In a word: "No."
The structure of the US workforce does not lend itself to competing with Asia for semi-skilled manufacturing. In China factories work 12 hour shifts six days a week, and for many factories the work force lives on-site in company dormitories. This means that to staff a plant running full time the factory needs two shifts. In the US (with five 8-hour workdays) to run factories at comparable capacity we would need four shifts - 2x the number of workers.
In addition, of course, the wages in Asia are also much lower. So it is much more expensive and more complicated to run a factory here, and you have a less dedicated (at least based upon proximity) workforce. None of these factors are ever likely to change.
Can we increase manufacturing in the US? Sure. But modestly. We are unlikely to ever return to the manufacturing driven economy of the 1950s, 1960s, and 1970s.
The US is the world's leader in intellectual capital. We are a nation driven by ideas. Our technology powers the world, our medical products keep it healthy and our media products entertain it. We therefore need to invest in and produce knowledge workers. The days of large scale manufacturing driving our economy is over. Rather than devoting resources to reversing this trend, we instead need to invest in enabling workers to compete in the new reality.
What is the new reality? More companies are being created, and the number of employees in them is smaller. The skillsets required by these companies are broader. Workers need to be fascile with technology as a basic skillset, not as a specialization. Workers need to be cross trained across many disciplines, because in smaller companies everyone needs to wear multiple hats. Workers need to be able to think outside the box to be creative problem solvers.
How do we get there? We need to drastically change the way our schools are educating kids. Our schools encourage kids to sit down, be quiet, pay attention, and focus on one thing and/or one teacher for 50-60 minutes at a time. That might be fine for training assembly line employees, but not for developing multi-tasking, cross-discipline problem solvers.
Our kids need to be fascile with technology by the time they reach 3rd grade. They should be able to: search the web; use social media; chose, download and use on-line tools; craft websites; set-up local networks and add devices to these networks; and download and install software to these devices. At a minimum.
They need to be creative problem solvers, and be able to work in groups. Schools need to encourage this creativity rather than enforce rules. There is no "one right answer" for most of the problems in the world, so lets not encourage kids to seek it. Studies have shown that on average creativity declines with age and higher levels of education. We are educating people to be less creative, not more!
The objective of education should not be performance on standardized tests, but development of creativity to enable multi-faceted problem solving abilities. Today our schools and especially our colleges encourage specialization. There should not be a separation between liberal arts, engineering, math and science - they should be integrated. We need engineers who can develop creatively, and we need artists and service professional with the ability to reach us using technology, and teachers who can utilize technology seamlessly.
So, every kid should have access to a computer, and every kid should have access to high speed broadband internet. From the age of four, if not earlier.
This will take investment in broadband infrastructure. And investment in computers and networking equipment at our libraries and schools. Massive investment.
Which brings up another point - factory work may be on the decline, but skilled labor should not be. In order to deploy broadband internet everywhere we need skilled installers. In addition we will need more investment in physical infrastructure - new schools, roads, clean energy installations and extended power grid to serve it. All this requires two things - massive investment and skilled, well paid labor.
Lets not waste a dollar or a minute of time trying to encourage companies to manufacture a $3.00 part or produce a $2.00 assembly in the US. Lets instead spend our time and money developing the infrastructure necessary to support the economy of the future and in schools that will teach the skillset necessary to thrive in it.
Wednesday, January 25, 2012
Saturday, February 13, 2010
Regulating the Banks
Is the structure of our banking system, in and of itself, a risk to our financial markets generally and, more broadly, our economy as a whole?
The answer is a resounding: "Yes!"
Part I - History
Banking used to be a relatively staid, unexciting business. After the collapse of the financial markets in 1929 and the failure of hundreds of banks in the early 1930's, our government sought to place regulations on both the financial markets and banks. They created the Securities Acts of 1933 and 1934 which regulated how securities were sold to the public. They also created the Glass-Steagall Act, which required separation of banks, or lenders, from investment banks - or purveyors of securities.
This forced institutions such as JP Morgan to spin out their investment bank (which became Morgan Stanley) into separate institutions. The banks were large publicly traded entities in order to have the necessary access to capital to support lending; the investment banks were typically private partnerships with limited capital that relied on their wits.
Further, the government created the deposit insurance system (now called the FDIC) to insure depositors against bank failures, and created rules which set capital and operating requirements upon the banks.
This worked extremely well, until 1984, when excessive lending to the "oil patch" in 1984 brought down a number of banks. Continental Illinois was deemed "too big to fail" at that time, and so it was rescued through government intervention - ie financial support. The oil patch fiasco deflated the real estate markets of Texas and Colorado significantly, leading to flat values in those markets for almost ten years. But the rest of the country was largely left untouched as a result of the Continental bailout. It was generally considered a success.
When the financial markets failed in 1990-1991, the government took quite a different tact. Government action exacerbated the issue, shutting down the leveraged lending markets. Instead of bailing out large institutions they aggressively foreclosed on them, including Lincoln Savings and Bank of New England. The government's Resolution Trust Company (RTC) then aggressively sold large portfolios of loans and securities inherited from the failed banks and S&Ls at fire-sale prices, further depressing their prices and making overnight fortunes for the owners of Apollo Investments, the Bass family, as well as TCW and others.
The smart view after this fiasco was that aggressive government intervention (via foreclosing and liquidation of financial institutions) was the real problem. Markets were deemed to be efficient, and banks/investment banks were deemed to be more effectively regulated by market pressure and moral suasion than by government officials who were too unsophisticated to understand these complicated issues.
Glass-Steagall was deemed out-dated: let banks and investment banks compete against each other and eliminate the distinction. After all, that is the way it was done in Europe and Japan and they had created behemoth institutions. This will lead to great liquidity in the capital markets, greater availability of funds and lower cost financings = the argument went. Indeed this did come to pass, and in the mid 1990s the line between banks and investment banks disappeared.
Interest rates dropped due to aggressive inflation management by Alan Greenspan, causing the cost of borrowing to drop to previously unheard of levels. On the equity front lower interest rates led to higher stock prices (for explanation of the math google: CAPM). But what drove equity prices further was a phenomena little commented upon: the widespread adoption of the 401k.
In the 1990s retirement accounts moved from defined benefit programs (which generally had been funded through investment grade bonds to match the expected liabilities) to defined contribution programs (with individuals moving into equities). As a result record amounts of money flowed into the equity markets, leading to previously unforeseen price levels: On April 17th, 1991 the Dow Jones Industrial Average exceeded 3000! Four years later on February 23, 1995 the Dow crossed 4000. Only nine months later it hit, 5000, and so on until it peaked at over 14,000 in October 2007.
At the same time banks created new products and new markets. As big as the equity markets became, the bond markets became many times bigger fueled by low interest rates.
Next: Part II - Path to Destruction
The answer is a resounding: "Yes!"
Part I - History
Banking used to be a relatively staid, unexciting business. After the collapse of the financial markets in 1929 and the failure of hundreds of banks in the early 1930's, our government sought to place regulations on both the financial markets and banks. They created the Securities Acts of 1933 and 1934 which regulated how securities were sold to the public. They also created the Glass-Steagall Act, which required separation of banks, or lenders, from investment banks - or purveyors of securities.
This forced institutions such as JP Morgan to spin out their investment bank (which became Morgan Stanley) into separate institutions. The banks were large publicly traded entities in order to have the necessary access to capital to support lending; the investment banks were typically private partnerships with limited capital that relied on their wits.
Further, the government created the deposit insurance system (now called the FDIC) to insure depositors against bank failures, and created rules which set capital and operating requirements upon the banks.
This worked extremely well, until 1984, when excessive lending to the "oil patch" in 1984 brought down a number of banks. Continental Illinois was deemed "too big to fail" at that time, and so it was rescued through government intervention - ie financial support. The oil patch fiasco deflated the real estate markets of Texas and Colorado significantly, leading to flat values in those markets for almost ten years. But the rest of the country was largely left untouched as a result of the Continental bailout. It was generally considered a success.
When the financial markets failed in 1990-1991, the government took quite a different tact. Government action exacerbated the issue, shutting down the leveraged lending markets. Instead of bailing out large institutions they aggressively foreclosed on them, including Lincoln Savings and Bank of New England. The government's Resolution Trust Company (RTC) then aggressively sold large portfolios of loans and securities inherited from the failed banks and S&Ls at fire-sale prices, further depressing their prices and making overnight fortunes for the owners of Apollo Investments, the Bass family, as well as TCW and others.
The smart view after this fiasco was that aggressive government intervention (via foreclosing and liquidation of financial institutions) was the real problem. Markets were deemed to be efficient, and banks/investment banks were deemed to be more effectively regulated by market pressure and moral suasion than by government officials who were too unsophisticated to understand these complicated issues.
Glass-Steagall was deemed out-dated: let banks and investment banks compete against each other and eliminate the distinction. After all, that is the way it was done in Europe and Japan and they had created behemoth institutions. This will lead to great liquidity in the capital markets, greater availability of funds and lower cost financings = the argument went. Indeed this did come to pass, and in the mid 1990s the line between banks and investment banks disappeared.
Interest rates dropped due to aggressive inflation management by Alan Greenspan, causing the cost of borrowing to drop to previously unheard of levels. On the equity front lower interest rates led to higher stock prices (for explanation of the math google: CAPM). But what drove equity prices further was a phenomena little commented upon: the widespread adoption of the 401k.
In the 1990s retirement accounts moved from defined benefit programs (which generally had been funded through investment grade bonds to match the expected liabilities) to defined contribution programs (with individuals moving into equities). As a result record amounts of money flowed into the equity markets, leading to previously unforeseen price levels: On April 17th, 1991 the Dow Jones Industrial Average exceeded 3000! Four years later on February 23, 1995 the Dow crossed 4000. Only nine months later it hit, 5000, and so on until it peaked at over 14,000 in October 2007.
At the same time banks created new products and new markets. As big as the equity markets became, the bond markets became many times bigger fueled by low interest rates.
Next: Part II - Path to Destruction
Saturday, October 3, 2009
Health Care Eden?
It amazes me the ridiculous rhetoric regarding a new health care plan.
Can anyone deny that our current situation of roughly 40 million uninsured Americans - 12% of our population - works? Or that our infant mortality rate ranking of 33rd in the world is acceptable? Or that the infant mortality rate for black mothers, which would equate to a world ranking of 74th, behind Jamaica, is a reasonable standard of care.
People talk about our cancer survival rate, which is 1st or second (depending upon the year) with Japan, versus the UK and Canada which are in the teens. However, the reason for the survival rate is early testing, which is more of a social norm, rather than poor or unavailable surgeons. The survival rate for people who are diagnosed at the same stage are the same.
Why is it that people on the anti-side of the "public option" either spout nonsense or outright lie?
On the other hand, how does the government intend to implement this plan? Providing insurance without providing care is a waste of energy and time. We need more rural and inner city care. Where is the plan to set up clinics that can diagnose problems and dispense meds, provide nutrition advice, and pre + post natal care?
Making rural or inner city patients drive to the burbs will not have a meaningful effect on the uptake of health care. It needs to be convenient, efficient, and inexpensive for it to work.
Lets get more details please.
Can anyone deny that our current situation of roughly 40 million uninsured Americans - 12% of our population - works? Or that our infant mortality rate ranking of 33rd in the world is acceptable? Or that the infant mortality rate for black mothers, which would equate to a world ranking of 74th, behind Jamaica, is a reasonable standard of care.
People talk about our cancer survival rate, which is 1st or second (depending upon the year) with Japan, versus the UK and Canada which are in the teens. However, the reason for the survival rate is early testing, which is more of a social norm, rather than poor or unavailable surgeons. The survival rate for people who are diagnosed at the same stage are the same.
Why is it that people on the anti-side of the "public option" either spout nonsense or outright lie?
On the other hand, how does the government intend to implement this plan? Providing insurance without providing care is a waste of energy and time. We need more rural and inner city care. Where is the plan to set up clinics that can diagnose problems and dispense meds, provide nutrition advice, and pre + post natal care?
Making rural or inner city patients drive to the burbs will not have a meaningful effect on the uptake of health care. It needs to be convenient, efficient, and inexpensive for it to work.
Lets get more details please.
Friday, March 20, 2009
FDIC Getting it Right? Finally
Perhaps the FDIC is reading this blog.
It took a week, but yesterday Sheila C. Bair, the new head of the FDIC, re-stated the argument our argument on banks: Instead of stepping in to support institutions "too big to fail," the government should not allow firms to get that big in the first place. Ms. Bair testified to Congress that current regulation places too much risk on the financial system, and that the Congress proposed idea of a "systemic risk regulatory" will be inadequate to change that level of risk.
The other concern is that Congress' current proposal will lead to the creation of a massive regulatory body which will increase beauracracy and red tape, but no fundamental change in the nature of the risks. Not everyone in her audience got it - hopefully they will soon.
Go Sheila - we are with you.
See today's article in the NY Times:
http://www.nytimes.com/2009/03/20/business/economy/20regulate.html?dlbk
It took a week, but yesterday Sheila C. Bair, the new head of the FDIC, re-stated the argument our argument on banks: Instead of stepping in to support institutions "too big to fail," the government should not allow firms to get that big in the first place. Ms. Bair testified to Congress that current regulation places too much risk on the financial system, and that the Congress proposed idea of a "systemic risk regulatory" will be inadequate to change that level of risk.
The other concern is that Congress' current proposal will lead to the creation of a massive regulatory body which will increase beauracracy and red tape, but no fundamental change in the nature of the risks. Not everyone in her audience got it - hopefully they will soon.
Go Sheila - we are with you.
See today's article in the NY Times:
http://www.nytimes.com/2009/03/20/business/economy/20regulate.html?dlbk
Friday, March 13, 2009
Too Big To Fail
Sometimes, albeit rarely, politicians get it right. Such was the case yesterday, when Senator Bernard Sanders, Vermont independent, stated:“If an organization is too big to fail, it is too big to exist.”
Some background: In trying to prevent a financial meltdown, the previous Secretary of the Treasury, Henry Paulson, encouraged and in fact forced certain mergers to occur: JP Morgan took over Bear Sterns and later Washington Mutual, Wells took over Wachovia, and Bank of America took over Merrill Lynch. After absorbing these dwindling businesses, each of the previously strong firms needed to take down significant funds from the government to stay afloat. The government had determined that these financial behemoths, as well as AIG and others, were "too big to fail," i.e. the repurcussions to the economy were too great to allow one of them to default on their many obligations.
The argument previously for allowing combinations of large financial institutions had been that competition among financial institutions had become global, and to compete globally you needed to be big and have the ability to deliver every product. So banks merged, merged, merged until they could deliver all these products and underwrite huge sums. But as they became more competitive globally, they spread the risk of their failure throughout the world. Now, if Citibank fails, it affects not just the US but also Europe, Asia, and Latin America in a meaningful way.
Further, until the early 1990s the businesses of banks and investment banks were quite separate. With the fall of Glass Steagle, a depression era law requiring those businesses to remain apart, the lines distinguishing the two businesses fell away. Banks became investment banks, investment banks became banks. The consequences, as we know now, were disastrous.
The answer is simple - these firms are too big, they need to be broken up. Just as there are limits on the market share of broadcast companies and cable tv companies, there needs to be limits on banks. Also, the lines of business need to again be separated. This is the only way that the failure of a single institution or a single market will have less impact on the economy and financial markets as a whole.
So score one point for Senator Sanders. It may be a long time before another politician gets one right again!
Some background: In trying to prevent a financial meltdown, the previous Secretary of the Treasury, Henry Paulson, encouraged and in fact forced certain mergers to occur: JP Morgan took over Bear Sterns and later Washington Mutual, Wells took over Wachovia, and Bank of America took over Merrill Lynch. After absorbing these dwindling businesses, each of the previously strong firms needed to take down significant funds from the government to stay afloat. The government had determined that these financial behemoths, as well as AIG and others, were "too big to fail," i.e. the repurcussions to the economy were too great to allow one of them to default on their many obligations.
The argument previously for allowing combinations of large financial institutions had been that competition among financial institutions had become global, and to compete globally you needed to be big and have the ability to deliver every product. So banks merged, merged, merged until they could deliver all these products and underwrite huge sums. But as they became more competitive globally, they spread the risk of their failure throughout the world. Now, if Citibank fails, it affects not just the US but also Europe, Asia, and Latin America in a meaningful way.
Further, until the early 1990s the businesses of banks and investment banks were quite separate. With the fall of Glass Steagle, a depression era law requiring those businesses to remain apart, the lines distinguishing the two businesses fell away. Banks became investment banks, investment banks became banks. The consequences, as we know now, were disastrous.
The answer is simple - these firms are too big, they need to be broken up. Just as there are limits on the market share of broadcast companies and cable tv companies, there needs to be limits on banks. Also, the lines of business need to again be separated. This is the only way that the failure of a single institution or a single market will have less impact on the economy and financial markets as a whole.
So score one point for Senator Sanders. It may be a long time before another politician gets one right again!
Saturday, March 7, 2009
Why Banks Failed
I see pundits using lots of jargon, charts, and ratios trying to determine why banks failed. Some argue that leverage ratios of the investment banks are largely unchanged from those of the mid 1990s, and those of commercial banks actually declined, so are puzzled as to why we have the problem that we have now.
The bottom line is that banks (no distinction between commercial or investment) did not adhere to strict mortgage underwriting policies, largely because either a) they did not intend to hold the mortgages, or b) in the case of banks that held mortgages, they felt they had to in order to compete with the big conduit players.
Banks and investors relied on Loan To Value (asset value) as first way out - which as we know is always a mistake. Assets are only worth what someone will pay for them - unless they are cash flow generating, assets do not have inherent value.
The other issue, which often goes undiscussed because it is difficult to track statistically, is the impact of the CDS debacle. There are roughly $20 trillion in corporate and mortgage backed debt securities outstanding. Yet there are $56 trillion in Credit Default Swaps - or 2.8x the entire traded debt market. The counter party risk of such a pervasive, mispriced, and unregulated market is staggering, and we will feel its effects for years to come. Leverage ratios of banks and I-banks do not accurately reflect this risk - and therefore are grossly understated. This is a market that really only took off starting in 2002 - so comparing recent leverage levels to that of the 1990s is non-meaningful.
Our current market failure is also misunderstood - but is quite simple. Liquidity has been driven by both the issuance of $20 trillion in traded debt and $56 trillion in CDS, not to mention the untraded loan markets. There is zero net new issuance in any of these markets - in fact there is contraction. A contracting liquidity market means a contracting economy. Period.
As Bette Davis famously said in "All About Eve": "Fasten your seatbelt - its going to be a bumpy night."
The bottom line is that banks (no distinction between commercial or investment) did not adhere to strict mortgage underwriting policies, largely because either a) they did not intend to hold the mortgages, or b) in the case of banks that held mortgages, they felt they had to in order to compete with the big conduit players.
Banks and investors relied on Loan To Value (asset value) as first way out - which as we know is always a mistake. Assets are only worth what someone will pay for them - unless they are cash flow generating, assets do not have inherent value.
The other issue, which often goes undiscussed because it is difficult to track statistically, is the impact of the CDS debacle. There are roughly $20 trillion in corporate and mortgage backed debt securities outstanding. Yet there are $56 trillion in Credit Default Swaps - or 2.8x the entire traded debt market. The counter party risk of such a pervasive, mispriced, and unregulated market is staggering, and we will feel its effects for years to come. Leverage ratios of banks and I-banks do not accurately reflect this risk - and therefore are grossly understated. This is a market that really only took off starting in 2002 - so comparing recent leverage levels to that of the 1990s is non-meaningful.
Our current market failure is also misunderstood - but is quite simple. Liquidity has been driven by both the issuance of $20 trillion in traded debt and $56 trillion in CDS, not to mention the untraded loan markets. There is zero net new issuance in any of these markets - in fact there is contraction. A contracting liquidity market means a contracting economy. Period.
As Bette Davis famously said in "All About Eve": "Fasten your seatbelt - its going to be a bumpy night."
Wednesday, February 25, 2009
Why the Banks Broke
Here is an interesting article about the rise of mortgage securities CDOs and Credit Default Swaps. The problem is too great to put at the feet of any one man (unless that person is Alan Greenspan) but it is still interesting. I will post some more analysis later.
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=3
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=3
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