The Right Kind of Bailout. Finally heard about One Today !

I am not sure whether you are tired of hearing the word bailout, but I sure am !

Airline Industry, The Banking Industry, The Auto Industry and even countries now !

However, today as I heard Robert Reich, Professor of Public Policy at the University of California, Berkeley on Marketplace on NPR, for the first time I really felt , he talked about a bailout, that made sense, hopefully someone is listening:

The argument was simple : Robert Reich's Quote "Financial capital moves instantly around the globe to wherever it can earn the best return. Human capital -- the skills and insights of our people -- is the one resource that's uniquely American, on which our future living standards uniquely depend." UnQuote

For full commentary visit : http://marketplace.publicradio.org/display/web/2010/03/10/pm-reich-commentary/

My understanding in simple terms: We should not let the budget short falls of state and local government impact our school and universities, so we should bail them out to ensure education at all levels is affordable. This kind of bailout will create the human capital needed for a sustainable economy in the long run.

My Take: I whole heartedly agree with Robert Reich. His commentary reminded me of my first blog : Wake Up - If you did not already know you should, which was all about our ability drive value. I truly, can say today I heard about a bailout that made sense and hence decided to blog it.

Thanks
Nagesh

The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.

Economic Crisis - Have we even defined the problem right?

Link to Previous Post: My Views on Business and Technology: Economic Crisis - Have we even defined the problem right?

Though after writing this article, I got a little lesson on commercial paper market drying up at the 4th McCombs Alumni Conference, it however did not convince me fully.

Today, as I read thru the articles on "Wells Fargo's" Windfall earnings, I felt these prove my belief on the topic of Credit Worthiness - Banks are lending and there is credit available for those who are credit worthy; however, I guess they are lending to who they deem are "Credit Worthy". So if anyone is not getting credit - may be like Mahatma Gandhi Said - It is time to look in the mirror.

Some Links
http://finance.yahoo.com/loans/article/106893/Wells-Cashes-in-on-Mortgage-Boom
http://tampabay.bizjournals.com/tampabay/stories/2009/04/06/daily56.html?ana=yfcpc


Thanks
Nagesh
The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.

Economic Crisis - Have we even defined the problem right?

My Basic Education was in Mechanical / Industrial Engineering with some focus in Operations Research. I still remember the first thing my Professor said way back. 95% of the solving the problem is about "Defining the problem right" remaining 5% is about "applying the right algorithm".

Off late, as I have been questioning whether we have even defined the problem right?

Looks like the root cause economic problem is defined as "Lack of Lending" or "Lack of Credit Flowing"?

So the solutions to the problem range from Re-capitalization to Closing Banks. The current govt solutions are trying to meet in the middle with plans like public-private partnership etc etc as noted in Prof. Brandl's Blog today - http://blogs.mccombs.utexas.edu/brandl/2009/03/25/geithner/

So I took the liberty to comment on the blog entry, the essence of which is as follows

1. If we truly believe there are good well run banks in the mix - then why are they not lending and why are we focussing on the so called large insolvent banks? With interest rates close to 0% the good ones should be able to borrow and lend infinetly? ( Net - Net - It should really not matter if the insolvent ones do not !)
2. Lend to whom ? The american consumer is so much in debt. When was the last time any bank lent to the person who has maxed out his borrowing capability or does not have a job? Would you, if you were running a bank lend to a consumer profile who is already saddled with debt he cannot pay?
3. Assuming, we are successful in re-capitalizing the banks. The banks will naturally try to find the most credit worthy and profitable consumer profile to lend to. Are we really sure that, THAT consumer profile is really the American Consumer ? If not, Question who this consumer is and will money start flowing to that consumer?

As I think thru this subject, I really, would like some economists to illustrate which credit worthy institution / individual is not able to borrow ? and if there is such an example, I would like to further understand why the so called well run banks are not lending to them ? That may shed light on what the real problem is?

So what is My Take: My Gut tells me that the real problem, America now faces is not availability of credit, it is credit worthiness of American Consumer. So the solutions should make American Consumer Strong and Credit Worthy Again.

In the short run this may be best acheived by letting the American Consumer - The individual who is acutally working 8 hrs a day and makes a salary around the national average keep more of his money and " by American Consumer I do not mean American Businesses or citizens who make say more than 2x of national average". The mid-term solutions lie in executing national projects like upgrading National Infrastructure - Highway Systems, Air traffic Control Systems, Power Grids etc and The longer-term solutions lie investing into education, re-training, and providing funding future technologies - Energy Independence, Regulatory Frameworks, Tax-Code re-write etc.

Finally, we cannot ignore the psychology of markets, we have to recognize that as long as every one, which includes banks feel that there will be a better opportunity (option) in future they will stay out which will make things worse. John Maynard Keynes recognized this way back, so long as government in this case keeps the hope that more help is one the way to the banks, it will stall the recovery.

Thank you for reading. Your feedback is appreciated.

Thanks

Nagesh

The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.

Follow up to My Post "Wake Up - If you did not already know you should"

Recently, I had written blog post titled, "Wake up - If you did not already know you should". A key point in my view about expectation of "Credit Flowing" as soon as Banks had enough capital is that it is not a valid expectation as "Flow of credit should be tied to credit worthiness" and not somebody's ability to lend or that somebody feels he is entitled to credit.

"Part I: Geithner's Plan "Extremely Dangerous," Economist Galbraith Says" was the Tech Ticker interview with Prof. James Galbraith, The University of Texas at Austin on Yahoo! Finance today. I was surprised at how clearly he articulated that lending by banks will not resume unless the loans are provided to credit worthy purposes and that the American Consumer is saddled with debt and cannot take on any more debt.

Net-net, given what I heard and read today, my convictions around my post have become stronger. I strongly recommend every one reading this blog to listen to Prof. Galbraith interview and come to their own perceptions of the right medicine for the economic mess. I was humbled by some to the simple solutions suggested by him.

Happy reading and forming opinions

Thanks

Nagesh

The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.

Wake Up - If you did not already know you should

What is at stake today is our ability to drive value in the long-run, and the long-run is not far away - It is here. Please watch and read the following blog posts

• “Did you know” by Karl Fisch, Scott McLeod, and Jeff Bronman. Watch it, you will be surprised. The link is http://www.youtube.com/watch?v=cL9Wu2kWwSY
• Macro-Economic Updates by Professor Brandl’s from McCombs School of Business at The University of Texas at Austin. The link is http://blogs.mccombs.utexas.edu/brandl/

If these posts are not providing a wake up call - I am not sure what will!

My View:

1. Stop talking about tax breaks (I am sure by now most people do not mind paying a little more for a greater good. At least, I am) and start trying to figure out how to invest into our Future (education being one of them) that will allow us and our kids (our future) to be competitive. So Rather than taking a stance of rejecting money due to political affiliations, figure out a way to invest that will produce long-term benefits.
2. Stop talking about bail-outs (they are necessary so lets get beyond that) and ordering banks to lend (there is no entitlement here, carelessness in lending is what got us here in the first place), so rather than having an entitlement behavior, lets provide a reason for institutions to lend; Announcing projects, is one way - which becomes the basis for credit worthiness and reason for someone to lend. If not, just lending will get us back to current situation faster than we can imagine. New business (Projects) will provide the “Hope” needed to move forward.
3. "Hope" does not emerge if the justification for every move is based on “Catastrophe Avoided”. This will only scare people further, So Let the next bail-out be framed in-terms of meeting Business needs (insurance/lending - what ever they may be) rather than another “Dooms Day” Avoided. That will help show “Light at the end of the Tunnel” rather the darkness everyone sees on every bail-out measure announced.
   

Thanks
Nagesh

The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.