● Misunderstanding Financial Crises: Why We Don’t See Them Coming
By Gary Gorton
Summary via publisher, Oxford University Press
Before 2007, economists thought that financial crises would never happen again in the United States, that such upheavals were a thing of the past. Gary B. Gorton, a prominent expert on financial crises, argues that economists fundamentally misunderstand what they are, why they occur, and why there were none in the U.S. from 1934 to 2007. Misunderstanding Financial Crises offers a back-to-basics overview of financial crises, and shows that they are not rare, idiosyncratic events caused by a perfect storm of unconnected factors. Gorton shows how financial crises are, indeed, inherent to our financial system. Economists, Gorton writes, looked from a certain point of view and missed everything that was important: the evolution of capital markets and the banking system, the existence of new financial instruments, and the size of certain money markets like the sale and repurchase market. Comparing the so-called “Quiet Period” of 1934 to 2007, when there were no systemic crises, to the “Panic of 2007-2008,” Gorton ties together key issues like bank debt and liquidity, credit booms and manias, moral hazard, and too-big-too-fail–all to illustrate the true causes of financial collapse. He argues that the successful regulation that prevented crises since 1934 did not adequately keep pace with innovation in the financial sector, due in part to the misunderstandings of economists, who assured regulators that all was well.
US Economic Growth Strengthened In Third Quarter
The U.S. economy grew at an annualized 2.0% rate in the third-quarter, the Bureau of Economic Analysis reports in its initial GDP estimate for the July-to-September period. That’s an improvement over Q2’s sluggish 1.3% pace, and another sign that recession risk in recent months was considerably lower than the dire warnings issued by some analysts.
Chicago Fed: September Economic Improves
Yesterday’s update of the Chicago Fed National Activity Index (CFNAI) strengthened the case for what’s become obvious in recent weeks: economic conditions overall improved modestly in September. Last week’s review of the numbers published to date certainly looked encouraging, as tracked by The Capital Spectator Economic Trend Index (CS-ETI). Not surprisingly, the September read on the economy via CFNAI tells a similar story.
Today’s Economic Reports Bring A Sigh Of Relief
Today’s updates on jobless claims and durable goods orders bring good news, or at least good relative to the worst fears inspired by recent data points in these series. There’s still plenty to worry about and it’s premature to conclude that we’ve pulled out of the bog with these statistics. But if you’re looking for fresh evidence that the economy is crumbling, you won’t find it in the numbers du jour.
New Home Sales Rise In September, But…
The pace of new home sales in September rose nearly 6% vs. August and is up 27% vs. a year ago, the Census Bureau reports, offering more evidence that the housing market continues to improve. The volume of new sales is still far below the pre-Great Recession levels, but in the here and now it’s no trivial matter that residential real estate is on the mend. Housing, after all, is said to cast a long shadow on the economy through a variety of channels, and so every month of improvement brings a bit more confidence for thinking that the economy can continue to muddle forward.
Strategic Briefing | 10.24.12 | ADP Revises Employment Report Methodology
ADP and Moody’s Analytics Enhance ADP National Employment Report
Press release via ADP | Oct 24
ADP, a leader in human capital management services, and Moody’s Analytics, a leading independent provider of economic forecasting, today announced enhancements to the ADP National Employment Report, ADP’s widely followed gauge of U.S. nonfarm private sector employment. The newly expanded ADP National Employment Report will be issued each month by the ADP Research InstituteSM, a specialized group within ADP that provides insights around employment trends and workforce strategy. The first enhanced monthly report issued in collaboration with Moody’s Analytics will be released on November 1, and will report private payroll changes for the month of October 2012.
Passive Asset Allocation Vs. The World
What can you expect from a passive asset allocation strategy that owns all the major asset classes? More than you might think. Owning everything has a tendency to deliver average-to-above-average returns relative to a broad set of actively managed asset strategies across the risk spectrum. Surprised? You shouldn’t be.
Still Joined At The Hip: Inflation Expectations & Stocks
The connection between the stock market and inflation expectations may not be on everyone’s radar these days, but the link remains strong. That’s unusual across the broad sweep of investment history, but it’s par for the course in the new world order of the last four years. I call it the new abnormal, and it continues to roll on. Stocks have rallied smartly since (notwithstanding Friday’s sharp selloff) and the market’s estimate of future inflation has climbed too (based on implied inflation via the yield spread in the 10-year Treasury less its inflation-indexed counterpart). Random events? Guess again.
Book Bits | 10.20.12
● The Big Flatline: Oil and the No-Growth Economy
By Jeff Rubin
Excerpt via Bloomberg
For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies.
The countries guzzling the most oil are taking the biggest hits to potential economic growth. That’s sobering news for the U.S., which consumes almost a fifth of the oil used in the world every day. Not long ago, when oil was $20 a barrel, the U.S. was the locomotive of global economic growth; the federal government was running budget surpluses; the jobless rate at the beginning of the last decade was at a 40-year low. Now, growth is stalled, the deficit is more than $1 trillion and almost 13 million Americans are unemployed.
Wrestling With Forecasting
All forecasts are wrong. That’s the nature of trying to look through the fog of uncertainty for guidance on the future. Some forecasts are less wrong than others, of course, but it’s always sensible to assume that the prediction du jour contains noise. That doesn’t mean that forecasting is worthless, but it does make predictions dangerous if you don’t look at the estimates in probabilistic terms. But that’s hardly standard procedure in the wider world. Thinking through the finer points for forecasting is too often neglected, and sometimes ignored entirely.