Tag Archive for Grossman

Grossman Chairs Session at Banking Conference in Munich

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.”

Grossman’s Op-Ed on the Libor Banking Scandal in the Courant

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.

5 Questions With . . . Richard Grossman on the Libor Scandal

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.

Grossman Speaks on Banking Regulation in Canadian Magazine

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.”

Grossman Discussant at Economic Policy Meeting

Richard Grossman, professor of economics.

Richard Grossman, professor of economics, was a discussant at the Research Group on Political Institutions and Economic Policy at Harvard University on Dec. 3.

Grossman commented on a paper, “Trade shocks, mass movements and decolonization: Evidence from India’s independence struggle,” written by Assistant Professor of Political Economy Saumitra Jha of the Stanford Graduate School of Business.

David Stasavage, professor of politics at New York University, served as co-discussant on the paper along with Professor Grossman.

Grossman Coordinates Economic History Association Meeting

Richard Grossman, professor of economics.

Richard Grossman, professor of economics, served as program chair of the annual meetings of the Economic History Association Sept. 9-11 in Boston, Mass.

Grossman was responsible for coordinating the work of the four member selection panel in choosing 45 papers.

He also organized these into 15 sessions, selected and recruited discussants, session chairs, plenary speakers and graduate student poster presenters.  More information of the annual meeting is online here.

Grossman Presents Bank Risk-Taking Paper at History Workshop

Richard Grossman, professor of economics. (Photo by Bill Burkhart)

Richard Grossman, professor of economics, presented a paper titled “Contingent Capital and Bank Risk-Taking: Evidence from British Equity Markets before World War I” at the Yale Economic History Workshop on Feb. 21.

Masami Imai, chair and associate professor of East Asian studies, associate professor of economics and director of the Freeman Center for East Asian Studies, co-authored the paper.

The workshop was sponsored by Yale University’s Department of Economics.

The Recession and Banking Crisis: We’ve Been Here, Dozens of Times

Richard Grossman, professor of economics. (Photo by Bill Burkhart)

So much has been written about the recession that befell the country in the late summer of 2008. It was “unprecedented;” it “caught experts by surprise;” “virtually no one saw it coming.”

After all, a recession triggered by a major segment of the economy that was vulnerable to speculation, occurring during a time of high government deficits, cuts in interest rates, and tax reductions combined with dramatic increases in federal spending? When has that happened before?

“Dozens of times, if not more, during the last one hundred and fifty years or so,” says Richard Grossman, professor of economics, economic historian and author of the new book Unsettled Account: The Evolution of Banking in the Industrialized World Since 1800 (Princeton University Press).

“The collapse we just

Grossman Author of Banking Evolution Book

Richard Grossman, professor of economics, is the author of the book, Unsettled Account: The Evolution of Banking in the Industrialized World since 1800, published by Princeton University Press in June 2010. The 400-page book provides a comparative history of banking focusing on four types of events that have been central to the lifecycle of banking systems: crises, bailouts, mergers and regulatory reform.