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Improving State Revenue Forecasting: Best Practices for a More Trusted and Reliable Revenue Estimate

August 27, 2014 Comments off

Improving State Revenue Forecasting: Best Practices for a More Trusted and Reliable Revenue Estimate
Source: Center on Budget and Policy Priorities

Every state estimates how much revenue it will collect in the upcoming fiscal year. A reliable estimate is essential to building a fiscally responsible budget and sets a benchmark for how much funding the state will be able to provide to schools and other public services. Yet some states forecast revenues using faulty processes that leave out key players and lack transparency.

While there is no one right way to forecast revenues, research and experience suggest that states benefit from including both the legislature, the governor, and independent experts in the process from the start, giving the public, media, and advocates access to the deliberations and the data that go into the estimates, and regularly revisiting estimates during the budget session.

These components together create a strong, reliable revenue estimate. For example, a professional and open revenue estimating process makes revenue forecasts more transparent and accessible to the public and a broader group of legislators, which can lead to a healthier and more democratic debate and greater fiscal discipline.

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Corporate Inversions

August 22, 2014 Comments off

Corporate Inversions
Source: Urban Institute

Recently, there has been a spate of corporate inversions, where U.S. multinational corporations have combined with foreign companies, arranging their corporate structure to locate the residence of the resulting corporation in a foreign country with an attractive corporate tax climate. Several features of the U.S. tax system provide strong incentives for corporate inversion: a high statutory tax rate, a worldwide system of taxation, and limits on income shifting. Corporate inversions allow more flexible access to foreign cash stockpiles and easier shifting of income out of the U.S. tax base. The recent surge in inversions has likely resulted from the large accumulation of unrepatriated foreign cash together with pessimism about the prospect of policy changes that would reduce the U.S. tax burden associated with cash repatriations. If unfettered, corporate inversions are likely to undermine the U.S. tax base, so swift policy action is likely warranted. Inversions can be effectively addressed in a targeted fashion.

CRS — Systemically Important or “Too Big to Fail” Financial Institutions (August 8, 2014)

August 18, 2014 Comments off

Systemically Important or “Too Big to Fail” Financial Institutions (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Although “too big to fail” (TBTF) has been a perennial policy issue, it was highlighted by the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policy makers judge that their failure would cause unacceptable disruptions to the overall financial system, and they can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail create moral hazard—if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm’s riskiness because they are shielded from the negative consequences of those risks. If so, they could have a funding advantage compared with other banks, which some call an implicit subsidy. S.Con.Res. 8, passed by the Senate on March 22, 2013, and H.Con.Res. 25, as amended and passed by the Senate on October 16, 2013, create a non-binding budget reserve fund that allows for future legislation to address the TBTF funding advantage.

There are a number of policy approaches—some complementary, some conflicting—to coping with the TBTF problem, including providing government assistance to prevent TBTF firms from failing or systemic risk from spreading; enforcing “market discipline” to ensure that investors, creditors, and counterparties curb excessive risk-taking at TBTF firms; enhancing regulation to hold TBTF firms to stricter prudential standards than other financial firms; curbing firms’ size and scope, by preventing mergers or compelling firms to divest assets, for example; minimizing spillover effects by limiting counterparty exposure; and instituting a special resolution regime for failing systemically important firms. A comprehensive policy is likely to incorporate more than one approach, as some approaches are aimed at preventing failures and some at containing fallout when a failure occurs.

Pitfalls and Fraud In Online Advertising Metrics: Are Cheaters Hurting Your Bottom Line?

August 14, 2014 Comments off

Pitfalls and Fraud In Online Advertising Metrics: Are Cheaters Hurting Your Bottom Line? (PDF)
Source: Journal of Advertising Research

How does online advertising become less effective than advertisers expect and less effective than measurements indicate? The current research explores problems that result, in part, from malfeasance by outside perpetrators who overstate their efforts to increase their measured performance. In parallel, similar vulnerabilities result from mistaken analysis of cause and effect-errors that have become more fundamental as advertisers target their advertisements with greater precision. In the paper that follows, the author attempts to identify the circumstances that make advertisers most vulnerable, notes adjusted contract structures that offer some protections, and explores the origins of the problems in participants’ incentives and in legal rules.

A Real Fix for Credit Ratings

August 8, 2014 Comments off

A Real Fix for Credit Ratings
Source: Brookings Institution

The failure of credit ratings agencies to do their job – warn investors of the true risks entailed by the subprime mortgage securities they rated – was at the heart of the financial crisis. Policy makers since have wrestled with how to “fix” the ratings process going forward. Although the Securities and Exchange Commission has required the agencies to disclose more of their methodology, the ratings process is still less than transparent. The issuer-pay rating agency business model has been criticized as a central cause and new agencies designated by the SEC after 2008 moved away from this model, though they have since moved back. Various additional ideas to fix the system have been put forward but none has been adopted: randomizing the choice of ratings agency, or replacing private ratings with those of a public agency, such as the Securities and Exchange Commission.

Faulting the issuer-pay model for the Crisis, which has been in continuous use for more than 40 years cannot explain the sudden explosion and subsequent collapse of the securitization market, which occurred over a much shorter period. We offer a different approach here: by showing how the absence of a single, numerical, public structured credit scale to serve as a yardstick of structured credit quality in the U.S. debt capital markets provides a more plausible explanation for the problems in structured finance in particular. Transparent, numerical benchmarks of credit risk relating to structured credits should not only fix structured finance going forward, and ideally help resuscitate the market but in a more sensible fashion. In addition, we will argue that such benchmarks also are a necessary component to a prudent system of capital regulation and for accurately informing investors of true credit risk, just as speed limits are a necessary component of vehicular traffic regulation.

Source of Weakness: Worrisome Trends in Solvency Regulation of Insurance Groups in a Post-Crisis World

August 8, 2014 Comments off

Source of Weakness: Worrisome Trends in Solvency Regulation of Insurance Groups in a Post-Crisis World
Source: Brookings Institution

The regulation of insurer financial strength in the United States historically has focused on a fundamental principle: that the premiums and capital of any insurer are meant to pay the claims of that insurer’s policyholders and not to be drawn on to rescue a failing affiliate within the same group. This is a customer-centric approach, based on the individual insurance contract that is issued by a separately capitalized insurer for a specific period of time, in which the premiums charged are regulated based on that issuer’s solvency position and the risk assumed under that contract.

Since the financial crisis, however, international financial bodies, including the EU, have been pressing U.S. policy makers to adopt the EU’s very different approach toward insurance regulation for globally and systemically important insurers, and potentially for all insurers, borrowing from the banking industry the notion of “group capital” regulation. This latter approach ignores the legal separateness of the different entities belonging to the same group and makes all parts of a banking group financially responsible for each other, through the so-called “source of strength” doctrine for holding companies and “cross-guarantee” requirements for bank subsidiaries. In effect, group capital regulation is creditor-centric, and potentially ignores the specifics of individual insurance contracts.

The IMF crisis and how to solve it

August 7, 2014 Comments off

The IMF crisis and how to solve it
Source: Oxford Economics

As the IMF approaches its 70th birthday, this extract from our July UK Economic Outlook investigates the Fund’s Greek programme, one of the most credibility-sapping in its history. We trace the IMF’s role in the programme from its stormy launch to misfiring implementation; the Fund’s half-hearted apology; and its early (and ongoing) attempts to draw lessons and revise its sovereign debt restructuring framework, which appear destined to deliver insufficient meaningful change. A transparency revolution is both necessary and feasible. It worked for central banks in the 1990s. Why not the Fund?

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