The Pendulum
Over the past couple of decades, the financial services industry and the environment in which it operates has experienced a sea of changes. Globalization has become a predominant characteristic of the economic way of life. Business activities on an international level have impacted financial operations the world over, and with it the lives of the citizens of numerous countries. Complex financial instruments have also made the system virtually incomprehensible to the uninitiated.
Until about a decade ago, the US regulatory approach was highly restrictive and harkened back to the philosophies that grew out of the Great Depression. These mechanisms were much too confining for the emerging realities of world commerce, and limited the capacity of the US to function as the top economic power. Much needed reforms that opened up the system were enacted in 1999, but did not include sufficient safeguards regarding exotic new funding mechanisms.
Last week, President Obama took an initial step toward regulatory reform by making several recommendations to accomplish what some call bringing America’s financial institutions into the 21st century (though others apply less positive descriptions). If adopted, his proposals will impact banks, hedge funds, investment banks, and various other aspects of the financial services industry. They will also seek to rein in the abuses in various securities that contributed to the recent debacle.
As is well known, the financial services sector enables and facilitates economic expansion through the allocation of capital. While this process is essential and generally works quite well, it is easy for short-term incentives to drive behavior that is counterproductive and potentially (as we have recently seen) disastrous. To prevent such adverse outcomes, some level of supervision is required.
The nation’s financial services’ regulatory system normally controls activities according to function. This approach is designed to enable overall consistency but does not require agencies charged with oversight to have expertise in every aspect of financial regulation. Formal and informal communications systems operate between the entities, but even so, they sometimes do not produce sufficient rules and policies to ensure proper functioning.
According to the President, such a process, as well as the lack of crises resulting from positive growth over the past several years, has led to complacency. This situation, coupled with the burden recently placed on the shoulders of the American public as a result of rising unemployment, business downturns, and housing and credit difficulties, as well as myriad other challenges, has required an assessment through new eyes.
The President has made recommendations that purport to establish comprehensive regulation of financial firms, protect consumers and investors from financial abuse, provide the government with tools to manage financial crises, and improve international cooperation. The ultimate goal of the President’s proposals are to create avenues to prevent the economy from approaching collapse by providing policymakers more tools to stem any significant financial ebb tide in the future.
There is no doubt that the economic situation confronting our nation, and even the entire world, is historic in magnitude and complexity and that bold action is being required for a return to normalcy. Nonetheless, there is legitimate concern that the recommendations as proffered might be too ambitious or could end up placing too much control in the hands of the Federal Reserve (Fed) and/or other regulatory entities. The plan would enhance the power of the Fed in some areas, yet take away much of its role in protecting consumers.
The key to effective regulation is to provide significant oversight to avoid the types of things we have seen recently while not stifling the innovation that is essential to progress. We never seem to get it right. Before the 1999 reforms, we were clearly too restrictive. Recently, we have not been sufficiently vigilant. Similar patterns pervade our history. The pendulum swings, but never seems to come to rest in the happy middle.
Of course, the President’s sweeping overall regulatory recommendations are just the opening bell calling for an examination of the current situation to be followed by much discussion and debate regarding the best courses of action to follow. No matter how things come out, you can bet that the brainiacs will ultimately figure out ways to avoid and circumvent the best of intentions. Despite this inevitability, we have to improve the system. If the ensuing rounds lead to laws that strike the right balance between control and freedom, then new regulations could provide vital oil to the financial machinery which will eventually prove highly beneficial in enhancing the nation’s financial system.
posted @ 08:04 AM CST [link]
Friday, June 19, 2009
Wise Investments
Often, when someone mentions the “eyes of Texas,” they are referring to the popular song that has become the alma mater of the University of Texas. Although the inspiration of the writing of the song is disputed, there is no argument regarding the emotional impact the tune has on students and alumni of that institution.
There is also probably no disagreement with the three “I’s” that are fast becoming the trademarks of the Lone Star State—Imagination, Innovation, and Investment. The actions of the 81st Legislature definitely confirmed these concepts with the authorization by lawmakers of new funding for three special programs for 2010 and 2011.
The Texas Enterprise Fund was provided an additional $20 million to push the total to $200 million, and the Emerging Technology Fund gained $94 million to reach almost $204 million when unexpended monies are considered. In addition, funding for a new initiative to encourage feature film and television production in the state tripled (from $20 million to $60 million).
These endeavors have been highly important to the state’s overall economy in recent years. Based on past achievements, the Legislature’s additional funding for them will prove significant in enabling Texas to enhance its position as an economic leader.
The Texas Enterprise Fund was created by the 78th Legislature in 2003 to provide financial resources to help strengthen the state’s economy. The fund was renewed by the next two legislatures, making approximately $250 million available during the 2008-2009 biennium to help attract businesses and expand employment opportunities. As a result of this innovative program, some 54,000 new jobs have been created and more than $14 billion generated in capital investments.
The Texas Emerging Technology Fund (ETF), which was launched in September 2005 with an allocation of approximately $275 million, has enabled the state to achieve nonpareil success in advancing the development and commercialization of many of the most innovative technologies to enter the scene. By helping spur the creation of several technology companies, the ETF has greatly expanded Texas’ global competitiveness and will continue to benefit the state economically while also providing opportunities for medical and scientific breakthroughs designed to greatly enhance our quality of life. Furthermore, because of the ETF, much highly sought-after research talent has made Texas home. ` Over the past decade, the moving image industry has provided more than $1.2 billion to the state. However, in recent years, Texas has lost film and video production spending, as well as about 25% of its film professionals, to neighboring states. In fact, movies about Texas are being produced in those neighboring states. The funds allocated by the state’s legislators place Texas in a better competitive position and stand to boost operations and create expanded opportunities for the entertainment industry. Businesses that support these kinds of productions will also be positively impacted.
Texas has been a perennial leader among the states in job creation, exports, and Fortune 500 companies. Moreover, in the past several years, the Lone Star State has often been the top destination for the relocation of people and industries.
Many factors have contributed to this unique distinction including the state’s central geographical location; relatively low taxation and friendly business atmosphere; quality of higher education and availability of skilled labor; favorable regulatory environment, climate, and infrastructure; and plentiful supplies of energy.
The actions of the Legislature in providing vital funding for the Texas Enterprise Fund, the Emerging Technology Fund, and the film production industry are certainly wise investments and undoubtedly will help ensure the future economic growth and development of the Texas economy.
posted @ 08:20 AM CST [link]
Friday, June 12, 2009
Kick Start
Prior to the Great Depression of the 1920s and ’30s, practically every major downturn in the nation’s economy, at least those that lasted over several months, was labeled a “panic.” Such calamities have borne such a descriptive nomenclature throughout history. In more recent times, economic calamities such as the one we are currently experiencing have been known as recessions.
Regardless of the name, the difficulties Americans suffered during such periods have been similar—job losses, slow to negative production growth, and consumer wariness. Each recession has had its own personality, and myriad actions have been attempted to secure a return to normalcy.
Since World War II, our nation has endured around a dozen recessions, with an average length of around 14 months. The current recession, which began in December 2007, has surpassed that timeframe by some four months, and the end is still likely a few months away.
The economic turmoil in America is impossible to ignore as daily headlines and newscasts present the dismal picture in full color. The nation’s economy has shrunk for three consecutive quarters and approximately 5 million jobs have been lost over the past 16 months, more than 1.6 million of those since February. That total number far exceeds the 1.6 million total employment drop in the 1990-1991 recession and the 2.7 million during the 2001 recession before those economies turned around. Even though job losses have slowed slightly in recent weeks, unemployment levels have still reached 9.4%, the highest level in more than a quarter century.
Signs of improvement (or at least declines at a slower rate indicating proximate recovery) are now appearing in a number of statistics. Moreover, consumer sentiment is on the rise, and most people remain confident that actions being taken to cure our economic ills will eventually reap the desired results. A recent Gallup Poll noted that the “consumer mood” has become more positive since March. The decision announced by President Obama this week to deliver approximately 600,000 jobs during the summer will undoubtedly be received as encouraging and perhaps further enhance consumers’ optimism.
The President’s pledge to speed up federal spending for various endeavors includes monies for maintenance projects at military bases, as well as state road and airport improvements, along with the employment of around 135,000 school teachers and support staff. This decision is expected to kick start the flow of money into state coffers.
Since the better summer weather is normally considered optimum for expanding public construction works, state agencies had already been submitting applications. With the news that money will now become more readily available for funneling to these kinds of endeavors, greater opportunities for slowing the economic decline have now entered the picture. It will, of course, take time to see what develops and how these actions will mesh with other events occurring in the US and the world. It is always a challenge to implement the proper safeguards for using public funds while trying to expedite their impact, but this effort is certainly a step in the right direction.
posted @ 07:55 AM CST [link]
Friday, June 5, 2009
Road Block?
It’s all over—or is it? The Texas biennial legislative session mercifully closed this week amid cries of both congratulation and consternation. Most legislators were pleased they had been able to accomplish much of the agenda presented them in January, but others were still concerned about the many important measures upon which they had failed to act. As a result, unfinished business may result in a special called session at some point in the future.
Of the various matters still on tap, perhaps the one that impacts the state to the greatest degree is transportation. Texas is facing historic challenges due to the significant increases in population, vehicles owned, and roads traveled across the state’s 79,000 miles of highways. During the past Memorial Day weekend, some 2.25 million persons in the Lone Star State were expected to make trips of at least 50 miles from home by car, bus, train, or air, an increase of some 6% over last year despite a sluggish economy. Nationwide, travel during this three-day period was expected to see a 1.5% hike. We continue to add well over 1,000 people per day to our transportation system.
Even beyond the needs of leisure travelers, transportation infrastructure is key to the ongoing vitality of the state’s economy. When the interstate highway system was developed in the late 1950s and early 1960s, little attention was paid to the potential for population booms and distribution needs. As a result, many of the state’s highways are suffering from heavy congestion, and some are in dire need of safety improvements. Mobility studies and regional planning entities consistently indicate that the increasing levels of congestion far exceed the current fiscal resources to accommodate.
Over the past several decades, Texans have moved away from urban work centers, thereby increasing daily travel time on the road, along with increasing traffic in smaller communities. With an addition to the state’s population of approximately 14 million people over the next 25 years and vehicle registration anticipated to experience a 214% increase, it is evident that the situation demands special attention geared toward meeting specific needs.
Among the key needs are improved safety measures and compliance with federally-mandated air quality standards. Air quality is directly affected by traffic conditions; mobile sources are responsible for the majority of local emissions of many harmful pollutants, and cars stuck in traffic contribute to the problem.
The transportation system in Texas is a significant asset to the state and can be quantified by development and preservation costs, as well as by the tax and toll revenues derived from it. Moreover, the level of highway development, especially in crowded corridors, directly impacts gains in economic efficiency.
Ongoing improvements in the Texas transportation infrastructure are crucial to the state’s economic health. Better transportation efficiency can improve profits for firms locating in the state, and mobility serves as a substantial incremental stimulus to the future prosperity of regional and state economies.
On the other hand, congestion can cause a number of problems for business such as impairing the ability of manufacturing concerns to use sophisticated inventory management techniques or reducing productivity as workers sit in traffic jams. For individuals, congested roadways can significantly affect perceived quality of life. The environmental consequences in urban centers are also profound.
Although this essential matter was considered by the lawmakers, no definitive decisions were forthcoming during their 140 days in Austin. In fact, due to last minute machinations, lawmakers ended up not passing the bill that extends the life of the Texas Department of Transportation beyond September 2010. It remains to be seen if this failure requires a special session or if some clever means can be found to keep the agency in place.
More fundamental, however, is the fact that $2 billion in bonds for new arteries were not approved, regional authorities were denied the ability to allow local elections to impose gasoline taxes to fund new facilities, and toll roads and public-private partnerships faced increasing opposition. In other words, we seem to be limiting options for solving the problems, yet the needs continue to escalate and virtually all available resources are absorbed by maintenance of what we have.
Economic growth and population expansion have left the Lone Star State with a crowded transportation system, particularly in major urban areas, a trend which is likely to continue. Prior studies by my firm and others indicate that the ongoing annual return on investments in major transportation projects is more than 30% per year.
Texas can ill afford to fall further behind in its transportation infrastructure. Thus, it is essential that major consideration be given to a variety of options for enhancing and expanding the myriad economic opportunities that are dependent on transportation. The future demands such action.
posted @ 08:02 AM CST [link]