Tag Archive for Grossman

Grossman’s Op-Ed: Replace Libor with Fair Alternative

Professor of Economics Richard Grossman’s op-ed, “The Best Way to Reform Libor: Scrap It,” was published in The Wall Street Journal on July 25. “The British have learned nothing from the recent Libor scandal”  involving the manipulation by banks of a vitally important interest-rate benchmark, writes GrossmanThis is clear from a recent decision by a British government-appointed committee to hand over control of Libor to NYSE Euronext, a company that owns the New York Stock Exchange, the London International Financial Futures and Options Exchange, and a number of other stock, bond, and derivatives exchanges. “In other words, the company that will be responsible for making sure that Libor is set responsibly and fairly will be in a position to profit like no one else from even the slightest movements in Libor.”

The only solution, writes Grossman, is to scrap Libor and devise alternative market-determined benchmark rates, which cannot be manipulated. He concludes, “The incentive to game an benchmark rate such as Libor is just too high to risk putting it in the hands of a single private entity, however committed that entity may be to restoring its credibility. Replacing Libor with a transparent, fair, market-based alternative is the only sensible solution.”

The op-ed can be read on The Wall Street Journal website by those in the Wesleyan network, and WSJ subscribers.

Grossman Presents Paper at Financial History Workshop

Professor of Economics Richard Grossman presented a paper during the Workshop on Monetary and Financial History, held June 26 at the at the Federal Reserve Bank of Atlanta. The paper he presented, titled, “Bloody Foreigners! Overseas Equity on the London Stock Exchange, 1870-1913,” considers data on capital gains, dividend, and total returns for domestic and overseas equities listed on the London Stock Exchange during 1870-1913. The paper is available to read here.

Grossman to Study Banking Regulation as 2013 Guggenheim Fellow

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.”

Grossman Discusses Treasury Supply at Capital Structures Conference

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.

 

 

Grossman’s Fiscal Cliff Op-Ed Published in Hartford Courant

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.

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.