September 2011 - Global Economic Watch

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'Capitalism at Risk' Authors on Disruptive Forces to Business

09-30-2011 9:47 AM with no comments

In their new book, Capitalism at Risk: Rethinking the Role of Business, Harvard Business School professors Joseph Bower, Herman Leonard, and Lynn Paine put the onus on business leaders, not government, to counter the disruptive forces that threaten free market success.  Paine and Leonard recently discussed the key forces that they say place capitalism as we know it in danger in this HBR IdeaCast:

Posted by Graham Griffith

Bernanke on Lessons from Emerging Economies

09-29-2011 2:55 PM with no comments

Ben Bernanke spoke in Cleveland last night as part of the Cleveland Clinic's Ideas for Tomorrow Series.  The Federal Reserve chair used the occasion to talk about what developed economies might learn from emergin economies when it comes to fostering sustained growth.  He seemed to appreciate the opportunity to discuss issues in a larger economic context, as opposed to "short run economic concerns" that he usually addresses. 

Bernanke framed much of his outlook on the success of emerging economies on the Washington Consensus, as put forward by John Williamson in 1990 and adopted as a guide by the World Bank.  From the speech:

Ultimately, the principles that John Williamson enumerated two decades ago have much to recommend them. Macroeconomic stability, increased reliance on market forces, and strong political and economic institutions are important for sustainable growth. However, with the experience and perspective of the past 20 years, we can see that Williamson's recommendations were not complete. Reforms must be sequenced and implemented appropriately to have their desired effects. And a successful development framework must take into account that activities such as the adaptation of advanced technologies and the harnessing economies of scale are often critical to economic growth and depend on a host of institutional conditions, such as an educated workforce, to be fully effective.

Indeed, advanced economies like the United States would do well to re-learn some of the lessons from the experiences of the emerging market economies, such as the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments, the high returns to education and to promoting technological advances, and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability. As the advanced economies look for ways of enhancing longer-term growth, a re-reading of Williamson's original Washington Consensus, combined with close attention to the experiences of successful emerging market economies, could pay significant dividends.

Read the full speech here.

Posted by Graham Griffith

Radio Boston: Does Reliance on Private Funding Harm Innovation in Science Research?

09-29-2011 10:47 AM with no comments

Our friends Meghna Chakrabarti and Anthony Brooks of the WBUR program Radio Boston, featured a compelling discussion with Phillip Mirowski yesterday.  Mirowski is professor of economics and the history and philosophy of science at the University of Notre Dame, and author of Science Mart — Privatizing American Science.  "Science is always organized by somebody," Mirwoski says. Today science is largely organized by the private sector.  And that has Mirowski concerned that innovation is being squelched.  He cites "patent degradation" as but one of the results of market-driven science research.  Take a listen and see if you find the argument compelling.  Click here.

Posted by Graham Griffith

'Extreme' Policy Moves of 2011

09-29-2011 10:08 AM with no comments

Calling the Fed's latest maneuvering, dubbed operation twist, extreme policy might seem a little, well, extreme.  But that is exactly what the folks at Central Bank News have done in adding it to the list of the most extreme policy moves of 2011.  Here's the list:

1. Belarus Financial Crisis

2. The Twist

3. Swiss Franc Floor

4. ECB SMP and the Confidence Crisis

5. Bank of Japan Earthquake Response

6. Vietnamese Hyperinflation

7. Brazilian Rate Reversal

8. Kiwi Earthquake Insurance

9. Joint Liquidity Operations

10. 'Chindia' Tightening

For details of each of the policy moves listed above, read Top 10 Most Extreme Monetary Policy Moves of 2011 here.

Posted by Graham Griffith

Niall Ferguson on Prosperity and the Great Divergence

09-28-2011 12:45 PM with no comments

The West has dominated wealth creation since the Industrial Revolution.  It sure feels like the dawn of the twenty-first century is revealing a shift of some sort.  Could this be the end of the West's dominance of the global economy?  If it is, in what ways is that a bad thing for the global economy?  And what lessons might China, India, Brazil, and other rising economies take from the last 200 years? 

The often-provocative Niall Ferguson tries to tackle the question of how the "Great Divergence" came about.  In this Ted Talk, Ferguson outlines what he calls "killer apps," that set the course for the West's unrivaled rise of prosperity:

 

Posted by Graham Griffith

Feldstein on Europe's Reluctance to Let Greece Default

09-28-2011 9:28 AM with no comments

Martin Feldstein calls Greece's mix of overwhelming government debt and a free-falling economy an "otherwise impossible situation."  Greece will default, as Feldstein argues that is the only way out.  But after it defaults, will it leave the euro zone?  Having its own currency just might open more options.

Feldstein argues there are two reasons that the key influencers in the Euro zone (Germany and France) do not want Greece to leave. At least not just yet. From Project Syndicate:

First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank.

The second, and more important, reason for the Franco-German struggle to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy. This risk was highlighted by the recent downgrade of Italy’s credit rating by Standard & Poor’s.

A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany. The European Financial Stability Fund is large enough to cover Greece’s financing needs but not large enough to finance Italy and Spain if they lose access to private markets. So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks.

Read Europe’s High-Risk Gamble here.

Posted by Graham Griffith

Failure of Imagination Dooms Start-ups

09-27-2011 10:16 AM with no comments

Scott Shane wants entrepreneurs to take responsibility in their decisions.  He rejects assertions that most start-ups fail because of outside forces beyond control of the people who start the start-ups.  And he especially rejects the notion that start-ups struggle because they can't keep up with rapid growth.  Rather, Shane, Professor of Entrepreneurial Studies at Case Western Reserve University, argues that entrepreneurs set their new companies up for failure by choosing to enter industries that are "unfavorable to new companies."  From Small Business Trends:

Many entrepreneurs start companies that stand little chance of out-competing other businesses. Data from the Panel Study of Entrepreneurial Dynamics reveals that nearly 40 percent of the founders of new companies don’t think that their businesses have a competitive advantage. (Because entrepreneurs are an optimistic lot, if a business’s founders don’t think the company has a competitive advantage, what are the odds that it does?)

Not enough entrepreneurs have experience in the industries in which they are starting their businesses. Academic research shows that working in an industry for several years before starting a business enhances the survival prospects of a start-up, but a sizable fraction of entrepreneurs start businesses in industries in which they have no work experience.

Many entrepreneurs fail to take the actions that research shows help businesses to survive. Academic evidence shows that putting in place careful financial controls, emphasizing marketing plans and writing a business plan increase the odds that a new business will survive, yet many founders fail to write plans, have inadequate financial controls and don’t focus on their marketing plans.

Read Why Do Most Start Ups Fail? here.

Posted by Graham Griffith

Europe's Dollar Problems

09-27-2011 9:52 AM with no comments

Europe has its euro problems.  But it has dollar problems as well.  Like most of us, European banks don't have enough dollars. 

In the latest Marketplace Whiteboard, Paddy Hirsch explains why European banks need US capital, even though they have their own currency:

Posted by Graham Griffith

The IMF Growth Tracker Showing Moderating Growth Across Global Economy

09-26-2011 12:04 PM with no comments

The IMF's World Economic Outlook shows a worrying global economic slowdown, led by Europe and the US.  Among the many causes cited for slowing economic activity is the lack of demand in the private sector.  The IMF's researchers suggest that they expected a quicker "handover from public to private demand." The tsunami and earthquake damage in Japan also bears some of the blame, as do disruption in oil supplies in North Africa this year. 

A lasting, and troubling factor is the lack of confidence on the part of consumers and businesses in developed economies of the West.  The ripple effects of the dip in confidence are being felt around the globe.  Note the impact on growth, as shown in the IMF's Growth Tracker:

From the report:

Worryingly, various consumer and business confidence indicators in advanced economies have retreated sharply, rather than strengthened as might have been expected in the presence of mostly temporary shocks that are unwinding. Accordingly, the IMF’s Growth Tracker (Figure 1.4, top panel) points to low growth over the near term. WEO projections assume that policymakers keep their commitments and the financial turmoil does not run beyond their control, allowing confidence to return as conditions stabilize. The return to stronger activity in advanced economies will then be delayed rather than derailed by the turmoil.

Read the World Economic Outlook, and watch video of the IMF staff discussing their findings, here.

Posted by Graham Griffith

Latin American Economies Relatively Strong, but Still Exposed to Risk from Europe, US

09-26-2011 9:19 AM with no comments

Luis Moreno, president of the Inter-American Development Bank, says Latin America now has a "pretty good macroeconomic picture."  This helps protect the relatively healthy Latin American economies from the problems in Europe and the US--Moreno calls it a "buffer."  But it does not mean that they are not affected.  Ahead of this weekend's IMF Meetings, Moreno spoke with The Economist's Matthew Bishop about potential danger to Latin American economies from Europe's debt crisis and reasons for optimism looking forward:

Posted by Graham Griffith

Derivative Holding Even More Centralized than in 2008

09-26-2011 8:58 AM with no comments

If you subscribe to the idea that banks holding a lot of derivatives increases exposure to risk (see WaMu, Bear Stearns), and you hoped that after the events of 2008 that such exposure might be less centralized, then you will surely be disappointed, or concerned, with this chart from Tyler Durden of ZeroHedge:

Durden writes:

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

Durden goes on to say that he does not accept the notion that bilateral netting limits exposure.  Read Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb? here.

Hat tip to Washington Blog at The Big Picture.

Posted by Graham Griffith

FOMC Meeting Response

09-22-2011 7:07 AM with no comments

The Federal Reserve decided yesterday to leave the federal funds target rate unchanged at 0-0.25%, citing the slowness of the economy's growth and stable longer term inflation expectations.  The Fed will also sell some short term Treasuries, and in return buy some longer term Treasuries.  While there were calls for more action from the Fed, Tim Duy called the Fed' stance "bold."  

Bottom Line:  I think Fed official believe they are being bold; I see them as continuing to ease policy in 25bp increments.  Expect that to continue.  Assuming the economy fails to regain momentum, the Fed will follow up with additional action – QE3 will be the next stop.  Ignore the dissents; they are background noise.  Don’t expect miracles; expect small moves, the equivalent of 15bp here, 25bp there.  The real leverage could potentially come from fiscal policy leveraging the easy monetary policy.  Print the money and spend it.  Open up the refinancing channel.  Overall, make the objective of national economic policy simply be to decisively move us off the zero bound.  Not deficits, not the dual mandate, just commit to pulling us off the bottom.

Read Duy's Fed Watch response to the FOMC meeting here.

For more analysis of the announcement and possible response today on Wall Street and in Washington, here's the Wall Street Journal's Evan Newmark, Jon Hilsenrath, and Thorold Barker:

Posted by Graham Griffith

Small Business Trends: Managing and Marketing Expertise in Today's Economy

09-22-2011 6:55 AM with no comments

Diane Helbig says we are living in an "expertise economy."  With all the tools consumers have to do their own research, Helbig says what business owners know is as important as what they make.  Writing at Small Business Trends, Helbig shares some best practices for businesses in this new economy.  One of the parctices she encourages is to "build a community":

Find experts in other fields that are complementary to yours. Invite those experts to share their information with your audience. Build a foundation of experts so your audience sees you as a go-to company whenever they need information – even outside of your area of expertise.

Szarka Financial in North Olmsted, Ohio, is a great example of this practice. Not only have they developed programs that they offer around their industry, but they have gathered a stable of experts in various areas that touch theirs. They have established their firm as a go-to source for people who are looking for information in and around the area of personal and business finances. They understand that they aren’t going to do business with everyone.

However, sharing information with everyone helps consumers decide if Szarka is right for them and provides Szarka with a great referral pool. Actually, two referral pools: (1) the partner organizations they promote, and (2) the people who take advantage of the information Szarka and their partners share.

Read 3 Steps to Succeeding in the Expertise Economy here.

Posted by Graham Griffith

Harvard Publishing: Overrated Values in Business

09-21-2011 7:05 AM with no comments

Loyalty, efficiency, decisiveness--all important values for leaders in business, yes? Yet when asked to name the most overrated value in business by Harvard Publishing, those three terms made the list.  Take a look:

So what is your take?  Do we place too much importance on loyalty?  Do you have a value to add to the list of most overrated in business?

Posted by Graham Griffith

Roubini's Steps for Avoiding a Depression

09-20-2011 11:57 AM with no comments

In the period before the global economic crisis of 2008, Nouriel Roubini was tagged "Dr. Doom" by many media outlets.  The label was often dismissive, but it became more of a badge of honor after crisis hit. 

Roubini has remained vigilant about the vulnerability of the financial markets.  His concern now is a global depression.  In order to avoid depression, Roubini says there must me a multi-national approach.  While austerity measures in many countries are necessary, he argues that other nations must postpone austerity in order to inject stimulus into the global economy.  Writing at Project Syndicate, Roubini outlines several other steps:

Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures.

Third, to restore credit growth, eurozone banks and banking systems that are under-capitalized should be strengthened with public financing in a European Union-wide program. To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements. Also, since the US and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential.

Fourth, large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency. Even with policy changes, it takes time for governments to restore their credibility. Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely.

Agree or disagree with Roubini, by proposing specific steps, he does allow for a meaningful discussion. Two big questions raised by his proposals are 1) is a coordinated global policy possible in today's political climate, and 2) if so, then how might it come about?  Read How to Prevent a Depression here

Posted by Graham Griffith

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