Category Archives: Finance

US Fed as Lender of the Last Resort?

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Ben Bernanke writes: Earlier this week Senators Elizabeth Warren (D-Massachusetts) and David Vitter (R-Louisiana) introduced a bill they call the “Bailout Prevention Act of 2015.” If enacted, the bill would further restrict the Federal Reserve’s emergency lending powers in a financial crisis. That would be a mistake, one that would imprudently limit the Fed’s ability to protect the economy in a financial panic.

During the 2007-2009 crisis, the Fed used its emergency lending authorities in two quite different ways. First, it made loans to help prevent the collapse of two systemically critical firms, Bear Stearns and AIG. The Fed took these actions, with the support of the Treasury, because it feared that the disorderly failure of a large, complex, and highly interconnected firm would greatly worsen the financial panic and damage the economy—a judgment confirmed by the aftermath of the bankruptcy of Lehman Brothers in September 2008. Second, the Fed created a variety of broad-based lending programs, to unfreeze dysfunctional markets and to help stem devastating runs that left whole sectors of the financial system without adequate funding. In providing this funding via short-term, fully collateralized loans, the Fed was fulfilling the traditional central bank role of serving as lender of last resort. This lending, all of which was repaid with interest, was essential for stabilizing the financial system and restoring the flow of credit.   Should the US Fed be Lender of the Last Resort

Lender of the Last Resort

Do Business Qualifications Work for a Political Leader?

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Robert E. Litan writes:  It’s impossible for anyone to come into the White House with all the skills required to be a good president. We can know that key traits include intelligence, both cognitive and emotional; self-confidence; and decisiveness. Also needed are the ability to communicate; to listen and learn; to delegate; to recognize problems–and a sense of humor and humility.

Candidates’ stands on the issues are critical in primaries and in the general election, but I suspect that the views of many independent voters–whose ranks are growing–may not be as intensely held as those of partisan voters.

Given Americans’ widespread frustration with traditional politicians, it is understandable why a few candidates with at least some business experience have entered the fray. Having run a business exposes one to how government affects the private sector, which is the engine of economic growth and drives improvements in living standards.
But running a private-sector business is very different from heading a federal government that employs millions, and that takes in and spends trillions, while also dealing with a wide range of domestic and foreign policy issues, many of which demand immediate attention. These things require dexterity–and the combined challenges are ones that no business ever comes close to dealing with. (Probably the closest experience to the presidency is running a large state. But even then, no governor has had to confront the range of foreign policy challenges facing the president.)

A critical difference between running a business and government is that CEOs can usually make sure that their orders are carried out; and if they’re not, those who didn’t do their jobs can be fired. Imagine a president tried working with Congress that way.

One might think that military leaders would face the same problem, but successful generals, especially in recent times, have had to develop and hone political skills as well as knowing how to fight. Gen. Dwight Eisenhower is now regarded as a good president not only because of his military experience but because he also was a politician-administrator while commanding allied forces during World War II.

Some 2016 voters will cast ballots based on particular issues. But for others, particularly those who believe this country is on the wrong track, a candidate running on his or her business background in an effort to stand out from the pack is not likely to have the qualifications most important to being a successful president.

 Leadership?

Whole Foods Sets Up a Trader Joe’s Division?

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Robyn Bolton writes:  The news that Whole Foods will open a separate chain of stores designed to appeal to millennials stopped me mid-aisle. According to Whole Foods co-CEO Walter Robb, these future stores will feature “modern, streamlined design, innovative technology, and a curated selection” of lower- priced organic and natural foods.
As millennials would write—facepalm.

By relying on demographics to define a consumer base, executives are implicitly, or explicitly, saying that all people of a certain demographic (in this case the same age cohort) are the same and that they are also distinctly different from everyone in other demographics.  This flawed approach applies not just to Whole Foods but to any business.

A better approach is to target and design for consumers based on what my colleagues and I call their “jobs-to-be-done” – the fundamental problems they are trying to solve or goals they are trying to achieve. By understanding consumers’ jobs, companies can identify what drives their behavior and their buying decisions—and then create offerings that resolve their most important and unsatisfied jobs.

Within its existing stores, Whole Foods has demonstrated its ability to successfully design offerings that satisfy a range of functional, emotional, and social jobs.

Certainly, Whole Foods’ concerted effort to solve important jobs that are not currently satisfied by existing stores is laudable. But it’s thrusting the company into a field crowded with other large and established retailers seeking to fulfill the same jobs of urban consumers willing to trade off selection for value and natural/organic foods, including, namely:

  • “Give me convenient access to healthy food” – Both Target and Walmart are aggressively working to satisfy this job by rapidly expanding the number of CityTarget, TargetExpress, and Walmart Express stores.
  • “Let me feel confident in the choices I’m making” – “Curated selections” are an effective solution for this job, and Whole Foods’ is already delivering brilliantly in its existing stores, with its 365 Everyday Value house brand (which may be the focus of the new chain, if trademark filings are to be believed).
  • “Give me good value” + “Enable me to make healthy choices” – Whole Foods is often referred to as “Whole Paycheck” because many perceive its prices to be significantly higher than those of traditional grocers.

Consumers are already visiting an average of 2.5 stores or online venues to solve their many grocery jobs,

Until it resolves the question of differentiation, Whole Fods will likely be forced to answer a far more awkward question, eloquently posed by one millennial: “Why don’t they just call the new chain Trader Joe’s?”

Whole Foods New Chain

Are Bitcoins Digital Gold?

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Sometimes, in spite of the incredible speed with which we can use the tech at our fingertips to find the information we’re looking for — hail a taxi, book a vacation, and wire money across the world — it’s easy to forget how fast things are changing, and that every day entire industries are being disrupted by some new startup.

Brad Templeton,  the founder and architect of the first-ever entirely web-based business, ClariNet, points out that Bitcoin and other virtual currencies are significant in that they take some aspects of finance that were formerly in the hands of professionals and unlock them for the public at large. Now anyone can be a banker. And in the future, the extent to which this is the case will expand exponentially. Back in 1990, with a four-track home recorder, an aspiring musician could make a few low-fi demo tracks. Today, you can produce an entire album on an iPad. The case of finance is analogous, with Bitcoin and crowdfunding platforms paving the way and even bigger changes to come.

Understanding these kinds of exponential changes in advance is a major advantage for individuals and businesses that want to stay a step (or 100 steps) ahead of their peers.

Nathaniel Popper’s important book, Digital Gold, is due out this week, and we will be reviewing it and parsing its implications all week.

Bitcoins-Currency of the Future?

What is Digital Journalism?

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Michael Massing writes:   “No one can feel secure,” said one Times reporter who had survived the cut. Her comment captured the climate of fear and insecurity that has gripped traditional news organizations in the digital era. “Disruption” is the catch-all phrase.

That digital technology is disrupting the business of journalism is beyond dispute. What’s striking is how little attention has been paid to the impact that technology has had on the actual practice of journalism. The distinctive properties of the Internet—speed, immediacy, interactivity, boundless capacity, global reach—provide tremendous new opportunities for the gathering and presentation of news and information.

The Huffington Post is undergoing an identity crisis. One of its initial core innovations—using content from elsewhere—has become so dominant as to nearly choke the site.

Arianna Huffington said that the site plans to end its relationship with the AP and build its own in-house news service, while “doubling down on original reporting and bringing together a new investigative team.” To head that team, The Huffington Post hired three former staff members of The New Republic—editors Greg Veis and Rachel Morris and writer Jonathan Cohn—to help “bring long-form journalism to a new audience.”

The Huffington Post has been down this road before. In 2009, it set up a nonprofit Investigative Fund with a staff of eleven and a budget of nearly $2 million,  Within a year, the fund was folded into the Center for Public Integrity, a nonprofit investigative outfit.

Huffington Post editors claim that these print-based imports proved a poor fit in an all-digital operation. Perhaps so, but the AOL deal seems to have been a Faustian bargain for the organization; in return for a huge pot of cash, it came under relentless pressure to turn a profit. The only way to do that was by increasing ad revenues, which in turn meant drawing more readers. That explains the site’s perpetual motion, nonstop expansion, and proliferation of sections. In its early years, The Huffington Post seemed on its way to defining a new type of digital journalism. Ten years on, it seems stuck in place, struggling to recapture the innovative spirit that had once defined it.

The same seems true of the first generation of digital news sites in general. After an initial burst of daring and creativity, they have entered a middle-aged lethargy.

These sites, which all seem to blend into one another, rarely break news or cause a commotion. After the Charlie Hebdo attacks, I was hoping to see one of them grab hold of the event and provide a forum for the many pressing questions raised—free speech versus hate speech, anti-Semitism and anti-Islamism, the state of religious tolerance and religious fanaticism in Europe.  The State of Digital News

Digital Journalism

Tsipras Threat and Aftermath

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 Greece’s Prime Minister Alexis Tsipras had at one stage warned foreign creditors that Athens would not repay 750 million euros due to the IMF in May unless they provided it with immediate liquidity, the Kathimerini newspaper reported.

Athens ultimately made the May 12 payment by emptying an International Monetary Fund holding account.

Citing European sources, the newspaper said Tsipras made the threat in a May 8 letter to EU Commission President Jean-Claude Juncker, IMF head Christine Lagarde and ECB President Mario Draghi.

Greek Debt

 

Enlightened Self Interest, Share Buybacks and Innovation

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Jim O’Neill writes:  In a forthcoming paper, the Review on Antimicrobial Resistance estimates that bringing new antimicrobials to market and improving their administration will cost about $25 billion – a significant sum, but one that pales in comparison to the costs to society if the problem is not checked.

While the review has yet to come up with recommendations for financing the development of new drugs, it seems clear that it is well within the capacity of the pharmaceutical industry to contribute. A common argument made by drug companies is that they need to be guaranteed a reward if they are to invest in developing medicines that are unlikely to deliver the kind of returns that other investments may provide.

Why should the pharmaceutical industry play a major role in financing something like a common “Innovation Fund” to provide financing for early-stage research into solving the problem of antimicrobial resistance?

Share buybacks do not seem justified – especially when considered from the standpoint of enlightened self-interest. In December, the pharmaceutical giant Merck spent $8.4 billion to acquire Cubist Pharmaceuticals, a Massachusetts-based drug-maker that specializes in combating Methicillin-resistant Staphylococcus aureus (MRSA), a bacteria that has become resistant to many types of antibiotics.

In early March – less than three months after the acquisition – Merck announced it would close down Cubist’s early-stage research unit.  Three weeks later, Merck announced that it would spend an additional $10 billion to buy back some of its shares.

Of course, dubious buybacks are not confined to the pharmaceutical industry. Apple is another good example. Within a year, China will likely be a bigger market for Apple’s  products than the United States.

In April, the company announced it had authorized an additional $50 billion to be used for repurchasing shares, bringing the total to $140 billion.

Coming at a time when the technology industry is under increasing scrutiny in the developed world as governments struggle with budget shortfalls and rising debt, this seems to me to be a questionable decision. Companies’ ability to minimize their global tax burden, while boosting their earnings per share through buybacks – in some cases financed with debt – does not strike me as a stable trend.

When companies are genuinely unable to identify areas of research and investment that would help their business (and employees and clients), they are better off returning the savings to shareholders in the form of higher dividends than authorizing buybacks.

Share Buybacks

TPP and Latin America

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Andres Velasco writes: With the International Monetary Fund having just cut its forecasts for economic growth in Latin America for the fifth year in a row, the region’s countries are casting about for ways to reignite investment and boost productivity. They should look to fast-growing Asia, argue advocates of the Transpacific Trade Partnership (TPP), the proposed mega-regional trade accord that would bind together 12 Pacific Rim countries. But should they?

If done right, the TPP could help Mexico, Peru, and Chile – the accord’s Latin American members – make the leap to high-productivity exports based on innovation. But that would require the TPP to foster, not impede, the flow of knowledge around the Pacific Rim. Regrettably, the United States is insisting on a series of intellectual-property provisions that serve the interests of US-based firms, but do little to create a sound environment for innovation elsewhere.

In the last two decades, Mexico has managed to diversify its export base and is now a major supplier of industrial goods to the US and Canada. The bad news is that Mexico’s growth prospects have become inextricably tied to those of its huge neighbor to the north. The good news is that the US is growing faster than any other major industrialized economy, so Mexico can look forward to a couple of years of accelerating economic expansion.

Peru and Chile, by contrast, are natural-resource exporters that derived huge benefits from the China-driven commodity boom of the last decade. Today commodity prices are down, and so is growth.

That is where Pacific Rim trade and the TPP come in. A firm in Thailand, the Philippines, or Vietnam can develop a new product line by plugging into the huge East Asian value chain and producing, for example, a tiny component which, along with myriad other components, will be assembled into a smartphone at a factory in China.  TPP and Latin America

TPP Issus

Is London a City-State?

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Gillian Tett writes: About two decades ago, my brother and I combined all our savings and bought a small, scruffy flat in Gloucester Road, west London. Back then, property did not seem so crazily expensive (in 1991, the UK real estate market had crashed sharply). Nor did the residents of that white stucco building seem wildly cosmopolitan. They mostly considered themselves English and were either young professionals or “Sloanes” (a tribe of upper-class Brits.

London became a modern trading hub; private commercial interests, such as banks, hold sway. And, unlike those Ottoman rulers, the UK government is not very effective at extracting tribute, aka taxes – which is one reason why those French, German, Danes, Italians and Russians flood in. But, like Constantinople, one of the joys of London is that it is wonderfully multi-ethnic and largely tolerant – albeit due to the grubby reality that what unites the multi-ethnic elite is commerce – a desire to make money.

Is this a bad thing? Yes, if you want the UK to exist as a truly cohesive nation state. After all, the arrival of these wealthy professionals has widened the gap between the elite and everyone else. Look at London house prices compared with those elsewhere in England (the flat that my brother and I once owned has surely risen about sixfold in price since we bought it). And when some economists from Deutsche Bank recently looked at the city, they discovered, astonishingly, that there was less correlation in growth patterns between London and the rest of the UK than between the different members of the eurozone; London is driven by global trading flows, not the British economy. “The overall pattern that emerges . . . is one of the rest of the UK dancing to the capital’s tune but out of time,” they wrote.

But if you look at London in its own terms, as a European city-state, it is hard to not feel a sense of excitement. Just like Constantinople, this new urban centre is buzzing with cultural blending and creative collisions; there is entrepreneurial energy and sunny optimism.

To put it another way, just as the US has benefited over recent centuries from the arrival of energetic immigrants from Europe and elsewhere, London flourishes on the energy created by waves of wealthy (and not so wealthy) immigrants from continental Europe.

London

Does Happiness Factor into Business Success?

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Is Happiness a Factor in Business Success?  Tuugi Chuluun and Carol Graham write:  Economists—and other social scientists—are now using a burgeoning body of research based on surveys of reported well-being or, more colloquially put, happiness. They are studying areas as diverse as the effects of income, inflation, unemployment, exercising, smoking, and marital status on well-being. They are also exploring the effects of well-being on individuals’ attitudes about and investments in the future.

The results are not surprising: smoking, inflation, and unemployment (particularly the latter) are bad for well-being; while income, exercise, and marriage are, on average, good for well-being. Individuals with higher levels of well-being on average have better future outcomes in the health, labor market, and social arenas. The latter is due to innate optimism and intrinsic motivation on the one hand, and the capacity of individuals with higher levels of well-being to make choices about what kind of lives they want to lead on the other. In short, numerous studies show that higher levels of well-being are associated with all sorts of positive outcomes.

It is important to note that the use of these metrics requires methodological precision. Scholars do not ask respondents if particular things make them happy or unhappy. Instead, they use large-scale surveys with the well-being question of interest up front in the survey. They control for all sorts of socio-demographic traits (such as income, gender, age, education, and employment status) and assess how well-being levels vary with the variable of interest, holding all other things equal.
But does any of this have relevance for the business world? Here is what we examined:
Does happiness play a role in corporate economic behavior?
We recently explored whether well-being is relevant to our understanding of firm behavior and found, rather remarkably, that it is.  Does Happiness Improve Business

Happiness