Robbing Banks

William K. Black of UMKC, former regulator and author of The Best Way to Rob a Bank is to Own One, opened the conference with an ASE keynote. He took us back to the last banking crisis - the savings and loan debacle of the 80's. The crisis was brought about by interest rate risk caused by the big run-ups in rates from the FED trying to wrench out inflation.

The high rates gave s and l's incentive to create high returns in order to eke out any profit. Some took it as a license to commit fraud. The most popular stories are the Keating (Lincoln Savings and Loan) and (Oklahoma stories) retold in Funny Money.

Black recounted the salient fact that federal regulators made thousands of referrals to criminal authorities during the s and l debacle. As far as we know there have been none as a result of our current crisis.

I go to Denver but the biggest economic news may be out of Boston...

NYT: Massachusetts Court Voids Fore

Securitization of mortgages the bad penny (well trillions of them) that keep on returning.

Panel on economic inequality

This morning began with an interesting panel discussion regarding the relationship between economic inequality and the recent financial crisis. The main presenter was Prof Rajan from Chicago who reviewed the notion that the reaction to growing inequality in our society led to policies that fed the housing bubble. Discussants were Profs Acemoglu and Glaeser.

Acemoglu grabbed my attention by quoting from Robert Dahl and Who Governs...but he tried to politely refute the hypothesis from Rajan. As always, Glaeser had strong numbers showing the weather related connection between housing boom and bust.

In follow-on discussion Prof Glaeser had the insight of the day. That education is the path to improved performance and equality in society. However he recognizes that the policy must be put forward as a matter of national strength and security as inequality is a political non-starter. While I believe we do need to address inequality not necessarily in the context of education.

Decline in Small Business Failures?

NYT: Six Companies That Did Not Survive 2010

While still too high the numbers indicate that small business failures declined from first quarter 2009 to first quarter 2010. These are interesting numbers to watch.

Transparency in Economics

The American Economic Association (AEA) has its annual meeting this week in Denver. The Executive Committee is considering a code of ethics to guide members that do work outside their academic or research institution requiring disclosure of the information. While this sounds like a great idea; readers of academic papers, textbooks and students in the classroom have the right to know that their professors are in the pay of other institutions, the impetus for this action is fascinating.

According to The New York Times:

The proposal, which has not been announced to the public or to the association’s 17,000 members, is partly a response to “Inside Job,” a documentary film released in October that excoriates leading academic economists for their ties to Wall Street as consultants, advisers or corporate directors.

That's right. It was not the financial meltdown per se (and the participation of members of academia in its cause), but rather a documentary film that made certain members of the profession look bad.

I will be in attendance at the conference and will be interested to see if this is discussed and adopted.

http://www.youtube.com/watch?v=FzrBurlJUNk

Krugman, Okun and the Level of Unemployment

One of the concepts I stress to Macro students is "Okun's Law". Created by famed Brookings Institution economist Arthur Okun, the Law states simply that for each percentage above the natural rate of unemployment, the economy is losing 2% of potential output. So in round numbers, if the unemployment rate is 10% and the natural rate is 5% (both are probably lower right now, but the spread is the same...about 5%) then the economy is losing 10% of potential output. Roughly speaking then we have a recessionary GDP gap of 10%. In a 14 Trillion dollar economy that means we are down about $1.4 Trillion in output.

Paul Krugman blogged over the holiday about this point and illustrated his analysis with data from the Federal Reserve Bank of St. Louis.

NY Times

The illustration shows that when economic growth is negative, unemployment shoots up. When economic growth is strong (in the neighborhood of 3.5 to 5% on an annual basis) then the unemployment rate will slowly reduce. My conclusion is that based on the low levels of growth projected in 2011 and without significant stimulus from government spending the unemployment rate will stay very high. The tiny stimulative effect of the tax changes signed into law could be overwhelmed by state and local cutbacks and federal reductions in spending. While cutbacks may make good political theatre, they endanger the tepid recovery from the very traumatic events of 2008 and the housing and financial bubbles.

Happy New Year

Today is our seventh wedding anniversary in addition to being a holiday. We have had a very enjoyable break and tomorrow i will be back to regular updates. I wish everyone a healthy and prosperous 2011.