June 2007 Archives

The jobs report came in better than expected. Payrolls increased by 157,000, and the jobless rate stayed at 4.5%. Government staticticians also reported that inflation is tame, running at a 2% pace from April of last year.

It looks like the economy is picking up. Now, I expect a lot of worried commentary about inflation risks rising with more people getting hired. That's nonsense. More people working and paying taxes and buying goods and services does not debauch the currency. Money supply growth is low. The Fed is tight. The inflation rate is heading lower, not higher.

I have a review of Pop! Why Bubbles Are Great For The Economy by Daniel Gross. It's a quick read. Time well spent.

The Good: A breezy and perceptive argument that creative destruction and bubbles go hand-in-hand.

The Bottom Line: Canny and readable, propelled by brief histories of several transformative euphorias.

The pressure for genuine health care continues. The good news is that Democratic candidate Barack Obama has come up with a serious approach for bringing universal health care coverage to the U.S. I'm a fan of his advisor, economist David Cutler of Harvard University. His book Your Money or Your Life is a good analysis of the American health care system and offers a route toward reform. He explodes one of the biggest myths in public policy today--and there is a lot of competition--that we can't afford universal health insurance. Rising health-care spending isn't the costly devil it's made out to be.

America is unique among the major industrial nations for not guaranteeing comprehensive coverage for essential health care and in this case American Exceptionalism is a shame. That said, for anyone like me who believes in universal health care I'd recommend reading One Nation Uninsured: Why the U.S. Has No National Health Insurance by Jill Quadagno. She's a sociology professor at Florida State University. (The book came out in 2005.) It's a cautionary and bleak tale.

There have been a number of major reform initiatives to create universal health insurance. The American Association for Labor Legislation (AALL) proposal for compulsory state health insurance in the 1910s; Roosevelt's national health insurance idea from the New Deal; Truman's Fair Deal idea; Nixon's National health Insurance Partnership and Senator Kennedy's Health Care for All Americas in ‘70s; and, of course, the notorious debacle known as the Clinton Health Security Plan. Each of these plans did affect foundered, although the "ironic outcome in each instance was federal action that entrenched a private alternative to a public program," writes Quadagno.

It's largely an ignoble history. The "socialized medicine" red scares of the American Medical Association. The racial politics of the South that stifled national health insurance between the 1930s and the 1960s. The scare tactics of the health insurance industry from the '70s to the '90s. "Across an entire century, each attempt to enact national health insurance has been met with a fierce attack by powerful stakeholders who have mobilized their considerable resources to keep the financing of health care a private affair," writes Quadagno. "Whenever government action seemed imminent, they have lobbied legislators, influenced elections by giving huge campaign contributions to sympathetic candidates, and organized 'grassroots' protests, conspiring with like minded groups to defeat reform efforts."

Still, I don't think the pressure for reform will whither this time around. The reason is globalization. In a competitive global economy, layoffs, restructurings, downsizings, reengineerings--pick your favorite euphemism--are a permanent part of management's toolkit. Globalization and free trade bring enormous benefits to the U.S. economy and society. There is no doubt about that. But it also brings job insecurity and earnings instability. What's more, in our system, when a worker loses a job, he or she loses more than an income. Their family loses their health insurance.

Business is also finding that health care is no longer a "fringe" benefit, but a growing expense. They'd much rather focus on burning the midnight oil how to boost productivity rather than how to cut back on health benefits. We want the benefits of fee trade while limiting the downside. My own sense is that the price for maintaining the genuine benefits of freer trade will be universal health insurance. But Quadagno's book brings home the message that it will still take tough political leadership and savvy coalition building to bring about universal health care.

We're going through a periodic inflation scare. Basically, with central banks tightening (Europe) or standing firm (U.S.), and long-term interest rates racheting slightly higher (the 10 year Treasury breaking the 5% barrier) it's hard to see an upward spiral in the overall price level.

Plus, I'm skeptical about the popular notion on Wall Street that wage pressures are mounting rapidly. The data isn't very convincing. And conversations about the job market still seem dominated by how hard it is to get another offer rather than the joys of jumping ship.

Strong global economic growth and tight central bankers doesn't translate into inflation. Hopefully, it means strong real growth, lots of real hiring, and stable real prices.

The Internet pioneer Marc Andreessen, co-creator of the web browser Mosaic and co-founder of Netscape, has a blog. It is well worth reading.

His latest post is on how to hire the best people and, no, it's not brainpower or mental bandwidth. He focuses on drive, curiousity and ethics. Andreessen offers up tips on conducting a good job interview. He ends his reflections for managers hiring talent with this all-too-often forgotten point:

Finally, although this goes without saying: value the hell out of the great people you do have on your team. Given all of the above, they are incredibly special people.

Other posts include: Why there is no Web 2.0 (thank goodness), his obsession with productivity porn (a fascinating guide for focusing on doing what you love, including a strong argument against keeping a schedule), and why the current boom in Silicon Valley isn't a bubble.

The posts are long and insightful. Senior management in any organization that values creativity should bookmark it.

Financiers may pocket gargantuan paychecks, but they get no respect. There is a widespread sense that financiers don't create anything of value, at least not enough to justify their incomes. My favorite example of this derisive perspective comes form author Tom Wolfe in his 1980s classic, Bonfire of the Vanities. Judy, the wife of a "master of the universe" is trying to explain to their daughter, Campbell, what her father does.

Daddy doesn't build roads or hospitals, and he doesn't help build them, but he does handle the bonds for the people who raise the money.... Just imagine that a bond is a slice of cake, and you didn't bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that... If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic cake.

Even worse than the crumb theory of finance is the fear in many parts of the world that financiers are a force for chronic instability and occasional catastrophe. With good reason, considering the history of financial calamities, currency crisis, and debt implosions in emerging markets in Latin America and the Far East in recent decades. Thanks to the mysterious mood swings of the global money men (and yes, it's still mostly men), waves of speculative fevers and chills can upend economies, shutter thousands of companies, and throw millions out of work. For instance, the poverty rate in Indonesia soared by 50% after its 1997 currency crisis.

Even a number of eminent economists that argue vociferously for free trade in goods and services share qualms about the flee flow of capital. "Only an untutored economist will argue that free trade in widgets and life insurance policies is the same as free capital mobility," Jagdish Bhagwati, professor of economics at Columbia University and a leading free trade advocate, wrote several years ago.

Frederick S. Mishkin is hardly an untutored economist. He's a former colleague of Bhagwati's and now a governor at the Federal Reserve Board. He agrees with Bhagwati that unfettered global capital flows are risky and potentially dangerous. Financial assets are inherently volatile since its reasonably easy for investors and banks to quickly change their risk assessment, especially with the time-honored tendency of financiers to follow the herd on the way up and on the way down. But in his new book, The Next Great Globalization, Mishkin argues that the unleashing the wealth-creating promise of globalization now calls for a global financial revolution.

"For emerging economies to reach the next stage of development and get rich, financial globalization must go much further than it already has," he writes. "In particular, the financial systems in emerging economies must be more tightly integrated with those in the developed countries in order to partake in the benefits of financial investment, the lifeblood of the industrialized world."

What Mishkin is tapping into is a far different view of the role of the financier in the economy. To him, the banking and capital markets are remarkable social and economic institutions for communicating all kinds of data, information, and knowledge. Financiers are the elixir of creative destruction, channeling money into profitable ideas and organizational innovations while abandoning stale business models and failed management strategies. And the richer the financial system and the more developed its financial institutions, the better the financial system does at efficiently channeling money toward productive investment--a boon to economic growth and everyday living standards. The question, of course, is how mto tap into the power of finance to allocate capital while limiting the downside risk. Mishkin believes it can be done.

History offers some intriguing analogies for his perspective. For instance, Mishkin cites a pioneering study by economists Robert King and Ross Levine ("Finance and Growth: Schumpeter Might Be Right," Quarterly Journal of Economics, 1993). Using a sample of 80 countries, the scholars found that those countries with the largest financial sector in 1960 compared to other countries on the list experienced faster economic growth over the following three decades.

Even more intriguing is the story told about the early U.S. by economists Peter L. Rousseau of Vanderbilt University and Richard Sylla of the Stern School of Business at New York University ("Emerging Financial markets and Early U.S. Growth," NBER Working paper 7448, 1999). In a remarkable tale, not long after the end of the Revolutionary War, the U.S. had restructured its war debt, introduced the dollar as a convertible currency, formed a banking system, established securities markets, and attracted plenty of European capital. Over the next century, state governments chartered more than 800 new banks and securities markets. America's innovative and expanding financial system was central to the country's early growth and modernization. "By implication, the interest today in improving financial systems as a means of fostering sustainable growth is not misplaced," argue Rousseau and Sylla.

It's a convincing story. Mishkin's book is largely a central banker's manifesto on how to accomplish the goal of developing stronger financial systems in emerging markets. That means it often reads like a textbook with a heavy focus on establishing solid rules of the road to prevent financial skullduggery and meltdowns. Free-market fundamentalists and competition loathing governmentalists will abhor his balanced, nuanced approach toward establishing sensible boundaries between the private sector incentives and the public sector infrastructure.

He goes into detail over what conditions encourage a healthy financial system. They are: Strong property rights, a healthy legal system, anti-corruption initiatives, good financial information, improved corporate governance, and private institutions dominating the allocation of credit. At the same time, he shows a healthy respect for indigenous solutions to financial problems.

Mishkin is convincing in his core argument. The Next Great Globalization should be read alongside another book that makes a terrific case for finance. It’s Saving Capitalism from the Capitalists: Unleashing the Power of Financial markets to Create Wealth and Spread Opportunity by Raghuram G. Rajan and Luigi Zingales (Crown Business, 2003). The thoughtful authors of that book summarize the new view of finance well: "Many of the evils of capitalism--the tyranny of capital over labor, the excessive concentration of industry, the unequal distribution of income in favor of the owners of capital, the relative lack of opportunity for the poor--can be attributed, in some if not substantial measure, to the underdevelopment of finance."

Perhaps the motto of the next stage of globalization should be "Finance for the People." If so, Mishkin's book offers a practical guide toward moving closer to that goal.

It's graduation season. This Stanford University graduation address by Steve Jobs is one of the best I've ever read. He delivered it in 2005, but it is still worth reading.

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.

Thank you all very much.

Remember the employee discount pricing come-on of the Big Three? Well, here's more evidence why the Big Three auto companies are in trouble.

During the summer of 2005, the Big Three U.S. automobile manufacturers offered a customer promotion that allowed customers to buy new cars at the discounted price formerly offered only to employees. The initial months of the promotion were record sales months for each of the Big Three firms, suggesting that customers thought that the prices offered during the promotions were particularly attractive. In fact, such large rebates had been available before the employee discount promotion that many customers paid higher prices following the introduction of the promotions than they would have in the weeks just before. We hypothesize that the complex nature of auto prices, the fact that prices are negotiated rather than posted, and the fact that buyers do not participate frequently in the market leads customers to rely on "price cues" in evaluating how good current prices are. We argue that the employee discount pricing promotions were price cues, and that customers responded to the promotions as a signal that prices were discounted.

That's from the abstract to the new National Bureau of Economic Research paper, "'The Best Price You'll Ever Get' The 2005 Employee Discount Pricing Promotions in the U.S. Auto Industry." It's by economists Meghan R. Busse, Duncan Simester and Florian Zettelmeyer.

The New York Times has a compelling story on the surge in private student loans. The private student loan market is disturbing. Students are taking on too much of this debt. Interest rates are high, and poorly disclosed. The terms of the loans are unfavorable for the student, too, especially for young adults entering the job market for the first time. And, for no good reason beyond lobbying muscle, the industry managed to protect their loans from being discharged in bankruptcy in 2005.

As college tuition has soared past the stagnant limits on federal aid, private loans have become the fastest-growing sector of the student finance market, more than tripling over five years to $17.3 billion in the 2005-06 school year, according to the College Board.

While federal loans also allow borrowers myriad chances to reduce or defer payments for hardship, private loans typically do not. And many private loan agreements make it impossible for students to reduce the principal by paying extra each month unless they are paying off the entire loan. Officials say they are troubled by the amount of debt that loan companies and colleges are encouraging students to take on.

Private students loans are just part of a much larger problem, one we deal with all the time on Marketplace Money. Four decades ago, credit redlining of minorities and low income families was commonplace. Women were systematically excluded from the loan market, too. For decades economists and regulators focused on the democratization of credit, breaking down barriers to legitimate lenders and opening up access to mainstream financial institutions. They succeeded.

Although there are still troubling incidents, denial of credit because of race, ethnicity, income and gender are largely behind us. For instance, the mailboxes of both low-income and middle-income families are stuffed with multiple credit offers. The problem today is deceptive practices from credit card companies, mortgage lenders and, it seems, purveyers of private student loans.

The democratization of credit is a public policy achievement. But times change, and the pendulum has swung too far from redlining to "greenlining." The challenge is for regulators and economists to devise ways that make the the high cost of credit in all its forms very clear to consumers, to build in better incentives for lenders to stop much of their credit gamesmanship, and to ban some practices--like universal default with credit cards--that are abusive and wrong.

Will this dry up credit? I seriously doubt it.

Domestic Chinese stocks trade at stratospheric price/earnings multiples. It's essentially a closed market to foreign buyers. There is a search on to find a benchmark to see just how overvalued is the Chinese stock market. According to this story on Bloomberg, investors believe the most reasonable multiples are in Singapre, a reasonably wide open market. Using Chinese securities trading in Singapore as a benchmark, Bloomberg calculates that China's CSI 300 Index would have to fall 65% to match the average muliple for Chinese shares traded in Singapore. Oops.

There's been a lot of speculation in the papers the last several days that the recent rise in Treasury yields will cool down private equity takeover fever. These deals are typically financed with a sliver of equity and mounds of debt. Now, higher Treasury yields might give a few dealmakers (especially grizzled veterans already sounding the alarms) reason to pause. But for most private equity buccaneers it's business as usual. After all, the borrowed money in these private equity deals comes from the junk bond market, and so far interest rates in that market have barely budged. There is just too much cash around seeking a higher return.

No, it will take a high profile deal gone bad to slow down private equity dealmaking.

I understand the political reasons why the Clinton's liquidated millions of dollars worth of stock holdings in their blind trust.

But it seems to me there is a better way for all candidates to arrange their stock and bond portfolios. Why not just index the world markets? That way, they own a piece of the private economy around the world. It's a low fee, broadly diversified portfolio and it eliminates many conflicts of interest. In fact, public figures could just abandon the whole blind trust idea and openly embrace indexing. Good disclosure and good investing can co-exist.

There's a lot of handwringing over the rise in long-term interest rates, especially when it comes to stock market values. But I'm skeptical for now. The jump in long-term bond yields doesn't seem to reflect rising inflation. An overall increase in the price level just isn't in the numbers.

No, a better interpretation is that higher yields are driven by optimism among investors that the economy will grow at a faster pace without generating genuine inflation pressures.

To be sure, mortgage rates are climbing and that's bad news for the housing market (and not just the subprime portion of it). But gains in the rest of the economy will be strong enough to offset the housing drag. At least that's what I think the bond market is saying.