Interesting read, but where does he support the assertion that it's a solvency rather than a liquidity problem.
That may be true, as a number of assets (particularly mortgage-backed) have dropped in price dramatically, thus potentially making some banks which relied on them insolvent, but it may only be so in the short term, as the price for those securities is unrealistically low at the moment.
In any case, I'm always one for supporting the point that I make in the title, somewhere in the article.
Yes, but those assets are held by banks, who would otherwise be lending that money back out into the economy. Even a modest drop in total loan values across a very broad market (in this case, the US real estate market) means that a huge amount of money just isn't there any more. So you can't borrow it to fund your startup, or business expansion, etc...
I like his idea of a 7-year waiting period on executive bonuses. Anything that gets us out of the quarter to quarter short-term mind set would be an improvement.
The underlying issue is the lack of shareholder-oriented corporate governance.
The executive bonuses are one of the symptoms of that.
Alcoa has 107K employees and is considered well-run, the CEO gets about $8M per year. Verizon, a huge 228K employee company - the CEO gets under $6M per year.
Compare this to Nardelli at Home Depot - under his watch they screwed up and allowed Lowe's to come in and take over a big profitable chunk of the market, among other mis-steps. Nardelli walked away with some $240 million in compensation along with a huge severance package.
I don't understand that kind of thing. Shouldn't a company be allowed to be whomever they want however much they want? If not, why not? I know about the incentives for risk taking, but what would be the point of creating a law about it? If banks figure out that a particular "bonus construct" is harmful in the long run, they can change it by themselves.
I have mixed feelings about this issue. On the one hand, I generally feel that if a company's board of directors wants to shoot the company in the foot, then the shareholders, not the government, have the duty to wrestle away the gun. On the other hand, there's a real principal-agent problem here--there are so many layers between the shareholders and the compensation committee, and so many perverse incentives, that it's easy for the directors to make decisions that are not in the shareholders' best interest.
> The problem is that it is not necessarily harmful to them, but harmful to others (and encourages behavior to that effect.)
It's only harmful to others who decide to make the same mistake. It's useful to (different) others who observe and conclude "wow, that's dumb in 3D".
Someone else doing something different is a free (to you) learning opportunity. If it works, you can copy. If it doesn't work, you can avoid.
There are CEOs who are worth $240M/year in specific circumstances. Laws are unlikely to make the right call but the market will, rewarding folks who get it right and punishing those who get it wrong. What can be better than that?
But do those who do it wrong get punished, or do they get to keep the $240M? I've seen a lot of incompetent CEOs walk away with substantial golden parachutes, while employees harmed by their actions got nothing but two week's noticw...
Because they only care about short term wins? But wouldn't that still damage the companies who employ them? And should it be illegal to seek short term wins?
Also bear in mind that a corporation's only purpose is to make money for its shareholders. By eliminating short term wins you're interfering with that area.
I don't think it should be illegal to seek short term wins. Unless perhaps they qualify as gambling, but even then I am not sure that gambling should be illegal (really don't know).
How can you get away with gambling with other people's money?
I think fraud should be illegal, that is telling people that their investments are 100% secure, when they are not, should be illegal. Other than that, if people invest into a risky company, it is them who are gambling.
Well, he says that the government shouldn't be setting these sorts of conditions, but that one way or another (shareholder pressure, hopefully), something like this ought to happen, to provide better incentives for management to take a long-term look at things, rather than just trying to jack up profits in the short term.
Currency prices aren't affected by recession as much as they are by interest rates. The ECB has held really high interest rates through the past few years (which probably wasn't a good economic policy looking back). So, if you buy Euros and deposit them in a European bank, you get higher interest than if you buy dollars and hold them in an American bank. That increases the demand for Euros and when you increase the demand for something, the price goes up.
Recently, most central banks (including the European Central Bank) coordinated a rate cut to prevent the economy from collapsing even more than it already has. That means that European banks won't be offering such high interest as they used to and it means that the demand for Euros falls.
So, it's not the economy so much as a change in interest rate policy at the European Central Bank. The high price of Euros over the past few years wasn't a vote of confidence in the European economy as much as it was the high interest rates you could get in European bank accounts (when compared to American bank accounts).
It's been an interesting trade off. I've not tracked the reasoning behind it, but just from watching how things have played out the strong rates managed to establish the euro as a significant foreign reserve currency, while on the other hand hurting european exports. For the latter reason I'd (again, mostly just uninformedly) expected a rate cut for a while.
A lot of people have grand theories of how their government is hurting them by things like this. Most of it is just bunk because it just swaps ends.
For example: a strong Euro makes European exports expensive. However, a strong Euro makes it cheap to import things. So, VW has a hard time exporting Jettas, but they have an easy time importing the parts they need to make Jettas.
It's also one of those situations where that increased demand for Euros would eventually need to be spent. Lots of foreigners put their money in Euros raising the price of Euros, but eventually they'll want to spend it and if their buying power is higher in the US or other non-Eurozone places, they'll dump the Euros for that currency which lessens the demand for Euros.
Economics tends toward equilibriums. Lots of things push it out of equilibrium, but not over the long-term.
The one thing that higher interest rates tend to do is discourage investment. The profits of non-financial firms doesn't depend on interest rates and I think it's safe to assume that the average firm sees about 10% growth per annum. So, if you (as an investor) can get a guaranteed 6% from a bank or a potentially risky 10% in stocks, stocks look less attractive than when your bank is giving you 2% interest. The reward for the risk of stocks diminishes as interest rates are higher.
Likewise, on the loan end, higher interest rates make it less attractive for businesses (or individuals) to borrow money to start a company or buy a house since it diminishes their potential profit and makes it riskier that they will even achieve a profit since their costs are higher.
That's not to say raising interest rates is a bad thing in all cases - in fact, during boom times you want to do that in order to manage the economic growth. But when faced with an economic crisis, it's good to get the money flowing more freely (by having lower interest rates).
Yep -- and nice commentary. I'm not one of the conspiracy theorists. :-)
The strong euro definitely hurt the software industry and I suppose other fields where there were "soft" products targeted at international markets. There wasn't a lot to import, but revenues went down with the dollar and salaries were still paid in euro.
Because Europe is entering a recession too. Given that both are sinking boats it is probably just equalizing from the previous run to the euro in the previous months when this looked like it might be a USA only thing.
Dude, right now is not the time to be speculating in the currency markets. Sit tight, get your assets into something stable. Spread your risk around. Above all get your spending and cash flow under control so you're prepared for events like a job loss.
Do not look for the secret life raft investment that is going to save you, because you'll probably drown holding it.
That may be true, as a number of assets (particularly mortgage-backed) have dropped in price dramatically, thus potentially making some banks which relied on them insolvent, but it may only be so in the short term, as the price for those securities is unrealistically low at the moment.
In any case, I'm always one for supporting the point that I make in the title, somewhere in the article.