• GDP: 6.2% 4th Quarter Drop

    At the beginning of the month, the Commerce Department predicted that fourth quarter gross domestic product (GDP) figures for 2008 would show 3.8% drop.  This seemed low to some economists, and it turns out it was.  Today Commerce released a revised estimate.  From October through December, GDP dropped at a seasonally adjusted annual rate of 6.2%--the biggest one quarter drop since 1982.  This from the Bureau of Economic Analysis's news release:

    The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by a positive contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

    Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports.

    Final sales of computers subtracted 0.01 percentage point from the fourth-quarter change in real GDP, the same contribution as in the third quarter. Motor vehicle output subtracted 2.04 percentage points from the fourth-quarter change in real GDP after adding 0.16 percentage point to the third-quarter change.

    Exports decreased 23.6 percent in the 4th quarter.  They had risen 3% in the 3rd quarter.  The one area with significant growth was government spending--up 6.7%.

    As noted above, the figures aren't a big surprise.  As Barry Rithotlz writes in a short but clear post, "WHO THE HELL IS STILL SURPRISED BY THESE NUMBERS?!?" But Marketplace's Steve Henn will have a report today on just how the Commerce Department got its estimates wrong. Local listings are here

     

     

  • Yale Economists Discuss the Crisis

    Shortly after President Obama signed the $787 billion dollar economic recovery act, a panel of Yale professors discussed the state of the economy at Yale Law School in New Haven, CT.  John Geanakoplos, William Nordhaus, and Robert Shiller--all professors in the Econ department at Yale--joined Yale Law deputy dean Jonathan Macey.  The discussion, moderated by Yale president Richard Levin--himself a former professor of economics at Yale--covered the severity of the current recession, the root causes of the global economic crisis, and the specific problems of the banking system.  The panel seemed to be in agreement twhen it came to fiscal stimulus (they think we need it, and we might need more than what the Obama plan provides) and the banks (we can't allow them to fail).  And while there is a lot of talk of gloom, the panelists for the most part) do not give in to the gloom themselves.  And they do provide prescriptions.  Of course, you may or may not agree with them.  As always, share your thoughts by clicking on comments below. 

    Here's the full discussion:

  • New Poll Shows More Americans Believe Small Business Can Lead The Way

    A We Media/Zogby poll shows a majority of Americans believe small business owners and entrepreneurs, and science and technology leaders "will lead the U.S. to a better future." Government and business leaders didn't garner nearly as much respect. And don't even get them started on media leaders: 

    Nearly two-thirds of Americans (63%) said small business and entrepreneurs will lead the U.S. to a better future, while 52% said the same of science and technology leaders. Americans are far less optimistic about the leadership of government (31%), large corporations and business leaders (21%), or traditional news media such as newspapers, television, radio, and magazines (13%).

    Read We Media's release hereSmall Business Trends weighs in on the poll here, with pride, of course. 

  • 'Dangerous Home Loans', 2000-2007

    According to a report out today from RealtyTrac, 1 in 54 homes received at least one foreclosure filing in 2008.  According to the USA Today, that is an increase of 81% over 2007. As we now know, a lot of Americans were taking on loans that were way beyond their means, and when the housing bubble burst, and their presumed home values sank, they could not keep up with payments.  USA Today has a good illustration of the growth in what they call "dangerous loans," or mortgages that were at least four times the applicant's annual income.  The number of these loans ballooned between 2000 and 2007.  The first map shows where and how many of these loans were issued in 2000:

    And here's the map for 2007:

    Maps by Brad Heath, Joshua Hatch, and Dave Merrill, USA TODAY

    Bear in mind that the second map is for 2007, when as Brad Heath writes in USAT, "foreclosures and plummeting housing prices began sending shockwaves through the nation's economy." 

    The size of those loans should have been a clear red flag, says Susan Wachter, who studies real estate and finance at the University of Pennsylvania's Wharton School. People who borrow that much money are more likely to default on loans.  "It's the continuation of loans that were clearly designed to fail," she says. "In 2007, we were clearly about to go into a disaster, but ... the loans were still being written." On average, buyers in 2007 got mortgages that were double their income.

    You can read the full article, and see the USA Today's interactive map of dangerous loans from 2000 through 2007 here

  • 'Here we go again: Are manufacturers the new farmers?'

    In yesterday's post about January's mass layoff statistics, we pointed out that the manufacturing sector, once again, was hit the hardest.  So it is a good time to share this post from Clemson University professors William Ward and William Gartner:

    In all of the talk to save automobile manufacturing jobs, doesn't it seem we've been down this road before?  One hundred years ago it was farm jobs that needed to be saved.  Later, creating manufacturing jobs was the universally-acclaimed path to economic development. As we begin this century, the immediate goal seems to be saving manufacturing jobs.

    When the talk turns from creating jobs to saving them, foolish economic policies tend to follow. These include trade protectionism, income support and tax subsidies. None of these policies saved agricultural jobs, but they made agriculture the most distorted sector in the US economy.  So, as the political talk shifts from creating to saving manufacturing jobs, we ask: "Do we really need a manufacturing sector policy that matches our agricultural policy?"

    Let's take a quick historical tour.  Thomas Jefferson argued that agriculture, forestry, fisheries and mining were the basis of economic wealth, a belief supported in employment terms by the US Census of 1820 that showed 83% of the US workforce to be farmers, while only 14% worked in manufacturing. By the end of World War I, farm employment had dropped below 33% of the workforce, and major programs began to emerge to keep agriculture at "parity" with the rest of the US economy. 

    After nearly a century of these agricultural programs, farm employment represents barely 1% of the US workforce, and farm output barely 1% of US GDP-not because agricultural output declined but because manufacturing and services outputs grew faster.  US farm output in 2005 was actually 2.2 times the farm output of 1961. Likewise, world agricultural output went up nearly three-fold, while farm employment as a percent of global total employment declined.  Yet, government subsidies to farmers make up 16% of US farm income, one-third of farm income in some EU countries and nearly two-thirds of farm income in Japan.

    Manufacturing employment is following the same downward trend as agriculture.  Manufacturing employment peaked at the end of World War II at 33% of US employment and has trended downwards to around 10% of the US workforce in 2008 and could easily be down to 5% by 2020.  Manufacturing employment is declining, not because US manufacturing output is declining, but because, like farming in the last 100 years, it takes fewer-and-fewer workers to produce more-and-more output.

     The decline in manufacturing employment, as a percentage of the total workforce, is not unique to the United States. We estimate that global manufacturing employment declined 15% (by 30 million workers) between 1995 and 2002 alone (years for which we have good data), while global manufacturing goods exports increased by 27% (current values).  It should be noted that China is not "absorbing" these manufacturing jobs.  China's manufacturing employment declined by 18 million during that period (from 98 million to 80 million), even as China's share of global manufacturing exports more than doubled (from a 2.49% share to a 6.08% share). While we don't have later data for China, we have it for the sixteen major competitor countries followed by US Department of Labor.  Between 1992 and 2007, manufactured goods production increased in all sixteen, while manufacturing employment fell in all except Spain (who started out with a 20% national unemployment rate), Taiwan (minuscule growth) and Canada (miniscule totals).  In South Korea, for example, manufacturing output-per-worker increased three-fold, exports increased four-fold and manufacturing employment declined by nearly 12%. At the same time, US manufacturing output increased more than 70% (in real terms), manufacturing exports were up by 170% (in current values) and US manufacturing employment dropped nearly 20%.

     The future of manufacturing, simply, is fewer jobs.  This is what increases in productivity means: Fewer and fewer people are needed to make more and more goods.  You simply cannot save jobs in sectors where there are increasing gains through productivity.  Providing subsidies to farmers hasn't increased farm employment.  So, do we really want future autoworkers and shareholders to get 16% of their income from the US Treasury in the same way that farmers do?

    Ward teaches applied economics and statistics at Clemson. Gartner teaches entrepreneurial leadership at Clemson and is author of Handbook of Entrepreneurial Dynamics.  Gartner.  The above piece first ran in Greenville Magazine

  • Geithner on Stress Tests

    The nation's largest financial institutions are going under the microscope this week.  The US Treasury Department began administering stress tests yesterday, with the aim of determining whether the banks have the necessary capital to make it through two years of adverse economic conditions.  On yesterday evening's All Things Considered Treasury Secretary Timothy Geithner described the purpose of the stress tests to NPR international business and economics correspondent Adam Davidson.

    Geithner: What we want to do is to bring a more realistic, a more conservative, a more consistent, forward-looking assessment so that we are confident that these institutions are going to have the resources necessary to withstand a more challenging economic environment. And to do that we're gong to make sure they have support from the government — in terms of capital from the government — where that is necessary.

    We know Davidson, and we've highlighted his work before.  He started Planet Money for NPR just as the global economic crisis struck last year. And his features for This American Life (Giant Pool of Money, parts 1 and 2 in particular), provide some of the clearest explanations of the root causes of the crisis.  And this interview is consistent wth his previous work. As Davidson presses Geithner on how the Treasury will go about administering the stress tests, he put the Secretary through a little bit of his own stress test.  You can catch the ATC interview here.   But there's more that didn't make it onto the ATC edited version.   The latest Planet Money podcast features the full interview with Geithner, and a description of the scene in Geithner's office.  Download, or take a listen to the full interview here

    UPDATE: The Baseline Scenario reacts to the Geithner interview.

  • January Mass Layoffs--Fewer "Events" From December, More Jobs Lost

    The number of mass layoff events--50 employees or more laid off in a single event--declined from December to January, according to the Bureau of Labor Statistics.  There were 2,227 mass layoff events last month, compared to 2,275 in December.  But the number of people who lost jobs in these layoffs increased to 237, 902--11,785 over December figures. 

     

    The total number of events is up by nearly 50% over January 2008.  "Temporary help services" had the highest number of inital claims of any industry with 25, 467, but overall, manufacturing jobs were hit the worst.

    The manufacturing sector accounted for 38 percent of all mass layoff events and 44 percent of initial claims filed in January 2009; a year earlier, manufacturing made up 30 percent of events and 35 percent of initial claims. This January, the number of manufacturing claimants was greatest in transportation equipment (57,173) and machinery (14,120). (See table 3.) The administrative and waste services industry accounted for 12 percent of mass layoff events and associated initial claims during the month.

    The South was the hardest hit region (among the 4 census regions) in January with 115,630 jobs lost in mass layoffs.   The Midwest lost 114,195 jobs to mass layoffs, compared to 81, 846 in the West and 77,142 in the Northeast.  You can get the full data from the Bureau of Labor Statistics website here

  • Startup Advice for Lean Times

    Cisco, Oracle, Lotus, Atari: all technology businesses that were start-ups during economic downtimes.  BusinessWeek's Spencer Ante spoke with some entrepreneurs who saw opportunities during recessions and shares some of their advice.  The article is yet another reminder that a lot of top American businesses owe some of their success to the decisions their founders made that ran against the economic tide.  As Harvard Business School's Tom Nicholas tells Ante, "Recessions can be really useful strategic opportunities."  Ante goes on to write:

    Entrepreneurs, financiers, and historians point to several reasons for this phenomenon. For starters, everything is cheaper during a downturn, including the cost of labor, materials, and office space. There's less competition, both from incumbents that are trying to put out their own fires and from startups that find it harder to raise money. And the tough times force entrepreneurs to work on their business models earlier, so they end up reaching profitability more quickly than when money comes cheap. "The companies are tougher because they were tested during a tougher time," says Carl Schramm, president of the Kauffman Foundation, an organization that promotes entrepreneurship.

    The advice in the article, though not necessarily brand new, serves as a good reminder to entrepreneurs to match up core strengths with clear opportunities.  And most of all, believe in what you are doing as you build a company and a culture. 

    Another key lesson is to pick markets strategically, says Umang Gupta, who joined database maker Oracle (ORCL) in 1980 as employee No. 17 and wrote its first business plan. Ultimately, the company wanted to build a database program that would work with multiple types of computers, from minicomputers to PCs to mainframes, those hulking machines that crunched massive amounts of data. But Oracle couldn't do it all at once. It started out creating a database that worked on minicomputers such as Digital Equipment's PDP-11. Then Oracle methodically went upstream, pursuing mainframes next, rather than going for mainframes and PCs at the same time. "We concentrated our bets," says Gupta, now CEO of Internet measurement firm Keynote (KEYN). "We built a culture of an extremely focused, aggressive company."

    Read the full article here

  • Economy Day--In Pictures

    The New York Times counted President Obama saying "economy" thirty times in his address to Congress.  And that was just one chapter in a day of economic talk in Washington.  Earlier, Ben Bernanke, chair of the Federal Reserve, addressed the Senate Banking Committee and said, if the government makes the right moves, economic recovery could be just a year away. 

    To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets.  If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.  If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.  

    Here is his opening statement from yesterday:

     

    A transcript of Bernanke's testimony is here.

    President Obama was up in prime time, and it certainly didn't hurt to have stocks rally in the afternoon, after Bernanke's testimony.  Before addressing specific details of his administration's economic recovery plans, the President said it is time for the country to "take charge of our future." 

    Now is the time to act boldly and wisely – to not only revive this economy, but to build a new foundation for lasting prosperity.  Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down.  That is what my economic agenda is designed to do, and that’s what I’d like to talk to you about tonight.

    Here is an excerpt from his speech:

    You can watch the full address here.

    Before the day was up, the Republicans sent Louisiana Governor Bobby Jindal to the podium (at the Governor's Mansion in Baton Rouge) to respond to Obama's address.  Jindal stressed his party's belief that "the way to lead is by empowering you, the American people." 

    That is why Republicans put forward plans to create jobs by lowering income tax rates for working families, cutting taxes for small businesses, strengthening incentives for businesses to invest in new equipment and hire new workers, and stabilizing home values by creating a new tax credit for home-buyers. These plans would cost less and create more jobs.

    Here's an excerpt from his response:

    Governor Jindal's office promises a full video of his address will be available here.  You can read a full transcript from CNN here

  • An Animated View of the Credit Crisis

    Los Angeles-based designer Jonathan Jarvis has created a whole new way of looking at the credit crisis.  Here it is:

    Jarvis says "The goal of giving form to a complex situation like the credit crisis is to quickly supply the essence of the situation to those unfamilar and uninitiated."  The above project does seem to hit the mark.  Jarvis's Website is here

  • Bailout Money for Venture Capital Firms?

    Over the weekend, Thomas Friedman expressed frustration at the prospect of more federal bailout money going to GM and Chrysler, writing, "Bailing out losers is not how we got rich as a country, and it is not how we'll get out of this crisis."  Friedman thinks we need to focus on start-ups.

    You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners - university endowments and pension funds - are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors' upside and keep 80 percent for themselves.

     This talk has Anita Campbell of Small Business Trends nervous.  She says "bailing out venture capitalists is a dumb idea."  Setting aside for a moment that Campbell's statement seems to misrepresent Friedman's idea (he is saying that federal bailout money would be better spent if we gave it to VC firms.  I don't see him arguing that we need to "bail out" those firms), her larger point remains worth exploring.  She points out that most small businesses don't get venture capital.

    Look, venture capitalists play a valuable role. But venture capitalists are simply irrelevant when it comes to the vast majority of small businesses and the economic engine they create. And we definitely shouldn't be subsidizing VCs' high investment returns with taxpayer money, especially not my taxes as a small business owner.

    Read Anita Campbell's post here

    Is she right?  Or is there something in Friedman's idea that makes sense for economic growth, and therefore a net gain for small business?  Weigh in.

  • The Geography of the Meltdown and the Recovery

    Global crises have a way of reshaping nations, and it is likely the US will look very different in the years following this recession.  Some cities will have a much harder time climbing out of the economic hole than others.  Some might not ever recover, or will only do so by reinventing themselves.  Urban studies theorist Richard Florida considers how the crisis will change where we live, how we work, and the US's stature in the global economy in a comprehensive article in the March issue of The Atlantic titled, How the Crash Will Reshape America

    No place in the United States is likely to escape a long and deep recession. Nonetheless, as the crisis continues to spread outward from New York, through industrial centers like Detroit, and into the Sun Belt, it will undoubtedly settle much more heavily on some places than on others. Some cities and regions will eventually spring back stronger than before. Others may never come back at all. As the crisis deepens, it will permanently and profoundly alter the country’s economic landscape. I believe it marks the end of a chapter in American economic history, and indeed, the end of a whole way of life.

    While New York City was at the center of the global economic crisis when it touched off nearly 6 months ago, it looks like it will not bear the brunt of the storm over the long term.  While at the height of the bubble, "greater New York depended on financial sector for roughly 22% of local wages," the city has been attracted top minds from in a diverse array of fields for much of its existence.  Cities that were already in decline before the crisis--Rust Belt cities for example--are in much greater danger because they have not been adding talented minds.  Florida, who wrote The Rise of the Creative Class, has spent a big part of his career looking at how urban centers depend on attracting talented, innovative people, and that those people thrive in environments that are active, stimulating, and fun.  As a result, these places--New York, Chicago, Boston, Seattle, Silicon Valley--have grown and experienced ever increasing rates of innovation and wealth creation--something Florida calls "urban metabolism." 

    Metabolism and talent-clustering are important to the fortunes of U.S. city-regions in good times, but they’re even more so when times get tough. It’s not that “fast” cities are immune to the failure of businesses, large or small. (One of the great lessons of the 1873 crisis—and of this one so far—is that when credit freezes up and a long slump follows, companies can fail unpredictably, no matter where they are.) It’s that unlike many other places, they can overcome business failures with relative ease, reabsorbing their talented workers, growing nascent businesses, founding new ones.

    Economic crises tend to reinforce and accelerate the underlying, long-term trends within an economy. Our economy is in the midst of a fundamental long-term transformation—similar to that of the late 19th century, when people streamed off farms and into new and rising industrial cities. In this case, the economy is shifting away from manufacturing and toward idea-driven creative industries—and that, too, favors America’s talent-rich, fast-metabolizing places.

    As "creative" capitals become more vital and recover from the crisis, other places that will likely suffer longer include a lot of old factory cities that have not evolved and possibly Sunbelt cities where rapid growth was centered on rising housing prices rather than new economic sectors.  The full article is a must read, as is an additional Q&A with Florida that focuses largely on the stimulus package and what sort of infrastructure will help foster growth in the new America. 

    Also, The Atlantic has pust together an interactive feature that is highly useful.  For example, the map above shows the relative growth and decline of patents per capita in urban centers.  You can use the mapping tool here

    UPDATE: Richard Florida was a guest on WBUR's On Point with Tom Ashbrook yesterday.  Listen here.

  • The Drumbeat of Bad Forecasts (no shades necessary)

    We should expect this recession to continue at least through the first half of 2009, and the downturn will "rival that of 1973-75," according to a panel of economics forecasters surveyed by the National Association for Business Economics.  Other lowlights highlights include:

    -Economic weakness will be dominated by a retrenchment in consumer -spending reflecting large employment and wealth losses.-Business investment will experience an exaggerated cyclical decline characteristic of economic downturns

    -Real government spending is expected to advance a robust 2.8% in an otherwise grim 2009

    -The jobless rate will peak at 9.0% by the end of the year.  House prices are predicted to decline 5% during 2009, though the S&P 500 index is expected to rise a solid 8% by December 31, 2009. 

    There is some good news in the report.  The NABE panel projected moderate growth in 2010 of 3.1%.  This is only one of several gloomy reports that have come out recently.  Last week, the Federal Reserve even downgraded previous projections, and now forecasts that the economy will contract by 0.5 to 1.2%, and unemployment will rise to between 8.5 and 8.8%

    Former Fed Chair Paul Volcker, now chair of President Obama's Economic Recovery Advisory Board, shared his own downcast views of the current economic climate in a speech before economists and investors at Columbia University on Friday.  The 81-year old Volcker told the audience he doesn't "remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world."  Here are more of his comments:

     

  • Must Listen: Launching a Business in a Recession

    There is plenty to suggest that, as counterintuitive as it may seem, recessions are a good time to start a business (assuming you have the right ideas, the money, and the patience).  We've written before (here and here) about the surprising number of successful businesses that started during economic downturns.  From Southwest Airlines to Microsoft to Target, the list goes on.  Today, on Weekday, KUOW radio's daily news-talk program, host Steve Scher spoke with entrepreneurs who started businesses during the current recession.  Here's the program blurb:

    Stocks are down, pink slips are flying, and houses are in foreclosure. What better time to start a new business! What have you got to lose? We talk to entrepreneurs who venture into today's economy with high hopes. What are their business plans? And where are they getting funding?

    KUOW, a Seattle based public radio station, is the top news station in Washington, and Seattle is one market that seems to have a concentration of entrepreneurs.  Washington state is one of the top five states for entrepreneurs, according to the Small Business Entrepreneurship Council.   So while this is a local program, it is an interesting look at what entrepreneurs are doing to find success in this recession.  Listen online or download the podcast here

  • CPI: The Good, The Bad, The Uncertain

    January's Consumer Price Index (CPI), released Friday by the Labor Department, reveals a slight rise in prices last month, after siginificant drops in the last quarter of 2008--November's 1.6% drop was the largest since the government starting tracking consumer prices 61 years ago.  A lot of consumers, many with less to spend than recent years, welcome lower prices.  But given the overall trend during this recession, especially when compared to other recessions, some economists have been concerned about deflation.  See the below graph from the St. Louis Fed.

     

    But James Hamiltonof UC-San Diego and Econobrowser, who has been concerned about deflation, sees some good news in the latest figures.  He says the .3% rise in the CPI for last month projects out to a 3.4% annual inflation rate--just above the 3% mark that he deems necessary (more on that below). 

    Hamilton's enthusiasm remains tempered.  The 2.2% drop in the CPI since October works out to a -8.7% annualized deflation rate.  But he thinks these statistics are "worth watching."

    The core motivation for policy stimulus is the perceived need to increase aggregate nominal spending. Some have claimed that with the nominal T-bill rate near zero, monetary policy is no longer capable of providing such a stimulus. I disagree with that assessment, though I can understand that it is a very legitimate position to take. But if we do get back up to a year-over-year 3% inflation rate, I would think that an objective observer would want to agree at that point that we've achieved all we can hope for with the tool of demand stimulus. I continue to recommend that the Federal Reserve think of achieving that 3% inflation rate as their primary policy objective at the moment.

    Read the full post here

     The Bureau of Labor Statistics has a very useful Q&A on misconceptions about the CPI here

  • Citigroup and A Bad Bank/Good Bank Scenario

    A year ago, Citigroup had a market capitalization of over $137 billion.  At the start of business today, its value in the market is below $10 billion.  Citi stock tumbled to $1.95 last week as talk of more government aid and/or intervention ratcheted up.  Now, according to the Wall Street Journal, and others, Citigroup is in talks with the federal government about further moves to keep the bank afloat, and these talks could lead to the government "substantially expanding its ownership [of Citigroup]":

    Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

    The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

    Susan Woodward and Robert Hall use Citigroup's plight to illustrate how the U.S. Government might go about creating a "good" bank and a "bad" bank without fully splitting up a bank, thus keeping the bad bank solvent.  "The key idea", as Woodward and Hall write, crediting Jeremy Bulow, "is that the bad bank owns all of the equity in the bad bank."

    The left column shows Citicorp’s balance sheet roughly marked to market. The company’s value in the stock market of $11 billion is $76 billion less than reported book equity value. We deduct that amount from the reported value of long-term assets, which is where the troubled real-estate related assets are most likely to reside.

    The other two columns show the balance sheets of the new good bank and bad bank. The good bank will continue to operate under the Citi brands as a well-capitalized operating entity. The bad bank will be a financial fund with no operating functions.  The good bank gets the short-terms assets and the “other” assets because many of these are related to its operating activities. It gets the better half of the long-term assets, taken to have book value, while the bad bank gets the poor half, where the impairment has already occurred and suspicions of further price declines persist. The bad bank holds the valuable equity in the good bank to the tune of $427 billion.

    Read Woodward and Hall's full analysis at their Financial Crisis and Recession blog here

  • St. Louis Fed: Tracking the Recession

    The Federal Reserve of St. Louis has pulled together a set of online resources for tracking the recession.  From charts that track various components of the economy (like the chart for Real Income included below), to analysis of the key characteristics of recessions in general, and the specific economic conditions driving this recession specifically, the site provides a helpful overview.  In one recent paper, Michael McCracken, economist at the St. Louis Fed, explains why forecasts during recessions are so difficult to get right. 

    One main contributor to the deterioration in the forecasts is an inability to detect turning points—that period when the economy shifts from being in a recession to not being in a recession—and vice versa. Another contributor is a clear bias in the forecasts during a recession. Forecasts of GDP growth and the unemployment rate both generally tend to be overly optimistic: Forecasts of GDP growth tend to be too high, whereas those for the unemployment rate tend to be too low. Perhaps not surprisingly, the degree of accuracy of the two series tends to move together; the correlation between the two series is roughly 80 percent. The unfortunate conclusion is that during a recession, economic decisions are not only more important, but also more difficult to make.

    Read McCracken's paper here, and check out the whole Tracking the Recession site here

     

  • Understanding Cramdowns at The Whiteboard

    In announcing his administration's new housing plan this week, President Obama said he supports a "cramdown" law.  Simply put, cramdowns laws would allow for bankruptcy judges to reevaluate home values and adjust the amount homeowners owe on properties, and, theoretically, reduce the number of foreclosuresPaddy Hirsch, senior editor of Marketplace, explains cramdowns in this Marketplace Whiteboard video:

  • Nightly Business Report Names Top 30 Innovations from Last 30 Years

    The PBS program Nightly Business Report went on air in 1979, and in marking thirty years of business coverage, the program teamed up with KnowledgeWharton in an interesting exericise.  The program asked viewers to name the top 30 innovations of the past 30 years.  A panel of faculty and administrators at the Wharton School then combed through the nominations, judging each based on questions like "Did it improve quality of life?"; "Was it a fresh breakthrough with a 'wow' factor?"; and "Did it spark an ongoing stream of innovations on top of the original innovation?".  The program released the final list this week.  Here is the top 10:

    1. Internet, broadband, www (browser and html) 
    2. PC/laptop computers 
    3. Mobile phones 
    4. E-mail 
    5. DNA testing and sequencing/human genome mapping 
    6. Magnetic Resonance Imaging (MRI) 
    7. Microprocessors 
    8. Fiber optics 
    9. Office software (spreadsheets, word processors) 
    10. Non-invasive laser/robotic surgery (laparoscopy)

    Catch the full top 30 in a slideshow from Nightly Business Report here

  • Saturn Dealers Banking on Brand

    When General Motors submitted its viability plan to the federal government on Tuesday, it said it will be phasing out its Saturn division by 2011.  Saturn dealers immediately began calling for a plan that would allow them to "spin off" from GM and begin seeking deals with other automakers to sell their cars under the Saturn brand.  Saturn struggled even more than most brands in 2008.  Sales dropped 22%, compared with 18% in the overall market.  But it is important to remember, at a time when a lot of analysts, politicians, and citizens are criticizing GM for being behind the times, that Saturn's past success had a lot to do with the automaker's innovative approach in setting up the subsidiary back in 1986. 

    As David Aaker, who teaches at the Haas School of Business at Cal-Berkely, wrote in his 1996 book Building Strong Brands, GM went about creating a strong brand identity for Saturn by making sure it was seen as distinct from the parent company: 

    GM's basic premise was that a world-class compact car and a strong quality culture could not be created within the confines of an existing General Motors division. A new company was therefore formed and given the freedom to create not only a product but a whole new organization free from the restrictive UAW contract and the historically confrontational relationship between labor and GM management, free from the constraints caused by an existing brand family, and free from the inhibitions of an existing way of doing business. People who joined Saturn broke ties with their prior GM unit and often moved to Spring Hill, Tennessee, where a "green field" manufacturing facility was built. This new organization was integral not only to creating the product but also to the broader challenge of creating a brand and communicating its identity.

    Saturn dealers clearly believe that their brand continues to have value and are looking to turn back to the notion that they are part of, as the Saturn's first ads proclaimed, a "different kind of car company."  And Jill Lajdziak, general manager of Saturn, wrote in a memo to Saturn owners that, as the division works with GM to create an independent company, "it feels a bit like it did back in the 80s."    

    Lajdziak saw this day coming.  Here she is a month ago at the International Auto Show in Detroit, telling Business Week's David Kiley that Saturn and GM were "looking for the business model that really works for the brand long term,"

    So what might the new business model for Saturn look like?  Consumers Reports likens the notion of one brand selling goods made by several manufacturers--which is essentially what will happen if dealers are able to sell cars from Indian and/or Chinese companies under the Saturn label--to what Sears set up with the Kenmore Brand.  Will this work for an automaker?  The first step will be to see if the plan is viable enough to be put in effect, then it will be interesting to see if consumers share Lajdziak's and Saturn Dealers' enthusiasm for the brand.

    Read Lajdziak's memo to Saturn owners here.

    David Aaker's case study on Saturn is available here

     

  • The Obama Housing Plan

    President Obama announced his administration's plan for helping some 9 million homeowners avoid foreclosures through refinancing or modifying mortgages.  The price tag for the plan could reach $275 billion.  Here's an excerpt from the President's announcement in Phoenix:

    The Treasury Department provides a summary of the plan here.  Treasury also has some interesting case studies to demonstrate how the plan works for three fictional families. Get the examples here.  And the New York Times neatly lays out who qualifies for help in the plan here

    A lot of economists have shared their reaction to the plan since yesterday afternoon.  Mark Thoma of the University of Oregon has pulled together some of the best responses at Economist's View.  Read them here.

  • Must Read: Economists Tell WSJ the Best Way to Spend $8

    The Wall Street Journal's Real Time Economics blog asked the Feldsteins, Shillers, and Mankiws of the world for suggestions on the best way to spend $8 a week--the amount most Americans will see added to their paycheck as a result of tax credits in the stimulus bill.  Here's the response of Adam Posen, of the Peterson Institute for International Economics:

    Invest in human capital through existing institutions: buy $8 of cupcakes at the PTA bake sale; attend a lecture at a community college ($8 admission); purchase a book on personal finance or retraining - any of these get spending into the economy with no lag, but also improve your or your family’s future productivity.

    The whole post is a must-read.  Get it here

  • Economist Gone Wild: The Story of Al Parish

    Last night, CNBC 's American Greed series profiled Al Parish, a professor of economics at Charleston Southern University who, as a financial advisor, bilked his clients out of millions of dollars and built a lavish lifestyle for himself.  He was convicted of fraud last summer and sentenced to 24 years in jail.  The breadth and scope of Parish's scheme pales in comparison to that of Bernie Madoff, but Parish's conviction was a major get for the SEC and federal prosecutors.  Of course, Parish's fraud hit his home city of Charleston hard, financially and otherwise.  He was dubbed 'Economan'--he says by his students--and used the super-hero image of himself at right on his investment firm's website.  He bacame a local celebrity and appeared on the local news as an investment expert.  But, as he tells The Post and Courier in this interview, he never took a course in finance or investments:

    Q: Do you think you were smarter or better than the experts? Where did this come from?

    A: I honestly don't know. I'm very good at mathematics and I'm very good at economics. I have never had a course in investments. I have never had a course in finance. I've taught graduate level courses in both. I went and looked back at my transcripts and I've never had courses in either.

    Q: But you've been called on as an expert in both?

    A: That's kind of interesting, isn't it?  Finance is one thing. That is math and economics. That's not hard to learn if you have a good math background. But investments is different, it involves psychology. Teaching a course in investments is one thing. Managing money for someone is something else ... The teaching part I did pretty well but the latter was disastrous. I guess it was arrogance to think I could do that, that I thought I'd found a way to generate these returns for these people.

    Charleston Southern not only allowed Parish to teach graduate level courses in areas he hadn't himself studied, the univeristy's board was so enamored with their star professor they gave him $10 million of the school's endowment to invest.  That money is, of  course, long gone.  The full Post and Courier interview is striking in that Parish plays the role of one who has been duped himself, almost as a third party.  The interview is from the day before Parish's sentencing, and his biggest regrets are that he "got involved in this."  Read the full interview here

    American Greed  airs next at 11pm ET Sunday.  You can watch a slide show and a short video at American Greed's website.  

  • CNNMoney: The Stimulus Bill and Small Business

    Small business owners saw lending from banks all but disappear last October, and the lack of access to cash has proven to be a major obstacle.  One hope with the stimulus bill President Obama just signed is that it will thaw the loan market.  While some provisions, like a House proposal to to give the Small Business Administration authority to give loans directly to small businesses that have been shut out by banks, did not make it in the final version of the bill, CNNMoney outlines some potentially good news for owners and the SBA. 

    Other measures in the bill that should benefit small business, according to the article, include tax deductions for new equipment purchases, hiring incentives, and increased capital gains "relief."  Read the full article here.   

    The bill authorizes the Small Business Administration to temporarily eliminate or reduce fees for participation in its flagship loan-guarantee programs, which insure banks against default by small business borrowers. The stimulus bill also increases to 90% the percentage of qualifying loans that the SBA can guarantee.

    For companies in need of quick relief, the bill offers a "small business stabilization financing," which gives them money to pay off existing loans. Under the program, the SBA can issue or back loans of up to $35,000; businesses can then use the money to make up to six months of payments on previous loans. Interest on stabilization loans will be fully subsidized, and the loans won't have any payments due for the first year. Borrowers must repay them within five years. Details of how and when the program will be implemented will be left to the SBA, which is currently waiting for Obama's nominee to head the agency, Karen Gordon Mills, to be confirm.

  • R. Allen Stanford Saw Problems Coming in 2009, But Not for Him

    People are lining up by the hundreds at Stanford Bank in St. John's, Antigua this morning, trying to withdraw their money a day after US federal regulators shut down the Stanford Group headquarters in Houston for "massive ongoing fraud."  According to the Securities and Exchange Commission, the company's namesake and lone shareholder, R. Allen Stanford, and two executives of the company "fraudulently sold $8 billion in high-yield certificates of deposit."  Stanford whereabouts are unknown at the moment.  And investors, and charities and companies that were recipients of Stanford's support are left searching for answers.  But the impact of Stanford's fraud may be most keenly felt in the Carribbean island nation of Antigua, where the cricket-loving Texan's influence was substantial enough for the prime minister to bestow knighthood upon him. 

    R Allen Stanford In a May, 2008 interview on CNBC, Stanford talked about how his bank was able to avoid the the "subprime debacle."  But the real money quote from the interview is: "I think we are going to see a lot of problems surface in the first quarter of '09."  Here is an excerpt:

    Watch the full interview from CNBC here.