Archive for October, 2011
October 21st, 2011 by Eric Miller under Faculty Commentary. No Comments.
by Bill Longbrake
Center for Financial Policy
This is an excerpt of the October 2011 edition of the Longbrake Letter. To read more, click here.
The answer to this question is not yet clear. But, in a very short time two things have happened. First, the protests so far have had durability and have spread to many other geographical locales from the initial venue of Zuccotti Park in New York City near Wall Street. Second, media coverage has mushroomed and is at about the same level of intensity that prevailed during the early stages of the Tea Party movement.
Polling done in the first week of October by the Pew Charitable Trusts Project for Excellence in Journalism found that the protests accounted for 7% of the collective news media coverage. Increased news media coverage is important in sustaining protests and in helping to create the potential to transform those protests into a movement. In another Pew poll, 42% said they were either following the news coverage “very closely” or “fairly closely”. A poll conducted by Rasmussen indicated that 33% had a favorable opinion of the protests; 27% had an unfavorable reaction; and 40% had no knowledge about “Occupy Wall Street”.
Drivers of “Occupy Wall Street” Protests. Anne-Marie Slaughter recently wrote in the New York Times that “… the twin drivers of America’s nascent protest movement against the financial sector are injustice and invisibility, the very grievances that drove the Arab Spring.”
Injustice is about economic inequality and the capture of the political and economic systems in America by the financial elite to serve their interests to the detriment of the other 99%. The core grievance is that the economic hardships millions of Americans are enduring have been caused by the practices of big financial institutions and the enormous political power Wall Street wields over the U.S. government.
Invisibility is about a dysfunctional political system dominated by narrowly-based partisan political agendas which are unresponsive to the grievances of millions of Americans. Simply put, millions of Americans are hurting because America’s economic system is not working for them and they don’t feel the government is listening to them or responding to their grievances. As Ms. Slaughter wrote, “In the words of one protester interviewed in San Francisco, “We don’t have a government for ‘we the people’ anymore.”
Thus, the drivers of “Occupy Wall Street” are broken economic and political systems.
Movement Criteria. Many have been quick to point out that a few protests and some news media coverage do not guarantee that significant change will follow. For that to happen, the protests need to evolve into a movement. Movements generally develop from a crisply defined grievance and explicitly stated solutions. This was the case for the civil rights movement and the Viet Nam War protests.
Economic injustice and governmental dysfunction are much more broadly-based grievances and lack the kind of focus that spawn and propel movements. Also, there is not yet a well-defined list of solutions. However, perhaps that is the relevancy of the Arab Spring for “Occupy Wall Street”. The Arab Spring was about challenging governments which catered to narrow elites and which had become unresponsive to the people. Perhaps that grievance is also deep-seated in America and that will be sufficient to perpetuate and expand the protests to the point where they transform into a movement which then might have the potential to force fundamental political and economic change.
Movements which have impact typically have the following attributes:
· Single identifiable or charismatic leader. “Occupy Wall Street” has no identifiable leader, although that was also the case for the Tea Party movement in the early days.
· Creation of an institution which can influence and martial public opinion. “Occupy Wall Street” has yet to evolve into an institutional framework.
· Define an action agenda; develop a program. There are many grievances but no action agenda or program yet exists.
· Engage in the political process. This poses a challenge because many “Occupy Wall Street” protesters believe that both political parties have been captured by Wall Street. But, politicians aren’t likely to respond unless they believe that the movement has become powerful enough to change election outcomes.
In the words of Stephen Zunes, professor of politics at the University of San Francisco, “Successful movements focus on developing a well-thought-out strategy, clearly articulated political demands, a logical sequencing of tactics, well-trained and disciplined activists, and a recognition that colorful protests are no substitute for door-to-door organizing among real people.”
We will know in time whether “Occupy Wall Street” becomes the catalytic agent that spurs political change and economic revival. One can hope that it does have impact because the course we have been on appears to be one that is contributing to America’s slow decline as a global power.
 Anne-Marie Slaughter. “Occupied Wall Street, Seen From Abroad.” The New York Times. October 6, 2011.
 Stephen Zunes. “Protests Are Not a Movement.” The New York Times. October 7, 2011.
October 7th, 2011 by Eric Miller under News & Events. No Comments.
The Center for Financial Policy (CFP) co-hosted a two-day conference on systemic risk and data issues in partnership with the Salomon Center for the Study of Financial Institutions at the NYU Stern School of Business, the Center for Financial Markets at Carnegie Mellon’s Tepper School of Business, and the Fisher Center for Real Estate and Urban Economics at UC Berkeley’s Haas School of Business. The conference was inspired by the Dodd-Frank Act and the establishment of two new entities, the Office of Financial Center (OFR) and the Financial Stability Oversight Council (FSOC).
The conference was reflective of the commitment of these four institutions to play a central role in promoting research that informs policy. “The research papers were selected from a competitive pool from around the world and represented the best of academic traditions to inform policy on systemic risk and data issues,” said Lemma Senbet, Director of the Center for Financial Policy.
Government regulators, industry leaders and academic researchers, including a Nobel Laureate, gathered to collaborate and discuss how systemic risk builds up in the economy, how it is conceptualized and how it is measured. Moreover, data issues were addressed through a panel consisting of representatives from industry as well as a representative of the International Monetary Fund. A follow-up synopsis will be developed by the conference’s program committee for submission to regulatory agencies and Congress.
The Oct. 5-6 conference, held at the Ronald Reagan Building and International Trade Center in Washington, D.C., opened with a keynote address from Sen. Jack Reed (RI). Reed is a senior member of the Senate Banking, Housing and Urban Affairs Committee and was instrumental in pushing through key Wall Street reform legislation. He spoke about the importance of the Dodd-Frank regulation — the most comprehensive financial reform legislation passed since the 1930s.
“The failure to effectively regulate the financial industry has created tremendous economic impact,” said Reed, pointing to the lagging economy and dismal jobs market. “We have to make sure Dodd-Frank is indeed effectively implemented.”
He talked about the Office of Financial Research and the Consumer Financial Protection Bureau, two new organizations created from the Dodd-Frank Act to give firms and regulators a real-time understanding of evolving risk in the financial system, to protect consumers, and to improve the regulatory efficiency of markets in the U.S. and around the world.
“If we set up a model that appears to be operating efficiently and effectively … then the rest of the world will follow,” Reed said.
The implementation challenges – and the reason attendees gathered for the conference – stem from the volume of data in the financial industry and how difficult it is for government and industry to coordinate the monitoring and absorption of data in a way that will mitigate systemic risk and head off future financial meltdowns.
“It’s very important that as academics, we not only write the research papers, but also engage with policy makers in Washington and leaders on Wall Street to come up with solutions for these kinds of financial and economic problems,” said G. “Anand” Anandalingam, dean of the Smith School.
Robert Engle, Nobel Laureate, spoke about his work with colleagues at NYU Stern on the failure of financial institutions and the option to institute more regulation to avoid having to bailout banks again in the future. He addressed how much capital a bank will need to ensure that tax-payers will not be on the hook for a rescue if we find ourselves in another financial crisis. In this spirit, Engle and colleagues have developed a method for monitoring and ranking financial institutions in terms of systemic risk.
Paper sessions focused on government itself as a source of risk, management and measurement of systemic risk, government guarantees and systemic risk, and mortgage data and incentives. One panel session focused on the volume and collection of financial data and how to sort through it while another session focused on the risks of the unregulated shadow banking industry, including a research presentation from Russell Wermers, associate professor of finance at the Smith School. This latter session also featured a keynote presentation on shadow banking and hedge funds from Andrew Lo, a professor at the Massachusetts Institute of Technology.
The conference wrapped up Thursday morning with a regulatory panel that highlighted views from high level officials from the five major regulatory agencies: Richard Berner, counselor to the Secretary of the Treasury, Office of Financial Research; Andrei Kirlenko, chief economist, Commodity Futures Trading Commission; Craig Lewis, chief economic and director of the Division of Risk, Strategy, and Financial Innovation at the Securities and Exchange Commission; and Art Murton, director of the Division of Insurance and Research at the Federal Deposit Insurance Corporation.
Conference papers and presentations can be found here.
Check back soon at the Conference Recap page for videos and photographs.
October 5th, 2011 by Eric Miller under News & Events. No Comments.
Finance Professor Michael Faulkender discusses his research on Executive Compensation on PBS Newshour’s segment, “In a Weak Economy, Why is CEO Pay on the Rise?”
Watch the video here.
His research was also highlighted in The Washington Post article, Cosy relationships and ‘peer benchmarking’ send CEOs’ pay soaring. Read the article here.
For more information on Professor Faulkender’s research, and the Center for Financial Policy’s research on executive compensation, please visit the Corporate Governance page on CFP’s website.
October 2nd, 2011 by Eric Miller under Faculty Commentary. No Comments.
by Phillip Swagel
CFP Academic Fellow and Professor of International Economics at the
Maryland School of Public Policy
In a recent American.com essay, Peter Wallison asserts that it is “completely frivolous” to believe that the government is incapable of resisting the urge to bail out the housing market. But history is not so kind to this assertion. Congress has taken many steps to foster homeownership and it seems far from frivolous to envision that Congress would act again in the future if mortgage credit dried up for American families. One can similarly imagine an intervention taking place if the secondary market in mortgage-backed securities locked up, since this in turn would likely lead to a lack of credit for new mortgages. After all, the Federal Reserve and Treasury Departments intervened in the fall of 2008 to stabilize money market mutual funds, which then consisted of not quite $4 trillion of assets. Housing-related securities are $10 trillion out of around $53 trillion in U.S. debt. While one can hope that a future administration and Congress in the midst of a financial crisis would avoid particular interventions, Wallison rests on just this—hope.
Wallison criticizes my proposal for housing finance reform that includes an explicit secondary government backstop on conforming mortgage-backed securities. He points out that the government will charge too little for providing the insurance. Oddly, Wallison writes as if my proposal does not recognize this. But a key facet of my proposal is to allow entry by new firms that securitize conforming MBS precisely because the government will inevitably underprice the guarantee. The competition from these entrants will help ensure that the implicit subsidy of underpriced insurance goes to homebuyers in the form of lower interest rates rather than being kept by GSE shareholders and management as in the previous system. Wallison does not have to agree with this proposed response to the inevitable government underpricing of insurance, but his criticism has a disingenuous flavor in pretending that it was not made.
My view is that the government will intervene in housing in the future and will underprice insurance today. As the saying goes, these are not problems to be solved, but instead facts of life that must be dealt with. My proposal for housing finance reform does so by ensuring that there is considerable private capital ahead of a secondary guarantee, taxpayers are compensated for taking on risk, and private market competition directs the benefits of the inevitable government subsidy to homeowners. Moreover, allowing for entry by new firms will eventually result in a housing finance system in which firms are no longer too big to fail.
The alternative espoused by Wallison would involve a system that is notionally private but in which the government guarantee is latent and uncompensated. Moreover, given that there is little prospect for the fully private alternative to ever come into being, holding out for it in fact leaves Fannie and Freddie in government hands—and the longer this persists, the more likely they will stay there forever. Waiting for a supposedly perfect but unattainable housing finance reform could instead leave us permanently with the worse alternative of a government-run housing finance system in which there is no private capital other than downpayments and none of the benefits of private sector competition and innovation.
This article was first published on American.com, the Journal of the American Enterprise Institute, on September 26, 2011.