The Case of the Negative Nominal Interest Rates: New Estimates of the Term Structure of Interest Rates During the Great Depression

During the 1930s and early 1940s U.S. Treasury bonds and notes had negative nominal yields as they approached maturity. But since an investor can always hold cash, this is impossible. Any bond must have a positive nominal yield. This paper poses a resolution to this puzzle: in addition to making coupon payments, Treasury securities were options that gave the owner the right to buy a new security on a future date. The paper proposes a method for valuing this 'exchange privilege' and computing the yield to the coupon bearing component of these composite bond/options. The case of the negative nominal interest rates demonstrates that the construction of accurate data requires close examination of the institutional environment, even when studying financial markets. The corrected bond and note yields are used to calculate new estimates of the term structure of interest rates from 1929 to 1949. These new data allow one to follow changes in the both the level and the shape of the yield curve during the Great Depression.

Assistant Secretary for Financial Stability Herbert M. Allison, Jr. Testimony on the Troubled Assets Relief Program House Committee on Financial Services Subcommittee on Oversight and Investigations

Testimony providing an update on efforts to stabilize the financial system through a comprehensive range of programs under the both the Troubled Assets Relief Program (TARP) and the Financial Stability Plan (FSP). Also, update on coordination with the four oversight bodies and discussion on some of the challenges and priorities going forward

Administering Crisis: The Success of Alternative Accountability Mechanisms in the Capital Purchase Program

The recent financial crisis is the worst the United States has faced since the Great Depression. As the crisis gradually evolved from a mere housing bubble into a severe recession, the government\u27s response evolved as, well, culminating in the well-known Troubled Asset Relief Program (TARP). Established by the Emergency Economic Stabilization Act (EESA), this unprecedented program authorized the Secretary of the Treasury to purchase up to $70o billion in assets and securities from financial institutions in order to stabilize the nation\u27s financial markets. But however necessary it may have been to avert a crisis, EESA\u27s extremely broad delegation of authority, vague statutory commands, and weak provisions on judicial review raised the possibility of unaccountable administrative governance on a massive scale

New Developments in Corporate Finance and Tax Avoidance: Some Evidence

The financial behavior of corporations has changed greatly in the last ten years. Previously most of the cash that stockholders received from corporations took the form of dividends, and economists' models that have dividends as the ultimate determinant of equity values were not far off the mark. This paper documents how much things have changed. There are strong tax incentives for nondividend cash payments between corporations and shareholders. These payments can take the form of a repurchase by the company of its own shares, or the acquisition of the shares in another company. There has been tremendous growth in the magnitude of nondividend cash payments. In the early 1970s these payments amounted to roughly 15 percent of dividends. By 1984, they exceeded dividends, and in 1985 the amounted to $120 billion, or almost 50 percent more than total dividends in the economy. The paper shows that dividends per unit equity have not fallen. Rather, the acquisition of equity has allowed firms to retain relatively constant debt equity ratios in the past five years despite strong equity markets. Firms have chosen to absorb equity and issue debt, roughly holding leverage constant, and have thus saved large amounts of taxes. The paper estimates that the cost to the Treasury of treating share purchase payments differently than dividends was more than$25 billion in 1985. It also finds that future corporate tax collections are significantly reduced by the resulting decline in corporate equity. The paper suggests that the existing model of dividend driven equity valuation must be discarded. It simply is not consistent with the facts. Further research on the form of payments between firms and their shareholders is clearly merited.

The War In Iraq And IMF Reform

IMF is largely failing in its mission to address economic stability. However, the Commission unanimously supported a proposal maintaining that the IMF continues to restrict short-term crises assistance. Why limit IMF assistance? Since the IMF provides funds to countries in need, the expectation of such assistance creates moral hazard or incentives that encourage reckless behavior and bad policies for countries. In other words, countries may not make necessary economic reforms because they believe that the IMF will bail them out during difficult times, especially if there is an important strategic interest in preventing a country from economic crisis. good economic policy is sacrificed when the political cost is too great. In the remainder of my essay, I lay out strategies for effective IMF reform that were largely ignored in the past and conclude with possible reasons why such reform was not made

Qualified Conservation Restrictions: Recollections of and Reflections on the Origins of Section 170(h)

It has been over thirty years since Congress added to the Internal Revenue Code section 170(h), which allows a deduction for contributions to charity of “qualified conservation restrictions,” commonly known as “conservation easements”. That provision was adopted over the objections of the Treasury, who had expressed reservations of both a conceptual and practical nature about the legislation, which the Treasury viewed as more than ordinarily vulnerable to abuse. I was invited to participate in this symposium, not because I have any expertise in working with these restrictions—I don’t—but to provide some perspective on what might have motivated the Treasury thirty-plus years ago to take the position that it did, on what is very popular legislation among the conservation and historic preservation communities. I think of myself as no better than the second most qualified individual to fill that role. The most qualified, in my opinion, is Professor Daniel Halperin, who served as the Deputy Assistant Secretary for Tax Policy when the legislation was under deliberation, testified twice on versions of the proposed legislation, and has recently written in this area.3 But I was there at the time; I did work with Professor Halperin on his testimony and the legislation; and so I am able to offer a (sometimes more and sometimes less vaguely recalled) first-hand account of what was happening then. In some respects I find it advantageous not to have worked in this area in the intervening years. The invitation to participate in this symposium offered me an opportunity to reflect on whether I think the positions the Treasury took then rested on well-founded concerns, and to speculate on whether, if I had known then what I have learned since, I would have recommended that the Treasury approach the matter in exactly the fashion that it did

Role of depreciation and the investment tax credit in tax policy and their influence on financial reporting during the 20th century

Since the inception of the modern income tax, the investment tax credit and depreciation have been some of the most modified provisions. This paper traces the history of major changes in depreciation and the investment tax credit along with the tax policy justifications given at the time the changes were made. In addition, the influence of tax depreciation on financial reporting is also discussed. An historical perspective of these two major provisions in tax should be helpful to policymakers and researchers attempting to assess the effectiveness of these policies

The Stern Review and its Critics: Implications for the Theory and Practice of Benefit-Cost Analysis

The UK\u27s Treasury\u27s Stern Review: The Economics of Climate Change (Oct. 2006) reached dramatically different conclusions and policy recommendations than most earlier economic analyses of climate change. It found that the costs of climate change, as well as the potential net benefits of greenhouse gas reductions, were much higher that previously estimated, and consequently recommended more rapid and extensive cuts in emissions than other economist analysts. The Stern Review estimated that a 1% annual investment of global GDP in mitigation could prevent a 5% (or more) reduction in annual global GDP from climate change harm, forever. A number of prominent economists, including William Nordhaus, Partha Dasgupta, Richard S.J. Tol, Robert Mendelsohn, and Martin Weitzman, have criticized the Stern Review on various grounds, including its damage estimates and the selection of parameter values (the utility discount rate and the elasticity of marginal utility), which affect the interest rate at which future costs and benefits are discounted to present value. This paper summarizes the Stern Review and its critiques, and assesses them from a process-oriented perspective to determine what they can teach us, positively and negatively, about how benefit-cost analyses (BCAs) should (or should not) be done