Author: ken

The Politics of Blame

While the media are obsessed with the prospect of a debt default, very few people in America take it seriously.  Even financial markets are calm.  The New York Times put it this way over last weekend, commenting on yet another  collapse of a potential deal:  “The breakdown of negotiations Friday has jolted that sense of equanimity, wrenching the worst-case scenario from unthinkable to merely unlikely.” (See, Default Seen as Unlikely, but Markets Prepare.”)

Yes, “unlikely” – but not for any inability to imagine financial catastrophe.  Most people think default would be disastrous, if only because it would dramatically increase the cost of borrowing and that, in turn, would increase the debt.  But that outcome just doesn’t jibe with our intuitive grasp of U.S. politics.  We feel, correctly, it can’t happen.

It’s not because our governing institutions and political parties will, in the end, put the national interest ahead of their own special aims.  It’s because our politics have become all about blame, and the risk of being the party stuck with the blame is just too great.  This dance is all about determining which party will be seen to be at fault.

Obama has done a brilliant job of positioning himself as the Great Compromiser, willing to give on the issues central to his own party, standing above the fray.  In fact he has risked angering many Democrats with his compromises on Medicare and Social Security.  I suspect that is why the Republicans walked away from the latest deal.  The President would get too much credit for it – and they, in turn, would seem petty by comparison.

On the other hand, the Republicans have positioned themselves as Anti-tax, always a popular position among American voters.  Yes, the tea-party extremists need to be accommodated by the Republican leadership of the House, but if a compromise were to fail because they could not agree to raise taxes on the wealthy, the voters would blame them.  Ideological purity goes only so far with the electorate.

But, then, if Obama is forced to act without Congressional support – as some say he has the legal authority to do – no doubt the Republicans can then blame him for increasing the debt on his own.  He, in turn, can blame them for being unwilling to cooperate, etc.

We need to reach the point where the chances for blame are equal and “fair.”  Then action is possible.

At this point it is not possible to see the shape of the deal that will ultimately be agreed to in Washington.  But it is not too soon to know that there will be one.

 

 

 

 

Can It Be Done?

Capitalism must reform itself writes Dominic Barton, the global managing director of McKinsey & Company.  He’s not talking about oversight or imposing regulation.  He’s talking about fundamental differences in how it is actually working, changes for the “long term.”

Today’s emphasis on quarterly earnings has to go.  Then business’s primary focus on “shareholder value,” i.e. stock prices, has to be altered.  Finally, boards have to take seriously their fiduciary responsibility to represent shareholders.  They have to act as if they were the owners, not the partners of management.

Here are his own words in The Harvard Business Review:  “First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.” (See “Capitalism for the Long Term”)

It is a good program, one I suspect many top executives responsible for running our industries would be in agreement with.  They know they would have an easier time managing effectively if they did not have to constantly look over their shoulders at how financial markets were judging their performance.  But how to get it implemented?  He is probably right that capitalism can’t be reformed from outside.  Labor lacks the force or political clout, and the legislatures are controlled by lobbyists and campaign donations.

On the other hand, capitalism is a juggernaut that runs on a logic of its own.  Barton makes it seem that good management could get its hands around the problem.  But there are two problems with that assumption.  Changing any organization is immensely difficult.  Individuals tenaciously resist change but organizations are even more entrenched in doing things the way they have always done them.  Even worse:  In an age where the financial industry is driving the economy, the entire system of financial relationships would have to be revamped.  Someone is bound to lose money and power with these changes.  To be sure, the losses would be in the short term, but who is willing or able to do even that?

So what is Barton up to in offering this analysis?  As a director of McKinsey, he knows better than most how difficult it is to bring about organizational change and how improbable it is that large, systemic restructurings can be effected.

Is he protecting consultants from the charge of failing to change what management “must” but can’t or won’t do.  Alternatively, by setting such an agenda, perhaps he is drumming up business for his firm – business for the long term.

It’s an interesting moment for our economic system.  The solutions are becoming apparent, but the means for change are not.  And yet it is something of a relief to see someone distancing himself from Wall Street and its one-sided focus on finance, offering an intelligent analysis of the larger problems our system faces.

Even if we can’t see how it can be changed, it’s better to see the problems more clearly.

 

 

 

Managing Funds for a Doomsday Scenario

Investors today are more alert than ever to the chance of a catastrophic downturn in financial markets, when conventional forms of risk management fail.  “Black Swans” Nassim Taleb called such unexpected and unpredictable events that are not supposed to happen – until they do.

Recently The New York Times surveyed fund managers who are offering investors protection against such financial doomsdays.  In the past, diversification was seen as the best way to guard against market crashes.  But our recent financial crisis showed that seemingly unrelated assets were far more connected than most had thought.  As The Times put it:  “As a result, an increasing number of investors now want protection for financial end times.”  (See “New Investment Strategy: Preparing for End Times”)

“A former partner of Mr. Taleb’s, has raised more than $6 billion for a fund that is awaiting a market calamity.”  The basic strategy is taking out options to sell stocks when their price goes down.  He cheerfully acknowledges,  “it is losing money nearly every day.”

“It takes someone that’s a little bit nuts.” he said.  “I’ll do a trade, then say, ‘This is the best trade I’ve ever done in my career, but I’m quite sure I’m going to lose money on it.’”

One has to admire the ingenuity and determination that goes into such thinking.  But can it really work?  It is “a little bit nuts,” as he said, but not because it goes counter to conventional investment thinking.  It is the very essence of catastrophe to be unpredictable, to be outside usual expectations, larger than our minds.  Those who hope to outrun doomsday run three risks:  Is their plan tenable?  Will it work?  And what about the required scale?

Those who bet against the sub-prime mortgage bubble were anticipating a specific reversal in those investment instruments.  They saw something about the economy that others were ignoring.  But even they couldn’t hold on to many of their investors, as they kept spending on their short positions, while the market kept driving up the price of the derivatives they were trying to short.  Many had to give up their potential gains because they couldn’t stand the strain of keeping it up.

Second, how can these Armageddon fund managers be sure that those who buy their options will have the money to redeem them when the market finally crashes?  It reminds me of the “credit default swaps” that were supposed to insure against losses of sub-prime securities.  The insurers who issued them did not have the required reserves and  went out of business.

Most troubling, though, is the scale of their ambition.  Those who bet against the subprime derivatives focused on just one area of the market, and had trouble holding their position.  Armageddon, by definition, will be worldwide.  Nothing will be spared.  How many options can one possibly buy against the Flood?

The most reliable way to reduce risk is simply “to take things out of the portfolio, not add them,” as Ken Grant said, the president and founder of Risk Resources.  What an old fashioned idea, but it’s one that is fool-proof.

 

 

 

Who Pays?

The news about unemployment is dismal – and getting worse.  Today the official unemployment rate in the U.S. has inched up another tenth of a percent.  But there is even worse news, embedded in the seemingly positive figures about productivity in the workplace.

Americans now put in an average of 122 more hours per year than the British, and 378 hours (nearly 10 weeks!) more than Germans.  They are working harder and accomplishing more.  How is this possible?

As employees are fired, their work is reassigned to others.  As businesses are merged, roles are combined.  As managers are seeking to cut costs, they give existing employees more responsibility.

A report in Mother Jones quotes Erica Groshen ,  V-P at the Federal Reserve Bank of New York:  “It’s easier here than in, say, the UK or Germany for employers to avoid adding permanent jobs. They’re less constrained by traditional human-resources practices or union contracts.”  That is, they are more willing to exploit their workers.  Rutger’s political scientist Carl Van Horn explained: “Everything is tilted in favor of the employers…. The employee has no leverage. If your boss says, ‘I want you to come in the next two Saturdays,’ what are you going to say—no?” (See, “Overworked America:  The Great Speed Up.”)

The result is what The Wall Street Journal calls “superjobs,” jobs that are expanded to include more tasks and responsibilities:  “businesses of all sizes have asked employees to take on extra tasks that have little to do with their primary roles and expertise — with engineers going on sales calls, accountants pitching in on customer service and chief financial officers running a division on the side.”

And this is surprisingly widespread.  “In a recent survey by Spherion Staffing, 53% of workers surveyed said they’ve taken on new roles, most of them without extra pay (just 7% got a raise or a bonus). Now that sales are picking up, there’s even more work to do, but companies are reluctant to hire, say human-resources experts.”

The Journal suggests  that this shift may be “permanent, as the quickening pace of change demands more flexibility from everyone at the office.”

Some management advisors try to put a positive spin on this development.  “Research shows that many successful leaders grew the most through “stretch experiences,” says a senior vice president at Aon Hewitt’s talent-and-rewards practice.  But a recent survey found that “just 43% of Americans are satisfied with their job — a record low.” (See “’Superjobs’: Why You Work More, Enjoy It Less.”)

And there are other consequences.  Overwork can impair the quality of performance as the brain gets fatigued.  Moreover, switching among tasks consumes extra energy and affects concentration.  But, perhaps most important, workers who feel exploited get angry and resentful or depressed.  Inevitably, they slow down, get sick, or they take revenge.

Those costs often don’t show up in workplace statistics, but they show up in people’s lives.  Generally speaking, economists know that very little is free.  The real question is who gets to pay for it.

 

 

 

 

 

Are They Different From the Rest of Us?

The rich, the super-rich and the merely rich around the globe are getting richer.  A report in The New York Times confirms what we already know, but it also tells us something about how they are thinking.

“The wealthy increased their percentage in equities in 2010 to 33 percent from 29 percent,” according to The World Wealth Report,” and that is expected to increase to 38 percent by 2012.”  At the same time, “they were spreading their investments around the world to reduce the risk from political, economic and financial uncertainty.” (See, “Picking the Brains of the Super-Rich, and Picking Up Tips.”)

The Institute for Private Investors said “the wealthiest people had at least a third of their portfolios outside their home countries. One in five had 50 percent of their money invested internationally.”  According to the World Wealth Report, “wealthy Asians were the only ones confident in investing in their own region.”

That makes sense.  The benefits of growth – and the risks of loss – are unequally distributed around the globe, and Asia is booming now.  Europeans and Americans lack confidence in the potential of their own economies, with South Americans being the most pessimistic of all.

But not only are the wealthy looking far afield for reliable returns, they are demanding more and more from their advisors.  An analysis by PricewaterhouseCoopers found “most investors had less trust and were less loyal to their advisers and were demanding more service than they were a couple of years ago.”

The report went on to make an intriguing and disturbing point:  many people with at least $3 million had not given any real thought to leaving an inheritance to their children. More worryingly, hardly any entrepreneurs said they had a succession plan in place for their businesses.

Why don’t they worry more about the future?  Could it be that they have so much money they don’t care?  But they care enough to keep making more.  Does making money make them indifferent to others?  Are they so preoccupied with making money in the present, they can’t give their attention to the future?  But good investments require attention to future growth and future risk.

Perhaps, though, it isn’t about the money at all.  At their level, the money they have made may be less about the goods and services they can buy with it than it is a measure of their status and success.   Just having the money may be the most important thing.

So they don’t plan for the future because making their money and having it has already bought them what they want.