Interview with Gary Gorton

Public Workers Facing Outrage as Budget Crises Grow – Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions — wage freezes, benefit cuts and tougher work rules.  It is an angry conversation. Union chiefs, who sometimes persuaded members to take pension sweeteners in lieu of raises, are loath to surrender ground. Taxpayers are split between those who want cuts and those who hope that rising tax receipts might bring easier choices.  And a growing cadre of political leaders and municipal finance experts argue that much of the edifice of municipal and state finance is jury-rigged and, without new revenue, perhaps unsustainable. Too many political leaders, they argue, acted too irresponsibly, failing to either raise taxes or cut spending.

U.S. Seeks Chief For Financial Consumer Agency  – White House adviser Elizabeth Warren and a top lieutenant are quietly asking business and consumer groups for names of people who might run the new Consumer Financial Protection Bureau, people familiar with the matter said. The hunt suggests that Ms. Warren, a lightning rod for some bankers, might not be selected to lead the bureau, a centerpiece of the Dodd-Frank financial overhaul bill that passed this summer. Still, many liberal groups will push to get her in the post. President Barack Obama’s choice could signal how he intends to deal with resurgent Republicans in Congress. The feelers to business groups serve as a reminder that any nominee would likely need support from at least seven Republicans in the Senate to win confirmation.  Among the names being discussed are Iowa’s attorney general, Tom Miller; New York state bank regulator Richard Neiman; and former Office of Thrift Supervision director Ellen Seidman.

Real wages for the previously unemployed – Catherine Rampell reports: Nearly 7 in 10 of the survey’s respondents who took jobs in new fields say they had to take a cut in pay, compared with just 45 percent of workers who successfully found work in their original field. Of all the newly re-employed tracked by the Heldrich Center, 29 percent took a reduction in fringe benefits in their new job. Again, those switching careers had to sacrifice more: Nearly half of these workers (46 percent) suffered a benefits cut, compared with just 29 percent who stayed in the same career.
 

Individual losses in a banking crisis have long-lasting effects on expectations and behaviour – The systemic and macroeconomic issues associated with a banking crisis are much in the news. The cost of banking crises is usually measured as the loss of output and the fiscal cost of cleaning up the financial system (e.g. Reinhart and Rockoff 2009, Laeven and Valencia 2010). While these may well be substantial, there is also a third potential cost, which is more long-term and difficult to measure. A sweeping crisis could affect people’s confidence in financial stability for decades, leading to more cautious investment behaviour and higher risk premia. A banking crisis could then be a drag on the economy for many years. This column focuses on the impact on individuals, particularly those who experienced losses, and presents evidence of effects on their expectations and behaviour lasting a decade or more.

 Oil up 34% since May; average gas price hits $3.07 – The price of oil is poised for another run at $100 a barrel after a global economic rebound sent it surging 34% since May. That could push gasoline prices to $4 a gallon by summer in some parts of the country, experts say. The run-up in oil prices this year sent the average gas pump price to $3.07, according to AAA, Wright Express and Oil Price Information Service. That’s 43 cents, or 16%, more than a year ago.  Benchmark oil for February delivery rose $1.54 on Friday to end the year at $91.38 a barrel on the New York Mercantile Exchange. It reached $92.06 earlier in the day. Flying, shipping a package and ordering a pizza all likely will get more expensive if companies pass along higher energy costs. Some economists say rising energy prices will slow economic growth. Gasoline expert Fred Rozell predicts that 15 states — including Alaska, Hawaii, Connecticut and Rhode Island— will see gasoline prices top $4 a gallon by Memorial Day. "A dollar more per gallon isn’t that much — probably about $750 more per year for each motorist, but there’s a psychological aspect to gas prices," he said. "People are going to be up in arms about this."
House Price Indexes: Case-Shiller vs. FHFA; Based on FHFA, There’s No Threat to Economic Recovery –  In a post yesterday, I discussed Alan Reynolds’ recent editorial in the IBD titled "Do Falling Home Prices Imperil Recovery?, where he points out that house price declines in a "few troubled cities in a few states [based on the Case-Shiller 20-city composite house price index] do not represent the entire nation."  This was in response to a recent front-page Wall Street Journal article ("Housing Recovery Stalls") that fretted about how "A new bout of declining home prices (based on the October decline in the Case-Shiller house price index) is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing."  Like the chart in the previous post, the chart above provides further evidence of the significant disconnect between the Case-Shiller Home Price Index (10-city composite above)and the FHFA U.S. House Price Index.   Based on the FHFA House Price Index, there’s no threat to the U.S. economic recovery.  

 

Interview with Gary Gorton – Minneapolis Fed – Shadow banking—the intricate web of financial arrangements and techniques that developed symbiotically with the traditional, regulated banking system over the past 30 or so years—is territory Gorton has studied for decades, but it (and he) have been largely on the periphery of mainstream economics and policy.  That all changed in mid-2007, when panic broke out in the subprime mortgage market and financial institutions that support it. Expressions like “collateralized debt obligation” and “repo haircut” escaped the confines of Wall Street and business schools, and began to fill the airwaves. We’re still struggling to come to terms—and few are in a better position to help than Gorton. Gorton also consulted for AIG Financial Products, where he worked on structured credit, credit derivatives, and commodity futures. Thus, Gorton’s appreciation of modern banking and its vulnerabilities is informed by practice as well as theory. Sharing that understanding requires considerable effort; we’ve provided a glossary to help with the terminology and, fortunately, Gorton is a lucid narrator of a complex tale. And as Wright suggests, the rewards to studying this material are profound.

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