Iranian kidney sales

Interesting documentary about kidney markets in Iran (60 minutes).

Slums as green engines of development: (fascinating 16 min. video)

Make sure you see the train scene at 6:00-6:50

It's the Incentives, Stupid, IV

It is an encouraging sign that even the NY Times is beginning to look beyond Canada for alternative health care delivery models:

On average, [Swiss] out-of-pocket payments come to $1,350 annually. That is the highest among the 30 countries tracked by the O.E.C.D. and well above the $890 average for the United States, which comes in second.

It is not a surprise that these higher co-payments are associated with lower medical care consumption (11% of income, as opposed to 16% in the US).

Anticipate failure

Rene Stulz explains five type of risk management failures:

1. Failure to use appropirate risk metrics
2. Mismeasurement of known risks
3. Mismeasurement stemming from overlooked risks
4. Failure to communicate risks to top management
5. Failure to monitor and manage risk

Ethics and the Financial Crisis

Marketplace interviewed political philosopher Michael Sandel yesterday on ethical issues surrounding the financial crisis. Evidently, he has learned the one lesson of business:

You go up to someone on one of those street corners down by Wall Street. And you ask him or her in a quiet moment, how do you justify this frenzied way of life that you're engaged in? I suspect they would give you in a reflective moment an answer something like this: "By pursuing gain and engaging in risk, we are providing the lubricant for the financial system and therefore for the economic system as a whole. And we are helping contribute to allocating capital to those projects and innovations in the economy that will make everybody better off."

Pretty good. I do have a nit to pick at another point though.

The chief justice of the U.S. Supreme Court, Justice Roberts, makes about $220,000 a year. There's another judge, Judge Judy, a television judge, you know how much she makes? . . . Twenty-five million [dollars] a year. Now that's the result of markets, market supply and demand. Television program people like to watch. Is there any reason to assume that simply because the market has delivered that outcome, that Judge Judy deserves to make 100 times more than Chief Justice Roberts? I would say not.

Please define terms. What do you mean by "deserves?" Chief Justice Roberts also receives the prestige of being Chief Justice while Judge Judy gets the disdain of being a TV judge. Is this deserved too? Unless there is an identifiable market failure (perhaps more likely for Roberts than Judy), I assume that each are generating value in excess of their compensation. Regardless of what they deserve, we third parties receive the excess value that they generate (whether we deserve it or not).

How to turn around a corporation

Lessons from Starbucks' renaissance:

1. Hire the old CEO who originally built up the brand
2. Close poorly performing outlets
3. Squeeze $500M efficiencies out of the production process
4. "Freshen" the brand with social awareness and "fair trade" coffee
5. Get rid of the cookie-cutter retail outlets, and customize shop designs to fit into local markets
6. Close for a day to teach the baristas how to make better espresso
   

These changes have lead to a 100% abnormal return (above what the market did) in the last year.

How to "loot" a corporation

In 1994, George Akerlof and Paul Romer showed us how to loot a corporation by borrowing with other people's money:

firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Ben Bernanke has apparently read their paper:

On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the “Looting” paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called “excessive risk-taking.”

I like the NY Time's characterization of the current crisis as an example of looting 

Think about the so-called liars’ loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynch’s losses from the last two years wiped out its profits from the previous decade.

What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it “management fees” or “performance bonuses.” Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.

There are two ways to address this problem. Get rid of the "too big to fail" guarantees that allow banks to gamble with other people's money (heads I win, tails the government loses) or impose more regulation on the banks to prevent them from taking risk. You can probably guess which path they will take.

The Economist on B-School Reform

After citing some sketchy statistics about MBAs' responsibility for the recent global "catastrophe" (e.g., "Most of the people at the heart of the crisis . . . had MBAs after their name"), the Economist offers some advice for how B-Schools should reform themselves. Ideas include teaching more business history, fostering more scepticism and cynicism in students, and hiring more professors who aren't afraid to "bite the hand that feeds them" (which I believe refers to business in general).

Moral Hazard at NSF

Oh my!

For instance, one senior executive spent at least 331 days looking at pornography on his government computer and chatting online with nude or partially clad women without being detected, the records show.

and

Investigators put the cost to taxpayers of the senior official's porn surfing at between $13,800 and about $58,000.

Evidently, he was not alone

The problems at the National Science Foundation (NSF) were so pervasive they swamped the agency's inspector general and forced the internal watchdog to cut back on its primary mission of investigating grant fraud and recovering misspent tax dollars.

Unfair, but well done