The stocks of Bank of America and Citigroup were hammered today after the 'Bank nationalization' rumor started to gain strength. Moreover, editorials and various publications started to raise their voice in favor of nationalizing the failing banks. Though most of the economists are not openly admitting this option, they accept that the tax payers money infused into the big banks is not working.
Considering the banks' high level of dependence on the government funds, now these banks are almost under the orders of Washington. This was clearly evident in the Congress hearing that was held last week. The CEOs of the Eight big banks were literally grilled and pounded by the Congressman. At one point of time, a congressman was asking a CEO to reduce his bank's interest rates and an other congressman asked the CEOs to sell their private jets. It almost looked like hundreds of Board of Directors were questioning the CEOs. Virtually, the bank executives resembled like the government employees of a nationalized bank.
Since these banks are in need of federal funds, it makes sense to nationalize the banks and remove the existing top management which brought the crisis at the first place. This option would be a better one, if the economic crisis is not bad as it is now.
Nationalizing these banks will serve as an additional burden to the govt which is already hands full in executing the stimulus plan. Acquiring these banks and running them successfully along with streamlining the funds of the stimulus plan is an onerous task and there is no room for failure. Considering the size of these banks, it is not an easy task to replace a new management and expect it to run the bank successfully in this tough economic situation. Any error in the nationalized banks would seriously hamper the confidence on US by the world countries. This will also add up to the already huge deficit and would heavily hamper the valuation of US currency. Then, US as a country would like a big corporation at the verge of bankrupt. On the other hand, successful execution of Bank and the stimulus plan would be a dream run. But this is not the time to test the tough waters.
Now the government would like to play safe and not worsen the current situation. But at the same time, it should avoid banks going bankrupt. Debacle of a single major consumer bank is enough to bring down the confidence and which this will eventually prolong the economic recovery process. The only way to help the failing banks is to acquire the toxic assets held by those banks. The government can aggregate these toxic assets into one entity and could alienate the banks from these assets. At the same time, it should ensure that the infused funds are used for its intended purpose. Strict transparency should be enforced in regulating the injected money. Essentially, a new regulatory environment should be setup which should have a greater control over these banks and at the same time a super regulator should be setup to oversee the interconnection between Wall street and Main street. The government can hold up these toxic assets and can sell them to the private investors in a staggered basis, thereby the spent money can be gained back.
The whole nationalization idea is widely seen as an option as the Swedish government followed this approach to recover its economy decades ago. Some say we can follow the same approach and others are against it. But, every situation is different and should be handled with its own pros and cons. US should devise its own customized model to suit the current situation. Revival of a country's economy is not so easy as copy-pasting a model from the history. It all depends on the risk capability of the government in devising an innovative approach.
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2/21/09
2/9/09
Don't criticize the stimulus package
There are several criticisms going rounds on the effectiveness of US stimulus package.The most prominent grumble about the amount being spent on industries which really don't need stimulus. There are also critics who are against the passage of such stimulus packages, as the amount is too big ajnd it will add more to the current US debt. But is there a better alternative than passing this stimulus bill? I don't think so.
Firstly, the president can't just allow the economy to drown without acting on it immediately. The most important thing at this juncture is to raise the confidence among the consumers and trigger the cash flow. Just proposing long-term policies would not create any impact. You have to do something which would create an immediate effect. This can be done only injecting money into the economy. Now, the next question is whether the package would help the industries to be back on track immediately? possibly not. Most of the companies don't need dollar bills, instead, they want the consumers to spend, which is directly related to the confidence. Only if the job layoffs reduce, consumers can gain some confidence. There are two ways in which the proposed developmental projects could create or save jobs. Firstly, these government projects directly create jobs for the people who were fired by the private companies. Employing them will reduce the unemployment rate. Though all of them cannot be employed, the number will reduce a bit in the initial stage. Secondly, these proposed projects requires equipments which can be purchased only from the private companies. These new orders could benefit the businesses. Though, we cannot see a dramatic increase in the job creation, it could save the existing jobs. These new orders in the private companies would also benefit other small businesses who are linked as sub-contractors.
By including every industry in the stimulus plan, you are literally bringing in some level of confidence and new jobs across every set of consumers. Increasing a little amount of share on the 'most affected' industry is less preferable than allocating the same amount to the small industries, particularly when the government wants to instill confidence across the board..
All the above activities would buy some time for the government to act on the toxic assets held by the banks. These assets serve as a great headache both to the Govt and the bank. Once some solution is found for those bad assets, the banks can see some stabilization and can start the lending process. Unless the consumers hear some good news from their banks, they would not do the spending. In the mean time, new regulations can be implemented in the markets, which would shun away the existing fears. One thing is sure;the recovery will definitely consume more time, but any hasty decision along the way could prolong the tough times.
On a final note, the passage of the stimulus package is certain and should be immediate. Considering the current stage, any further delay would worsen the economy. Best anyone can do is to avoid disparaging the current stimulus plan. Criticizing the plan will dampen the very purpose of instilling confidence among the consumers.
Tags: stimulus package, Recession, Stimulus pacakge criticism
Read rest of the entry...
Firstly, the president can't just allow the economy to drown without acting on it immediately. The most important thing at this juncture is to raise the confidence among the consumers and trigger the cash flow. Just proposing long-term policies would not create any impact. You have to do something which would create an immediate effect. This can be done only injecting money into the economy. Now, the next question is whether the package would help the industries to be back on track immediately? possibly not. Most of the companies don't need dollar bills, instead, they want the consumers to spend, which is directly related to the confidence. Only if the job layoffs reduce, consumers can gain some confidence. There are two ways in which the proposed developmental projects could create or save jobs. Firstly, these government projects directly create jobs for the people who were fired by the private companies. Employing them will reduce the unemployment rate. Though all of them cannot be employed, the number will reduce a bit in the initial stage. Secondly, these proposed projects requires equipments which can be purchased only from the private companies. These new orders could benefit the businesses. Though, we cannot see a dramatic increase in the job creation, it could save the existing jobs. These new orders in the private companies would also benefit other small businesses who are linked as sub-contractors.
By including every industry in the stimulus plan, you are literally bringing in some level of confidence and new jobs across every set of consumers. Increasing a little amount of share on the 'most affected' industry is less preferable than allocating the same amount to the small industries, particularly when the government wants to instill confidence across the board..
All the above activities would buy some time for the government to act on the toxic assets held by the banks. These assets serve as a great headache both to the Govt and the bank. Once some solution is found for those bad assets, the banks can see some stabilization and can start the lending process. Unless the consumers hear some good news from their banks, they would not do the spending. In the mean time, new regulations can be implemented in the markets, which would shun away the existing fears. One thing is sure;the recovery will definitely consume more time, but any hasty decision along the way could prolong the tough times.
On a final note, the passage of the stimulus package is certain and should be immediate. Considering the current stage, any further delay would worsen the economy. Best anyone can do is to avoid disparaging the current stimulus plan. Criticizing the plan will dampen the very purpose of instilling confidence among the consumers.
Tags: stimulus package, Recession, Stimulus pacakge criticism
Read rest of the entry...
2/6/09
IBM's alternative to layoffs -
Initially IBM announced around 1200 layoffs citing the current economic crisis. The employees in the state of New york were also affected by this announcement, but IBM had earlier received around $140 million tax cuts in a pledge to create jobs in NY. This contrary move of receiving incentives and still firing employees created rage among the residents, which resulted in the reversal of the plan. But, there is a catch:
"The company has created a job-matching service it has dubbed "Project Match." Instead of firing employees, IBM is trying to sell them on the opportunity to move to exotic locales, experience new and different cultures, and participate in exciting IBM business ventures across the globe—all for just a fraction of what they'd earn back home."
The options which had more openings are: India, Brazil and China. This model of relocation from developed countries to developing countries was not expected to happen so quick. But, the current situation has brought in too many changes to Globalization. Things are happening too fast in IT industry, quicker than Friedman's prediction in his book 'The world is Flat'. But, there is also a good possibility that this model of relocation could have been brought in, considering the number of foreign employees working in IBM,USA. Some US citizens may consider this option temporarily and may move back to USA when the situation improves.
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"The company has created a job-matching service it has dubbed "Project Match." Instead of firing employees, IBM is trying to sell them on the opportunity to move to exotic locales, experience new and different cultures, and participate in exciting IBM business ventures across the globe—all for just a fraction of what they'd earn back home."
The options which had more openings are: India, Brazil and China. This model of relocation from developed countries to developing countries was not expected to happen so quick. But, the current situation has brought in too many changes to Globalization. Things are happening too fast in IT industry, quicker than Friedman's prediction in his book 'The world is Flat'. But, there is also a good possibility that this model of relocation could have been brought in, considering the number of foreign employees working in IBM,USA. Some US citizens may consider this option temporarily and may move back to USA when the situation improves.
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2/4/09
When the top economists brainstorm - WEF
The other day, WEF conducted a brainstorming session on the topic "What happened to the world economy?". This was attended by renowned economists from around the world and they brainstormed on various reasons and causes for this crisis. The economists were distributed into separate groups and finally, one from each table summarized their discussions.
As expected, the biggest wrong assumption the economists had was that, the markets would self-regulate. This was endorsed by many economists. Of course, there were few who declared that the basic structure of the economy is wrong. Their point is, if a failure of a single module in an industry brings down the whole economy, then the underlying model is wrong. The other valid point made in the discussion was, that the present risk model which is purely based on past data should not be believed completely, as it wont predict the future. Also, the available data is too small to rely upon.
Though most of the points discussed were quiet common, the one blame which always received the applause was 'the greediness of the bankers and the compensation' they received . The group criticized the compensation model for the bankers, which is purely based on the revenue they generate, it doesn't matter on how you do that. An other pundit suggested that, the executives whoever is responsible should be jailed and should be set as an example for all the wrong-doers. This was also well endorsed by a group of applause. Another table cited that the regulators always believed that China would do all the savings and the rest can just spend. Few think heads blamed that the banks depended too much on Mathematics model, instead of applying common sense. One economists just simply attributed to one word "Stupidity". Even though, regulators were blamed, one group of economists differed by targeting the 'interest groups" who had the control over the regulators.
Of course, lack of corporate governance and ethics were identified as a fundamental problem, which would have prevented this at the first place.
Finally, the economists were asked to vote on the assumptions and causes. In the below order, the first point got the highest vote and so on.
1. Assumption that markets would self-regulate
2. Cheap flow of money
3.Assumption that good times last forever. ie..house rates never fall
4.Putting regulation over ethics
5.High leverage
6. Assumption of economic literacy
7. China can do the saving.
The group also concluded that the regulation of the international framework as the top action item.
Watch the full video here: ( 90 mins) - Scroll to the last 20 mins for various voting results.
World Economic Forum, WEF 2009, economists, World Economy
Read rest of the entry...
As expected, the biggest wrong assumption the economists had was that, the markets would self-regulate. This was endorsed by many economists. Of course, there were few who declared that the basic structure of the economy is wrong. Their point is, if a failure of a single module in an industry brings down the whole economy, then the underlying model is wrong. The other valid point made in the discussion was, that the present risk model which is purely based on past data should not be believed completely, as it wont predict the future. Also, the available data is too small to rely upon.
Though most of the points discussed were quiet common, the one blame which always received the applause was 'the greediness of the bankers and the compensation' they received . The group criticized the compensation model for the bankers, which is purely based on the revenue they generate, it doesn't matter on how you do that. An other pundit suggested that, the executives whoever is responsible should be jailed and should be set as an example for all the wrong-doers. This was also well endorsed by a group of applause. Another table cited that the regulators always believed that China would do all the savings and the rest can just spend. Few think heads blamed that the banks depended too much on Mathematics model, instead of applying common sense. One economists just simply attributed to one word "Stupidity". Even though, regulators were blamed, one group of economists differed by targeting the 'interest groups" who had the control over the regulators.
Of course, lack of corporate governance and ethics were identified as a fundamental problem, which would have prevented this at the first place.
Finally, the economists were asked to vote on the assumptions and causes. In the below order, the first point got the highest vote and so on.
1. Assumption that markets would self-regulate
2. Cheap flow of money
3.Assumption that good times last forever. ie..house rates never fall
4.Putting regulation over ethics
5.High leverage
6. Assumption of economic literacy
7. China can do the saving.
The group also concluded that the regulation of the international framework as the top action item.
Watch the full video here: ( 90 mins) - Scroll to the last 20 mins for various voting results.
World Economic Forum, WEF 2009, economists, World Economy
Read rest of the entry...
2/2/09
Minister's support for outsourcing at the WEF
Among the several events hosted at the World Economic forum (Davos), a discussion was held on "Managing Global Risks", in which the Indian Union Minister Kamal Nath shared the stage with other global heads. The event host asked different questions to the participants, which revolved around the topic of various risks in the current environment. Mr.Kamal Nath was asked about the 'Protectionism' which is prevalent across the countries. Protectionism is "the policy of imposing duties or quotas on imports in order to protect home industries from overseas competition". Kamal Nath clearly spoke against protectionism followed by various countries at the time of this economic crisis. He added that, Protectionism is kind of a panic response whenever a crisis looms in a country. He cited an hypothetical example in Auto industry. If a country is adding import duties on the auto components, it would definitely increase the price of the vehicle for the consumer.
As he was talking about the perils, he moved his topic towards Outsourcing. He told the panel and the group that, if protectionism is carried out it outsourcing, the competitiveness will definitely decrease and will affect the growth of the company, as the cost is finally transferred to the consumers. He also added that, lack of skill and better cost is pushing the companies towards outsourcing. Kamal Nath's response at a cardinal stage like WEF, is kind of response to the Obama's proposal to cut taxes for the companies which outsource the jobs. Though, the new president is not very keen on this campaign proposal at this time of crisis, the recent letter from Senator Grassley to Microsoft has started the 'protectionism' issue once again. The senator urged Microsoft to give American workers priority in the layoffs. Infact, Grassley, with Sen. Richard Durbin, D-Ill., is pushing for legislation to make employers recruit American workers first, along with other changes to the visa program.
But, Carl Guardino, the CEO of Silicon Valley's Leadership Council has a different view. Below is his response on CNBC:
He says in the tech industry today, 53 percent of the engineers are "foreign born" and half the CEOs and founders of tech companies are foreign born.
"If America ever goes against our strong roots of welcoming talents from around the world, wanting to work here, contribute here, be a part of America, that's the day that we are risking everything that this democracy is about," he says. "We cannot take an attitude in good or bad times that suddenly we should be throwing immigrants out."
The bottom line: As grim as the economy is today, and as much as we might want to protect our citizens from losing jobs to foreigners, giving US citizens the inside track because of their citizenship over their abilities is a short-term fix with long-term, negative implications. If a US worker's skills are equal to the skills of a non-US citizen's, then sure, the US worker should get the job. Go Team! If it's about salaries and money-saved, and how much more cost-effective a foreign-born worker might be over his US counterpart in a similar position, then legislators and companies need to re-work the H1B visa program.
But if it comes down to cutting your engineering team because they're all from India so you can keep your American born employees on the shipping dock, you shouldn't have to lay off your engineering team just because they're foreigners.The whole idea here should be about hiring the best and the brightest, no matter where they're from.
It's the only way US companies, or any company, can expect to compete in a global market. Period.
Easy to become xenophobic in an economic climate like this one, though we do so at the risk of not just dulling our competitive edge, but losing it completely.
Tags: outsourcing, WEF, India at WEF, World Economic Forum, Kamal Nath
Read rest of the entry...
As he was talking about the perils, he moved his topic towards Outsourcing. He told the panel and the group that, if protectionism is carried out it outsourcing, the competitiveness will definitely decrease and will affect the growth of the company, as the cost is finally transferred to the consumers. He also added that, lack of skill and better cost is pushing the companies towards outsourcing. Kamal Nath's response at a cardinal stage like WEF, is kind of response to the Obama's proposal to cut taxes for the companies which outsource the jobs. Though, the new president is not very keen on this campaign proposal at this time of crisis, the recent letter from Senator Grassley to Microsoft has started the 'protectionism' issue once again. The senator urged Microsoft to give American workers priority in the layoffs. Infact, Grassley, with Sen. Richard Durbin, D-Ill., is pushing for legislation to make employers recruit American workers first, along with other changes to the visa program.
But, Carl Guardino, the CEO of Silicon Valley's Leadership Council has a different view. Below is his response on CNBC:
He says in the tech industry today, 53 percent of the engineers are "foreign born" and half the CEOs and founders of tech companies are foreign born.
"If America ever goes against our strong roots of welcoming talents from around the world, wanting to work here, contribute here, be a part of America, that's the day that we are risking everything that this democracy is about," he says. "We cannot take an attitude in good or bad times that suddenly we should be throwing immigrants out."
The bottom line: As grim as the economy is today, and as much as we might want to protect our citizens from losing jobs to foreigners, giving US citizens the inside track because of their citizenship over their abilities is a short-term fix with long-term, negative implications. If a US worker's skills are equal to the skills of a non-US citizen's, then sure, the US worker should get the job. Go Team! If it's about salaries and money-saved, and how much more cost-effective a foreign-born worker might be over his US counterpart in a similar position, then legislators and companies need to re-work the H1B visa program.
But if it comes down to cutting your engineering team because they're all from India so you can keep your American born employees on the shipping dock, you shouldn't have to lay off your engineering team just because they're foreigners.The whole idea here should be about hiring the best and the brightest, no matter where they're from.
It's the only way US companies, or any company, can expect to compete in a global market. Period.
Easy to become xenophobic in an economic climate like this one, though we do so at the risk of not just dulling our competitive edge, but losing it completely.
Tags: outsourcing, WEF, India at WEF, World Economic Forum, Kamal Nath
Read rest of the entry...
2/1/09
What really is the Stimulus Plan?
In order to avoid the recession to linger for years, the US government has announced a stimulus plan (American Recovery and Reinvestment Plan) of $819 billion, that would be invested in diverse sectors. The idea is to create more jobs in these industries, thereby jump starting the confidence and trigger spending from the consumers. But, is economy so simple to just pump in money and avoid a recession. To understand this, lets look through a brief history of this stimulus plan.
Why Stimulus plan?
During the great depression in 1930s, then president Roosevelt introduced a series of spending initiatives named 'New Deal', aimed at creating more jobs and recover the economy. These initiatives helped to create more jobs at the time when the nation unemployment was at 25%. More than the actual benefits, it raised the confidence in the consumers mind. Some of the programs that were created through the 'New deal' is still existent. Social security system, Security Exchange commission and Fannie Mae were part of the initiative. Arguably, it is believed that these programs helped US to get out of the recession. So, following the same policy, the current government also introduced the same kind of stimulus plan to stage a recovery. This model is called 'Keynesian economics'- which is named after the economist John Maynard Keynes. Its an economic theory which advocates government intervention, or demand-side management of the economy, to achieve full employment and stable prices.
Unfortunately, the government is left with no other option than injecting money through these plans. The only other way which will encourage spending is to reduce the interest rates, but that is not possible now. In December 2008, the Fed reduced it rate to almost Zero and there was no positive effect.
What is the criticism about the plan?
When the stimulus plan was brought to congress for the approval, the Republicans voted against the bill. Some of the reasons were that, the plan has lot of investments which would not really create jobs. Eg: Investment in arts, Global climate studies etc. They propose to setup a new bill with better spending areas, even if takes more time to draft one. However, they support the tax cuts for the individuals proposed in the current bill. Nevertheless, the democrats has the house majority and the bill was passed.
Risks in the stimulus plans:
Though there is no better alternative to stimulus plan, there are risks involved in it. Since the US just needs more money for these plans, this huge amount adds to the already debt deficit US, which would come to 60% of its GDP by 2010. At the same time, it should pay off the interests to the foreigners who brought its treasury bonds. Remember, just printing more money would lead to inflation. Also, it will further reduce the value of the dollar in the global market. In order to avoid all these mishaps, the stimulus plan should work as expected and once the economy recovers, the government should align its economy more towards 'saving money' and produce more goods. Else, it wont be long enough before the dollar loses its sheen in the global market and the Euro could take over the position.
What if the Stimulus plan works too fast?
When the world economy started de-stabilizing in 2008, international investment poured into US treasuries and bonds. So if the stimulus works faster, then there will huge flow of money supply leading to inflation.
Indeed, its a tricky situation. All US needs is to boost the economy by bringing in confidence to the consumers. At the same time, the market should be regulated to avoid any unforeseen crisis that may occur due to any sporadic economic activity.
Tags: Stimulus Plan
Read rest of the entry...
Why Stimulus plan?
During the great depression in 1930s, then president Roosevelt introduced a series of spending initiatives named 'New Deal', aimed at creating more jobs and recover the economy. These initiatives helped to create more jobs at the time when the nation unemployment was at 25%. More than the actual benefits, it raised the confidence in the consumers mind. Some of the programs that were created through the 'New deal' is still existent. Social security system, Security Exchange commission and Fannie Mae were part of the initiative. Arguably, it is believed that these programs helped US to get out of the recession. So, following the same policy, the current government also introduced the same kind of stimulus plan to stage a recovery. This model is called 'Keynesian economics'- which is named after the economist John Maynard Keynes. Its an economic theory which advocates government intervention, or demand-side management of the economy, to achieve full employment and stable prices.
Unfortunately, the government is left with no other option than injecting money through these plans. The only other way which will encourage spending is to reduce the interest rates, but that is not possible now. In December 2008, the Fed reduced it rate to almost Zero and there was no positive effect.
What is the criticism about the plan?
When the stimulus plan was brought to congress for the approval, the Republicans voted against the bill. Some of the reasons were that, the plan has lot of investments which would not really create jobs. Eg: Investment in arts, Global climate studies etc. They propose to setup a new bill with better spending areas, even if takes more time to draft one. However, they support the tax cuts for the individuals proposed in the current bill. Nevertheless, the democrats has the house majority and the bill was passed.
Risks in the stimulus plans:
Though there is no better alternative to stimulus plan, there are risks involved in it. Since the US just needs more money for these plans, this huge amount adds to the already debt deficit US, which would come to 60% of its GDP by 2010. At the same time, it should pay off the interests to the foreigners who brought its treasury bonds. Remember, just printing more money would lead to inflation. Also, it will further reduce the value of the dollar in the global market. In order to avoid all these mishaps, the stimulus plan should work as expected and once the economy recovers, the government should align its economy more towards 'saving money' and produce more goods. Else, it wont be long enough before the dollar loses its sheen in the global market and the Euro could take over the position.
What if the Stimulus plan works too fast?
When the world economy started de-stabilizing in 2008, international investment poured into US treasuries and bonds. So if the stimulus works faster, then there will huge flow of money supply leading to inflation.
Indeed, its a tricky situation. All US needs is to boost the economy by bringing in confidence to the consumers. At the same time, the market should be regulated to avoid any unforeseen crisis that may occur due to any sporadic economic activity.
Tags: Stimulus Plan
Read rest of the entry...
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