Global Economic Watch

Robert Shiller's Speech to Finance Graduates

Graham Griffith — Tue, 22 May 2012 15:48:00 GMT

Tis the season of graduations, and Robert Shiller has some thoughts to share with newly minted graduates looking to work in the field of finance. One key theme: Shiller wants new entrants into the fields of banking, economics, and finance to consider themselves as fiscal stewards and not simply people out to make money for money's sake. From Project Syndicate:

Those of you deciding to pursue careers as economists and finance scholars need to develop a better understanding of asset bubbles – and better ways to communicate this understanding to the finance profession and to the public. As much as Wall Street had a hand in the current crisis, it began as a broadly held belief that housing prices could not fall – a belief that fueled a full-blown social contagion. Learning how to spot such bubbles and deal with them before they infect entire economies will be a major challenge for the next generation of finance scholars.

Equipped with sophisticated financial ideas ranging from the capital asset pricing model to intricate options-pricing formulas, you are certainly and justifiably interested in building materially rewarding careers. There is no shame in this, and your financial success will reflect to a large degree your effectiveness in producing strong results for the firms that employ you. But, however imperceptibly, the rewards for success on Wall Street, and in finance more generally, are changing, just as the definition of finance must change if is to reclaim its stature in society and the trust of citizens and leaders.

Finance, at its best, does not merely manage risk, but also acts as the steward of society’s assets and an advocate of its deepest goals. Beyond compensation, the next generation of finance professionals will be paid its truest rewards in the satisfaction that comes with the gains made in democratizing finance – extending its benefits into corners of society where they are most needed. This is a new challenge for a new generation, and will require all of the imagination and skill that you can bring to bear.

Read the full speech here.

WSJ Survey: CEO Pay More Closely Tied to Companies' Financial Performance

Graham Griffith — Mon, 21 May 2012 19:52:00 GMT

A new Wall Street Journal survey of executive pay shows that CEO pay for the last year was tied to company performance much more than in recent year. Scott Thurm warns us to be careful not to draw too many conclusions for this, as some CEOs are still seeing pay increases even when their companies do not improve in performance. But the difference from 2010, when there was no apparent correlation between CEO pay and performance, to 2011. Read Thurm's article here (registration required), and watch Thurm discuss the findings below:

Infographic: Social Enterprise

Graham Griffith — Mon, 21 May 2012 15:41:00 GMT

Social enterprise may be growing in the U.S. and globally, but the future of responsible businesses depends on their proving themselves as sustainable. FedEx and Good.is put together a graphic to help explain what it takes for social enterprise to succeed:

The Euro on the Block: Schumpeterian Theory and the Eurozone

Graham Griffith — Mon, 21 May 2012 15:02:00 GMT

The week begins with a lot of dire talk of the future of Greece, the EU, and the Euro. CNN International's Richard Quest likens a Greek exit from the euro to the Lehman Brothers collapse of 2008, only worse. The Guardian's Larry Elliott echoes that sentiment. Elliott writes today that, despite assurances to the contrary, Europe's leaders are not equipped to protect the euro. And he argues that "monetary union" is an outdated model.

Despite this monetary chaos, there are still some in Brussels or Frankfurt who argue that the euro has been a success and will go from strength to strength. They sound suspiciously like the members of the politburo who in the 1980s said the Soviet Union was working and would last for ever. The undoubted political commitment to the euro means that there are now calls for a fast-track approach to full political union, but this means repeating the top-down approach used for monetary union and - at a time when the markets are talking about a Greek exit within weeks or months - would take years to finesse.

Instead, the realistic options for the euro are that it breaks up or staggers on in a zombie-like condition, with low growth, high unemployment, growing public disenchantment and widely divergent views in Europe's capitals about what needs to be done. As a company, the euro would have gone bust by now. It had a duff business plan, which has been poorly executed. The experiment survived in the benign conditions of the early 2000s but only the core business, Germany, has been able to cope with the much tougher climate of the past five years. There is boardroom squabbling, the workforce is in open revolt and there are no new product lines.

The euro, in short, is ripe for what Joseph Schumpeter called creative destruction. Capitalism, according to Schumpeter, was the story of constant, normally gut-wrenching change, in which innovation put established firms out of business and made whole sectors obsolete. Anybody working in the music industry, publishing or newspapers in the past decade understands what Schumpeter was talking about.

Read The euro is ripe for creative destruction here.

Facebook's Revenue Challenge

Graham Griffith — Thu, 17 May 2012 14:37:00 GMT

There has been a great deal of excitement, and spending, in Silicon Valley in advance of Facebook launching its IPO tomorrow. NPR's Steve Henn and Lam Thuy Vo remind us that Facebook has some work to do to live up to its valuation. They have to grow their revenue, and that means a big increase in users and revenue per user. From Planet Money:

Lam Thu Vo provides more detail here.

Training Customers

Graham Griffith — Wed, 16 May 2012 18:10:00 GMT

The customer is always right. We get that. But it appears Starbucks has found a way to make the customer right where the company wants them, when the company wants them. In this Harvard Business Review video, Anne Morriss of the Concire Leadership Institute explains how Starbucks has trained its customers, almost as if they were employees.

Liquidity, Traditional Deposits, and Risk Mitigation at U.S. Banks

Graham Griffith — Wed, 16 May 2012 15:02:00 GMT

Philip Strahan--professor of finance at Boston College's Carroll School of Management, and a visiting scholar at the Federal Reserve Bank of San Francisco--has an Economic Letter on liquidity risks at banks during and following the 2007-2008 financial crisis. Strahan highlights the importance of traditional deposits to mitigating risk:

Banks finance their balance sheets with more than just deposits and equity capital. Other liabilities include uninsured wholesale deposits, repurchase agreements, and other short-term unsecured debt instruments. These sources became scarce during the crisis. For example, repurchase agreements, known as repos, were often used to finance risky assets such as private-label mortgage-backed securities. Gorton and Metrick (2011) show that, in the middle of 2007, mortgage-backed securities could be almost completely financed with short-term borrowed funds in the repo market. However, by the fourth quarter of 2008, only about 55% of each dollar invested in such securities could be financed this way. Banks that used repos to finance purchases of mortgage-backed securities faced an unpleasant choice. They could sell their securities holdings into a falling market and take a big loss. Or they could find new, and presumably expensive, sources of credit.

In the case of nonbank brokerage firms, the collapse of the repo market was a calamity. However, it was less of a disaster for commercial banks because they could use increases in deposits to bridge the financing gap.

Figure 1 shows how these sources of liquidity risk affected overall bank credit during the crisis. Off-balance-sheet loan commitments rose steadily from 1990 to 2007. Overall bank credit production, including both on- and off-balance-sheet credit commitments, started to fall in the middle of 2007. The decline accelerated sharply in the last quarter of 2008. By contrast, loans held on bank balance sheets continued to rise until the end of 2008. That rise in on-balance-sheet loans during the crisis was due to borrowers drawing down preexisting credit lines. Banks began cutting back new lending in the middle of 2007. This illustrates how bank obligations to existing borrowers crowded out new borrowers.

Read Liquidity Risk and Credit in the Financial Crisis here.

JP Morgan's Index of Credit Defaults

Graham Griffith — Tue, 15 May 2012 14:43:00 GMT

JP Morgan executives are meeting with shareholders this morning and will try to explain how the bank lost $2 billion through risky derivative trades. It is easy to get overwhelmed by the size of the loss, and by the complexity of the trades that caused the loss. Paddy Hirsch takes to the Marketplace Whiteboard to help make sense of these credit default swaps:

A Call to Rein in the High-Tech Hype-Machine

Graham Griffith — Mon, 14 May 2012 18:22:00 GMT

Farhad Manjoo is worried that the tech industry has gone Hollywood. Everyone is looking for the next Facebook or iPod, but they seem less willing to wait for the next-big-thing to develop before they lavish hype on it. Writing at Fast Company, Manjoo cautions us against putting stock in a model that doesn't give products time to develop before grading them as successes or failures:

As digital culture has become mainstream culture--pushed along by, yes, Apple and its now masterfully calibrated launch events--the iPod's slow start would make it a dud today, the TouchPad of music players (remember HP's ill-fated tablet? Me neither). Tech has now become about hits, not unlike Hollywood movies. And the numbers for what defines a smash are only growing: In 2010, Microsoft's Kinect motion-gaming add-on sold 8 million units in 60 days, earning it a Guinness world record. A year later, Apple sold 33 million iPhone 4S's in its first 78 days. The Instagram photo-sharing app attracted 7 million users in its first nine months; this spring, the Draw Something app wooed 35 million people in its first six weeks, prompting Zynga to buy it for a reported $180 million. On the flip side, slow starters are being kicked to the curb. The recommendation app Oink, backed by a Silicon Valley Who's Who, didn't pop and shut down after a few months, the John Carter of the App Store.

These megahits present a danger for the tech business. The iPod's early years suggest that the industry will lose something in the rush to kill off products that don't catch fire immediately. "There's a subsection of people in the Valley who think the only way to be successful is to create a viral overnight hit," says Dave Morin, CEO of the social-networking app Path, which attracted nearly a million registered users in its first year. That's a more modest start than, say, Pinterest, but Morin points out that Facebook, Flickr, LinkedIn, and Twitter all took years to gain millions of users.

He's right: New technology isn't like a movie, a finished product that you either like or you don't. High-quality tech products take time--after they're released. It's relatively easy to get a lot of people to check out your new thing: see MySpace, Chatroulette, or any number of Zynga games. But it takes more determined work, more trial and error, to keep them using your product. Look at all of Facebook's redesigns, missteps, and reorganizations on the path to winning big.

Read Why Tech's Hunger For Overnight Hits Is Bad For Business here.

Nineteenth Century Disruption and the Business of Music

Graham Griffith — Mon, 14 May 2012 17:41:00 GMT

One way to look at the evolution of pop music is as the expansion of a market. While it is easy to recognize the expansionary period in which we are currently living, it might be surprising to learn that the spreading of music into wider and wider markets goes back a couple of centuries. Jose Bowen, Dean of SMU's Meadows School of the Arts, is a musician and teacher who studies the impact of technology on music. And he looks to the early Nineteenth Century as the beginning of the music industry as we have come to know it. In this TedX Talk, Bowen gives us a lot to consider about music as a business, and how it came to be that way:

IMF: African Economies Still Outpacing Global Growth

Graham Griffith — Mon, 14 May 2012 14:45:00 GMT

The IMF's latest economic outlook for Sub-Saharan Africa is relatively strong. IMF economists expect African nations to continue to outpace global economic growth. The region's 5% growth rate for 2011 was down a bit from the 6.5% growth before 2008, but still quite strong.

Most countries participated in this expansion, although drought slowed growth in many West Africa Economic and Monetary Union (WAEMU) member countries and post-election civil strife saw GDP decline by close to 5 percent in Côte d'Ivoire. Supportive macroeconomic policies played an important role in sustaining growth in many countries across the region.

Rising global food and fuel prices contributed to inflationary pressures in many countries, although food prices across the region were significantly affected by local supply conditions. Large and sustained jumps in inflation were mostly concentrated in eastern Africa-eventually inducing sharp monetary tightening in several affected countries that is expected to cut inflation over the course of 2012.

For 2012, regional growth is expected to rise slightly, helped by new resource production in several countries and by recovery from drought and civil conflict in the WAEMU countries; adjusting for these one-off factors, the pace of growth would be slightly lower than in 2011. For the region's two largest economies, growth in South Africa is set to slow (to below 3 percent), held back by weaker exports to advanced country markets, and to remain broadly unchanged in Nigeria (around 7 percent), notwithstanding some fiscal consolidation. For most countries in the region, growth rates will either be unchanged or slightly weaker than in 2011.

Here is a look at the growth trend for the region's different economies:

Read the full report here.

Startup Hubs--Silicon Valley and Northeast Still Dominate, but Growth Elsewhere

Graham Griffith — Mon, 14 May 2012 12:39:00 GMT

In case you didn't already grasp just how much Silicon Valley dominates as THE place for startups, Venture51 and Column 5 have put together an infographic highlighting the startup "Sweet Spots" across the country. New England and New York City show some life here, but the California hub is really on its own. And while it is hard to imagine other regions of the country becoming more than just drops compared to the ocean that is Silicon Valley, at least they are becoming bigger drops. (Click here for the full size infographic)

Hat tip Barry Ritholtz.

Impact of Values on Business

Graham Griffith — Fri, 11 May 2012 17:18:00 GMT

Dov Seidman, CEO of LRN and author of How: Why How We Do Anything Means Everything...in Business (and in Life), spoke about ethics in business at the Carnegie Council recently. Seidman shared some interesting data on the impact a company's ethics can have on its bottom line. In this excerpt, he argues that "values driven" companies are better equipped to stay on a stable trajectory despite major market fluctuations:

Watch the full talk here.

Pew: Economic Mobility by State

Graham Griffith — Fri, 11 May 2012 12:25:00 GMT

In the U.S., where you live can have a significant impact on how easy it is to move up or down economically, according to the Pew Center on the States. Pew's Economic Mobility Project has identified some sharp regional differences. The nine states with the lowest economic upward mobility are all clustered together in the South, while most of the 9 states with higher than average economic upward mobility are East Coast states. Take a look at states that are higher or lower than the national average for upward economic mobility:

Eight states, primarily in the Mideast and New England regions, have consistently higher upward and lower downward mobility compared to the nation as a whole.

Maryland, New Jersey, and New York have better economic mobility than the national average on all three measures investigated; Connecticut, Massachusetts, Pennsylvania, Michigan, and Utah have better mobility than the national average on two measures.

Nine states, all in the South, have consistently lower upward and higher downward mobility compared to the nation as a whole.

Louisiana, Oklahoma, and South Carolina have worse economic mobility than the national average on all three measures investigated; Alabama, Florida, Kentucky, Mississippi, North Carolina, and Texas have worse mobility than the national average on two measures.

Read more, and access the interactive map, here.

Brookings Feature: Manufacturing in America

Graham Griffith — Thu, 10 May 2012 14:11:00 GMT

Brookings has a new interactive feature on manufacturing in America. The interactive graphics paint a fairly clear picture of the ups and downs of manufacturing jobs across the country. And the producers also make the case for manufacturing jobs remaining vital to a growing economy, even in this digital age. For one, they pay better. But manufacturers also drive innovation. From the report.

Manufacturing firms are far more likely than non-manufacturing firms to introduce new products and new production or business processes. The most innovative manufacturing industries relate to computers, communications, and pharmaceuticals.

Manufacturing makes up about 11 percent of U.S. GDP, but accounts for more than two-thirds (68 percent) of U.S. domestic company R&D spending-a key input to innovation

Engineers are an essential input into technological innovation and they are disproportionately concentrated in manufacturing. Furthermore labor productivity growth-a broad measure of innovation-is higher in manufacturing than in the private sector as a whole.

Below is a glimpse of what the interactive feature looks like. Click here to go to the site.