• NYSE Reopens, but Questions Remain About Why it Didn't Implement Backup Plan During Storm

    The New York Stock Exchange reopened this morning after being closed for Monday and Tuesday as hurricane Sandy battered New York City.  But it remains something of a surprise that the NYSE was not able to implement a plan that would allow it to stay open via all-electronic trading.  The Wall Street Journal's Ken Brown reports that the NYSE wanted to do exactly that, but key firms balked at the idea:

  • Case-Shiller: Housing Prices Continued to Rise in August

    Home prices continue to rise across the nation.  Average home prices rose 0.9% in August, according to the latest S&P/Case-Shiller Home Price Indices release.  Home prices rose in 19 of the 20 metro areas that make up the 20-city composite index--with prices declining 0.1% in Seattle.  On an annual basis, prices rose 1.3% for the 10-city composite index and 2.0% for the 20-city composite. Here's a look at the long term trend:

    From the release, quoting David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices.

    “Phoenix continues to lead the home price recovery. It recorded its fourth consecutive month of double-digit positive annual returns with a +18.8% rate for August. Atlanta posted a -6.1% annual rate, however this is significantly better than the nine consecutive months of double-digit declines it posted from October 2011 through June 2012. Las Vegas’ annual rate finally moved to positive territory with a +0.9% annual rate of change in August 2012, its first since January 2007.

    “The sustained good news in home prices over the past five months makes us optimistic for continued recovery in the housing market.

    “News on home prices confirms other good news about housing. Single family housing starts are 43% ahead of last year’s pace, existing and new home sales are also up, the inventory of homes for sale continues to drop and consumer mortgage default rates are reaching new lows. Further consumer confidence continues to rise. Even as we end the seasonally strong home buying period, the statistics are positive. For the fifth time in a row, both Composites had monthly gains. Home prices in Seattle fell modestly in August, but other than that the 20 cities have also seen home prices generally improve since April.”

    Read the full release here.

  • SF Fed: 'Credit Access Following a Mortgage Default'

    In a new Economic Letter for the San Francisco Fed, William Hedberg and John Krainer take a look at the impact defaulting on a mortgage has on borrowers returning to the mortgage market.  Not surprisingly, it takes defaulters a long time to get back into the home-owning game.  For the vast majority (90%), that means not getting another mortgage for at least a decade.  So the idea that defaulting represents an easy way out of a bad investment, and therefore something of a clean slate, does not seem to hold up.  From the article:

    We treat access to credit as a decision more or less made by lenders. In other words, at what point are they willing to lend again to a borrower with a tarnished history? In reality, borrowers may not want credit. The data only show the quantity of credit outstanding. They do not directly indicate credit demand or supply, although some inferences regarding credit supply can be made.

    In addition, important institutional restrictions affect credit following mortgage default or foreclosure, especially mortgage borrowing. People with a major derogatory event on their credit history, such as foreclosure or bankruptcy, typically can’t qualify for a conventional loan securitized through government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac until four to seven years have elapsed, depending on circumstances surrounding the event. This restriction does not completely preclude lending to borrowers who have recently defaulted. A lender has the option of making the loan and keeping it on its own balance sheet instead of selling it to one of the GSEs. However, the GSEs own or guarantee the vast majority of new mortgages, which makes the restriction a powerful barrier keeping defaulters from returning to the market.

    The Equifax data confirm that a prior mortgage default has a large effect on future access to mortgage credit. Figure 1 shows the rate at which borrowers with different credit histories return to the mortgage market following a termination or exit. Termination is defined as having a zero mortgage balance after having a positive mortgage balance.

    The blue line in Figure 1 plots the rate for returning to the mortgage market for borrowers with no prior defaults or foreclosures. We do not know why these borrowers terminated their mortgages. They could have moved, or adjusted their housing expenditures by trading up or downsizing. Or they could have paid down their mortgages and now own their houses outright. We might expect that most borrowers who have paid off their mortgages will never return to the market. Indeed, 12 years after a termination, just above 35% of borrowers with no prior defaults have taken out new mortgages. This number may seem low. But, as the red line in Figure 1 shows, it is much higher than the average rate at which borrowers with prior defaults return to the mortgage market over the same time horizon.

    Read Credit Access Following a Mortgage Default here.

  • World Economic Forum: Global Gender Gap Report 2012

    The World Economic Forum's Global Gender Gap 2012 is out, and there are not many surprises at the very top of the list.  Iceland, Finland, Sweden, Norway and Ireland all hold their places in the top five.   There is one newcomer to the top 10.  Nicaragua comes in at number 9 in the Global Gender Gap Index, up from 27 in 2011 and 90th just five years ago.  The jump comes largely from a significant increase in the political empowerment of women in Nicaragua over the last year. That made up for a relatively poor ranking in economic participation of women.

    The Gender Gap index is based on the World Economic finding that greater participation of women in the labor force and in policy correlates with stronger economic performance overall.  As the report's authors note, "The most important determinant of a country’s competitiveness is its human talent—the skills, education and productivity of its workforce—and women account for one-half of the potential talent base throughout the world." The below figure, from the report, plots countries' Gender Gap scores against per capita GDP.

    From the report:

    The correlation among competitiveness, income and development and gender gaps is evident despite the fact that the Global Gender Gap Index (unlike other gender indexes) explicitly eliminates any direct impact of the absolute levels of any of the variables (e.g. life expectancy, educational attainment, labour force participation) used in the Index. While correlation does not prove causality, it is consistent with the theory and mounting evidence that empowering women means a more efficient use of a nation’s human talent endowment and that reducing gender inequality enhances productivity and economic growth.

    Over time, therefore, a nation’s competitiveness depends, among other things, on whether and how it educates and utilizes its female talent. In Figure 10, we plot the educational attainment subindex against the economic participation and opportunity subindex. The data in the Global Gender Gap Index reveals four broad groups of countries: (1) countries that are generally closing education gaps and show high levels of women’s economic participation, (2) countries that are generally closing education gaps but show low levels of women’s economic participation, (3) countries that have large education gaps as well as large gaps in women’s economic participation and (4) countries that have large education gaps but display small gaps in women’s economic participation.

    You can access the full report, including data tables, here.

    And watch a summary of the report below:

  • Personal Income and Spending Both Increase in September

    We are continuing to see some improving economic signals from American households.  Personal income and spending both increased in September, according to the Commerce Department.  The 0.8 percent increase in spending--personal consumption expenditures, to be specific--is a welcome positive economic indicator, following a decline in August.  Take a look at the monthly change:

    Here are the toplines from the Bureau of Economic Analysis:

    Personal income increased 0.4 percent in September after increasing 0.1 percent in August. Wages and salaries, the largest component of personal income, increased 0.3 percent in September after increasing 0.1 percent in August. Government social benefits to persons turned up in September.

    Real consumer spending, spending adjusted for price changes, increased 0.4 percent in September after increasing 0.1 percent in August. Spending on nondurable goods rose 0.5 percent after increasing 0.4 percent, while spending on services increased 0.2 percent after decreasing 0.2 percent.

    Read the BEA's full report here.

  • Andy Xie: 'Australian economy is probably a bubble on top of China's overinvestment bubble'

    Australia sat out the global economic crisis as much as any major economy could. Thanks to mining wealth and ripple effects from China, Australia has seen strong growth while trading partners in the West have struggled.  But Chinese economist Andy Xie, Director at Rosetta Stone Advisors, warns that Australia may be due for a financial crisis of its own in the coming year.  Writing at The Big Picture, Xie outlines the threat to an economy that may have become too closely tied to China's fortunes and easy credit:

    The Australian economy has boomed more than any other developed economy over the past decade. Its nominal GDP has doubled in a decade, and its currency value against the U.S. dollar has doubled too. As a result, its per capita income is much higher than in the United States or Europe. Its property is the most expensive among developed economies. The price of its main export, iron ore, appreciated ten times at its peak, which justified some of its prosperity. Foreign investment in its mining sector has played a more important role. It has caused the Australian dollar to appreciate strongly despite its current account deficit and higher inflation than elsewhere. The strong currency has attracted financial capital from retail investors in China and Japan. The snowball effect on the financial side has made the Australian economy strong despite the recent tumbling of the price of iron ore. As mentioned, the investment flow is sticky due to the long cycle of mining asset development.

    So much capital inflow has pumped up Australia’s monetary system, creating an environment of easy credit. This is the factor behind the real estate and consumption booms. If capital inflow is a bubble, Australia’s property market must be a bubble, too. When the capital inflow reverses, the bubble will pop.

    The Australian economy is probably a bubble on top of China’s overinvestment bubble. The latter’s unwinding will sooner or later trigger the former to do so, too. Among the mining investors I have met there is strong hope that China would soon introduce a stimulus like in 2008. This is why the price of iron ore has rebounded by 40 percent recently. Bottom fishers came in to speculate on China’s possible stimulus before or soon after the 18th Party Congress. They are likely to be disappointed. The last stimulus has made the overinvestment situation so severe that another round is just plain wrong. Also, it would trigger severe inflation and currency devaluation. I just don’t see it happening.

    Read A Hard Landing Down Under here.

  • Wharton's Guillen: 'It may not be more than two or three months' before Spain will need to be bailed out

    If the situation in Spain does not change soon, we may be looking at another EU bailout of a member nation.  In this short video, Wharton management professor Mauro Guillen says that the government's pro-cyclical policies may even drive Spain to a bailout in a matter of months.

  • Coming to Terms With Shifting U.S. Position in Global Economy

    In this week's New York Times Magazine, Adam Davidson does his best to get us to look away from the election and consider the future of the economy, and the U.S.'s economic relationship with emerging markets--China in particular.  While politicians talk about currency manipulation and the economic threat from abroad, Davidson argues that future growth depends on connecting effectively with consumers in China and other emerging markets.  The days of the U.S. being "the dominant producer and consumer" are over.

    As this political cycle comes to a close, it’s clear that the U.S. has entered a new economic chapter. By the next election, the upheaval of the past few years will have (hopefully) settled, and we’ll be looking at a clearer vision of our future. I asked several leading experts to project what the U.S. will look like by 2016, and there was a consensus. Instead of a sudden bounce back, Harvard’s Jeffry Frieden told me, there will be steady but far-too-slow growth. Unemployment will be at around 6.4 percent, according to Nigel Gault of IHS Global Insight, an economic forecaster. More significant, by 2016, Frieden and Bremmer noted, the U.S. will be adjusting to an economy in which inequality is a structural fixture. There will be millions who are unable to get work, and tens of millions more who will have to adapt to lower income. Meanwhile, those with college and advanced degrees will experience a country that has rebounded. Their incomes will grow.

    China’s economy probably won’t eclipse the U.S. economy until some time in the 2020s, but by 2016, far fewer Americans will believe that the U.S. can stop China from manipulating its currency or doing whatever else it wants. By then Americans will probably have experienced its economic might firsthand. Brent Iadarola, a director at the industry-research firm Frost & Sullivan, told me that the new global economy will look like our current mobile-phone market. Nearly every American adult has a cellphone, but only 40 percent of them have an iPhone, Android or other smartphone. As such, the industry is expecting rapid growth in the next few years. By 2016, though, the U.S. market should be saturated, and smartphone manufacturers will have to add a lot of new features just to get a small number of people to upgrade. There won’t be large growth or large profits in the U.S. The major companies — and the secondary economy of case makers and app designers — will be focused on the tastes of emerging markets in Asia, Eastern Europe, Latin America and Africa.

    It’s also going to be much clearer to American workers in various industries that many of their best opportunities are overseas. Pharmaceutical companies are encouraged by the U.S. market in the next few years partly because so many baby boomers are reaching their peak medicine-consuming years. Once that market begins to disappear, though, Big Pharma will most likely pursue the billions of middle-aged people in quickly advancing poor countries. (They’ll have their work cut out for them competing against generic and local companies, but the potential is extraordinary.) According to the IMS Institute for Healthcare Informatics, 41 percent of all drugs sold throughout the world in 2006 were sold to Americans. Only 14 percent of drugs were sold to all of the emerging markets combined. By 2016, IMS expects that patients in those markets will buy the same value of drugs as Americans.

    Read Will We Be Better Off in 2016? here.

  • Commerce Department: US GDP Rises 2.0% in 3rd Quarter

    Real GDP grew at an annual rate of 2.0% in the third quarter of 2012, according to an advance estimate just released by the Commerce Department. According to the Bureau of Economic Analysis, personal consumption expenditures (PCE), federal government spending, and residential fixed investment were the primary drivers of the third quarter growth:

    Real personal consumption expenditures increased 2.0 percent in the third quarter, compared with an increase of 1.5 percent in the second. Durable goods increased 8.5 percent, in contrast to a decrease of 0.2 percent. Nondurable goods increased 2.4 percent, compared with an increase of 0.6 percent. Services increased 0.8 percent, compared with an increase of 2.1 percent.

    Real nonresidential fixed investment decreased 1.3 percent in the third quarter, in contrast to an increase of 3.6 percent in the second. Nonresidential structures decreased 4.4 percent, in contrast to an increase of 0.6 percent. Equipment and software decreased less than 0.1 percent, in contrast to an increase of 4.8 percent. Real residential fixed investment increased 14.4 percent, compared with an increase of 8.5 percent.

    Real exports of goods and services decreased 1.6 percent in the third quarter, in contrast to an increase of 5.3 percent in the second. Real imports of goods and services decreased 0.2 percent, in contrast to an increase of 2.8 percent.

    Real federal government consumption expenditures and gross investment increased 9.6 percent in the third quarter, in contrast to a decrease of 0.2 percent in the second. National defense increased 13.0 percent, in contrast to a decrease of 0.2 percent. Nondefense increased 3.0 percent, in contrast to a decrease of 0.4 percent. Real state and local government consumption expenditures and gross investment decreased 0.1 percent, compared with a decrease of 1.0 percent.

    Read the BEA release here.

  • The Benefits of Graceful, Deliberate Leadership

    If you're looking to the animal world for guidance on how to be an effective leader, you might want to avoid the big, bold aggressive beasts out there and consider the swan.  Gill Rider, president of the Chartered Institute of Personnel and Development says the most effective leaders are swan-like.  They are calm, and they always seem to know exactly where they are going and what they are doing.  Rider shares an anecdote to make her point about authentic leadership in this Harvard Business Insight video:

  • Infographic: Cost of Living Around the Globe

    We're based in Vancouver for a couple of days, and we've been struck by how expensive certain items are compared to other cities (Great food trucks, and we'll keep going back.  But we'll also keep being surprised at double digit prices on street food).  So we were poised to jump into some data when The Big Picture pointed us to Mercer's 2012 Cost of Living Survey.  It is always fascinating to see how some cities can offer relatively affordable options in one category of consumer goods, and then have others be so expensive. The full report is worth your time.  But we love this highly informative infographic (for full size, click here):

  • Midsize Businesses' Big Impact

    At Bloomberg Businessweek, Peter Coy speaks up for the not-so-little guy.  With small business getting all the attention in political debates, Coy points out that midsize businesses (annual revenue between $10 million and $1 billion) "account for one third of private-sector employment."  And those businesses can la a claim for being growth engines.  Coy writes:

    The National Center for the Middle Market is studying those neglected midsize companies with funding from GE Capital (GE), the biggest supplier of financing to the sector. The center is part of Ohio State University’s Fisher School of Business. It conducts a quarterly survey of 1,000 companies that’s designed to reflect the composition of the entire sector.

    On Oct. 24, the center announced that middle market companies increased head count by 2.2 percent over the 12 months through the third quarter, outpacing what it said was 1.7 percent growth in economywide employment. (The Bureau of Labor Statistics puts the economywide figure at 1.4 percent.)

    Revenue grew 5.5 percent over the year, vs. 1.6 percent for the big companies in the Standard & Poor’s 500-stock index, according to the National Center for the Middle Market.

    “Quarter after quarter, we see middle market firms emerge as the engine of growth in the U.S. economy,” Anil Makhija, who is the center’s academic director, said in a statement.

    Read Midsize Companies Get No Respect here.

  • American Workers Age 35-44 Most Concerned About Retirement Funds

    The Pew Research Center reports that more Americans are worried now that they will not have enough money for retirement than five years ago.  That's not much of a surprise.  What is striking from this Pew survey is the age of the people most worried.  Take a look:

    From the report:

    In 2009 it was “Gloomy Boomers” in their mid-50s who were the most worried that they would outlive their retirement nest eggs. Today, retirement worries peak among adults in their late 30s—many of whom are the older sons and daughters of the Baby Boom generation. According to a Pew Research analysis of Federal Reserve Board data, this is also the age group that has suffered the steepest losses in household wealth in recent years.

    The new Pew Research survey finds that among adults between the ages of 36 and 40, 53% say they are either “not too” or “not at all” confident that their income and assets will last through retirement. In contrast, only about a third (34%) of those ages 60 to 64 express similar concerns, as do a somewhat smaller share (27%) of those 18 to 22 years old.

    These findings stand in sharp contrast to the age pattern that emerged when the same question was asked in a Pew Research survey conducted in 2009. In that poll it was Baby Boomers between the ages of 51 and 55 who were the most concerned that their money would not last through their retirement years. Only 18% of those 36 to 40 years old were similarly worried they would fall short financially after they retire—a third of the share who express a similar concern today.

    Read the full report here.

  • Marketplace Whiteboard: Dividend Recapitalization

    In what the Wall Street Journal's Ryan Dezember and Matt Wirz described last week as a "controversial practice," more private equity firms are using dividend recapitalizations to increase the payoff from investments.  In short, this involves firms increasing debt at companies they own to make them higher yield investments.  But for a more thorough explanation, we turn to Paddy Hirsch and his Marketplace Whiteboard:

  • Planet Money: Age and Income in Graphs

    As Lam Thuy Vo points out, Planet Money has been researching and reporting a lot about household income and spending.  And now Lam breaks it down by age, in a couple of interesting graphs.  Here is one:

    Not really a surprise to see the shifts in household income over time, but it useful to have the detailed breakdown.  Click here for more.

  • McKinsey Quarterly: IT-Savvy Strategy Starts with the Board

    At most companies, there is a great distance between the IT help desk and the boardroom--if not literally then at least figuratively. This may be a leading reason why some companies fall behind in their technological growth, and then suffer the consequences in growth and earnings.  The McKinsey Quarterly is currently featuring a lot of papers and articles on the importance of IT strategy.  In one, from Michael Bloch, Brad Brown, and Johnson Sikes, the onus for IT advancement is put on corporate board members.  In companies where board members guide technology "by asking the right questions," advancement happens more strategically and rapidly.  But it takes having at least one board member who is "IT-savvy":

    Greater board involvement in technology matters means that corporate directors, just like CIOs, have to raise their game. Many more boards are seeking to better understand technology issues and their business implications than they have in the past. For boards that are lacking in this regard, there are ways to build the expertise that will enable them to have constructive dialogues with IT.

    One approach is to bring on, over time, more board members with technology backgrounds who can help start these conversations more organically during the course of board meetings. A recent report from Spencer Stuart4 indicated that 20 percent of boards are actively looking for directors who have this expertise. Finding the right board member can pay significant dividends. This is borne out by survey results (Exhibit above) and our client experience.

    Some boards are also considering their own “technology boot camp” training sessions, much like the risk or accounting training that some boards conduct for committee members. Although this will not turn board members into experts, it would give them a chance to become familiar with the core issues.

    Strengthen the technology governance structure. While boards often need to improve their technology expertise, there are also structural steps that can make them more effective stewards. One is to create a technology-focused committee to ensure more frequent and directed discussions on these topics. Twenty-two percent of survey respondents reported that their companies’ boards had a committee responsible for technology oversight. It is important to remember, however, that delegating this work to a committee does not relieve the full board of broader responsibilities, such as discussing technology trends.

    Read Elevating technology on the boardroom agenda here.

  • Potholes on the Road Toward Greater European Integration

    Leading German economist Hans-Werner Sinn counts himself among those post-war Europeans who saw a more unified Europe--"the idea of a United States of Europe"--as an ideal step toward lasting stability.  But, writing at Project Syndicate, Sinn shares concern that some centralized European institutions, like the European Central Bank, are taking steps that build greater rifts, rather than unity, among member states.

    Perhaps the idea of a United States of Europe, the dream of post-war children like me, can never be realized. But I am not so sure. After all, deeper European integration and the creation of a single political system offer solid, practical advantages that do not require a common identity or language. These advantages include the right to move freely across borders, the free movement of goods and services, legal certainty for cross-border economic activities, Europe-wide transportation infrastructure, and, not least, common security arrangements.

    Banking regulation is the most topical area in which collective action makes sense. If banks are regulated at the national level, but do business internationally, national regulatory authorities have a permanent incentive to set lax standards to avoid driving business to other countries and to lure it from them instead. Regulatory competition thus degenerates into a race to the bottom, since the benefits of lax regulation translate into profits at home, while the losses lie with bank creditors around the world.

    There are many similar examples from the fields of standards, competition policy, and taxation that are applicable here. So, fundamental considerations speak for deeper European integration, extending even to the creation of a single European state. Comments

    making bodies not only provide services that are useful to everybody, but also may abuse their power to redistribute resources among the participating countries. Even democratic bodies are not immune to this danger. On the contrary, they make it possible for majorities to exploit minorities. To counter this threat, democratic bodies invariably need special rules to protect minorities, such as the requirement of qualified majority voting or unanimous decision-making.

    Read Europe's Path to Disunity here.

  • IMF Report: 'Can Women Save Japan (and Asia Too)?'

    Some Asian economies have a women problem.  According to a new report from IMF senior economist Chad Steinberg, women in Japan and Korea find it difficult to participate in the labor force--at a rate higher than in other developed economies.  

    The reasons, according to the report, are part cultural, but are often driven by policy as well.  And this has an effect on the growth potential of the economy as a whole.

    In a 2010 survey of Japanese women by the Ministry of Internal Affairs and Communication, 34 percent of respondents cited housework and 14 percent working hours as the primary reason they were not participating in the workforce. A similar survey in Korea, by the Ministry of Labor in 2007, found that for 60 percent of the women surveyed, child rearing was the biggest obstacle to participating in the labor force. The difficulties of this balancing act are reflected in the sharp drop-off in labor participation rates of women in their late twenties and early thirties. This is particularly true in Japan, even though its labor participation rate for women at the start of their careers is as high as in comparator countries.

    Government policy has made a difference in many northern European countries. In Sweden, for example, the government has established a comprehensive parental leave policy, a highly subsidized child care system, and a strict policy of shorter working hours for women. These systems have resulted in high rates—over 90 percent—of women returning to the workforce following childbirth. In the Netherlands, meanwhile, the emphasis has been on making part-time work as attractive as full-time work, with comparable hourly wages, benefits, and employment protection. This is an important lesson for Japan and Korea, where the increasing prevalence of dual labor markets—favoring insiders over new participants—could be discouraging potential part-time workers, who tend to be women with family responsibilities, from entering the labor force.

    You can read the full report here.  And watch a short summary of the report in the below video:

  • BLS State and Regional Job Report: Unemployment Declined in 41 States in September

    As the national unemployment rate continues a slow steady decline, some states and regions have seen sharper changes.  Among the thirty states that have had statistically significant changes in employment since September 2011, only West Virginia has seen a decrease in jobs, according to the Bureau of Labor Statistics.  Overall 41 states had increases in employment between August and September 2012, while six had decreases.  From the BLS report on regional and state employment:

    Among the nine geographic divisions, the Pacific continued to report the highest jobless rate, 9.7 percent in September. The West North Central again registered the lowest rate, 5.7 percent. Five divisions experienced statistically significant unemployment rate changes over the month: the Pacific and West South Central (-0.3 percentage point each), the Mountain and West North Central (-0.2 point each), and the South Atlantic (-0.1 point). Seven divisions had significant rate changes from a year earlier, all of which were decreases. The largest of these declines occurred in the Pacific.

    Nevada continued to record the highest unemployment rate among the states, 11.8 percent in September. Rhode Island and California posted the next highest rates, 10.5 and 10.2 percent, respectively. North Dakota again registered the lowest jobless rate, 3.0 percent. In total, 21 states reported jobless rates significantly lower than the U.S. figure of 7.8 percent, 14 states had measurably higher rates, and 15 states and the District of Columbia had rates that were not appreciably different from that of the nation.

    Seventeen states reported statistically significant over-the-month unemployment rate decreases in September. The largest of these occurred in South Carolina (-0.5 percentage point), followed by California, Hawaii, Louisiana, and Utah (-0.4 point each). The remaining 33 states and the District of Columbia recorded jobless rates that were not measurably different from those of a month earlier, though some had changes that were at least as large numerically as the significant changes.

    Read the full report here.

  • Economist: Lessons Not Learned from Black Monday

    Today marks the biggest one-day decline in the Dow Jones Industrial Average's history--it dropped 508 points, nearly 23%--which we have come to know as Black Monday.  The Economist says the response was to look back and make comparisons with the 1929 crash.  But had analysts looked forward, they may have made some decisions that could have helped us avoid some of the problems of the last 5 years.  The Economist lists three reasons "why the crunch happened in 2007 date back to 1987." Here's the first:

    The biggest mistake was to do with monetary policy. Central banks around the world responded quickly to the crash, some cutting interest rates, others pumping money into the system. “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system,” said Alan Greenspan, recently appointed as head of the Fed. Calming a fraught financial system made sense at the time, but it introduced the idea of the “Greenspan put”, the notion that central banks would always intervene to support the markets when they fell sharply.

    This was compounded by Mr Greenspan taking the opposite position when it came to asset bubbles: that even when prices were sky-high, it was not the job of central banks to outguess markets by trying to bring them back to earth. The one-day price fall of 23% in 1987, seemingly unconnected to economic fundamentals, gave a hint that markets are not always efficient. But Mr Greenspan declined this newspaper’s advice to intervene both when dotcom stocks surged in the late 1990s and when house prices rocketed in the early 2000s. For investors, markets became a one-way bet: central banks would intervene when markets were falling, but not when they were rising. The “great moderation” was a long period of steady growth and low inflation—and a huge build-up of debt.

    Read Black Marks from Black Monday here.

    The Big Picture has compiled some archive media from 25 years ago.  Click here and here to go into the way back machine and see some of the coverage of Black Monday.

  • The Potential Impact of Slowing Growth in China on Global Economy

    China's GDP grew at a rate of 7.4% over the last quarter.  That's a rate of growth that would be welcome most places, but it is down from 7.6% the previous quarter.  With the rate of growth in China slowing for nearly two years, some are concerned about what that means for the global economy. 

    The Wall Street Journal's Yun-Hee Kim and Bob Davis discuss the impact of the new growth figures from China on the economy here and elsewhere:

  • OECD: Continuing Growth in India Will Depend on Continuing Reform

    A new report in the OECD's Better Policies series focuses on growth in India.  While commending India for making structural reforms that helped spark two decades of rapid growth, the report makes it clear that future growth will depend on additional reforms.  One area to target, according to the OECD, is inequality.  While India has made great strides in reducing absolute poverty, rising inequality matches that of other emerging economies like neighboring China:

    From the report:

    The Government’s recent Approach to the 12th Five Year Plan recognises that further lowering the incidence of poverty and reversing the pattern of growing inequality will require a comprehensive strategy. Many key elements of this multi-dimensional approach are addressed in the other chapters of this document, including policies to improve health, nutrition and educational outcomes (see dedicated chapters). In addition, labour market reforms could help reduce the segmentation between formal and informal employment. The tax system delivers only modest redistribution. In the context of the ongoing reform of direct taxation, increasing the tax free-threshold could increase the redistributive effects of the system.

    There is also scope for making social spending a more powerful tool to deal with rising inequality. Social spending, which amounts to about 5% of GDP in India, is low by international standards, including in comparison to other large emerging economies. However, India does not have much fiscal space to increase social spending, given the high general government deficit. Nevertheless, better targeting of inefficient subsidies offers a potential path for reform. Correcting the serious problems of “leakages” in the subsidies delivered through the public distribution system should be a priority. In addition, eliminating environmentally-harmful subsidies, which are poorly targeted to address poverty, should also be considered. Replacing these subsidies by more direct support to poor households can increase equity. Improving human development outcomes will also require specific and well-targeted programmes. One very important example is the National Rural Employment Guarantee Scheme (NREGS), which provides 100 days or more of employment at a wage determined by the central government to any member of a rural household who wishes to participate. The government may consider maintaining under check the cost effectiveness of the NREGS, which is essential to realize its potential as a mechanism for helping those most in need. In particular, this requires securing that wages are set at a level around the minimum wage, which is very low in India. By limiting the risk of attracting workers with viable alternatives, this would reinforce the important selfselection property of the mechanism.

    Read the report here.

  • Reinhart and Rogoff: 'U.S. Recoveries Really Aren't Different'

    Carmen Reinhart and Kenneth Rogoff seem a little miffed at op-ed writers who are once again pushing the notion that the American economy is so distinct that comparisons with recessions elsewhere and at other times are not relevant in understanding the challenges here.  Reinhart and Rogoff thought they dealt with this in their book, This Time Is Different: Eight Centuries of Financial Folly, but they have taken to Bloomberg News to make their points clear:

    Although no two crises are identical, we have found that there are some recurring features that cut across time and national borders. Common patterns in the nature of the long boom-bust cycles in debt and their relationship to economic activity emerge as a common thread across very diverse institutional settings.

    The most recent U.S. crisis appears to fit the more general pattern of a recovery from severe financial crisis that is more protracted than with a normal recession or milder forms of financial distress. There is certainly little evidence to suggest that this time was worse. Indeed, if one compares U.S. output per capita and employment performance with those of other countries that suffered systemic financial crises in 2007-08, the U.S. performance is better than average.

    This doesn’t mean that policy is irrelevant, of course. On the contrary, at the depth of the recent financial crisis, there was almost certainly a risk of a second Great Depression. However, although it is clear that the challenges in recovering from financial crises are daunting, an early recognition of the likely depth and duration of the problem would certainly have been helpful, particularly in assessing various responses and their attendant risks. Policy choices also matter going forward.

    It is not our intention to closely analyze policy responses that may take years of study to sort out. Rather, our aim is to dismiss the misconception that the U.S. is somehow different. The latest financial crisis, yet again, proved it is not.

    Read Sorry, U.S. Recoveries Really Aren’t Different here.

  • Alvin Roth on 'Rationality and Irrationality in Market Design'

    Now that Alvin Roth has a Nobel Economics Prize, we all have more reason than ever to further explore his ideas on market design.  Here is a lecture he gave in Jerusalem, at the Center for the Study of Rationality's 20th anniversary last year.  In the talk, Roth shares some market failures and some market successes.  Among the case studies he discusses are school choice in Boston and organ transplants.

  • China's Emerging Provinces and Their Impact on Per Capita Income Growth

    We are expecting that growth in China will have to slow down as the median income level in the country rises.  But that analysis may be the result of neglecting what is happening across China.  In a new Economic Letter for the San Francisco Fed, Israel Malkin and Mark Spiegel point out that there is a lot of room for income growth in emerging cities throughout China.

    Recent evidence suggests that the poorer Chinese provinces are catching up with their richer counterparts, at least on average. This phenomenon, called convergence, has been observed widely in other countries, including the United States, where poorer states have tended to grow income faster than richer states (see Barro and Sala-i-Martin 1992).

    Figure 1 displays average growth rates for Chinese provinces since 2000. There is a negative relationship between a province’s income in 2000 and its subsequent growth. China’s two wealthiest provinces, Beijing and Shanghai, have had the lowest per capita growth since 2000.

    We divide China’s provinces into higher and lower-income groups, examining their prospects for continued growth based on current income levels. Provinces with per capita income below $10,000 are identified in blue as emerging. Provinces above that level are identified in red as developed. We then perform a statistical exercise, using data from a group of other Asian economies that have had rapid growth experiences to predict expansion rates for these two groups of Chinese provinces.

    Our results indicate that growth of the wealthier portion of China is likely to slow, but substantial room remains for continued growth in China’s interior. For example, among the advanced Chinese provinces, average growth is predicted to slow to 7% in the five years beginning in 2016. However, growth among China’s emerging provinces is not expected to fall to that rate until sometime during the five years beginning in 2024. Thus, the emerging Chinese provinces are predicted to enjoy more than an additional decade of high growth before succumbing to the middle-income trap.

    Read the full Economic Letter here.