• Federal Reserve Pushes New Rules to Protect Credit Card Users

    The Federal Reserve is proposing new rules to strengthen Truth in Lending regulation.  And , according to the Fed, the new rules would:

    • Protect consumers from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance.
    • Prohibit creditors from issuing a credit card to a consumer who is under the age of 21 unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so.
    • Require creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit.
    • Limit the high fees associated with subprime credit cards.
    • Ban creditors from using the "two-cycle" billing method to impose interest charges.
    • Prohibit creditors from allocating payments in ways that maximize interest charges.

    Read the Fed's release here.

  • Top-Down Approach to Cutting Costs and Generating Cash

    As signs point toward recovery, companies need cash on hand to facilitate a rebound from the recession.  And for some that means continuing to cut costs.  Here's an instructive video from Knowledge@Wharton in which experts from Wharton and The Boston Consulting Group advocate a top-down approach to streamlining.  This advice seems to run counter to advice we have posted from other experts, who advise getting employee participation in cost cutting strategies.  Take a look:

  • New Interactive Chart from McKinsey Shows How Businesses are Using Web 2.0 Tech

    McKinsey has a great new interactive tool to track advances in how businesses are using Web 2.0 technologies.  The data behind the tool is the result of three years of surveys, and the input of some 1,700 executives from a variety of fields.  From the McKinsey description:

    This interactive focuses on several of the survey’s core questions—from what technologies and tools companies view as most important to what kind of investments, if any, organizations plan to make in Web 2.0 in the future. Our survey examines the business use of 12 technologies and tools: blogs, mash-ups (a Web application that combines multiple sources of data into a single tool), microblogging, peer to peer, podcasts, prediction markets, rating, RSS (Really Simple Syndication), social networking, tagging, video sharing, and wikis.

    Using the interactive, you can track the performance of each technology through the years or customize the view to compare particular technologies side by side. The interactive also contains an audio guide from Michael Chui—a consultant with McKinsey and one of the drivers of the Web 2.0 research initiative—who takes you further inside the results and trends.

    Here's what the tool looks like.  In this view, it shows which technologies executives find most useful to their businesses.  Click here to use the interactive version.  


  • Lacking Hope in Regulatory Reform

    We're past the one-year anniversaries of the fall of Lehman Brothers and the near collapse of AIG, but the question over what we have learned from the crisis is bothering more than a few big economic thinkers and policy makers.  Emma Bonino is Vice President of Italy's senate, and she concludes in today's Financial TImes that global leaders seem to have learned very little:

    As the saga of platitudes on the financial crisis comes to an end, hard questions now lie on the hands of world leaders. And the number of hands has expanded, with the Group of 20 leading nations set to replace the G7 and G8 as the hub of global economic co-operation. Economic giants, such as China, India and Brazil, will now have a voice in shaping world finance. This, of course, illustrates that decentralisation of economic power in the new world order is an unstoppable development, which may prove to be a positive one if the newcomers behave as responsible stakeholders.

    But will all this summitry really make a difference? With the benefit of hindsight we can see the flaws in the financial system that allowed the collapse of Lehman Brothers to bring the global economy to its knees. But will we be able to say we wised up and put in place a better financial system?

    Unlikely. So far, all we have really done is change the decision-making body, while the causes and symptoms of the financial crisis remain unchecked. Small and medium-sized banks continue to file for bankruptcy at a worrying pace. We still have not curbed the noxious behaviour of big banks: their social and political importance was enhanced more than scrutinised by the financial fallout after the Lehman disaster. “No more Lehmans” was the motto, cried both by banks and the public. The toxic combination of bank subsidies and bankers’ bonuses have socialised losses and privatised gains.

    Read What did we really learn from the financial crisis here.

    In the Washington Post, Simon Johnson and James Kwak argue that if we learned anything from the events of a year ago, the time to act is now.  "The next couple of months will be crucial in determining the shape of the financial system for decades to come," they write.  And they don't hold a lot of confidence in the Obama administration's ability to push through reform:

    We have criticized the administration's reform proposals, in particular for not going far enough to address the problem of financial institutions that are "too big to fail." But we support much of what was in the original package, particularly the CFPA and increased regulation of complex financial products. The question now is how hard Obama and Geithner will fight for it.

    Financial regulation, like health care reform, has entered the phase where speeches and proposals matter less than arm-twisting and horse-trading on Capitol Hill. With health care, President Obama attempted to go over the heads of Congress, directly to the American people. With financial regulation, that is no longer an option, given the extent to which it has faded from public consciousness.

    Read It's Crunch Time: The Fight to Fix the Financial System Comes Down to This here.  

  • Strategic Thinking Podcast from Total Picture Radio

    Successful companies are looking for a few good strategic thinkers.  Rich Horvath makes his living giving advice on how to develop strategic thinking skills.  Horvath is president and founder of the Strategic Thinking Institute, and author of Deep Dive: The Proven Method for Building Strategy, Focusing Your Resources, and Taking Smart Action.  He spoke about the paucity of strategic thinking training for executives with Peter Clayton of Total Picture Radio.  You can listen to the podcast here.  

  • Just Another Merger Monday

    The final Monday in August was a big day for mergers and acquisitions, and it looks like September is following suit.  Xerox is buying Affiliated Computer Systems in a $6.4 billion deal.  And Robert Profusek of Jones Day tells Bloomberg News that we should expect the M&A activity to keep up:

  • Joseph Stiglitz on the State of the Economy, and the Progress of Recovery

    Joseph Stiglitz says the federal government needs to spend more money (on infrastructure, schools, and elsewhere).  And if he were president, he would work to  restructure "large parts of the economy," and bring them up-to-date with the economics of the Twenty-First Century, rather than allowing them to keep following "Nineteenth Century economic principles."  Those are among the ideas he shares with The New Yorker's James Surowiecki in this interview:

  • Companies Saying Sorry: Costs Nothing, Yet Pays Big Dividends

    Earlier this month we posted a video that AT&T put out in response to a flurry of customer complaints.  A video in which, as Jackie Huba of Small Business Trends pointed out, AT&T never said "we're sorry."  And that raises the question, "Should companies apologize?"  A new paper from researchers at the University of Nottingham suggests that apologizing is a good idea:

    After an unsatisfactory purchase, many firms are quick to apologize to customers. It is, however, not clear why they should do that. As the apology is costless, it should be regarded as cheap talk and thus ignored by the customer. In this paper, we test in a controlled field experiment whether apologizing influences customers’ subsequent behavior. We find that apologizing yields much better outcomes for the firm than offering a monetary compensation. 

    Read The Power of Apology here.  

    (H/T Mark Thoma)

  • G-8 Supplanted by G-20

    It looks as though the G-8 is largely a thing of the past, and the G-20 is here to stay.  Without China, India, and Brazil, the old Group of Eight nations no longer represented a large enough chunk of the global economic powers.  The Wall Street Journal's Jonathan Weisman explains:

  • Booz & Company's Mainardi on Cutting Costs Strategically and Quickly

    Cost cutting has been a dominant theme in board rooms for at least the last year.  But Cesare Mainardi--managing director of Booz & Company and co-author of Cut Costs + Grow Stronger--says a lot of companies do not know how to cut costs strategically.  If done right, Mainardi says, companies can implement aggressive cost cutting rapidly.  He describes appropriate cost cutting strategy, and details his notion of the right process, in this interview with Harvard Publishing (the publisher of his book):

  • Fed Chooses to Keep Interest Rates Low

    The Federal Open Market Committee met today and decided to keep the federal fund rates at 0 to 0.25 percent.  So while the FOMC stated that it sees positive signs in the economic data, it is not ready to forgo monetary policy measures designed to push recovery, and it is not concerned about inflation at this point.  From the press release:

    In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

    Read the full release here.  

  • G-20 and Bankers' Bonuses

    The Group of 20 leaders meeting in Pittsburgh tomorrow and Friday have a substantial agenda with several contentious issues on the table, but Bloomberg is reporting that leaders are moving toward some consensus on bonus pay for bankers.  French President Nicolas Sarkozy had pushed for pay caps and limiting bonuses.  President Obama seems to be endorsing tying bonuses to banks' capital levels.  This would appear to be good news to Bob Pozen, lecturer at Harvard Business School.  Pozen writes, in a "Conversation Starter" for the Harvard Business Review, that caps on bonuses are unlikely to fix the perceived problem of overpaid bank execs:

    In my view, fixed limits on bonuses for individual bankers are likely to boomerang by leading to high guaranteed salaries. But limits on overall compensation at unprofitable banks make sense if combined with share awards based on performance.

    In February of 2009, Congress adopted legislative limits on bonuses of senior executives at financial institutions receiving federal assistance (Assisted Institutions). In specific, Congress limited their annual bonuses, or any other type of incentive awards, to grants of restricted shares of Assisted Institutions not exceeding one third of annual compensation.

    These legislative limits on individual bonuses have already led to much higher annual salaries at Assisted Institutions. For instance, Wells Fargo raised the base salary of its CEO from $900,000 to $5.6 million. More broadly, Morgan Stanley increased by 250% the base salaries of its four top executives just below its CEO.

    Thus, despite the best of intentions, these legislative caps have unlinked executive bonuses from executive performance. By raising base salaries, these institutions are effectively guaranteeing some or all of what used to be a variable payment contingent on that executive's performance. This is a perverse result, undermining years of efforts by investors, academics and others to tie executive pay more closely to company performance measured over a reasonable time period.

    Read Pozen's full piece here.

  • The Value of Initiative, Creativity, and Passion in Employees

    Obedience, diligence, and intellect.  Three key attributes for good employees, right?  Gary Hamel says yes, but they aren't enough.  In fact, he labels obedience, diligence, and intellect as global commodities that any business can get from various places around the globe.  Managers who want their companies to thrive need to find and foster employees with other attributes.  Hamel, author of the influential book The Future of Management, points to initiative.  Employees who "don't wait to be directed," and push to solve problems before they are even asked.  In this BigThink video, Hamel explains the value of initiative, along with passion and creatvitiy--all attributes that he suggests are too rare in the American workplace these days:

  • Ratings Agencies on the Stand: SEC, Congress and Possible Changes in Ratings Oversight

    On Thursday Eric Kolchinsky will testify about ratings-firm reform before the House Committee on Oversight and Reform.  The former analyst for Moddy's (he left the firm last week after being suspended) is likely to become a bit of a star witness for those who are concerned that ratings agencies have been boosting ratings.  The Wall Street Journal reports today that Kolchinsky told Congressional investigators that Moody's continues to issue inflated ratings of "complex debt securities."

    Last week the Securities and Exchange Commission approved a set of new rules designed to give the commission more oversight of credit ratings agencies.  If Kolchinsky's testimony is well received, it could mean Congress pushes for further regulation of the agencies.  The New Yorker's James Surowiecki is among those who believes the credit agencies share some responsibility for the housing bubble by giving high ratings to "dubious mortgage-backed securities."  Surowiecki writes, that while the SEC's move last week was a positive step in that it helps in resolving conflicts of interest...

    ...there’s a much bigger problem, which is that, even though nearly everyone knows that the agencies are compromised and exert too much influence, the system makes it impossible not to rely on them. In theory, of course, the mere fact that a rating agency says a particular bond is AAA (close to risk-free) doesn’t mean that investors have to buy it; the agencies’ opinions should be just one ingredient in any decision. In practice, the government’s seal of approval, coupled with those regulatory requirements, encourages investors to put far too much weight on the ratings. According to a recent paper on the subject by the academics Darren Kisgen and Philip Strahan, that’s true even when the agency doing the rating doesn’t have a long track record. During the housing bubble, investors put a huge amount of money into AAA-rated mortgage-backed securities—which would have been fine had the rating agencies’ judgments been sound. Needless to say, they weren’t. Despite subprime borrowers’ notoriously shaky finances, the agencies failed to allow for the possibility that housing prices might fall sharply.

    Read Ratings Downgrade here.  

  • Marketplace Whiteboard: Understanding the Difference Between Treasury Bonds, Notes, and Bills

    The US Treasury is set to auction off a record amount of debt this week, according to the Wall Street Journal's Tom Lauricella.  

    Defying conventional wisdom, the market for U.S. government debt is rallying thanks to an unusual combination of buyers including American households, banks and the Federal Reserve.

    The rally has taken Treasury yields -- which move opposite the bonds' price -- to their lowest levels since spring, and have helped push mortgage rates to their lowest levels in three months. The Fed's active presence has also raised questions of whether the rally is sustainable.

    The appetite for Treasurys, generally considered safe, points to an undercurrent of wariness about the health of the economy long term, even as investors have lately loaded up on riskier investments, like stocks and junk bonds. Typically, stocks and other risky investments move in the opposite direction of Treasurys in the short term.

    News of this "unlikely rally," as Lauricella calls it, provides a good opportunity to step back and help people understand the difference between the Treasury bonds, notes, and bills.  And Paddy Hirsch provides a nice primer on the latest Marketplace Whiteboard.  Take a look:

  • Tim Duy: Fed Looking at 'Long Hard Road' of Recovery During FOMC Meeting This week

    The Federal Open Market Committee (FOMC) is set to meet Tuesday and Wednesday of this week.  Tim Duy points out that Ben Bernanke and friends will be meeting with a far more positive "economic backdrop" than they have had for a long time.  But for all the relatively good economic news there is, uncertainty remains.  Duy believes that the FOMC should continue to anticipate slow recovery, and he points to limited consumer credit as a primary reason:

    Given the steady anecdotal buzz surrounding the deterioration of the commercial real estate market, it is difficult to expect a rapid reversal of these trends.  In short, if you think credit markets are still under stress, as the Fed certainly does, and are worried about the availability of credit to support future spending, also among Fed concerns, then shifting rhetorically to signal a tighter policy stance irrational.  Moreover, it would seem inconsistent with plans to continue expanding the balance sheet via purchases of mortgage backed securities and TALF assets.

    So, it seems Duy is telling us not to expect a drastic change in Fed policy until we see a major shift in consumer credit and unemployment.  Read Even With Growth, A Long, Hard Road here

  • Emmy Award for Mad Men as Another Old Media Venture Struggles with Revenue: Business Week

    It may say something about these times when the two big winners at the Emmy Awards are behind the scenes looks at an ad agency--Mad Men--and a mainstream media company--NBC in 30 Rock.  The ground is shifting in both industries, and in the relationship between them.  Last week, another old media venture went up on the auction block: the once highly profitable Business Week.  Revenue has dropped substantially, and so now the question is whether anyone wants the magazine at anywhere near the asking price.  AdAge shares this video from last week's Gotham Media seminar, in which Reed Phillips III, of the media investment bank DeSilva and Phillips, discusses the challenges for Business Week publisher McGraw-Hill:

    Perhaps in 40 year someone will produce a digital video series of an ad company that broke new ground by developing winning marketing campaigns for the digital era. 

  • The US Federal Budget, Visualized

    Jess Bachman created the first version of his Death and Taxes poster in 2004.  Now, thanks to a little pub from boingboing.net a few years back, his updated version each year is a must have for the fan of strong visual representation of budget matters.  Essentially, Death and Taxes is a graphic representation of the US Federal Budget.  The 2010 version is available, and it looks something like this:

    Go to WallStats.com to learn more about the poster and Bachman’s work.  

  • MSNBC's Your Business Talks Health Care and Small Business with Sen. Landrieu

    The Obama Administration has been touting health care reform as something small businesses need as much as anyone.  The latest Your Business, MSNBC’s small business program, took some time to talk to Sen. Mary Landrieu (D-LA), chair of the Senate’s Small Business Committee, about whether any plan can get health care costs low enough for small businesses to benefit.  

    Visit msnbc.com for Breaking News, World News, and News about the Economy

  • Facebook's Status as a Business Gets a Thumbs Up as Revenue Starts to Outpace Costs

    September 2009 should go down as an historic turning point for social media, as Facebook is now bringing more money in than it is paying out.  That doesn't necessarily mean that is is profitable yet, as Douglas MacMillan writes in BusinessWeek:

    Rather, the cash it generates from advertising and other forms of revenue now exceed the cost of servers and other capital expenditures required to keep Facebook running. One-time costs, like the reported $50 million acquisition of Friendfeed last month, and operational expenses like personnel, are not included in this equation. Outside investments in the company, like the $200 million it raised from Digital Sky Technologies in May, are not accounted for either.

    Facebook has never disclosed its revenues, but board member Marc Andreessen recently told Rueters that the site is on track to generate over $500 million in revenues this year.

    The same day it announced its cash flow milestone, Facebook said it has added 50 million users in the past two months — bringing its total user base to 300 million and its signup rate to roughly 806,000 users per day.

    That’s a huge amount of traffic to support, and the site’s accumulating stockpile of photos, videos, and other content requires an ever greater number of expensive servers. This was a serious problem for Facebook as recently as March, when my colleague Spencer Ante reportedthat it was seeking $100 million in debt financing directly related to server costs. Now, it appears that economies of scale are working in the company’s favor: the more members it attracts, the less it has to pay to support each one.

    Read the full article here.

    And listen to, or download, Marketplace radio's coverage of the news here.  

  • Charlie Rose Lehman Brothers Segment

    Of all the discussions we've heard or seen or read this week of the collapse of Lehman Brothers, the Charlie Rose segment might be the best.  Andrew Ross Sorkin and Jim Stewart were particularly clear in putting the event into context.  The video of the program is now available, so we thought we'd share.  Here's a short excerpt:

    Click here for the full program:

  • A Picture of Changing Jobs in America,1850-2000

    Flare, UC Berkeley's data visualization lab, put out this great graphic on Americans' reported occupations from 1850-2000.  We learned about this from Chris Blattman, who teaches Political Science and Economics at Yale, via Mark Thoma. Blattman takes issue with what seem to be some glaring ommisions (teacher, doctor/nurse, truck driver, lawyer), thought that may be a categorization issue rather than an ommission.  (If anyone knows, please share).  Still this is a remarkable portrait of the shifting occupations over time. 

    Click here for the full, interactive version.

  • OECD Report: Worst Unemployment Across Nations in Decades

    In 1993, the unemployment rate for the 30 member nations of the Organisation for Economic Co-operation and Development was 7.5%.  And as Matthew Saltmarsh points out in the New York Times, that was the highest rate for the OECD nations since 1970.  But now, unemployment continues to climb, and in a report released earlier today, the OECD is projecting it will approach a new post-World War II high of 10% (the current 8.5% rate is already a post-war high).  And while the report says that most nations have taken strong measures to offset the dangers of high unemployment, those measures should not be seen as long term.  Instead, the report recommends that nations:

    --Help young people who have been hardest hit by the crisis, especially those with few or no qualifications. Targeting this group will reduce the risk of a “lost generation” of young people falling into long-term unemployment and losing touch with the job market.

    --Reinforce social safety nets to avoid jobless people falling into poverty: on average in the OECD area, 37% of individuals living in jobless households are poor - five times higher than for individuals living in a household where at least one person has a job.

    --Increase spending on active labour market policies, such as job search assistance, and training, to help the unemployed back to work. Spending on these policies has risen in many countries over the past year, but only modestly compared with the magnitude and pace of job losses. In Ireland, Spain and the United States, which have seen the fastest rise in unemployment in OECD countries, spending per unemployed person on active labour market policies has fallen by 40% or more over the past year.

    --Foster skill formation to ensure that workers are well-equipped with the appropriate skills for emerging jobs, including green jobs.

    You can read more on the report here.  And watch the OECD's video release below.

  • Bernanke: 'Recession is very likely over'

    Add Fed Chair Ben Bernanke's voice to the growing chorus that the recession appears to be over and a long slow recovery is beginning.  Bernanke spoke at the Brookings Insititution yesterday about the events of the last year, and during his speech he noted that he was well aware that forecasters were announcing the end of the recession.  Here is a key excerpt from the speech.

    But the general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession, because of ongoing headwinds, including still ongoing financial and credit problems, you know, deleveraging by households, the needs for adjustments in the economy, sectoral adjustments in the economy, the need for a fiscal exit at some point, many, many factors that will likely, at least based on current information, make the 2010 recovery moderate, and in particular, not much faster than sort of the underlying potential growth rate of the economy. And the arithmetic is that unless the economy grows, you know, significantly faster than its longer term growth rate, it’ll be relatively slow in creating jobs over and above those needed to employ people coming into the labor force, and therefore, the unemployment rate would tend to come down quite slowly. So that’s a risk, that’s a possibility.

    Of course, there is on both sides of that forecast; we could have a stronger recovery, we could have a weaker recovery, but if we do, in fact, see moderate growth, but not growth much more than the underlying potential growth rate, then, unfortunately, unemployment will be slow to come down. It will come down, but it may take some time.

    Obviously, that’s a very serious concern, and that’s one reason why, even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was, and so that’s a challenge for us and all policy-makers going forward.

    You can read a full transcript of the speech, and watch the full session by clicking here

  • 'Finding New Shoots of Growth' at World Economic Forum's Annual Meeting of New Champions

    With the economic landscape decidedly different from a year ago, many economists and policy leaders are trying to determine where the sectors of growth will be moving forward.  Jeffrey Sachs is among those who believes that sustainable technology and "green" investments are the best hope.  He writes in today's Guardian that the recession and the slow recovery ahead gives us  "the historic opportunity – and need – to compensate for low consumer spending with increased investment spending on sustainable technologies":

    The crisis can yet be an opportunity to turn from a path of financial bubbles and excessive consumption to a path of sustainable development. In fact, seizing this opportunity is the only recipe for genuine growth that we have left.

    At the World Economic Forum's Annual Meeting of New Champions in Dalian, China, the search for new engines of growth became a central theme, and many of the panels--video for which is now available here--focused on business in the new economic climate.  The panel titled Finding the New Shoots of Growth included Marwan M. Boodai, Chief Executive Officer, Boodai Corporation, Kuwait; Liu Jiren, Chairman and Chief Executive Officer, Neusoft Corporation, People's Republic of China; Deepak Puri, Chairman and Managing Director, Moser Baer, India; Iqbal Survé, Executive Chairman, Sekunjalo Investments, South Africa; James S. Turley, Chairman and Chief Executive Officer, Ernst & Young; and Wan Gang, Minister of Science and Technology of the People's Republic of China.  Wan set the tone by discussing sustainable technologies--along with other areas like biotechnology and information technology.  So the Chinese minister appears to be on the same page as Sachs.  

    Here's the panel discussion: