Tuesday, January 31, 2012

The lasting impact of Ben Bernanke

WSJ (1-30-2012) "Bernanke's Imprint on Fed Not Easily Erased" by Jon Hilsenrath

This WSJ articles highlights the Fed chairman's initiatives to increase consensus building on the FOMC (the committee that makes monetary policy) and transparency of FOMC policy making.

Working conditions in China, what is fair?

1 minute video from Aug 2010

NYT (1-26-2012) Apples ipad and the human costs for workers in China by By Charles Duhigg and David Barboza

The above article describes working conditions in an ipad factory in China. The question for today is "How much should U.S. companies lower standards on working conditions and environmental protection in their factories abroad?"

Some viewpoints to consider,
1. At the turn of the 20th century, working conditions in factories in the U.S. were not so different from those described in the article. Should this phase be considered a right of passage that countries must  slog through on the way to an advanced economy?

2. Some companies are already bypassing China for cheaper labor in nearby places like Vietnam and Malaysia. In another 100 or so years, when all countries have reached a minimum level of wealth, perhaps this problem will resolve itself.

Another 3 minute video from June 2010 (embedding disabled):


Tuesday, January 24, 2012

Income Inequality

Poll: The Rich Just Know the Right People 1/12/2012

NYT ( 1-14-2012) Among the Wealthiest 1 Percent, Many Variations By Shaila Dewan and Robert Gebeloff

Some of my favorite points from this article are:

1. The national cutoff for a household to be in the top 1% of incomes is $380,000.
This cutoff varies greatly across cities. To be in the top 1% in New York City, a household must earn  at least $790,000. To be in the top 1% in Clarksville, TN, a household need only earn $200,000.

Needless to say the cost of living is much higher in New York City. Using CNN's cost of living adjustment tool for 2010 (see link below), $790,000 in Manhattan would buy the same amount of stuff as $339,510 in Clarksville, TN. This shows that the top 1% in Manhattan really are richer than the top 1% in Clarksville, even after controlling for the higher cost of living.


2. A majority of the 1% housholds report no inherited money.  However, as shown in the video, most do start out with significant advantages - including educated parents.

3. Education really does matter. In 27% of the 1% households, both spouses hold advanced degrees.

What 3 things did you find to be the most interesting or surprising in the article and video?

Sunday, January 22, 2012

iphones and jobs in China

Commerical about new iphone glass (less than 1 minute)

NYT (1-22-2012) Apple, America and a squeezed middle class by By Charles Duhigg and Keith Bradsher

An article in last Sunday's New York Times reveals how iphones are produced, and why jobs are going overseas. While everybody knows wages are lower in China, you might not be aware of two other  factors that are even more important: 1. Chinese workers are willing to live in dorms near the factories, to work longer hours, and to work overtime on short notice, and 2. costs are lowered dramatically by locating all production processes near each other.

This article also introduces the concept of the job multiplier. One new manufacturing job generates many other jobs (tools, inputs, equipment, infrastructure, management, energy, food services etc.), while one new service job does not generate nearly as many others jobs (management, food services etc.) The video link provided below does an even better job of making this point than the article .

Interactive video (5 minutes) on loss of jobs in the middle

Does anyone have any ideas on how the U.S. can get its job creation mojo back?

Wednesday, January 18, 2012

History of Corporations and Private Equity

An article in today's WSJ emphasizes that although private equity firms are recent creations, the work of private equity firms is "as old as capitalism itself".  The first private equity firms may have been created as recently as 1946, depending on your definition.

WSJ (1-18-2012) A Short (Sometimes Profitable) History of Private Equity by John Steele Gordon

For a primer on the history of corporations watch the following video (15 minutes - very well done):

Friday, January 13, 2012

Private Equity: Capitalism's savior or devil?

In light of Mitt Romney's success in the Republican primaries, and his former career running the private equity firm Bain Capital, private equity is again a hot topic. A private equity firm is a firm that buys equity in faltering firms and attempts to return them to profitability and then usually sells them. These efforts often involve layoffs and reductions in pensions and benefits. The critics of private equity include Romney's opponents and Warren Buffett.

The current top ranked video on WSJ currently shows a discussion of Warren Buffett's position (5 minutes).  Towards the end of the clip, valid complaints about private equity firms are raised. These mainly involve implementation and not the concept in general. The case is made that we need "business undertakers".

Jonathan Macey (Yale professor) wrote an article in today's WSJ opinion page that comes to the defense of private equity.  Macey relies on the classic argument first provided by the economist Joseph Schumpeter (8 February 1883 – 8 January 1950).  Schumpeter argued that "creative destruction" is necessary for economic growth. As firms get older, unwieldy, and unproductive they need to fail or be restructured. Economic super heroes, a.k.a. entrepreneurs or private equity, come to the rescue and, phoenix like, resurrect healthy firms from the ashes. 

WSJ (1-13-2012) How Private Equity Works by Jonathan Macey

Click on the video tab to see the associated video (8 minutes)

Hindsight is 20/20

Todays WSJ features an article highlighting how badly the Fed can read crystal balls. For my new macro students, the Fed is the entity in charge of monetary policy in the U.S.. Some of the main duties of the Fed are to set targets for a key interest rate (what banks charge each other for overnight lending) and to regulate some financial institutions.

WSJ (1-13-2012) Little Alarm Shown at Fed At Dawn of Housing Bust by Jon Hilsenrath, Luca Di Leo and Michael S. Derby

The Fed was certainly not alone in being blind to the coming crisis. They were part of a "mass delusion" according to Michael Lewis, author of  Big Short: Inside the Doomsday Machine. Lewis has written many other bestsellers, including Moneyball.  In the Big Short, Lewis focused not on Bernanke (chairman of the Fed) or CEOs of investment banks. He concluded these people had "no clue what was going on". Instead he focused on the "handful of characters who had seen it coming".

One of 10-20 or so investors in the world who saw it coming was Michael Burry, a doctor turned hedge fund investor.  Burry foresaw problems in the sub-prime markets by reading prospectuses of mortgage securities.

To learn more about who figured out what and when, watch this 15 minute video clip by 60 minutes (March 2010). Lewis concluded the main problem was improperly designed incentives - the short term focus of the bonus system for employees in the financial sector was the ultimate cause of the crisis.

March 2010