Jeremy Stein, a new FOMC nominee

Stein is one of the most creative contemporary economists, with some truly interesting and first-rate papers in the early to mid 1990s.  He has kept up his quality and creativity since then.  Most of the early papers are in mid-brow theory, industrial organization, and signaling.  Here is one of his very recent papers on macroprudential regulation; it stresses the importance of dynamic bank recapitalization. He is a very smart and still underrated economist; he’s one of the few where I will more or less automatically start reading his papers when I run across them.  I have no idea how he would do in the all-important political side of the job.  From the paper, an excerpt:

If significant increases in capital ratios have only small consequences for the rates that banks charge their customers, why do banks generally feel compelled to operate in such a highly-leveraged fashion, in spite of the obvious risks this poses? And why do they deploy armies of lobbyists to fight against increases in their capital requirements? By way of contrast, it should be noted that non-financial firms tend to operate with much less leverage than financial firms, and indeed often appear willing to forego the tax (or other) benefits of debt finance altogether. In Kashyap, Stein and Hanson (2010) we argue that the resolution of this puzzle has to do with the unique nature of competition in financial services. Unlike in many other industries, the most important (and in some cases, essentially the only) competitive advantage that banks bring to bear for many types of transactions is the ability to fund themselves cheaply. Thus if Bank A is forced to adopt a capital structure that raises its cost of funding relative to other intermediaries by only 20 basis points, it may lose most of its business. Contrast this with, say the auto industry, where cheap financing is only one of many possible sources of advantage: a strong brand, quality engineering and customer service, and control over labor and other input costs may all be vastly more important than a 20 basis-point difference in the cost of capital.

Here he argues for a very gradual phase-in of tough capital requirements.  In this paper he argues for a credit-based channel of monetary transmission, and here.  This puts him in an alliance with early Bernanke.  Here is his paper on the cyclical effects of Basel capital standards; he has done a lot of work with Anil Kashyap in that area.  Here is his overly optimistic paper on the eurozone.  In this paper he lays out his generally positive view of the efficacy of monetary policy, with a nod to Hyman Minsky on the debt issue.


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