• 'Capitalism at Risk' Authors on Disruptive Forces to Business

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

  • Bernanke on Lessons from Emerging Economies

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

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

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

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

    Read the full speech here.

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

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

  • 'Extreme' Policy Moves of 2011

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

    1. Belarus Financial Crisis

    2. The Twist

    3. Swiss Franc Floor

    4. ECB SMP and the Confidence Crisis

    5. Bank of Japan Earthquake Response

    6. Vietnamese Hyperinflation

    7. Brazilian Rate Reversal

    8. Kiwi Earthquake Insurance

    9. Joint Liquidity Operations

    10. 'Chindia' Tightening

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

  • Niall Ferguson on Prosperity and the Great Divergence

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

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

     

  • Feldstein on Europe's Reluctance to Let Greece Default

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

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

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

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

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

    Read Europe’s High-Risk Gamble here.

  • Failure of Imagination Dooms Start-ups

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

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

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

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

    Read Why Do Most Start Ups Fail? here.

  • Europe's Dollar Problems

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

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

  • The IMF Growth Tracker Showing Moderating Growth Across Global Economy

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

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

    From the report:

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

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

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

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

  • Derivative Holding Even More Centralized than in 2008

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

    Durden writes:

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

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

    Hat tip to Washington Blog at The Big Picture.

  • FOMC Meeting Response

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

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

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

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

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

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

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

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

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

    Read 3 Steps to Succeeding in the Expertise Economy here.

  • Harvard Publishing: Overrated Values in Business

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

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

  • Roubini's Steps for Avoiding a Depression

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

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

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

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

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

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

  • Motivating the Twenty-First Century Workforce

    Big Think has begun a new series titled Inside Employees' Minds: Navigating the New Rules of Engagement.  The series is a response to new data that suggests employees are now more interested, and more willing, to look for a chance to leave their company for a better job.  If this is a real problem, as the surveys suggest, then it means that managers and executives must reconsider how they are working to keep their employees happy. 

    Roger Martin, dean of the Rotman School of Management at the University of Toronto, argues that the workers of the 21st century--especially Millenials--need to have a stronger sense of purpose in their work than simply "the singular goal of maximizing the value for faceless, nameless people."  And if companies want to get anything out of this workforce, and to not be stuck training new employees over and over again, they will need to comply.

    Read more about the Big Think series here.

  • NAHB/Wells Fargo HMI Dips to 14

    Not that anybody is expecting new home sales to rebound in a significant way anytime soon, but the National Association of Home Builders had little positive news to report today upon release of monthly home builder confidence survey results.  The NAHB/Wells Fargo Housing Market Index slid one point to 14. The index has been below 16 for the last 6 months.

    From the release:

    "Very little has changed in terms of housing market conditions so far this year," said NAHB Chairman Bob Nielsen, a home builder from Reno, Nevada. "Builders continue to confront the same challenges in accessing construction credit, obtaining accurate appraisal values for new homes, and competing against foreclosed properties that they have seen for some time. Beyond this, both builder and consumer confidence took a hit in recent weeks with the market disruptions caused by the S&P downgrade and congressional gridlock on the budget deficit."

    "The fact that the HMI continues to hover within such a narrow, low range reflects builders' awareness that many consumers are simply unwilling or unable to move forward with a home purchase in today's uncertain economic climate," added NAHB Chief Economist David Crowe. "While some bright spots are beginning to emerge in about a dozen select metro areas, the broader picture remains fairly bleak due to the weak economy and job market."

    Read the full release here.

  • Paul Volcker on 'A Little Inflation'

    In a New York Times op-ed, Paul Volcker expresses some concern that members of the Federal Reserv's Open Market Committee are starting to find the prospects of "a little inflation" tempting.  The thinking that concerns Volcker is that 4 or 5% inflation might have a stimulating effect for the economy.  Not so, says Volcker:

    My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.

    What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate.

    It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy.

    Read A Little Inflation Can Be a Dangerous Thing here.

  • Long Term Impact of Unemployment on Earnings

    Brookings has released a series of papers on the long term impact of unemployment on earnings.  The subjects in the new issue of Brookings Papers on Economic Activity, include how government policy can help small businesses grow, and the effectiveness of quantitative easing.  Justin Wolfers was one of the editors of the papers, and he provides a nice summary here:

  • Planet Money: The German Approach to Job Growth

    Unemployment in Germany is now at about 6 percent.  That seems awfully low in today's global economic climate, but it seems high to Germans.  And still, it took some painful maneuvering to get it that low.  Planet Money took a trip over to Germany to learn more about the nation's ten year push to transform its labor market.  That push helped the once stagnant manufacturing get going again, and in the process to produce more jobs.

    Take a listen (skip ahead to 02:30 for the story on Germany's unemployment):

  • Searching for the V Shaped Recovery

    While we're all accustomed to the idea that what goes up must come down, we've been hoping that the opposite is true, at least as far as the economy is concerned.  Mark Wynne of the Federal Reserve Bank of Dallas refers to this way of thinking as the "plucking theory," a phrase coined by Milton Friedman.  The idea is that the depth and speed of a recession would be matched by a mirrored recovery, like a plucked guitar string.  Well, that certainly hasn't happened this time around. 

    In an Economic Letter, Wynne shares some data from past recessions and recoveries that were indeed V-shaped, and then looks at the current situation:

    How does recent U.S. experience compare? It depends to some extent on when we define the crisis start. Conventional wisdom holds that it began in August 2007, and the NBER dates the business-cycle peak in December 2007. Chart 3A  (below) overlays the recent behavior of U.S. real GDP relative to its precrisis trend along with the data plotted in Chart 2, taking 2007 as the first year of the crisis. Here we are just looking at annual GDP numbers. The numbers for 2011 and 2012 are based on projecting the 2010 number forward using the September 2011 Blue Chip Economic Indicators consensus. It is striking how closely the path of U.S. real GDP trend tracks the average path of output in countries that have experienced banking crises. In that sense, the pace of the recovery is more or less in line with what we might have expected based on the historical experience of other countries that have undergone similar banking calamities.

    However, reasonable people might argue that the crisis really started in 2008, when major U.S. financial institutions got into serious difficulties, ultimately prompting major policy initiatives from fiscal and monetary authorities to help stabilize the economy. Does this date change things?

    Chart 3B shows how the comparison is affected if we take 2008 as the beginning. If anything, the fit to the historical patterns observed elsewhere is better. That is, the performance of real GDP in the U.S. is almost exactly in line with what we might have expected based on the average experience of other countries that have gone through banking crises.

    Read the full Economic Letter here.

  • Innovation and Unintended Consequences

    Historian Edward Tenner wants us to take a positive view of unintended consequences.  In a speech just made available by TedTalks, Tenner runs through all the remarkable innovation that came about somewhat accidentally.  We've made a point here at The Watch to note all the successful companies that were born during economic downturns, and Tenner makes sure to highlight some of these examples as well.  But this is a much longer view of important shifts in culture, development, and business. 

  • Breaking Down Barclays Success in Lehman Deal

    Three years ago, as we were wondering whether we were witnessing the complete meltdown of the financial services industry, Bank of America bought Merrill Lynch and Barclays took over the bankrupt Lehman Brothers.  Steven Davidoff--professor at the Michael E. Moritz College of Law at The Ohio State University--looks back at those deals, and he argues Barclays won, and Bank of America did not.  And the primary reason, Davidoff writes at the New York Times DealBook blog, is because Barclays was more patient:

    Things would have been different had Bank of America waited. It would at a minimum have paid a bargain basement price for Merrill, one that was tens of billions lower at least.

    There is still some talk of spinning off Merrill Lynch. The operations of Merrill have already been combined with Bank of America, so a real separation would be complicated. And the recent reorganization of the bank’s management — which puts Merrill Lynch’s wealth management business under David Darnell, the co-chief operating officer, but Bank of America-Merrill Lynch under the other chief operating officer, Tom Montag — also makes a split more difficult.

    Ultimately, Barclays made a better deal by doing what should be done in an acquisition, carefully assessing the future liabilities and limiting them as much as possible. But let’s be clear. Barclays did this only because it was forced to by the regulator.

    The first lesson of Bank of America and Merrill Lynch is that impatience and a chief executive’s hubris can lead to some very bad decisions. And regulators can sometimes stop these heady moves.

    Read The Merrill Lynch and Lehman Deals, 3 Years Later here.

  • Innovation and Making the Case for Big Ideas

    So maybe IBM, Google, Apple, and other big dogs get the bulk of the patents.  Small firms can also drive innovation.  G. Michael Maddock and Raphael Louis Vitón of Maddock Douglas say the key is not the size of the firm, but the size of the idea.  And, writing at Businessweek, they argue not to waste anybody's time with small ideas:

    So when it comes to industry-changing ideas, the size of the ideas and the resolve behind them really do matter.

    We believe leaders should talk about big ideas. Big ideas get your company attention. They demand a higher price. They increase loyalty. They demonstrate that you know how to listen, invent, and take risks. Great leaders know how to recognize, promote, and successfully launch big ideas.

    Small ideas do just the opposite. With all your big talk, you may get someone to look at them, but in the end they will cost you your reputation, your team’s loyalty, and your customer. Far too often, leaders make the mistake of talking about big ideas that are really embarrassingly small.

    Read Innovation: Size Matters here.

  • Five Years of Microfinance with Kiva

    Want to see what five years of global micro-lending looks like in the form of a war games map of the world? 

    Kiva Microfunds, the San Francisco based organization that facilitates Internet lending of small scale loans to students and entrepreneurs with the aim of alleviating poverty.  In five years Kiva has facilitated over $240 million in loans, and attracted more than 620,000 lenders.  For details about Kiva's lending and many of the projects Kiva loans have funded, click here

    To get a sense of all the activity Kiva has sparked, take a look at the animated map Kiva has produced to mark five years of micro-lending:

    Intercontinental Ballistic Microfinance from Kiva on Vimeo.