Wednesday, December 31, 2008

The year of the CFO

New Year's prediction from the Economist:

For the past decade the prevailing wind in boardrooms has been gentle. Emotional intelligence and innovation have been what counted, and what leaders professed to value. But those ideas are all but finished. No one will talk of EQ (“emotional intelligence quotient”) any more. It will be EVA (“economic value added”) instead. Thinking outside the box (an over-rated activity at the best of times) will not be celebrated. Ticking boxes will be.

As financial skills are valued more highly, CFOs will make it to the corner office in greater numbers than before. Recession, credit crunch and the increasingly complex nature of global companies will all play directly into the bean counter’s hands.
And while the CFO gains, HR and Marketing will lose:
In this new world the HR director might just cling on to his title, but his job will be downgraded to personnel and in particular to payroll.

The marketing director will also lose out. He has already been kicked once by the decline of advertising and kicked again as the power of the internet has made his traditional tools useless. In 2009 his budgets will fall further, as will his status. As for the corporate-social-responsibility supremo, he will be told to take a gap year indefinitely.

Automakers Step in it Again

Say you lent me $1,000 and I took $500 of it and rented out a billboard to advertise what a swell person you were for lending me the money. Pretty stupid, huh? (And, I guess the other question would be who's the stupid one: me for buying the billboard or you for lending money to the type of idiot who would turn around and blow part of it).

If you think this sounds too ridiculous to actually happen, you'd be wrong. Chrysler recently spent a couple hundred grand to take out ads in the Wall Street Journal and USA Today thanking you and me for sending them a big chunk of taxpayer-funded bailout dollars. Are the automakers just clueless?

Monday, December 29, 2008

Drop in Demand = Raise Price?

If you don't see anything wrong with the title of this post, I think you are qualified to work somewhere in government.

According to this article, traffic in the express lanes of the I-25 toll road around Denver has fallen over the last year. So, what's the government doing? Raising the fee for the express lane, of course. Maybe we should appoint a toll czar!

Note: the increase in the toll is because of an agreement that the tolls can't be lower than express service rates on buses, and the bus rates are going up. The astute among you might wonder why road tolls are linked to bus rates - I have no idea, but I definitely think we should get government more involved in private business!

Sunday, December 28, 2008

Where does all the money come from?

The Fed and the Treasury are spending money like drunken sailors. But who pays for all this?
In the case of the Fed, the money comes from its authority to print dollars from thin air. Since late August, the Fed has expanded its balance sheet from about $900 billion to more than $2.2 trillion, creating $1.3 trillion that did not exist to replace some of the trillions wiped out by falling house prices and vengeful stock markets. The Fed has taken troublesome assets off the hands of banks and simply credited them with having reserves they previously lacked.
And the Treasury is borrowing from foreigners:
In the case of the Treasury, the money comes from the same wellspring that has been financing American debt for decades: Investors in the United States and around the world — not least, the central banks of China, Japan and Saudi Arabia, which have parked national savings in the safety of American government bonds.
...which raises the spectre of long term inflation and a run on the US dollar.

Americans have gotten accustomed to treating this well as bottomless, even as anxiety grows that it could one day run dry with potentially devastating consequences.

The value of outstanding American Treasury bills now reaches $10.6 trillion, a number sure to increase as dollars are spent building bridges, saving auto jobs and preventing the collapse of government-backed mortgage giants. Worry centers on the possibility that foreigners could come to doubt the American wherewithal to pay back such an extraordinary sum, prompting them to stop — or at least slow — their deposits of savings into the United States.

That could send the dollar plummeting, making imported goods more expensive for American consumers and businesses. It would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home- and auto-buyers, for businesses and credit-card holders.

For now, deflation looks like a bigger threat. But at some point, all this debt has to be paid for with a lower standard of living. If you want to glimpse our future, take a look at Iceland.

Saturday, December 27, 2008

Can unemployed investment bankers build bridges?

Where is Obama going to find 3 million workers to build new ports, medical infrastructure, mass public transit infrastructure and expanded electricity grid and "green" technologies.
We have 1.2 million unemployed construction workers. We have 123,000 unemployed architects and engineers. We have 83,000 unemployed machinery workers. We have 145,000 unemployed transportation-related workers. So that brings us to barely more than 1.5 million of a labor pool the government can tap into for all the new building activity. But the bulk of the joblessness is in financials (up to half a million), retail/wholesale (1.2 million), leisure/hospitality (1.3 million) and health/education (1.2 million). And if investment bankers, shopkeepers, bell captains and medical chart technicians have anything in common it is that they don't have much experience in shovel-ready activities.

Wednesday, December 24, 2008

Minimum prices on toys

In the past we have blogged about the incentive conflict between retailers and manufacturers, and how contracts on pricing can help manage the conflict. Last year, the Supreme Court reversed a 90 year old ruling that allowed manufacturers to set minimum prices as a means to enhance a brand's image and for retailers to make enough profit on their merchandise to provide better customer service. It appears that some toy manufacturers are doing so.

This season's products affected by pricing agreements include Guitar Hero World Tour Band Kit from Activision Blizzard Inc., documents show. The video musical game has been priced at $189 at Best Buy Inc., Circuit City Corp. and Toys "R" Us Inc. since its October release. A new rival product, Electronic Arts Inc.'s Rock Band 2 Special Edition, also has been retailing for that price at all three outlets.

"Activision Publishing Inc. would like to inform you of its Minimum Advertised ('MAP') program," the game maker wrote to retailers in a letter dated Sept. 24. The letter, which says it won't subsidize any advertisements that violate the policy, goes on to list 19 products and their minimum prices, including Guitar Hero and the James Bond: Quantum of Solace videogame.

The upside of recession

We begin saving again.

Get Your 102% Mortgage from the USDA

Use of the USDA's Rural Development Guaranteed Loan program has been growing recently. Over $7 billion in loans were insured under this program in 2008 compared to $3.6 billion in 2007. What's so attractive about these loans?

First, despite the name, the program is being used outside of rural areas. The loans are restricted to towns of no more than 25,000 residents, which allows areas beyond traditional "rural" areas to qualify. Second, the program allows borrowers to borrow 100% of the purchase price plus roll in the 2% program fee. But, don't worry. USDA officials say they have a strong track record, so excessive defaults shouldn't be a problem. They're smart bankers, so we should trust that they know what they are doing, right?

Monday, December 22, 2008

Where Do Deadbeats Shop?

I don't know, but apparently American Express thinks it does. According to this article from the Atlanta Journal-Constitution, AMEX has been reducing the credit limits of some of its customers based on the customers' shopping habits. The notice accompanying credit reductions states "Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express."

Sunday, December 21, 2008

Tax cuts vs. govt. spending

I have blogged about the broken window fallacy of government spending, as a theoretical matter. Now we get some practical advice on the difficulties of ramping up spending.
... existing agencies are working full time administering the budgets they have. They can't just add a zero at the end of each contract and be done with it.

Stop looking at models and equations and theoretical constructs for a while and look at the practical considerations of the stimulus package. I've been doing this sort of thing for quite a while and I'm convinced it's doomed from the start. If they feel the need to blast a trillion dollars into confetti, then tax cuts would make the most sense. Even if the public used the money to pay down debt, that would be a good thing as it would transfer the debt burden from the consumer to the government making the consumer feel a little bit like spending again.
Score one for tax cuts.

Saturday, December 20, 2008

Bargaining in bad faith?

On Monday, the Braves faxed a signed offer to Rafael Furcal,
...three years, $30 million with a fourth-year vesting option. The Braves then believed they had a deal. No member of the Braves’ front office ... could recall a time when a signed term sheet was not the equivalent of a handshake agreement, ethically – if not legally – binding. Instead, the Braves believe, Kinzer shopped the term sheet to the Dodgers.
And the Dodgers signed him for $3 million more.

Friday, December 19, 2008

Might the crisis be worse in Europe?

due to the closer links between banks and industry: Europe, the close connections between banks and industry almost assure a broad and deep spread of the contagion. Unlike the United States, where the government has spent more than a century battling to break the links among government, industry and banks, this battle is only rarely joined in Europe. If anything, such links — one could even say collusion — between banks and businesses were encouraged from the very beginning of modern European capitalism. times of a global shortage of capital, European corporations are left with few financing alternatives they are comfortable with. (In contrast, while banks are an important source of financing in the United States, corporations there depend much more on the stock market for investment. This forces American firms to compete ruthlessly for capital and constantly seek greater and greater efficiencies.)

Wednesday, December 17, 2008

St. Paul, in his own words

Volker compares the current crisis to past ones.

A simple way to reduce health care costs

Next month, Apollo Hospitals, India's biggest health-care company, will for the first time treat employees of a non-Indian company, Wisconsin-based Serigraph Inc., for certain elective procedures.

The costs will be picked up by Serigraph's insurer, Anthem Blue Cross and Blue Shield. Employees will receive travel and concierge help, including free plane tickets for patient and companion, plus post-operative care upon return to the U.S. There will be no co-payments.

It's a trial program, but the economic benefits aren't in doubt: A cardiac bypass can cost about $100,000 in a U.S. private hospital. Apollo says it can do the procedure -- and accommodate a companion -- for a tenth of the cost.

You Can't Fight Supply and Demand

I think we should update the old phrase "You can't fight City Hall" to "You can't fight supply and demand" to give people a better appreciation for economic forces that influence outcomes (leaving aside the issue that as the feds slowly nationalize one industry after another, we are all eventually going to be working for "City Hall"). The thought occurred to me as I read this post from The Huffington Post complaining about the treatment of adjunct professors in American colleges (or as the poster describes it - "The Great Shame of American Colleges").
they are hired only on a part-time basis, made to sign a pledge that they will not work more than twenty hours a week and will not--not now, not ever--have a claim to health or retirement or any other kind of benefits, not even a parking pass. That they are "at will" employees who can be let go at any time, for any reason. Their salaries are so meager, they have to teach two, three, sometimes five classes a semester, at five different universities, just to pay their rent.
And why do these "terrible" conditions exist? It's all about supply and demand. The poster notes that for each position there are "two or three other PhDs waiting in line for his job in case he dares complain or ask for more money." When supply exceeds demand, prices get driven down. It's not shameful; it's reality. Conditions for adjuncts will improve when fewer people are chasing the finite number of openings.

Tuesday, December 16, 2008

unsolicited advice

On his first day in office, President-elect Obama could save 7,000 American lives a year, put an end to the physical and mental suffering of another 100,000 men, women and children, and save billions of dollars in unnecessary medical costs:
All he has to do on Jan. 20 is call for the repeal of the National Organ Transplant Act of 1984. That's the terrible federal law that criminalizes the buying and selling of human organs for transplant operations—and therefore makes it a virtual certainty that the supply of kidneys, livers, and hearts will never meet our demand for them.

Uncle Fred Thompson on the economy

“Ask not what your country can spend for you … as what you can spend for your country.”

Flexible labour supply

Not only is demand down, but there is new entry: WARNING: ADULT CONTENT

An escort agency owner told the Sun he’s getting about 40 interested applicants every day, the majority of whom are women running from the wreckage of lost finance jobs.

Monday, December 15, 2008

More on bad business writing

To combat poor writing, I assign Fred Kahn's classic "My War Against Bureaucratese," the gobbledygook written by government bureaucrats designed to hide what they are really doing. Colleague Mike Shor's MBA Writer puts phrases from student memos together to generate sentences that sound all too familiar.
To proactively manage profit, our key initiative objective pushes the envelope toward systematized reciprocal capability.
And now the Onion takes a crack at it:
"Due to the increased scope of the project vis-à-vis Tuesday's meeting, compounded with our aforementioned desire to maintain quality without increasing cost, an as-yet indeterminate amount of time will be allocated to our newest venture," Atkins said without once stuttering. "You should all be proud of the amount of effort and energy you have put forth thus far, and can be certain the project's conclusion will become more apparent as the tasks become increasingly more finite."

Sales of Home Safes on the Rise

I saw an article this morning in the hometown newspaper about a recent rise in the sales of home safes (see Google news for a bunch of similar articles). As people have become concerned about leaving their money in banks, they appear to be turning more toward the home safe solution.

The perceived cost of using banks for money storage has risen leading to an increase in demand for a substitute product, the home safe. Perhaps this will, in turn, lead to an increase in home robberies. Any thieves reading this blog now know that the incentive to engage in robbery has increased with larger potential rewards from robbing the average house (assuming you are the type of thief who can figure out how to crack a home safe). That's one of the things that's cool about thinking in economic terms: what might be the unintended consequences or unforseen outcomes of events like this.

Thursday, December 11, 2008

One Tennessee Democrat opposed the auto bailout

Vanderbilt's own Jim Cooper puts reason above party loyalty:

The proposed rescue plan "won't revive America's auto industry," Cooper said in a statement. "It only delays the pain and rewards bad management."

Tennessee's own Marsh Blackburn had the best soundbite:
"I cannot recall the last time you saw the federal government (successfully) micromanage an industry," Blackburn said. "Not every solution needs to come out of Washington."

Wednesday, December 10, 2008

Illinois Governor uses economics

If you dont know the value of an item, and you dont know where its highest valued use is, an auction will identify the high-value bidder, and set a price for the item. Had not the FBI disrupted the auction, Obama's Senate seat would have moved to its highest-valued use.
The FBI says in an October 31, 2008 conversation, Blagojevich described an approach from an associate of Senate Candidate 5: "We were approached 'pay to play.' That, you know, he'd raise me 500 grand. An emissary came. Then the other guy would raise a million, if I mad him (Senate Candidate 5) a Senator."

Last Thursday, December 4, the FBI says Blagojevich "was giving Senate Candidate 5 greater consideration for the Senate seat" because he might "get some (money) up front, maybe."

Is it illegal to bid for a Senate seat?

High Re-Default Rates on Modified Mortgages

One of the calls to action in all of the bailout talk has been a call to help homeowners at or near default on their mortgages. Here's some early evidence that modifying mortgages (at least the types of modifications tried so far) hasn't been overly successful so far.
More than half of homeowners fell behind on mortgage payments in the first six months after their loans were modified earlier this year, new data from the Office of the Comptroller of the Currency and the Office of Thrift Supervision show. . . . The data, released Monday, cover loan modifications by the 14 largest national banks and thrifts, including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., which together account for more than 60% of mortgage loans outstanding. The lenders modified nearly 73,000 loans in the first quarter and an additional 114,000 in the second quarter.

Nearly 36% of borrowers were more than 30 days past due three months after their loan was modified, and nearly 53% were more than 30 days late after six months, according to an analysis of modifications completed in the first quarter, going through Sept 30.

Tuesday, December 9, 2008

Let them fail

An auto bailout that wont cost a dime

And will have immediate tangible benefits to both consumers and the automakers:

What the politicians have not highlighted is that a relatively simple change of regulations — perhaps just a temporary exemption — at the same time Congress opens the purse strings could quickly alter the competitive landscape for the Detroit Three.

General Motors and Ford already make popular, high-quality, high-mileage automobiles. The trouble is, because of regulatory differences between the United States and the European Union, they’re sold only in Europe.

The automakers’ reluctance to sell those cars in the United States is not as simple as the cars’ inability to meet United States standards for equipment, safety and exhaust emissions; there’s also the cost involved in the certification process. Changing the law to allow the United States sale of cars compliant with European emissions and crash standards, even for just a few years, would allow G.M. and Ford to quickly add some of their popular, high-mileage European models to their lineups here in America.

Ford S-Max

Monday, December 8, 2008

Prius prices are coming down

...because gasoline prices are coming down. From my former colleagues at the Department of Justice:
The median effect of a one dollar increase in the gasoline price per gallon is a reduction in the manufacturer price of $171. The calculation varies greatly across vehicles--for example, the effects range from a reduction of $1,506 for the 2005 GM Montana SV6 to a rise of $998 for the 2006 Toyota Prius.

The Quintessential Inferior Good

As noted in this prior post about Wal-Mart, an inferior good is one whose income elasticity of demand is negative, so that when income goes down, demand goes up. Sales of another inferior good, Spam, are also on the rise with the recent economic difficulties. Sales have increased over ten percent in the most recent three months, and the manufacturer (Hormel) has instituted double shifts at its production facility.

For those of you not familiar with the product, Spam "is made of just a few simple ingredients. Ham, pork, sugar, salt, water, a little potato starch, and a mere hint of sodium nitrite to help SPAM® keep its color. Sounds delicious, and it is."

Saturday, December 6, 2008

Why supply emergency medical services?

Low reimbursement (lousy payor mix) combined with high costs (liability), means that more hospitals are closing ER's or building new hospitalis without them. Meanwhile the ER visits keep growing, so that remaining ER's serve more and more patients.

How quickly things change

A year ago, the Army had trouble finding recruits. Now my students tell me that there is so much demand that they are raising their standards.

Isn't the government supposed to try to reduce unemployment?

So what gives with the new employment tax?
You and your spouse were both employed in 2005, at which time you bought a house, took out a mortgage equal to four years' family income and committed to a monthly payment about one quarter of your family's monthly income. Today your house is worth three year's income. To add to your injury, your family income is cut in half because you lost your job. Your housing payment is now more than half of your family income.

Your best course of action may be to fail to find a new job. Citigroup Inc. is your mortgage lender, and (as part of the Treasury rescue deal) is willing to renegotiate mortgages with people in financial trouble and limit their monthly housing payments to 38 percent of the family's monthly income. With you unemployed, your family income is low enough that you qualify for this loan forgiveness. If you find a new job quickly, you and your spouse will no longer qualify.

Friday, December 5, 2008

The Great Repression

A layman's guide to the crash: this makes for good teaching or reading material:
Had it not been for the frantic efforts of the Federal Reserve and the Treasury, to say nothing of their counterparts in almost equally afflicted Europe, there would by now have been a repeat of that “great contraction” of credit and economic activity that was the prime mover of the Depression. Back then, the Fed and the Treasury did next to nothing to prevent bank failures from translating into a drastic contraction of credit and hence of business activity and employment. If the more openhanded monetary and fiscal authorities of today are ultimately successful in preventing a comparable slump of output, future historians may end up calling this “the Great Repression.” This is the Depression they are hoping to bottle up—a Depression in denial.

Return to rationality: stocks predicted to yield 6%

In 1996, economists Campbell and Shiller met with Fed Chairman Alan Greenspan to brief him on their research that the stock market was significantly over-valued. Greenspan was impressed enough by their work to give his "irrational exuberance" speech. Christopher Carroll has applied Campbell and Shiller's methodology (P/E ratios computed using a 12 year moving average of earnings) to today's stock market and says that it is just about where it should be.
Some market commentators argue that the recent stock price declines reflect a degree of irrational pessimism or panic that is the inverse of the irrational exuberance of the 1990s. The Campbell and Shiller figure provides no support for that view; the vertical line reflecting the Graham P/E ratio in late October is right around the middle of historical experience, not on the far left end. The intersection of that line with the regression forecast indicates that historical experience would lead one to forecast a historically average return on equities over the next 12 years of about 6 percent or so per year (net of inflation).

Wednesday, December 3, 2008

In Defense of Corporate Jets

The CEOs of the Big Three automakers were skewered in the popular press for their recent decision to fly to Washington DC on corporate jets to request bailout funds for their companies. While this type of story plays well in the media, it's not at all clear that offering this type of perk is unreasonable. Among other things, it provides a non-monetary incentive for managers to work harder in an effort to move up the corporate ladder. Here's a defense of the Big Three "jet scandal" from Time Magazine.

While I don't think the use of corporate jets is a real issue, it is somewhat worrisome that these three stooges didn't anticipate the public relations aspect of their decisions.

Tuesday, December 2, 2008

Will your merger be challenged as anticompetitive?

New enforcement data released by FTC shows that in cases where entry is difficult, 2->1 mergers (duopoly to monopoly) are almost always challenged. Mergers with at least four significant competitors are challenged about one third of the time.

Be glad you are not in Iceland

Current residents are facing a falling currency and much higher prices for imports, which is most of what they consume. From a former student living in Reykjavik:
The Icelandic krona is the smallest currency in the world. The central bank failed to build foreign currency reserves as the Icelandic banks expanded internationally. The central bank pursued a policy of high interest rates to fight overheating of the economy. This was a fatally flawed policy that many, including yours truly, warned against. Predictably the high interest rates attracted investors who borrowed in low yield currencies and took advantage of carry trade. This in turn drove up the krona and fueled economic expansion. Icelanders, individuals and companies, borrowed in low yield currencies and the prices of imported goods came down in krona. This was all fine until international credit tightened and later crumbled. The Icelandic house of cards came crashing down. The central bank tried to fight the international credit crisis by repeatedly raising interest rates but to no avail. In a nervous financial world the krona was toxic and no one would touch it.
In hindsight Iceland may have been better off joining a larger currency area like the EU.

Monday, December 1, 2008

Does anyone support the bailout?

If they do, I am going to unleash Hazlett on them:

The real problem entailed by the auto-maker subsidies will never be discussed because it can never be seen. The opportunity cost of shovelling capital to companies such as GM is that companies such as Boeing or United Technologies or Disney or start-ups unknown will be unable to use it to fund their projects. Propping up today’s US car manufacturers means beating down tomorrow’s economic star. In an era of technological leaps, those emergent stars tend to be leapers. The bail-out puts the public’s chips on the former, pulling stakes from innovative rivals.

The UK ran this experiment in the 1960s, picking national champions that were to push the national economy to the cusp of global dominance. The government selected companies for protection and subsidy, including British Leyland in autos. BL sank so fast that it had to be acquired by the UK government in 1975 and over £1bn in public funds were pumped into that nationalised money pit by 1980. National champion? The unsubsidised Ford UK overtook BL in the British market. The Thatcher regime sold off BL, liquidating a failed experiment. Competitive car makers – private, unsubsidised and exporting – now dot the English countryside.

Competition between airports

Ironically, in Moscow:

Moscow's airport rivalry highlights a paradox of the global aviation industry: Airlines compete fiercely with each other for customers, but they face many monopolist suppliers, such as air-traffic control systems, fuel distributors and airports. Resulting costs and poor services get passed on to travelers.

Regulators world-wide are starting to tackle the issue -- and some see Moscow as a paradigm.

Britain's competition authority, for example, last year considered breaking up BAA, the company that runs London's three big airports. In testimony before the regulator, officials from the International Air Transport Association, a trade group, cited Moscow as evidence of the benefits that competition could bring London's airport system. IATA testified that fees at Moscow's fast-growing, privately owned Domodedovo Airport are as much as 20% lower than at Sheremetyevo, the state-owned hub of flag carrier Aeroflot.

Lessons from Mervyn's

The most recent issue of Business Week features a story of how private equity companies supposedly ruined Mervyn's , a mid-range department store located primarily in the western U.S. I think there are a number of interesting aspects to the Mervyn's story.
  • First, it's a prime example of the effects of competition. As this commentary argues, Mervyn's did quite well as a mid-range retailer until other stores started piling into the space and Mervyn's failed to adapt.
  • Second, although the main Business Week story casts the private equity companies as villains in the downfall of the company, I'm not sure the case is made very well. The main objection regarding the actions of the private equity companies seems to be focused on Mervyn's real estate holdings. The PE companies split the company into real estate and retail, and then sold off many of the operating leases. The new lease holders increased the rents to market rates, which caused lease payments to double in many cases. So, essentially, the company had previously been subsidizing poor retail operations with below-market lease rates. By moving lease rates to market rates, the PE companies were helping ensure that the real estate was being allocated to its highest and best use. Apparently that was not a Mervyn's department store, as the company could not survive and is filing for liquidation. Yes, I imagine the story is probably more complicated that this, but the Business Week story certainly doesn't give the PE companies any credit for moving these real estate assets to a better use.