more moral decisions towards co-villagers. A battery of robustness tests confirms that the behavioural differences between market and non-market participants are not driven by socioeconomic variables, childhood background, cultural identities, kinship structure, global connectedness, and exposure to religious and political institutions.

Markets and trade increase trust, cooperation and universal moral action–it is hard to think of a more important finding for the world today."

See also Market integration accounts for local variation in generalized altruism in a nationwide lost-letter experiment

by Delia Baldassarri of the Department of Sociology, New York University. Excerpts:

"Why do communities vary in their levels of prosocial behavior? And are members of the ingroup and outgroup treated differently? According to the generalized altruism hypothesis, the more people engage in market-exchange dynamics, the more they are forced to interact with unknown others, thus creating the premises for the extension of prosocial behavior beyond close-knit circles to include outgroup members. This paper uses a large-scale, nationwide lost-letter experiment in a sample of Italian communities and finds a positive relationship between market integration and prosociality: In areas where market exchange is dominant, letter-return rates are high. Moreover, prosocial behavior toward ingroup and outgroup members moves hand in hand, thus suggesting that norms of solidarity extend beyond group boundaries.
What explains variation in levels of prosocial behavior across communities? And are members of the ingroup and outgroup treated differently? According to evolutionary theories of generalized altruism, market integration should lead to greater levels of prosociality: Market exchange forces people to interact with unknown others, thus creating the conditions for the extension of prosocial behavior beyond close-knit circles to include outgroup members and strangers. Moving away from the evolutionary focus on cross-cultural variation, this article uses the market-integration hypothesis to explain intracultural variation in levels of prosociality in an advanced society. Taking advantage of an ideal setting, this study reports results from a large-scale, nationwide lost-letter experiment in which 5,980 letters were dispersed in a sample of 188 Italian communities. The study confirms the relevance of market integration in accounting for differences in levels of prosociality: In areas where market exchange is dominant, return rates are high. It also casts a light on the relationship between ingroup and outgroup prosociality: Return rates for both Italian and foreign recipients are the same; they vary together; and ingroup returns are highly predictive of outgroup returns at the community level.
You are walking down the street on a warm April afternoon and stumble upon a sealed, stamped letter. Someone must have dropped it accidentally. What do you do? And what would your neighbors do? And does it matter who the letter recipient is? In a lost-letter experiment, sealed, addressed, stamped, but unmailed letters are dispersed in public spaces (e.g., sidewalks, storefronts, parks, etc.). Passersby can either ignore, destroy, or mail the envelopes. Rates of return are commonly treated as an unobtrusive behavioral measure of prosocial behavior at the community level (13)."

Related posts 

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)  

Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

The Dalai Lama Says It Is Sometimes OK To Be Selfish

Why Being Kind Helps You, Too—Especially Now: Research links kindness to a wealth of physical and emotional benefits. And it’s an excellent coping skill for the Covid-19 era


Why being kind to others is good for your health (and that can include donating money)

Wednesday, October 19, 2022

Teaching the New Tools of Monetary Policy: Frequently Asked Questions

From the St. Louis Fed.

"The Federal Reserve has changed the way it implements monetary policy. As educators update their teaching methods and resources, they will likely have questions. This resource is intended to provide educators with answers to key questions as they transition to teaching the new tools of monetary policy.

What is the difference between “conducting” monetary policy and “implementing” monetary policy?

The Federal Open Market Committee (FOMC) conducts monetary policy by setting the target range for the federal funds rate. The target range is typically 25 basis points wide. The Fed then implements policy by using its monetary policy tools to ensure this target range transmits to market interest rates, keeping the market-determined federal funds rate within the FOMC’s target range. For more discussion, see: “Making Technical Adjustments: The Difference Between ‘Conducting’ and ‘Implementing’ Monetary Policy.”

What is the federal funds rate?

The federal funds rate is the interest rate at which depository institutions and government-sponsored entities—Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBs)—trade funds held in their reserve balance accounts at Federal Reserve banks with each other overnight. When one of these institutions has surplus balances in its reserve account, it may choose to lend funds to another institution that needs more balances. The rate that the borrowing institution pays to the lending institution is determined between the two parties; the weighted average rate for all these types of negotiations is called the effective federal funds rate. For more discussion, see: “How Does the Fed Use Its Monetary Policy Tools to Influence the Economy?

What is the Fed’s primary tool for implementing monetary policy?

The Fed’s primary tool for implementing monetary policy is interest on reserve balances (IORB), with its associated IORB rate, which is the interest rate that the Fed pays on the funds that banks hold in their reserve balance accounts at their Federal Reserve banks. For more discussion, see: “The Fed’s New Monetary Policy Tools.”

Are open market operations still used as a monetary policy tool?

Open market operations (OMOs) are still part of the Fed’s toolkit. However, they are not the primary tool. There are two ways OMOs are used. First, in normal, day-to-day activities, there are forces in the economy that slowly drain reserves from the banking system. The Fed monitors the level of reserves and, when deemed appropriate, conducts OMOs (where it purchases securities and injects reserves into the banking system) to keep the level ample. Second, in times of severe stress, the Fed may do large-scale asset purchases, where sizable purchases of securities assist with financial stability and put downward pressure on longer-term interest rates. The Fed took this action during both the Global Financial Crisis (GFC) and COVID-19 pandemic.

OMOs are a long-standing tool of the Fed. They were the key tool used before the GFC, when the Fed implemented policy with limited reserves. Today and going forward, periodic OMOs are an important tool in the ample reserves framework the Fed has chosen to maintain for its operations.

Are reserves requirements still used as a monetary policy tool?

Since March 2020, reserve requirement ratios have been set to zero, so banks do not have any required reserves. With this policy, all banks’ reserves are classified as excess. For more information on reserve balances see: Interest on Reserve Balances.

How does setting reserve requirement ratios to zero affect the money multiplier?

Many teaching materials suggest that banks loan out all funds that are not required reserves, which generates a money multiplier that links required reserves to the money supply. With reserve requirements eliminated in 2020, this explanation no longer works, and, mathematically, the textbook money multiplier equation is undefined. What to do? Instructors should teach that banks make loans with profits, risks and regulatory considerations in mind. When deposits come in, banks can hold the funds as reserves at the Fed or use them to make loans or invest in other assets. Some of these investment options increase the money supply. Also teach that the Fed influences banks' decision-making—about setting deposit and loan rates as well as lending and investment options—through the interest on reserve balance rate (a reservation rate for banks). For more discussion, see: “Teaching the Linkage Between Banks and the Fed: R.I.P. Money Multiplier.”

Will the Fed go back to using the old monetary policy tools?

Today and over the longer run, the Fed has stated that it plans to implement monetary policy with ample reserves in the banking system and will ensure control over the level of the federal funds rate and other short-term interest rates through setting its administered interest rates. For more information, see: Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization.

The FOMC sets the federal funds rate target range, but who determines the settings of the administered rates (IORB, ON RRP, SRF and discount rates)?

At the same time that the FOMC sets the target range for the federal funds rate, the Fed determines the appropriate settings of its administered rates to ensure short-term interest rates, especially the federal funds rate, are at the desired levels. As described in the Federal Reserve Act, the FOMC sets the overnight reverse repurchase (ON RRP) offering rate and standing repurchase agreement facility (SRF) rate, whereas the Federal Reserve Board sets the interest on reserve balances (IORB) rate and discount window rate. The settings of the administered rates are found in the Fed’s implementation note that is released at the same time as the FOMC statement. FOMC statements and implementation notes can be found on the Federal Reserve System’s Board of Governors website.

If the IORB rate is a floor, why has the federal funds rate at times traded below it?

The interest on reserve balances (IORB) rate does not set a floor on short-term interest rates. In fact, the effective federal funds rate is frequently less than the IORB rate. A key reason is that not all institutions eligible for accounts at the Fed earn interest. Government-sponsored entities—Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBs)—have accounts at the Fed that earn no interest. So, these institutions are willing to lend funds to a depository institution at an interest rate below the IORB rate but above zero. When this transaction occurs it is called arbitrage, and this action brings the federal funds rate close, but not equal, to the IORB rate.


Resources for Teaching the New Tools of Monetary Policy"

Related post: 

How Does the Fed Use Its Monetary Policy Tools to Influence the Economy? (they don't use open market operations to control the federal funds rate) (2022)

Sunday, October 09, 2022

One of the Hottest Trends in the World of Investing Is a Sham (ESG, environmental, social and governance criteria)

By Hans Taparia. He is a professor at the New York University Stern School of Business. Excerpts:

"But the reality is less inspiring. Wall Street’s current system for E.S.G. investing is designed almost entirely to maximize shareholder returns, falsely leading many investors to believe their portfolios are doing good for the world."

"Perhaps the biggest problem is the ratings industry. To construct E.S.G. funds, investment managers rely on rating agencies — such as Sustainalytics, S&P and MSCI — that create indexes grouping sets of companies that are meant to be good corporate citizens. (Some examples are the Dow Jones Sustainability World Index and the MSCI ESG Universal Indexes.) These agencies also rate companies on E.S.G. criteria and sell the ratings to investment firms.

But contrary to the spirit of E.S.G. investing (and likely unknown to most investors), the leading rating agencies are not scoring companies on their degree of environmental or social responsibility. Instead, they are measuring how much potential harm E.S.G. factors like carbon emissions have on companies’ financial performance.

Corporate responsibility and financial risk, however, are not the same thing. Indeed, they can be diametrically opposed.

McDonald’s, for instance, was given an upgrade of its E.S.G. rating last year by MSCI, which cited reduced risks to the company’s bottom line as a result of changes that the company made concerning packaging material and waste. But greenhouse gas emissions from the operations and supply chain of McDonald’s, which is one of the world’s largest buyers of beef, grew by 16 percent from 2015 to 2020. Those emissions are a direct cause of climate change, but because MSCI didn’t see them as posing a financial risk for McDonald’s, they didn’t negatively affect the rating."

"Given this lenient rating system, it’s not difficult for a company to be deemed environmentally or socially responsible. Indeed, 90 percent of stocks in the S&P 500 can be found in an E.S.G. fund built with MSCI ratings.

Most technology stocks, including Alphabet and Meta, are part of E.S.G. funds, despite concerns about their role in facilitating the spread of misinformation and hate speech. Coca-Cola and Pepsi have gotten very high E.S.G. scores and find themselves in most big E.S.G. funds, despite manufacturing products that are a major cause of diabetes, obesity and early mortality and despite being the world’s largest contributors to plastic pollution. Perhaps most egregiously, BP and Exxon get respectable ratings from MSCI."

"The best approach would be for rating agencies to measure the costs to society and the environment that are not directly borne by companies — what economists call negative externalities."

Related posts

An Inconvenient Truth About ESG Investing (2022)

ESG Investing Can Do Good or Do Well, but Don’t Expect Both  (2022)

The hidden costs of corporate social responsibility (2021)

Why the Sustainable Investment Craze Is Flawed (2020)

C.E.O.s Are Qualified to Make Profits, Not Lead Society (2020)

ESG Investing in the Pandemic Shows Power of Luck (2020)

ESG Investing Shines in Market Turmoil, With Help From Big Tech: The strength of socially responsible funds suggests they have staying power; ‘ESG is not a fad’ (2020)

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards (2020)

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges) (2019)

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy) (2017)

Can You Find Virtue by Investing in Vice? (2006)

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index

Is altruism a result of selfishness? (2017)

Do you have to be selfish to make more money? (2018)

Does collective self-deception mask selfish behavior? (2018)

Why Doing Good Makes It Easier to Be Bad (2019)

Businesses intentionally display their social and environmental performance in addition to theirfinancial performance to stakeholders (2019)

Should you invest according to religious guidelines? (2017)

Companies Adapt to Activism by Athletes (2021)

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find?
by Joseph C. Sternberg of the WSJ (2017)

Saturday, October 08, 2022

Is the job market cooling? Headlines conflict

This picture was tweeted by economist Martin Sullivan. It reminds me of newspapers I used show classes when I was teaching. One even had conflicting headlines right next to each other. One said the job outlook was good and the other said it wasn't.

One paper is The WSJ. The other is The Washington Post.