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Archive for the ‘economics’ Category

Perhaps calling it a “bailout” was a little counterproductive. Whether or not you support a bill to inject liquidity back into the market in an effort to get the credit machine rolling again (and whether or not you believe that such a bill is even necessary) it became pretty clear today that calling the effort a “bailout” certainly contributed to HR 3997 not getting the votes.

Watching MSNBC, CNN, Fox and Bloomberg today, I heard a common thread: Constituents of representatives who voted to defeat the bill simply didn’t want to see their hard-earned money go towards “bailing out” ginormous banks on Wall Street. In other words, President Bush, Speaker Pelosi, Secretary Paulson and the press probably killed the initiative from Day One by calling it a “bailout.” Perhaps if the plan had been referred to as something else, like an “Asset Purchase,” an “economic intervention” or even a “national credit adrenaline injection,” we probably wouldn’t be looking at the Dow’s worst day on record. Regardless of election-season politics, could today’s failure in Washington simply be due to a poor choice of words when it came to giving it an identity?

From Ina Fried over at Cnet:

I’m going to try to briefly accomplish in a few paragraphs what it seems to me our government has completely failed to do in this financial crisis.

No, I don’t have $700 billion of my own to shell out. But to me, Congress’ failure came not today on the House floor, but over the past week as both elected officials and members of the administration failed to translate the crisis into terms that have meaning for everyday Americans.

I’ve heard the phrases “Main Street” and “Wall Street” a lot, but what I haven’t heard is plain explanations of what credit really means and how essential it is to our system of doing business.

Here goes.

If the credit markets should freeze up–which many say is happening and will continue without massive intervention–everyone that borrows money will face a cash crunch. That means companies that take advantage of short-term loans to get by won’t be able to buy raw materials or make payroll. Even businesses that don’t need short-term capital may defer purchases to preserve capital.

If even banks are having a hard time getting money, what does that say for the small and midsize business? The Wall Street Journal had a story on Monday on how companies like McDonald’s may face a squeeze as their franchisees are unable to get loans to purchase or upgrade stores. I suspect that is just one visible example of a growing issue for businesses across the country.

We are stuck trying to move forward with new loans–essentially to keep the economy moving–while dealing with clearly bad ones of the past. While much of the attention has focused on concern over home loans, there are also construction loans and business loans that are at risk of default, risks that grow as those businesses find themselves essentially shut off from getting any new capital, extending the vicious circle.

You don’t have to take it from me.

Here’s C.H. Low, CEO of social-networking software start-up Orbius and a serial entrepreneur.

“When financial markets don’t function well, the ramification is broad,” he said in an e-mail interview on Monday. He said he is disappointed that the bailout is so misunderstood. Even the term bailout, he said, is a misnomer.

“This is an asset purchase, not a 100 percent bailout expense to taxpayer,” he said. “There is risk but also possibility of making a profit. Government’s main function is to do things that private sector cannot handle. This Market Stabilization Bill…is as necessary as having an Armed Forces to defend the country.”

Low noted that the main beneficiary is not Wall Street.

“As an early stage start-up, we rely on venture investments to carry us through a few more stages before we can be self-sustaining,” Low said. “With turmoil, smaller venture funds which fund many early stage companies themselves get anxious and their own investors may be affected and may affect their capital call. We ourselves planned for a rainy day but even we don’t have that much for a prolonged monsoon.”

He said that the seizing up of credit creates uncertainty in every sector. “Doing nothing is the worst of all choices,” he said.

Read the rest of Ina’s piece here.

Whether HR 3997 was a good plan or not – let’s face it, transparency about the latest contents of the bill hasn’t been great, – perhaps if it had been dubbed something other than a “Wall Street Bailout,” our representatives in Washington wouldn’t have been under so much pressure to vote nay on Monday. Lesson: Regardless of how great you think your product is, you probably won’t be able to launch it if you start by calling it the wrong thing.

The words we use matter.

PS: Since it is election season, click here to find out if your elected representative voted on HR 3997 the way you wanted them to. 😉

Photo by Christopher Wray McCann

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For better of for worse, countries and cultures – like companies, products and people – have identities too, and whether many of you in the US realize it or not, the US brand just experienced a very radical shift this month with a) the financial house of cards starting to come down on Wall Street, and b) the way that Washington responded to the crisis with its spectacular $700 BILLION “bailout” proposal.

Hat tip to ISB alumn Laurent Longin for forwarding this hilarious yet astute piece from Time’s Bill Saporito: “How We Became The United States of France.

This is the state of our great republic: We’ve nationalized the financial system, taking control from Wall Street bankers we no longer trust. We’re about to quasi-nationalize the Detroit auto companies via massive loans because they’re a source of American pride, and too many jobs — and votes — are at stake. Our Social Security system is going broke as we head for a future where too many retirees will be supported by too few workers. How long before we have national healthcare? Put it all together, and the America that emerges is a cartoonish version of the country most despised by red-meat red-state patriots: France. Only with worse food.

Admit it, mes amis, the rugged individualism and cutthroat capitalism that made America the land of unlimited opportunity has been shrink-wrapped by a half dozen short sellers in Greenwich, Conn. and FedExed to Washington D.C. to be spoon-fed back to life by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson. We’re now no different from any of those Western European semi-socialist welfare states that we love to deride. Italy? Sure, it’s had four governments since last Thursday, but none of them would have allowed this to go on; the Italians know how to rig an economy.

You just know the Frogs have only increased their disdain for us, if that is indeed possible. And why shouldn’t they? The average American is working two and half jobs, gets two weeks off, and has all the employment security of a one-armed trapeze artist. The [Bush] Administration has preached the “ownership society” to America: own your house, own your retirement account; you don’t need the government in your way. So Americans mortgaged themselves to the hilt to buy overpriced houses they can no longer afford and signed up for 401k programs that put money where, exactly? In the stock market!

Now our laissez-faire (hey, a French word) regulation-averse Administration has made France’s only Socialist president, Francois Mitterand, look like Adam Smith by comparison. All Mitterand did was nationalize France’s big banks and insurance companies in 1982; he didn’t have to deal with bankers who didn’t want to lend money, as Paulson does. When the state runs the banks, they are merely cows to be milked in the service of la patrie. France doesn’t have the mortgage crisis that we do, either. In bailing out mortgage lenders Fannie Mae and Freddie Mac, our government has basically turned America into the largest subsidized housing project in the world. Sure, France has its banlieues, where it likes to warehouse people who aren’t French enough (meaning, immigrants or Algerians) in huge apartment blocks. But the bulk of French homeowners are curiously free of subprime mortgages foisted on them by fellow citizens, and they aren’t over their heads in personal debt.

We’ve always dismissed the French as exquisitely fed wards of their welfare state. They work, what, 27 hours in a good week, have 19 holidays a month, go on strike for two days and enjoy a glass of wine every day with lunch — except for the 25% of the population that works for the government, who have an even sweeter deal. They retire before their kids finish high school, and they don’t have to save for a $45,000-a-year college tuition because college is free. For this, they pay a tax rate of about 103%, and their labor laws are so restrictive that they haven’t had a net gain in jobs since Napoleon. There is no way that the French government can pay for this lifestyle forever, except that it somehow does.

Mitterand tried to create both job-growth and wage-growth by nationalizing huge swaths of the economy, including some big industries, including automaker Renault, for instance. You haven’t driven a Renault lately because Renault couldn’t sell them here. Imagine that. An auto company that couldn’t compete with a Dodge Colt. But the Renault takeover ultimately proved successful and Renault became a private company again in 1996, although the government retains about 15% of the shares.

Now the U.S. is faced with the same prospect in the auto industry. GM and Ford need money to develop greener cars that can compete with Toyota and Honda. And they’re looking to Uncle Sam for investment — an investment that could have been avoided had Washington imposed more stringent mileage standards years earlier. But we don’t want to interfere with market forces like the French do — until we do.

Mitterand’s nationalization program and other economic reforms failed, as the development of the European Market made a centrally planned economy obsolete. The Rothschilds got their bank back, a little worse for wear. These days, France sashays around the issue of protectionism in a supposedly unfettered EU by proclaiming some industries to be national champions worthy of extra consideration — you know, special needs kids. And we’re not talking about pastry chefs, but the likes of GDF Suez, a major utility. I never thought of the stocks and junk securities sold by Goldman Sachs and Morgan Stanley as unique, but clearly Washington does. Morgan’s John Mack calls SEC boss Chris Cox to whine about short sellers and bingo, the government obliges. The elite serve the elite. How French is that?

Even in the strongest sectors in the U.S., there’s no getting away from the French influence. Nothing is more sacred to France than its farmers. They get whatever they demand, and they demand a lot. And if there are any issues about price supports, or feed costs being too high, or actual competition from other countries, French farmers simply shut down the country by marching their livestock up the Champs Elysee and piling up wheat on the highways. U.S. farmers would never resort to such behavior. They don’t have to: they’re the most coddled special interest group in U.S. history, lavished with $180 billion in subsidies by both parties, even when their products are fetching record prices. One consequence: U.S. consumers pay twice what the French pay for sugar, because of price guarantees. We’re more French than France.

So yes, while we’re still willing to work ourselves to death for the privilege of paying off our usurious credit cards, we can no longer look contemptuously at the land of 246 cheeses. Kraft Foods has replaced American International Group in the Dow Jones Industrial Average, the insurance company having been added to Paulson’s nationalized portfolio. Macaroni and cheese has supplanted credit default swaps at the fulcrum of capitalism. And one more thing: the food snob French love McDonalds, which does a fantastic business there. They know a good freedom fry when they taste one.

Whether you agree with Bill’s point of view or not, it’s certainly something to think about. 😉

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Hat tip to Gavin Heaton for pointing us to this crystal clear and refreshingly insightful explanation of the what, why, how of the current financial crisis on Freakonomics. This is absolutely the best summary I have read yet on the subject, and we have Douglas Diamond and Anil Kashyap to thank for it.

Read the full thing here. It’s excellent.

Have a great weekend, everyone.

Update: Hat tip to SteveAtdFruit for this great update.

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Watching it burn

Some of us who have managed projects know a little bit about budgets. Simply put, a budget is a bucket of money set up to pay for all of the line items in a project – or a series of projects.

Typically, the budget is set based on little things like what the client (internal or external) is looking to accomplish, what the client is able to spend, and ROI: (Return On Investment) Do the project’s benefits outweigh its cost, etc.

If you’re thinking “wow, that sounds like it takes a lot of planning and strategery,” you’re right. It does. The one thing you want to ensure as a project manager is that the goals, tactics and budget are aligned before a project starts: If the project is going to cost more than the budget allows, something is going to have to be cut from the project. Simple, basic stuff. If you don’t do this, you might run out of money before the project ends, which isn’t good. Your options then are a) ask the client for more money, b) close the project before having delivered it 100%, or c) eat the added cost. None of these options are good.

It’s with this simple methodology that I look at our federal budget deficit. Is it more complex than a marketing campaign? Of course it is. Infinitely so. But the principle is the same: Figure out how much funding you need to operate your series of projects (social security, national defense, infrastructure, research, wars, etc.), make the necessary adjustments, and go forward with what you can afford.

… Except… that isn’t how everyone understands the fundamentals of running a business/country. The latest Budget Deficit figures look pretty impressive. From CNN.com:

The White House on Monday predicted a record deficit of $490 billion for the 2009 budget year, a senior government official told CNN.

The deficit would amount to roughly 3.5 percent of the nation’s $14 trillion economy.

The official pointed to a faltering economy and the bipartisan $170 billion stimulus package that passed earlier this year for the record deficit.

The fiscal year begins October 1, 2008.

The federal deficit is the difference between what the government spends and what it takes in from taxes and other revenue sources. The government must borrow money to make up the difference.

President Bush inherited a budget surplus of $128 billion when he took office in 2001 but has since posted a budget deficit every year.

Wow.

Maybe I am reading this wrong, but if the FY’09 $490 BILLION deficit is indeed for the 2009 budget year, we’re talking about overspending $1,342,465,700 per day for 365 days in a row.

Wait… Let me get this straight. The US government is overspending (all up) at a rate of 1.3 BILLION dollars per day?

Tell me I’m not understanding this correctly. Please. Someone tell that figure needs to somehow be stretched out over the last 8 years or something… Pretty please? Tell me there is no way that the United States of America’s operating budget is so poorly managed that it bleeding $1.3B per day. Tell me I am wrong about this.  Tell me there is a plan to fix this. One that doesn’t involve a) just printing more money, or b) borrowing from foreign banks.

Maybe this kind of topic changes the conversation when it comes to what types of questions really need to be on people’s minds (and lips) when political candidates (from Presidential elections down to your municipal seats) run for office. Maybe the conversation should shift from soft broad-sweeping opinions about religion and security to cold hard facts and specific plans to fix what is broken. And by the way, this isn’t an indictment of either political party. Republicans and democrats together need to fix this – which is to say this isn’t just about this candidate or that one, but about us, American taxpayers and voters, who perhaps should refocus our attention when it comes to our definition of political leadership, and what our silver-haired years will be like, and the future our children will inherit.

Maybe there’s a branding lesson in there somewhere, both for world powers and the political candidates who aspire to help run them.

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Guy Kawasaki points us to this very cool little site where you can control where your tax money goes. Well… kinduv.

Connection to the branding discussion: At least four degrees of separation, but whatever. It’s still an interesting and fun little tool.

Update: I just spent fifteen minutes playing with the tool, and managed to push the budget bust back to 2070+ while cleaning up the environment, increasing access to medical care for the poor, children and young adults, and freeing the US from foreign energy.

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Fascinating article by Rough Type’s Nicholas Carr on the energy requirements of Second Life. (Okay, so it’s 2 years old, but it seems more relevant today than it did then.)

“We’re running at full power all the time, so we consume an enormous amount of electrical power in co-location facilities [where Second Life/Linden Labs houses their 4,000 server computers] … We’re running out of power for the square feet of rack space that we’ve got machines in. We can’t for example use [blade] servers right now because they would simply require more electricity than you could get for the floor space they occupy.”
– Philip Rosedale, Linden Labs

To put it all in perspective, Sun’s Dave Douglas looked at kilowatt hours in terms of CO2 production to see what the actual ecological impact of an avatar is: Each Second Life avatar requires 1,752kwh/year, which is basically 1.17 tons of CO2.

How does that translate into plain American? Easy: 2,300 SUV miles (or 4,000 Prius miles) per year. For just one avatar.

Wow.

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Chris Mooney just published a brilliant essay in Seed about the future of innovation in the United States and the leadership required to ensure that we, as a nation, restore our focus on it. It’s six pages long, and you absolutely need to read it. Here’s a taste:

“The next president of the United States of America will control a $150 billion annual research budget, 200,000 scientists, and 38 major research institutions and all their related labs. This president will shape human endeavors in space, bioethics debates, and the energy landscape of the 21st century.

“Setting the right policies for science in the US will prime and drive the nation’s economic engine for decades to come. At a time when economists agree that innovation fuels growth, the US finds itself importing more high-tech goods from the rest of the world than it is exporting. More low-tech than high-tech jobs are being created in this country; other nations, like South Korea, Singapore, and China, are producing a far higher percentage of natural science and engineering graduates. Bill Gates expresses this broad concern when he says: “When I compare our high schools with what I see when I’m traveling abroad, I am terrified for our workforce of tomorrow.”

“Indeed, the economic centrality of science and technology overlaps inextricably with international affairs. In the coming decades, China and India in particular are forecast to grow into major centers for innovation. China, powered by a leadership determined to achieve scientific advancement, is now second only to the US in its annual investment in research and development. India, meanwhile, is churning out 2.5 million science and engineering graduates per year. To successfully guide the US into the 2010s, the next president must understand the trends that are transforming these nations into key US competitors and have a plan for keeping pace with them—while simultaneously avoiding shallow nationalistic rivalry. The advancement of science is not a zero sum game.”

This is not a question of being Republican or Democrat, conservative or liberal, Christian or whatever. Understanding the value of providing educational resources that will enable the kids of today to someday innovate their way out of the economic, social, scientific, educational and cultural holes we are digging for them, shouldn’t take a whole lot of brainpower or bandwidth. The stakes are simple: Invest in science, research, engineering, critical thinking, innovation, and education in general, or watch this country turn into some version of this.

Where Chris’ piece shines is in its ability to connect the dots between effective leadership in the Oval Office, intelligent national scientific and educational policies, innovation… and economic growth. Great stuff and well worth the read.

Read it, and share it.

Have a great Tuesday everyone. 😉

image credit: orbitals b, by Jared Tarbell

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