March 2009 - Global Economic Watch

Simon Johnson: Break Up the 'Banking Elite'

03-31-2009 2:59 PM with 1 comment(s)

Simon Johnson was chief economist for the International Monetary Fund in 2007 and 2008.  Now he is a professor at MIT, is a senior fellow at The Peterson Institute for International Economics, and blogs about the global economic crisis at The Baseline Scenario.  For the last several months, he has been among the most vocal public economists warning that the US government's response to the crisis is far from enough.  Now, in a new piece for the May issue of The Atlantic, Johnson warns that the very people who lead the way into the financial crisis--the management of America's biggest banks--are being given too much say in how to respond to the crisis.  

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Read The Quiet Coup from The Atlantic here.  

Johnson has been making the rounds today to sound the warning in person.  You can watch the five-minute version, from MSNBC:

Or for a more extensive, 50-minute version from On Point with Tom Ashbrook,  download the podcast or listen here: 

Posted by Graham Griffith

William Raabe at Freakonomics: 'Tax Cheating Will Increase Significantly'

03-31-2009 10:46 AM with no comments

March comes to a close today, which means that tax day is just over two weeks away.  William Raabe, tax professor at [The] Ohio State University, expects tax cheating to increase under the Obama Administration.  Raabe is one of four participants in an online quorum at the Freakonomics blog about tax cheating.  He writes that cheating occurs when three conditions are met: "inclination, reward, and opportunity."  In tough economic times, Raabe writes, people are more inclined to cheat, and the rewards are that much greater as money is harder and harder to come by.  And, "opportunities to cheat on one’s taxes tend to arise when structural changes in the tax law occur."

The Obama team seems to favor the use of tax credits against the federal income tax to carry out the stimulus, health, energy, and education agendas that it is committed to. Tax credits, though, have been easy for tax cheats to use. The Earned Income Tax Credit, a federal welfare system mainly for low-income families, is notorious for attracting improper behavior, often via false taxpayer names and ID numbers. Education credits can be overstated when the taxpayer self-reports qualifying expenditures for supplies and travel. Oversight of energy credits (say for “green” home improvements) is almost nil. So the increased use of a credit of this sort by itself over the next few years will trigger new tax cheating.

Read Raabe's full post, along with other analysis from the Freakonomic Tax Cheating Quorum, here.  

Posted by Graham Griffith

Let's Go to the Movies: Attendance Up for 1st Quarter 2009

03-31-2009 9:18 AM with 1 comment(s)

In hard times, Americans usually go to the movies.  During the Great Depression, Hollywood was a boomtown.  During the recession of 1982, attendance went up 10% (and ET became the highest grossing film of all time).  But with the film industry's recent struggles over contracts with writers and actors, and the myriad new ways for consumers to access films without going to the cinema, it was no given that movie attendance would go up during the current recession.  But it has. The St. Louis Post-Dispatch has the story: 

The economy's a horror show? Try telling that to Harman Moseley. The operator of the Galleria, Chase Park Plaza and Moolah movie theaters says business has never been better.

"It's like Christmas every day," he said. "We had the best February in our history, and we're expecting to set another record in March."

The local Wehrenberg theater chain also reports that business is booming. "People are rediscovering movies as an affordable source of entertainment," said Kelly Hoskins, the company's director of marketing.

It's the same story nationwide. According to the box office tracking service Media By Numbers, movie attendance in the first quarter of 2009 is up 12 percent over the same period last year. The box office gross for the same period was $2 billion, a 14 percent jump from 2008.

Read the full article here.  

Posted by Graham Griffith

Bad Moments in Banking: Congressional Oversight Panel Gets a History Lesson

03-31-2009 8:20 AM with no comments

The Congressional Oversight Panel was set up to oversee the Treasury Department's implementation of TARP and the effectiveness of distributing federal bailout money.  Chair Elizabeth Warren and the panel have kept their process highly transparent--something they've called on the Treasury Department to do as well.  Earlier this month they brought in experts on notable banking crises of the last 100 years, and had them share lessons on goverment responses to those crises.  The Savings and Loan collapse of the 1980s, Japan's banking crisis and its monetary policy reaction in the 1990s, Sweden's nationalization of banks--also in the 1990s, and of course the Great Depression, were the lead topics.  The experts were Bo Lundgren, Director General, Swedish National Debt Office and Former Swedish Minister of Financial and Fiscal Affairs; Richard Katz, Editor-in-Chief, The Oriental Economist and author of Japan: The System That Soured—The Rise and Fall of the Japanese Economic Miracle and Japanese Phoenix; David C. Cooke, former executive director of Resolution Trust Corporation; and Eugene White, professor of economics, Rutgers University, and research associate at the National Bureau of Economic Research.  

Posted by Graham Griffith

M&A Volume Down to Start 2009

03-30-2009 11:01 AM with 1 comment(s)

Global Mergers and Acquisitions were down 36% in the first quarter of 2009 compared to a year ago.  Here is the year to year, and month to month comparisons from the Financial Times and Dealogic:

Posted by Graham Griffith

Entrepreneurship and Social Responsibility

03-30-2009 9:21 AM with no comments

Bill Green, Senior Vice Provost and Dean of Undergraduate Education at the University of Miami, believes that entrepreneurship is "an irreducable form of freedom."  And because of that, it is a form of social responsibility.  In a conversation with at The Kauffman Foundation, Green lays out the steps entrepreneurs take in helping society move forward.  Entrepreneurs, he says, 

1) Think a new thought,

2) Make that new thought into something real, and

3) Implement it and put it out there so that you and other people benefit.  

Watch Green in the full Kauffman Conversation, and let us know if you agree or disagree and why (by clicking on comments above):

Posted by Graham Griffith

Obama Administration on Viability of Automakers' Restructuring Plans

03-30-2009 8:39 AM with no comments

Chrysler and General Motors submitted viability plans to The White House back in February, and as part of the Treasury Department's agreement with the automakers, the Obama Administration was to give an evaluation of the plans by March 31.  The Administration has determined that these plans are not viable.  As stated in a report released this morning, "In their current form, they are not sufficient to justify a substantial new investment of taxpayer resources."  But, the automakers are not out of time...yet.  The Administration is giving them time and capital to work out viable plans.  GM gets more time than Chrysler--60 days compared to 30--but will have to operate without CEO Rick Wagoner, who is stepping down at the request of the White House.  Chrysler needs to work out a satisfactory partnership with Fiat.  From the White House report:

• General Motors: While GM’s current plan is not viable, the Administration is confident that with a more fundamental restructuring, GM will emerge from this process as a stronger more competitive business. This process will include leadership changes at GM and an increased effort by the U.S. Treasury and outside advisors to assist with the company’s restructuring effort. Rick Wagoner is stepping aside as Chairman and CEO. In this context, the Administration will provide GM with working capital for 60 days to develop a more aggressive restructuring plan and a credible strategy to implement such a plan. The Administration will stand behind GM’s restructuring effort.

• Chrysler: After extensive consultation with financial and industry experts, the  administration has reluctantly concluded that Chrysler is not viable as a stand-alone company. However, Chrysler has reached an understanding with Fiat that could be the basis of a path to viability. Fiat is prepared to transfer valuable technology to Chrysler and, after extensive consultation with the Administration, has committed to building new fuel efficient cars and engines in U.S. factories. At the same time, however, there are substantial hurdles to overcome before this deal can become a reality. Therefore, the Administration will provide Chrysler with working capital for 30 days to conclude a definitive agreement with Fiat and secure the support of necessary stakeholders. If successful, the government will consider investing up to the additional $6 billion requested by Chrysler to help this partnership succeed. If an agreement is not reached, the government will not invest any additional taxpayer funds in Chrysler.

You can read the full report here.  President Obama is expected to speak to the findings in this report later today.  He did speak to the Administration's overall view of the automakers' plans and the government's hope to keep GM and Chrysler afloat yesterday on CBS's Face the Nation.  Here's an excerpt:

Watch CBS Videos Online

Posted by Graham Griffith

'When Losing Leads to Winning'...In Basketball and Business

03-27-2009 4:13 PM with no comments

March Madness is in its second weekend.  By the end of Sunday, we will know which four college basketball teams will emerge for the Final Four in Detroit next week.  If you are watching games over the next few days, pay close attention to the halftime score.  Naturally, you want the team for which you are rooting to have a comfortable lead (whether you are a true fan or simply selected that team to win when you filled out your brackets).  But if the game is close, you might prefer to be the team slightly behind.  Wharton professor Jonah Berger explains:

Berger and Wharton colleague Devin Pope have put out a paper titled When Losing Leads to Winning, showing that it is preferable to be slightly behind than slightly ahead in college basketball.  And they explain how this phenomenon can be applied to business.  Read the paper here.    

Posted by Graham Griffith

Financial Policy, South Park Style

03-27-2009 11:33 AM with no comments

South Park's take on bailouts (via Greg Mankiw):

Watch the full episode here.  

Posted by Graham Griffith

End of Globalization? Yeah or Nay

03-27-2009 10:55 AM with no comments

The McKinsey Quarterly is hosting an online debate over globalization.  The question: "Will globalization be derailed by the world financial crisis?" Harold James, professor of history and international affairs at Princeton University, and author of The End of Globalization: Lessons from the Great Depression, says the end of globalization is inevitable:

The reactions against globalization are as much driven by a new psychology as by economic reality or a precise weighing of the costs and benefits of globalization. Crises give rise to conspiracy theories, often directed against foreigners or foreign countries. Many people in the United States argue that the blame can be placed on Chinese surpluses. Likewise, many people in other countries claim that they are being hit by an American crisis made in America. We will see not just little measures of trade protectionism, but massive and powerful xenophobic sentiment. It may also be that many former so-called “globalization critics” will see just how good integration was when it starts to fall apart.

Moisés Naím, editor in chief of Foreign Policy, disagrees.  He says that globalization is not only about international trade and investment:

As destabilizing as the ongoing financial crisis is, it is likely to spur new connections among nations. Globalization has multiplied the number of problems that cannot be solved by a single country: not just economic crises, but also climate change, nuclear proliferation, illegal migration, transnational crime, pandemics, and more. While the world’s multilateral institutions are more often described as dysfunctional than indispensable, these institutions are indispensable—and with the world in crisis mode, demands to shore up global governance will only increase. Would the world be as interested in the economic stability of India, Brazil, or Indonesia without the financial crisis? The G20’s newfound relevance is a direct consequence of both globalization and the financial crisis.

Read the full article, and get involved in the discussion here. 

Posted by Graham Griffith

'Marketing in a Downturn' from Harvard Business Review

03-27-2009 9:37 AM with no comments

For marketers, understanding what drives consumers is vital in good and bad economic times.  Harvard Business School professor John Quelch recommends "segmentation": breaking out consumers into different groups based on their behavior.  Given the severity of the current recession, he says segmentation exercises that marketers have done in the past are "obselete," and "most companies need to go and re-talk to their customers and reframe their segmentation approach."   Quelch and Katherine Jocz break consumers into four groups: The "Slam-on-the-brakes segment, the Pained-but-patient, the Comfortably well-off, and the Live-for-today segment."  They explain the psychology of each consumer segment in their article, How to Market in a Downturn.  It is the cover story for the April edition of Harvard Business Review.  Read it here and watch Quelch explain this consumer segmentation below.  

Posted by Graham Griffith

WTO: Global Trade to Decline 9% in 2009

03-27-2009 8:21 AM with no comments

The World Trade Organization put out a new report this week that forecasts a global trade decline of 9 percent in 2009.  The decline comes following a siginificant dropoff of trade and Real GDP of members of the Organization for Economic Cooperation and Development (OECD) that began last year (see below):  

Source: OECD National Accounts.

With the G20 summit starting next week, the report again calls on global leaders to resist the inevitable temptation during an economic downturn to use protectionist measures to fight domestic problems. In the report, WTO Director-General Pascal Lamy says says that global trade has been "an ever increasing part of economic activity," for the last three decades and he stresses its importance now:

"Governments must avoid making this bad situation worse by reverting to protectionist measures which in reality protect no nation and threaten the loss of more jobs. We are carefully monitoring trade policy developments. The use of protectionist measures is on the rise. The risk is increasing of such measures choking off trade as an engine of recovery. We must be vigilant because we know that restricting imports only leads your trade partner to follow suit and hit your exports. Trade can be a potent tool in lifting the world from these economic doldrums. In London G20 leaders will have a unique opportunity to unite in moving from pledges to action and refrain from any further protectionist measure which will render global recovery efforts less effective."

At VoxEU, Andreas Freytag and Sebastian Voll--both economists at Friederich-Schiller University in Jena, Germany--write that the "newly industrialized and transition economies" that will participate in the G20 summit need to resist protectionist measures, but they might be able to use the threat of protectionism to get greater influence in global trade policy.  These countries have been a major part of global economic growth, they write, and they now have an opportunity to gain political stature if they respond in the right way:

To grab this opportunity, the transition economies must realise its exact nature – demanding more responsibility and decision-making power requires acting responsibly. In international trade, this first and foremost means refusing protectionist measures – both explicit tariffs and devaluations as well as hidden measures via subsidies and standards. After all, the economic success of recent decades in both transition and economies and the OECD has roots in the efficiency gains induced by global economic integration in trade and FDI.

You can read the WTO report here.

And Freytag and Voll's full article here.  

Posted by Graham Griffith

Geithner Details Comprehensive Regulatory Reform

03-26-2009 2:01 PM with no comments

On Tuesday, Treasury Secretary and Fed Chair Ben Bernanke asked Congress for expanded regulatory powers over non-bank financial institutions like AIG (read Tuesday's post).  Today Geithner, again in testimony before the House Financial Services Committee, put forth a detailed plan to, as the Washington Post writes, " to overhaul financial regulation by subjecting hedge funds and traders of exotic financial instruments, now among the biggest and most freewheeling players on Wall Street."  

The plan calls for "comprehensive regulatory reform,"  and has four components, according to the Treasury's released outline:

  Addressing Systemic Risk: This crisis – and the cases of firms like Lehman Brothers and AIG – has made clear that certain large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime. It is not enough to address the potential insolvency of individual institutions – we must also ensure the stability of the system itself.

  Protecting Consumers and Investors: It is crucial that when households make choices to invest their savings we have clear rules of the road that prevent manipulation and abuse. While outright fraud like that perpetrated by Bernie Madoff is already illegal, these cases highlight the need to strengthen enforcement and improve transparency for all investors. Lax regulation also left too many households exposed to deception and abuse when taking out home mortgage loans

  Eliminating Gaps in Our Regulatory Structure: Our regulatory structure must assign clear authority, resources, and accountability for each of its key functions.  We must not let turf wars or concerns about the shape of organizational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people. 

  Fostering International Coordination: To keep pace with increasingly global markets, we must ensure that international rules for financial regulation are consistent with the high standards we will be implementing in the United States.  Additionally, we will launch a new, three-pronged initiative to address prudential supervision, tax havens, and money laundering issues in weakly-regulated jurisdictions. 

For details, read the full outline here.  And Sec. Geithner's statement to Congress here.  And the AP has a video excerpt of the statement:

Posted by Graham Griffith

New Home Sales Up From Last Month But Still Lag

03-26-2009 12:17 PM with no comments

The seasonally adjusted rate of new home sales for February was 337,000, according to a report released by the US Census Bureau this morning.  This represents a 4.7 percent increase over January.  But it is a 41.1 percent decline from February 2008.  

Over at The Big Picture, Barry Ritholtz explains why the new numbers are anything but cause for celebration--no matter what the headlines may say.  And for exhibit A, he points to this chart from the Census Bureau:

Read Ritholtz's post here.  

The full Census report is available here.  

Posted by Graham Griffith

Building a Brand: Virgin America's Porter Gale

03-26-2009 10:36 AM with no comments

Porter Gale has led marketing campaigns for a wide range of clients: Country Music Television, Snapple, Coach.  Now she is Vice President of Marketing for Virgin America.  Virgin American was born in 2004 and its first flights took off a year and a half ago.  The last few years have not been kind to the airline industry, and yet Virgin America has gotten off to a good start.  It is one of only two domestic airlines that is growing (the other being Southwest).  Porter Gale says the company saw an opportunity in lean times.  Brand loyalty in the industry has become virtually nonexistent.  So, she says, Virgin America set out to build a business based on its brand.  She explained the company's approach last week at The Economist Marketing Forum.  Here is her presentation:

Posted by Graham Griffith