Tag Archive for Grossman

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.

Grossman Presents Great Depression Economics Paper in London

Richard Grossman, professor of economics, presented a paper, co-authored with Chris Meissner (University of California at Davis), titled, “International Aspects of the Great Depression,” at a conference on Lessons from the 1930s Great Depression for the Making of Economic Policy, hosted by the British Academy in London on April 16-17.  Grossman also served as a discussant for a paper on “The Political Lessons of Depression-Era Banking Reform.” Conference papers are available online.