Monday, August 27, 2007

We think it's important but we know little about it 

The new semi-annual NABE Policy Survey is out from the National Association of Business Economists, and it reports a sharp uptick in concern over subprime mortgages and credit more generally among the 320 economists surveyed (I am one.)
�Financial market turmoil has shifted the focus away from terrorism and toward subprime and other credit problems as the most important near-term threats to the U.S. economy,� says Carl Tannenbaum, NABE President and Chief Economist, La Salle Bank/ABN-AMRO. �However, these concerns appear to be somewhat transitory, as the five-year outlook for housing remains positive.�
The reading for terrorism as a the top short-term concern dropped to 20% of respondents from 35% in March and 34% last August. 18% listed subprime loan defaults and 14% listed excessive household or business debt as their top concern. And yet the survey, which ran from late July to August 14, shows 72% of respondents still think monetary policy has been "about right", down from 81% last March. 16% thought it now "too restrictive." Most interestingly, 19% say they preferred more stimulative monetary policy for the next six months and 12% more restrictive. It would be interesting to hear if that opinion has changed over the last two weeks (mine has not, though I did indicate I expected a 50 bp decline in rates over the next six months -- I would take that to 75 now.)

That's all quite reasonable, but what bothered me was this paragraph:
Despite the prevalence of NABE members holding advanced degrees in economics and other business-related disciplines, substantial percentages admitted to having little or no familiarity with the structure, activities, and risks associated with hedge funds (45%), private equity funds (40%), asset-backed securitization (48%), credit default swaps (CDS, 68%) and collateralized debt obligations (CDOs, 51%).
And yet in the very next paragraph a good number want more regulation of these very same instruments and institutions.
In terms of regulation and reporting requirements, members were generally split between �fine as is� and �prefer more,� with the greatest need for regulatory and reporting enhancements seen for hedge funds (57%) and CDOs (48%).
If you don't understand the instruments, why are you asking for more regulation?