Posts Tagged ‘Economic Crisis’
Wednesday, August 24th, 2011
Speaking at a town hall meeting last week in Illinois, President Obama said that one of the challenges of creating jobs in our economy is that businesses have used technology to become incredibly efficient, thus reducing their need for employees.
“When was the last time somebody went to a bank teller instead of using the ATM, or used a travel agent instead of just going online?” the president asked. “A lot of jobs that used to be out there requiring people now have become automated.”
The impact on the unemployment rate of information technology and its concomitant automation is not at all clear. The effect is highly variable across different countries, for example. Looking domestically, travel agents were never a major job category: Even if such jobs were automated away as the number of agencies dropped by about two-thirds in the decade-plus after 1998, such numbers pale alongside construction, manufacturing, and, I would wager, computer programmers whose positions were offshored.
The unfortunate thing in the entire discussion, apart from people without jobs obviously, is the lack of political and popular understanding of both the sources of the unemployment and the necessary solutions. Merely saying “education” or “job retraining” defers rather than settles the debate about what actually is to be done in the face of the structural transformation we are living through. On that aspect, the president is assuredly correct: He has the terminology correct, but structural changes need to be addressed with fundamental rethinking of rules and behaviors rather than with sound bites and band-aids.
Jordan offers more detailed commentary and analysis in the August edition of Early Indications.
Thursday, July 21st, 2011
Smeal’s John Liechty testified before the U.S. House Committee on Financial Services, Subcommittee on Oversight and Investigations, last week regarding the newly formed federal Office of Financial Research (OFR). The OFR, which was formed last year with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is charged with collecting data on the financial system to allow another government entity, the Financial Services Oversight Council, to effectively monitor its stability and ward off potential threats. The agency is the brainchild of Liechty, who spent 18 months gathering industry support and meeting with members of Congress to push its establishment.
According to The Hill‘s On the Money blog, the banking subcommittee wanted to learn “how the new Office of Financial Research plans to keep mounds of financial data safe from hackers. … With hackers always looming over the horizon, Republicans want to know what the office—which they charge lacks proper congressional oversight—is doing to keep that information in the right hands.”
In his prepared testimony, Liechty explained the origins of the OFR and why he believes its a necessary component to the country’s financial security. He opened with an outline of his three main points:
Financial stability requires transparency – The ability for regulators to both see through the counterparty network and the ability to see through asset backed, financial products to the underlying assets is an important fundamental component that is needed in order to be able to monitor the stability of the financial system. Transparency will require universally accepted identifiers and reporting standards—in essence it will require banks to get their back-offices in order. The investments required to improve transparency will not only result in improved macro-prudential regulation; they will result in improved risk management and substantial operational savings for the industry.
We face a significant scientific task – Not only do we not have the data in place, we have not done the science needed to understand system-wide risks to the financial system. In many ways, financial regulators are like the weather services, before the National Oceanic and Atmospheric Administration (NOAA) was established. NOAA was given the mandate to i) collect new data, ii) develop new models for identifying extreme events and improving weather forecasts, and iii) conduct the science necessary to understand the weather systems and build these next generation models. The Financial Services Oversight Council (FSOC) and the Office of Financial Research face similar challenges and have been given a similar mandate.
We cannot afford to fail – We live in a leveraged economy where the resilience and growth potential of the economy depends on having both an innovative and stable financial system. Innovation often leads to instability, unless the appropriate infrastructure is in place to provide stability. The FSOC and OFR offer a way forward to build this infrastructure. The risk that we live with, if we fail to have the proper oversight to provide a stable system, is not just the devastating economic impact that would come from another financial crisis of the magnitude of the 2008 crisis, but more importantly the political reality that will follow. If we can’t get this right and there is another crisis, then there is a very real risk that the political response may result in a response that adversly affects the finanical market’s ability to innovate.
You can view the entire hearing on the House banking committee’s website. For more on the Office of Financial Research and Liechty’s role in its creation, check out this Smeal Report feature from late last year.
Tuesday, June 7th, 2011
On the blog of the Pennsylvania Association of Realtors, Smeal’s Austin Jaffe highlights a report from the Lincoln Institute of Land Policy that summarizes recent trends in the housing market. Jaffe pulls out five lessons from the report on the state of the housing market:
1. We are unlikely to see a repeat of the housing price boom and bust again anytime soon.
2. Changes in the mortgage finance industry helped brew the unanticipated collapse.
3. Housing starts, building permits, and the home building industry will take years to recover to reach their pre-bust levels.
4. Mortgage foreclosures may be slowing but there will be a surplus of foreclosed properties in many markets for some time to come.
5. Regulatory reform may help future housing markets (or it might not!) but the forces in the economy and demographics will provide important signals for future trends.
View Jaffe’s complete blog entry on PAR’s Just Listed blog for his complete analysis.
Friday, May 20th, 2011
Public radio’s Marketplace last night reported on the federal Office of Financial Research, a new financial watchdog dreamed up by Smeal’s own John Liechty and put into place with that passage of the Dodd-Frank financial reform law. The Marketplace report, which tells the story of how Liechty came up with the idea for the oversight agency, is online here.
For more on the Office of Financial Research and Liechty’s role in its creation, check out this Smeal Report feature from late last year.
Thursday, April 28th, 2011
What a week for couch potatoes—thrilling NBA and NHL playoff games; the fairy-tale royal wedding; and yes, the grand-daddy of them all, Federal Reserve Chairman Ben Bernanke’s Wednesday press conference. The first ever in the history of the Federal Reserve, I might add.
While I have no illusions that Bernanke will win the Nielson ratings wars this week, there is no doubt that the press conference was a seminal event in the Federal Reserve’s evolution toward greater transparency and accountability in its policymaking. Did the Chairman make any breaking news? Absolutely not, but there was important market reaction to what Bernanke said and the way that he said it.
Here is what I heard, and my perception of how the markets continue to view Fed policy:
1) The Federal Reserve Mandate – It was very clear that the chairman attempted to draw boundaries around what the Fed can do and what the Fed can’t do with respect to economic recovery. For the past three years various pundits have criticized the Fed for doing either too much or too little during the recent crisis, perhaps even overstepping its powers. Bernanke must have stated at least 15 times that the Federal Reserve’s mandate is to maintain/promote a growth level consistent with full employment and low inflation. His latest projections for the end of 2011 are range-bound estimates of GDP growth of 2.1 percent, inflation of 2 percent and unemployment at 8.3 percent.
These numbers are not going to make anyone jump for joy. But what is important here is that Bernanke emphasized (given his mandate of balancing growth, employment and inflation) that, in weighing the costs and benefits of various policy tools, he is more concerned with anemic growth and employment than he is with the specter of runaway inflation—at least for the next year. Notice there is nothing in the mandate statement concerning the appropriate level of the dollar.
2) Inflation – Bernanke was very clear to emphasize that if the Fed begins to see stronger signs of prices heating up, then the Fed will take swift action on the inflation front. This is definitely not what inflation hawks wanted to hear. Bernanke clearly feels that the main concern of Fed policy is unemployment and sluggish growth (yet, there are signs in the public speeches that other Fed Board members are beginning to challenge the Chairman’s position). Critics point to skyrocketing oil and commodity prices, the rise in food prices and some evidence of rising input costs leaking into other consumer good prices (Procter & Gamble and Coca-Cola announced price increases on products yesterday). Critics point out that latest CPI data shows all-level prices rising at a 2.7 percent rate, while Bernanke’s emphasis on the “core” CPI of 1.2 percent is unrealistic (the core rate strips out price increases from food and energy, which tend to be more volatile).
So how did the markets react? Silver moved up nearly 7 percent, approaching an all-time high of $50 an ounce, gold was more muted, rising about half a percent (Gold Bugs are now Silver Bugs), and oil was basically flat.
Clearly, Bernanke attempted to speak to “Main Street” in emphasizing that he understands the pain caused by food and energy price increases making up a significant portion of American budgets. However, inflation is defined as the general rise in the level of ALL prices, which is the reason for his focus on Core CPI. My feeling about the Fed’s position is that prices in two large sectors of the U.S. economy continue to be stagnant—housing and even more importantly wages. Until Bernanke sees inflationary pressure in the form of a wage and price spiral, I think he will continue to emphasize accommodative monetary policy. Bernanke was very clear on this point stating that the Fed could target a 0 percent CPI through monetary tightening, but in weighing the costs and benefits, the effect on economic growth and employment would be recessionary.
Wednesday, March 2nd, 2011
In today’s Philadelphia Inquirer, Smeal’s J. Edward Ketz and Anthony H. Catanach Jr. of Villanova argue that there are too many banks in the United States offering indistinguishable products to their customers. These banks, they say, are under enormous pressure to raise their margins, which eventually leads many of them down the road of questionable loan activities. Their solution:
First, reduce the number of financial institutions: 15,000 institutions simply cannot all make money by making loans funded by deposits to customers who tolerate them simply because they need check and processing services. Is a bank on every corner really necessary? As these regulated institutions struggle to meet performance targets in a talent-poor, over-banked industry, is it any wonder that they often turn to questionable, high-yield investments fueled by volatile, unstable funding sources? A banking glut forces institutions to compete aggressively for a fixed pool of high-quality investments, loans, and talent, meaning some banks will be forced to accept lower quality assets and personnel to operate.
Banking regulators can initiate this industry contraction by denying new charters for federally-insured financial institutions. Next, they should set a ceiling on the number of financial institutions significantly below current levels. This target should be aggressively pursued by closing and/or merging institutions that have historically been marginal performers. Finally, imposing a federal income tax on credit unions also will eliminate many poorly performing institutions that exist only because of their federally subsidized cost advantage.
Second, those who monitor financial institutions (accountants, auditors, and regulators) must reaffirm their responsibility to the investing public. Financial watchdogs must think more strategically and recognize that an over-banked industry leads to poor banking decisions and greater risks.
Monday, January 24th, 2011
Almost 2.9 million properties received foreclosure filings in the United States in 2010, despite federal programs like the Making Home Affordable Program, which allows some borrowers to modify or refinance their mortgages. According to Smeal’s Brent Ambrose, these programs are failing to stem the foreclosure crisis because they focus strictly on borrower payment-to-income ratios, and, as a result, do not remove the incentive to default for long.
“The programs rolled out by U.S. regulatory authorities will not significantly reduce defaults unless house prices rapidly stabilize or go up,” Ambrose says. “The only way to truly reduce the default probability is to either reset the mortgage balance to a loan-to-value ratio that is lower than 100 percent, probably around 80 percent, or have frequent, predictable balance resets.”
Yes, balance resets. Ambrose and his colleague Richard Buttimer, a professor in the Belk College of Business at the University of North Carolina at Charlotte, have proposed a new type of mortgage contract that automatically resets the balance and the monthly payment based on the mortgaged home’s market value. They call the new mortgage contract the “adjustable balance mortgage” and contend that it reduces the economic incentive to default while costing about the same as a typical fixed-rate mortgage. Under real-world conditions, including the presence of unrecoverable default transaction costs to the lender, this new mortgage contract is better for both lenders and borrowers.
It works like this: At origination, the adjustable balance mortgage resembles a fixed-rate mortgage—it has a fixed contract rate and is fully amortizing. From that point on, at fixed, preset intervals, the value of the house would be determined based on changes to a local house price index. If the house value is found to be lower than the originally scheduled balance for that date, the loan balance is set equal to the house value, and the monthly payment is recalculated based on this new value. If the house retains its initial value or increases in value, then the loan balance and payments remain unchanged, just as in a standard fixed-rate mortgage.
For example, if a homeowner was found to owe more than the current market value of her home at one of the predetermined quarterly adjustment dates, then her balance would reset to the current market value and her monthly payment would be lowered as a result. At the next reset interval, if the market had recovered and the house was now worth more than what the homeowner owes, the mortgage balance reverts back to the originally scheduled balance, resulting in a higher monthly payment but one that does not exceed the payment specified at origination.
Read more about this new mortgage contract in Ambrose and Buttimer’s paper, “The Adjustable Balance Mortgage: Reducing the Value of the Put,” scheduled for publication in a forthcoming issue of Real Estate Economics.
Thursday, October 7th, 2010
“Technically, if the economy starts growing again, no matter how slowly, the economy has left the recession period,” explains Anthony Kwasnica, associate professor of business economics at Penn State’s Smeal College of Business.
“A recession is measured from the peak of the latest non-recession growth period to the trough or very bottom of the decline, before an upswing,” he adds. “People tend to think we’ve recovered only when we’ve returned to where we started from. Most would agree that the growth since June of 2009 has not been very robust.”
Since the gross domestic product (defined as the market value of a country’s goods and services produced in one year) didn’t decline more than 10 percent, our current crisis isn’t typically described as a depression. However, the “Great Recession”, as it has been dubbed, remains the most sustained economic slump the United States has weathered since World War II, with jobless rates hitting 10.8 percent, the highest since 1982.
Can we predict when we’ll be back in the black? “There is no clear answer,” Kwasnica says. “A number of factors are at work here. Some analysts use qualitative, survey-based measures of how people feel about the direction of the economy.” The most well-known of these, the Consumer Confidence Index, surveys households on their feelings about the economy, the idea being that confident consumers are more likely to make purchases resulting in economic growth.
Kwasnica cautions against relying too much on such tools. “While I generally like the Consumer Confidence Index, one often has to worry about the issue of self-fulfilling prophecies in terms of economic activity,” he warns. “Suppose everyone thought a decline in consumer confidence was a strong signal of a future economic downturn? Then it might seem rational for a business to cut down production. But this could help create the economic downturn. This suggests that we might be better off not knowing exactly what data sources predict recessions.”
View the complete story here.
Tuesday, September 28th, 2010
Smeal’s John Liechty appeared on Bloomberg Television yesterday to talk about the Office of Financial Research, a new federal agency he helped create that is charged with identifying systemic risk in the financial sector.
You can view his appearance on YouTube.
Wednesday, September 15th, 2010
The Wall Street Journal reports today on the role Smeal’s John Liechty had in the creation of the new federal Office of Financial Research, which is part of the recently enacted financial reform bill. Here’s an excerpt:
Pennsylvania State University Prof. John Liechty last week gave an exam to his marketing class. Far from campus, another of his projects faces a much bigger test—and all of Wall Street is watching.
Mr. Liechty, 44 years old, has helped design an electronic safety net to assess systemic financial risk in a bid to prevent another banking calamity. The project—formalized as a new federal office in the financial-regulation act—is called the Office of Financial Research.
… Messrs. Liechty, Reesor and Flood got the idea for the OFR while attending a February 2009 financial-system workshop. Mr. Liechty realized regulators had no ability, or legal framework, to collect and share data on the global financial system and therefore no way to measure system-wide risk.
“Not only is it crazy, it’s dangerous,”‘ Mr. Liechty recalls thinking.
They wrote a seven-page paper proposing a national institute of finance that would operate a data center and then facilitate research and analysis. The proposal said regulators then could assess a financial contagion and perform independent stress tests for banks.
The article goes on to explain how Liechty and his colleagues worked with Congress to draft the legislation, which was signed into law by President Obama on July 21.