Tag: Capitalism

Free speech!

Hats off to some intrepid commentators

We are going through unprecedented troubled times and the way ahead looks very uncertain.  The whole world could be participating in the ‘lost decade’ that Japan experienced previously.

But this article is not about doom and gloom!  It is about recognising the commitment to open and honest reporting being undertaken by (at least) these three  individuals.  Three commentators that this author follows in admiration and awe.

Learning from Dogs has nothing like the following of James Kwak, Yves Smith and Karl Denninger but the LfD authors do have an inkling of the work involved in writing not one but often several articles each day.  It is a huge commitment.

James Kwak

First James Kwak of Baseline Scenario.  Simon Johnson is, perhaps, the more well-known of this duo that comprise Baseline Scenario but it is James that puts in the leg-work.  Here’s a taste of a recent article from James:

Radio Stories

I spend a lot of time in the car driving to and from school, so I end up listening to a lot of podcasts (mainly This American Life, Radio Lab, Fresh Air, and Planet Money). I was catching up recently and wanted to point out a few highlights.
Last week on Fresh Air, Terry Gross interviewed Scott Patterson, author of The Quants, and Ed Thorp, mathematician,  inventor of blackjack card counting (or, at least, the first person to publish his methods), and, according to the book, also the inventor of the market-neutral hedge fund.

Large chunk snipped ……

I finally got around to listening to Planet Money’s interview with Russ Roberts from December. Russ Roberts and I are pretty sure to disagree on almost any actual policy question. But what I liked about his interview was that he basically admitted that policy questions cannot be settled by looking at the empirical studies. On whether the minimum wage increases or decreases employment for example, he says that he can poke holes in the studies whose conclusions he doesn’t agree with, but other people can poke holes in the studies he agrees with. In Roberts’s view, people’s policy positions are determined by their prior normative commitments.

I don’t completely agree. I don’t think that these questions, like the one about the minimum wage, are inherently unanswerable in the sense that the answer does not exist. But I agree that empirical studies are unlikely to get to the truth, particularly on a politically charged question, because there are so many ways to fudge an empirical study. As one of my professors said, there are a million ways you can screw up a study, and only one way to do it right. But I agree with the general sentiment. We are living in an age of numbers, where people think that statistics can answer any question. Statistics can answer any question, but they can answer it in multiple ways depending on who is sitting at the keyboard.

By James Kwak

Read about Yves Smith & Karl Denninger

More Trouble Ahead?

This is clear! Clear as mud!

Help!! Is there a financial Wizard out there somewhere? I need your input! My bank, the Société Générale, is advising

Société Générale

its customers that “a global economic collapse” is very possible within the next two years and that we should make “defensive preparations” for it.

Is this a sign of the bank losing its mind (and they did lose £5 billion a few years ago at the hands of a rogue trader) or do they know something that other pundits don’t?

Where is the Guru that can tell me where I should put my money now? Under the mattress? And in which form? Shirt buttons?

They say gold will skyrocket as the only thing buyable worth buying! And there’s me having just sold all mine at what I thought was the top of the market!!!! Oh Dear …..

By Chris Snuggs

Are you really sure about your cell phone?

Society may be cooking up one hell of an issue.

Like most people if most western nations, for many years I had a cell phone, or a mobile phone as they are known in the UK.

I can recall a few years ago there being a scare in the UK about the microwave radiation hazard involved in using a cell phone but it certainly passed me by in terms of not really worrying about it.

Now a recent report in GQ Magazine seems to be gathering some momentum: once again, it’s about how your cell phone may be hazardous to your health.  It would be too easy just to dismiss this as just another poke at a very successful technology but something about this article caused me to write this Post – make of it what you will.

Here’s an extract:

Earlier this winter, I met an investment banker who was diagnosed with a brain tumor five years ago. He’s a managing director at a top Wall Street firm, and I was put in touch with him through a colleague who knew I was writing a story about the potential dangers of cell-phone radiation. He agreed to talk with me only if his name wasn’t used, so I’ll call him Jim. He explained that the tumor was located just behind his right ear and was not immediately fatal—the five-year survival rate is about 70 percent. He was 35 years old at the time of his diagnosis and immediately suspected it was the result of his intense cell-phone usage. “Not for nothing,” he said, “but in investment banking we’ve been using cell phones since 1992, back when they were the Gordon-Gekko-on-the-beach kind of phone.” When Jim asked his neurosurgeon, who was on the staff of a major medical center in Manhattan, about the possibility of a cell-phone-induced tumor, the doctor responded that in fact he was seeing more and more of such cases—young, relatively healthy businessmen who had long used their phones obsessively. He said he believed the industry had discredited studies showing there is a risk from cell phones. “I got a sense that he was pissed off,” Jim told me. A handful of Jim’s colleagues had already died from brain cancer; the more reports he encountered of young finance guys developing tumors, the more certain he felt that it wasn’t a coincidence. “I knew four or five people just at my firm who got tumors,” Jim says. “Each time, people ask the question. I hear it in the hallways.”

Continue reading “Are you really sure about your cell phone?” →

Organic milk in the USA

The unacceptable face of the big agricultural businesses

Another wonderful link from Naked Capitalism.  This one refers to the way that the definition of ‘organic’ as in organic milk is being twisted and distorted to favour the huge indoor milking herds, up to 10,000 cattle, that in any sensible mind could never be regarded as the organic production of milk.

This to me is a picture of organic production of milk:

An English meadow

This to me is NOT! Yet the milk from these cows is defined as organic!

Organic milk?

This last picture is courtesy of The Cornucopia Institute, another web site worth a visit whether or not you take an interest in farming – after all, one presumes that you do eat!

The article is on the Politics of the Plate website, worth your visit whether or not you are an American, and is, to me, so important that I am taking the liberty of publishing the article in full.
Here it is:
Read this very important article

Capitalism and The Daimler-Chrysler Saga: Part 2 of 3

In a new departure for Learning from Dogs, Sherry Jarrell publishes a three-part article on the Daimler-Chrysler merger.  Learning from Dogs is indebted to Professor Jarrell for both giving so freely of her time to the Blog and for sharing such erudite material.

Here is Part Two.  If you missed Part One then it is here.

What does the Daimler-Chrysler merger demonstrate in broader terms?

The 1998 Daimler-Chrysler  “merger of equals” was widely expected to realize both operating efficiencies and better access to international capital markets. Instead, when DCX incorporated it adopted German corporate governance standards.  U.S. institutional ownership in Chrysler was largely replaced by European banks that not only directly monitor the working capital financing of DCX but also may sit on its Management and Supervisory Boards.

Such superior access and corporate control created distinct advantages for large German institutional owners relative to minority owners; foreign shareholders in the U.S. found themselves among this minority group.  These advantages included the ability to: expropriate the private benefits of control from minority shareholders; share these benefits with management, effectively creating a collusion, and; profit from trading DCX shares with superior information.  As a result, minority owners priced their shares less aggressively – i.e., the bid-ask spread widened — to minimize their losses from transacting with controlling shareholders.  As their spread increased, U.S. minority shareholders’ trading costs rose and U.S. trading volume fell as it migrated to Germany, the relatively cheaper trading venue.

The Crossfire: first DCX combined product

The merger between Chrysler and Daimler and consequent changes in corporate governance create an ideal clinical study for isolating our hypothesis about the failure of the enhanced disclosure requirements to effectively compensate for lax corporate governance standards in protecting minority shareholders.

To test this hypothesis, we explored changes in the bid-ask spread that are associated with the change in corporate governance and the control over the flow of information about the Chrysler assets.  We look “inside” the trading mechanism that creates the observed transacted stock price, namely the bid-ask spread, to generate evidence on shifts in the quality and quantity of information available to minority versus controlling shareholders.  The bid-ask spread should grow as minority shareholders learn that traders on the other side of the spread possess superior information about the company, information which is linked to their majority control of the firm and its senior management compensation, asset disposition, and financing and risk-taking strategies.

We find that the decision to merge and become a German stock corporation significantly weakened the protection of minority shareholders, particularly prior owners of Chrysler assets, and led to their expropriation by controlling shareholders and principal creditors of the consolidated firm.  How? We find that the answer lies in the lack of protection afforded minority shareholders by the corporate governance structure of the newly combined DCX entity.

By Sherry Jarrell – Part Three continues tomorrow.

Capitalism and the Daimler-Chrysler Merger Saga

In a new departure for Learning from Dogs, Sherry Jarrell publishes a three-part article on the Daimler-Chrysler merger.  Learning from Dogs is indebted to Professor Jarrell for both giving so freely of her time to the Blog and for sharing such erudite material.

Here is Part One

What does the Daimler-Chrysler merger demonstrate in broader terms?

In a paper co-authored with Rick Harris, Tom McInish and Bob Wood, we explored the Daimler-Chrysler merger of 1998 to examine the interplay between disclosure rules in the U.S. and corporate governance standards in Germany.  Here is an overview of what we found.

Large shareholders typically control European and Asian industrial giants, leaving minority shareholders less than well protected.  In several studies of the legal protection afforded minority shareholders across 27 countries, German shareholder protection ranked among the very worst. In the early 1990s, Daimler-Benz, one of the largest firms in Germany, was no exception.  In 1993, with Deutsche Bank owning 24% of the equity, Mercedes AG Holding 25%, and the Emirate of Kuwait 14%, its controlling shareholders decided to cross-list Daimler-Benz on the New York Stock Exchange (NYSE).

1997 Daimler Mercedes

All foreign firms that cross-list [list their shares for sale in more than one country] in the U.S. subject themselves to stricter disclosure standards.    In addition to listing on a major U.S. stock exchange, Daimler was required to file financial statements with the SEC and report any material non-financial information as well.   Cross-listed firms are also followed more closely by U.S. stock analysts and the business press.  These legal disclosure requirements and additional scrutiny by the investing community improved both the quantity and quality of information available to all shareholders about Daimler.

1997 Chrysler Town and Country Minivan

By early 1998, the cross-listed Daimler shares were widely held and actively traded worldwide, including significant volume originating in the United States. In September of 1998, Daimler and Chrysler shareholders, majority and minority owners alike, overwhelmingly approved a merger creating DaimlerChrysler AG (DCX) through an exchange of the cross-listed share for the first “global registered share” (GRS).  The so-called “merger of equals” was widely expected to realize both operating efficiencies and, via the informational transparency of the GRS, improved access to international capital markets.

By Sherry Jarrell – Part Two continues tomorrow.

The Engine of Economic Growth is Sputtering

Here’s a surprise!

The engine of world economic growth is sputtering.  The most clearSputtering engine evidence of this is the lack of new business formation in developed nations across the globe.  Over the last year, the number of entrepreneurs starting new businesses in the wealthiest of nations dropped 10% from the 2006-07 level; in the U.S., that number fell by 24%.

The contaminants in the fuel line are oppressive government policies that increase the cost of doing business, increase unemployment, and raise the risks to the current labor force of quitting their jobs to try to start new businesses.

At a time when government should be encouraging venture capitalists and the formation of new business, it is instead putting on the brakes to this source of economic growth in the form of cap and trade, compensation regulations, fees on banks, and myriad other explicit and implicit new taxes.  In 2009, nearly half of U.S. employment was generated by small businesses; U.S. companies started through venture capital employed more than 12 million people, or 11 percent of private sector employment, and generated $2.9 trillion in revenues, or 21 percent of U.S. GDP.

Fully 100% of economic growth is created in private industry.  Government simply redistributes that wealth, destroying some portion of it in the process.  Never have we needed non-interventionist government policies more.

By Sherry Jarrell

Government Spending is like a Hamburger Store

THERE IS ONLY ONE. 100% TAX. BIG GOVERNMENT!

(with apologies to McDonald’s Big Mac packaging)

At times when money is tight and our resources are stretched to the limit, it pays to spend our money wisely.  That is why it makes so much more sense to reduce the costs imposed on private industry instead of increasing spending by government.  Industry takes their earnings and reinvests them to create sustainable wealth creation: they hire and train workers, conduct research, build and perfect machinery and robotics, and develop brand equity and a reputation for quality. All of these endeavors represent lasting value creation. What is spent on these things this year will continue to create revenues, wages, and profits for years to come.

100% Beef (or is it tax!)

Government spending is pure consumption.  Think of a hamburger store.  While it may taste  good at the time, it is temporary and fleeting, and will likely do more harm than good in the end.   It keeps the beast alive for one period, and then the process has to start all over again next period.

When we approve a massive spending bill, it covers government purchases of goods and services for the next year, maybe less.  In one end; out the other, with nothing left to show for it, except a hungry program that needs to be fed again next year, and the next and the next.

Government programs in and of themselves never produce lasting value; only in conjunction with private industry is any wealth or value created. And even then the government purchases have pushed aside, prevented, crowded out, or priced out purchases that would have been made by the private economy.

So, please, keep this in mind whenever you think of any type of government spending or tax increase: it is here today, gone tomorrow.  Oh, and skip the fries!

By Sherry Jarrell

Banks are being paid to NOT LEND!

It’s a funny old world just now!

The President of the United States recently pressured the heads of the nations’ largest banks to increase lending to

Pres. Obama

small business and home-owners.  Obama claimed that the banks, as recipients of federal bailout funds, had an unusually heavy responsibility to take such measures in order to create more jobs and help nurse the economy back to health.  All of this was done very publicly and with much fanfare.  Worldwide press coverage was universally favorable.

Seems reasonable, doesn’t it?

But it is not.  You are being duped.  I can’t tell whether whoever writes this stuff for Obama knows the truth and skilfully skirts it, or just writes flowing prose with no connection to the truth that curries voter buy-in by blaming Wall Street and Corporate America for all that’s wrong in the world.

Read more of this Post

Fractional Reserves of the U.S. Banking System Explained

What are Fractional Reserves?

The US Federal Reserve, or Central Bank, is the banking system’s bank. It is the lender of last resort.

It is through the Central Bank that banks settle their accounts with each other. The central bank serves as a clearinghouse for checks written by depositors, and it holds the commercial banks’ reserves.

Bank reserves (vault cash, and deposits by banks at the Central Bank or the Fed) are monies held out of circulation by banks to satisfy the Fed’s reserve requirements and the currency demand by the public. Excess reserves are those held above the legal reserve requirements to handle uncertain demand.  Bank deposits not held in (required plus excess) reserves are used to make loans and earn interest.

When banks make loans, they do not actually lend out the equivalent in cash but instead create on their balance sheet a loan asset and an equal liability called a demand deposit.  Such lending by banks is limited only by reserve requirements (set by the Fed) and the cash they need to satisfy cash withdrawal demand by their customers.

As these loans are then re-deposited by the borrower, the multiplier process continues as fractional reserves are held back and the balance is “lent” out again.

By Sherry Jarrell