The Wesleyan Connection

Richard Grossman, professor of economics.

Professor of Economics Richard Grossman has been named a 2013 Guggenheim Fellow. He will work on a project about the evolution of banking regulation across the industrialized world.

Awarded by the John Simon Guggenheim Memorial Foundation, the fellowship assists research and artistic creation “for men and women who have already demonstrated exceptional capacity for productive scholarship or exceptional creative ability in the arts.” This year, 175 scholars, artists and scientists were selected to receive fellowships from a group of almost 3,000 applicants from the U.S. and Canada.

“The Guggenheim Foundation has been giving awards to distinguished scholars and artists for nearly 90 years, including Nobel laureates, Pulitzer Prize winners, a winners of a host of other important awards. It is an honor to be in such company,” said Grossman. “It is particularly meaningful to be the only member of the 2013 class of Guggenheim Fellows who is an economist.”

Describing his project, Grossman said, “I will be looking in particular at how historical evolution affects current day banking regulation—what those in the business call, ‘path dependence.’ So, for example, if California had particularly liberal banking laws (eg. Easy entry into banking, a minimum of restrictions on how banks can conduct business) in the 19th century, and if Connecticut had particularly stringent laws (eg. High barriers to entry, many restrictions on banking operations), how likely is it that the relative stringency of their laws will remain today?”

He added, “I am excited about this research. When banks work well, they contribute to economic prosperity; when they don’t, things can go very wrong. This research will help identify which regulatory regimes have been conducive to economic growth and stability and which have not. I hope that the results will provide guidance to policy makers in the U.S., Europe, and Japan who are currently crafting new regulations.” (more…)

Rosa Hayes ’13 presented her paper on yield spread during The Carroll Round, an annual international economics conference at Georgetown University, in April. The Carroll Round provides a unique forum for research and discussion among the world’s top undergraduates.

The goal of the Carroll Round is to foster the exchange of ideas among the leading undergraduate international economics and political economy students by encouraging and supporting the pursuit of scholarly innovation in the field.

Hayes’ advisor is Masami Imai, chair and associate professor of East Asian studies, associate professor of economics and director of the Freeman Center for East Asian Studies. She also has been serving as the head tutor of Quantitative Analysis Center’s tutoring program under Manolis Kaparakis, director of the centers for advanced computing.

Richard Grossman, professor of economics.

Professor of Economics Richard Grossman was an invited discussant at a conference on “Understanding the Capital Structures of Non-Financial and Financial Corporations,” sponsored by the National Bureau of Economic Research. The conference took place in Cambridge, Mass. on April 5-6.

Grossman discussed a paper titled “Short-Term Debt and Financial Crises: What can we Learn from Treasury Supply,” by Arvind Krishnamurthy and Annette Vissing-Jorgensen, both of Northwestern University.  For more information see the conference’s website.

Pictured in the front, at right, Joyce Jacobsen, the Andrews Professor of Economics, tutor in the College of Social Studies, visited with Wesleyan alumni and parents in three countries. In March, she met with guests in Hong Kong, China and presented a talk on “Economist Circumnavigates the Globe: Thoughts on the World Economy.” The group met for dinner afterwards.

(more…)

Gary Yohe

“Climate Change, once considered an issue for a distant future, has moved firmly into the present.” This is the message in the draft version of the Third National Climate Assessment, which was released on Jan. 11.

Gary Yohe, the Huffington Foundation Professor of Economics and Environmental Studies, is vice chair of the National Climate Assessment and Development Advisory Committee (NCADAC), a 60-member committee that includes representatives from academia, state and local governments, non-governmental organizations, business and industry, and others, and the committee that issued this draft.

Since this is a “review draft,” Yohe encouraged the Wesleyan community and their friends (along with their enemies) to read the draft report, or any sections of the 1,000 page long document that are of interest. The draft is available online, and anyone can submit review comments at review.globalchange.gov by April 12.

Yohe said the committee is seeking comments from individuals, non-governmental organizations, and those working in government at all levels. He said author teams would respond publically, if not personally, to every comment received. The final draft of the National Climate Assessment is due to be released in 2014; the revision process will occupy most of the summer and fall of next year.

“It is a complicated process,” Yohe said. The draft report is written by 240 different authors, and was based on the best available climate science as of the end of the summer of 2012, gathered from experts around the country in the public and private sectors, from stakeholders in all sectors of the economy, and from federal agencies.

The draft concludes “that the evidence for a changing climate has strengthened considerably since the last National Climate Assessment report, written in 2009.”

According to the draft report, the average temperature in the U.S. has risen by about 1.5 degrees Fahrenheit since 1895, with more than 80 percent of this warming occurring since 1980. Moreover, this past decade was the hottest on record in the U.S., and 2012 was the warmest year on record by about one degree Fahrenheit. This warming trend is expected to continue, with average temperatures projected to rise between 2 and 4 degrees Fahrenheit in most areas over the next few decades.

An introductory Letter to the American People, signed by Yohe as a co-chair and his colleagues on the committee, states that, “Americans are noticing changes all around them. Summers are longer and hotter, and periods of extreme heat last longer than any living American has ever experienced. Winters are generally shorter and warmer. Rains come in heavier downpours, though in many regions there are longer dry spells in between.” These climatic changes have resulted in more frequent flooding in coastal cities and inland cities near large rivers; more wildfires that last longer, threaten more homes, and burn more acreage; and erosion of sea ice in Alaska, threatening to make relocation a necessity for some communities.

“The draft shows how observed climatic changes are already having wide-ranging impacts in every region of our country and most sectors of our economy. Some of these changes can be beneficial over the near term, but most have already proven to be detrimental,” Yohe remarked.

Richard Grossman

Professor of Economics Richard Grossman had an op-ed in The Hartford Courant on Jan. 5 about negotiations over the “fiscal cliff” in Washington. He writes that though reasonable people may disagree over what top marginal tax rate is ideal for the economy, the stubborn resistance of Congressional Republicans to any tax increases is the product of ideology, not reason. Looking back over history, he writes, the “abdication of sound economic reasoning in favor of ideology” has resulted in numerous policy mistakes with long-lasting economic impacts.

As an historical example, Grossman cites Britain’s decision to return to the gold standard following World War I out of nostalgia for a former all-powerful empire. This decision was made “despite structural changes that rendered the gold standard inappropriate in the postwar world,” and helped usher in the Great Depression, he writes.

On Sept. 14 and 15, Professor of Economics Richard Grossman attended a conference in Munich jointly sponsored by the Bundesbank (the German central bank) and a Munich-based research institute called CESifo. Grossman chaired a session and acted as a discussant at the conference, whose focus was, “The Banking Sector and the State.” According to the conference website: “The current financial and sovereign debt crisis has shown once again that the banking sector and the state are intertwined in many ways: On the one hand, the state lends support to distressed banks and accepts risks from the private sector; in this way banks quite often fall under public ownership. On the other hand, banks are important lenders and thus an indirect source of funding for the state in that they hold large amounts of government bonds. The conference will analyse the resulting interactions, the risks and the potential impact on the stability of the financial system.”

More information on the conference is available here.

In addition, on Aug. 29, The Los Angeles Times published an op-ed by Grossman on the Republican Party platform’s call for a commission to study restoring the link between the dollar and gold. Grossman writes that as an academic, he’s all for scientific study—but actually re-establishing the gold standard would be disastrous.

Grossman explains, “History provides ample evidence that the gold standard is a bad idea. After World War I, the major industrialized nations established the gold standard, which is widely seen as having contributed to the spread and intensification of the Great Depression. The gold standard tied the hands of monetary policymakers, forcing them to maintain high interest rates in order to maintain the price of gold, thereby making a bad economic situation even worse.

Had we been on the gold standard when the subprime crisis broke, the Federal Reserve would have had to raise interest rates instead of lowering them. Given that our economy was — and still is — struggling despite historically low interest rates, higher interest rates would have been devastating.”

Richard Grossman, professor of economics.

Professor of Economics Richard Grossman published an op-ed in The Hartford Courant on August 7 about the global “Libor” banking scandal. Taking a lesson from the old mob-run “numbers racket,” Grossman proposes an elegant solution to fixing deficits in the Libor, and renewing public confidence in the banking system.

The Libor (London Interbank Offered Rate) is currently calculated by asking a group of banks to self-report the cost for them to borrow money from other banks. The highest and lowest 25 percent of submitted estimates are thrown out, and the average of the remaining submissions is the Libor. Banks are supposed to submit their best estimate of their borrowing costs, but incentives to cheat are enormous, with millions of dollars in profits at stake, Grossman argues. Therefore, the Libor—the world’s leading benchmark interest rate—should be based on a market-determined figure, such as the recently launched GCF Repo index, published by the Depository Trust & Clearing Corp.

Richard Grossman, professor of economics.

In this issue of The Wesleyan Connection, we ask “5 Questions” of Professor of Economics Richard Grossman. In July, Grossman spoke to the Canadian news magazine Maclean’s about the Libor scandal rocking the global financial industry. Grossman’s 2010 book, Unsettled Account: The Evolution of Banking in the Industrialized World since 1800, reviews banking crises over the past 200 years in North America, Europe and other regions, and considers how they speak to today’s financial crises around the world. He blogs at Unsettledaccount.com.

Q: Professor Grossman, what is the Libor, and what is this scandal all about?

A: “Libor” is the London InterBank Offered Rate. Produced daily for the British Bankers’ Association, it is calculated by asking a group of banks how much they estimate it will cost them to borrow money. Banks are asked to provide estimates of borrowing costs for 15 different maturities ranging from overnight to one year in ten different currencies, so Libor is not one interest rate, but 150. Because not all of the banks deal in all maturity-currency combinations, somewhere between 6 and 18 banks are polled. The highest and lowest estimates are thrown out and the remainder—about half–are averaged to yield Libor. Libor plays a vital role in the world financial system because it serves as a benchmark for some $800 trillion in transactions–everything ranging from complex derivatives to simple home mortgages.

Because so much money is riding on Libor, traders have an incentive to pressure their banks into altering submission estimates to improve their profitability. The scandal is that they did just that. Even a small movement in Libor can lead to millions in extra profits–or losses–for banks.

It has also been alleged that the British authorities encouraged banks to lower their submissions in the wake of the 2008 Lehman Brothers bankruptcy to give the impression that banks had access to plentiful and cheap funds and were therefore less vulnerable to the crisis than they actually were.

Q: Sounds like a big deal for the banks, but why should an average person like me care?

A: If the interest rate you pay on your mortgage, home equity loan, or credit card balance is tied to Libor—and it may well be—then you should be concerned that the rate is set fairly. (more…)

Richard Grossman, professor of economics.

In the wake of the LIBOR banking scandal, Richard Grossman, professor of economics, commented in the Canadian news magazine Maclean’s on July 13 about banking regulation throughout history. “It’s guaranteed to be a losing battle,” he said. “The incentives in banking are so strong and the money is so big. As soon as you close off one area, someone is going to think of a new way to do things.”

Grossman stressed that governments and the public have a short memory when it comes to financial crises, so that regulations that seem prudent in one era become the next generation’s “political red tape.”

“The short answer is probably no, we can’t trust the banks to regulate themselves,” he said. “People and institutions react to incentives and there’s a lot of money to be made in financial sectors as long as that incentive is there.”

John Bonin, the the Chester D. Hubbard Professor of Economics and Social Science.

In the midst of the banking crisis affecting the euro, John Bonin found himself in June offering banking advice to two countries that are members of the European Union, but have yet to join the monetary union linked by the euro.

Bonin, the Chester D. Hubbard Professor of Economics and Social Science, professor of economics, gave the keynote address during the Annual Conference of the European Association for Banking and Financial History on June 7. The event was co-sponsored by National Bank of Romania in Bucharest, Romania. The address was titled “Two Decades of Foreign Banking in Emerging Europe: the Devil is in the Details.”

Romania is not yet in the European Monetary Union but its entry has been discussed during the last few years. Still it is likely linked to the European economy and Bonin’s presentation focused on the role of the six large international European banks in the Central and East European economies.

“The banking sectors of these countries have basically been taken over by these foreign banks,” Bonin says. “I traced the role of these banks in the retail credit, including mortgage, booms in the pre-financial crisis period. I then examined the differential responses across countries to the financial crisis and linked this to the structure of their banking sectors.”

Bonin shared the stage with Mugur Isarescu, the Governor of the National Bank of Romania, drawing extensive coverage from the Romanian and European news media. (more…)