Riding it Out
Many of us fortunate enough to be raised in Texas have heard the old saying “you don’t change horses midstream.” Even if you’ve never actually attempted to ride a horse through running water, the sentiment is clear: it’s a bad idea to make major changes in the midst of turmoil. President Obama’s renomination of Ben Bernanke as chairman of the Federal Reserve is nicely in line with this old (but still good) wisdom.
The past 18 months have seen some of the most turbulent economic times in our country’s history. Over that period, a crisis in the US mortgage market escalated into a massive shutdown of credit, the evaporation of trillions of dollars in wealth, the loss of millions of jobs, and a severe recession. No corner of the globe has been unscathed; industrialized and emerging countries have suffered.
The policy responses have been unprecedented, and despite the severity of the downturn, there is already talk of recovery. The prognosis regarding the timing and likely speed of the return to growth varies depending on the latest information, and the economy is still suffering from ongoing strains in various quarters. Even so, optimism about tomorrow is beginning to bud with some blooms anticipated soon and, indeed, already occurring.
One of the key contributors to our return to financial health is the Federal Reserve System, also known as the Federal Reserve or the Fed. Serving as the nation’s central bank, it was created by the Federal Reserve Act in December 1913 following the immense disruptions caused by the banking Panic of 1907. The Fed was originally established to help prevent and contain similar maladies in the future. The objectives of the Fed today are not that much different from earlier incarnations of a central bank, though its role in monetary policy has certainly expanded.
The individual who serves as Fed chairman wields tremendous influence on the nation’s overall financial system and is in the spotlight almost daily. Equity markets move based on comments by the Fed chairman and market watchers dissect every nuance. Even in relatively calm economic times, the leader of the Fed faces one of the most challenging positions imaginable.
Ben Bernanke, former chair of the economics department at Princeton University, has faced unique economic turbulence over his nearly four years of leadership. There have been both positives and negatives in his term, but generally he is credited with being a prominent player in keeping the recession from turning into a depression through his aggressive cutting of interest rates and pumping money into the economy.
When banks shut down credit last year, Bernanke was quick to offer emergency loans to improve their balance sheets and encourage lending. He also implemented the purchase of hundreds of billions of dollars in mortgage portfolios. Actions such as these served to help stop the downward slide in financial markets and the general economy. He also did things outside the normal purview of the Fed, including coordinating global policy and working with investment banks buffeted by the severity of the storm.
President Obama’s reappointment this week of Bernanke to head the Federal Reserve for another four years is a sign that the policies being instituted seem to be bearing fruit. There was certainly no need to change horses in midstream; the chairman has both the academic chops and the testing by fire in the very real world of an international crisis. Ironically, much of what he will be doing in the next few months is reversing the extraordinary things he did to respond to the recent debacle. Who better?
posted @ 08:05 AM CST [link]
Friday, August 21, 2009
Clunkers
With the economy beginning to show tentative signs of recovery from a traumatically challenging period of approximately 20 months, there was hope in some quarters that the Car Allowance Rebate System (CARS) authorized a few weeks ago would be the straw that would break the back of the recession. That was probably a bit too much to wish for, but it has brought consumers out in large enough numbers to encourage Congress to triple the program.
The program, commonly referred to as “cash for clunkers” has clearly picked up the pace of sales in the automobile industry and did what the stimulus was supposed to do—stimulated people to spend money!!! It has not, however, been the single economic panacea for which many folks have been searching. That will happen in a thousand different ways, and this program, although popular, is only one of them.
The $3 billion the government has allocated for this endeavor has certainly encouraged thousands of people to trade in their less fuel-efficient automobiles and receive up to a $4,500 bonus to secure more environmentally-friendly ones; some 250,000 vehicles were sold the first four days immediately after the program’s authorization. Still, many US consumers are keeping their fists tight due to job uncertainty and concerns about the direction the overall economy might take in the weeks and months ahead. They are not quite ready to jump in with gusto just yet.
The conditions for receiving up to $4,500, which some see as a tad complex, cumbersome, and complicated, emphasize (among other things) that the trade-in vehicle must get no more than 18 miles per gallon according to new standards which usually drops the estimate on the older car when it was new by a mile or two per gallon due to more recent testing standards. Another requisite for the bonus is that the new vehicle must have a price tag, without options, no higher than $45,000. Many luxury vehicles, in spite of their fuel-efficiency, fail to qualify under this restriction and often are not on the radar of buyers hoping for the influx of government cash. After all, it is a government program.
The original intention of CARS, of course, was to help American automakers. Unfortunately, the “cash for clunkers” endeavor has not turned out exactly as planned on that score. The reason is that many foreign-made vehicles have better gas mileage rates compared to US-made ones. Therefore, a lot of consumers are inclined to consider them instead of American models.
Another unforeseen problem is the amount of time that dealerships have to wait to receive their rebates. Because dealers have to dispense their own monies while waiting for government funds, many are facing unprecedented cash-flow hardships. Some are even storing on rented lots the vehicles that have been traded in as a hedge against the eventual unavailability of federal money. While the process of providing monies to dealers is currently a bureaucratic headache, additional workers have recently been put on the payroll in an attempt to speed up the delivery of the checks. Like I said, it is a government program.
According to the Commerce Department, in spite of the implementation of CARS, retail sales still fell 0.1% in July. In fact, removing automobiles and parts from the statistics, retail sales dipped 0.6% last month, due in large measure to drops in gasoline prices and diminished purchases of building materials. Discretionary spending in July, especially at major department stores, experienced the biggest monthly decline this year. That news was a bit of a damper to markets, but will likely be negated by more positive numbers soon.
The “cash for clunkers” program was inspired in part by similar programs in Europe, particularly in Germany, where it has met with substantial success. The European plan’s future is uncertain, however, as many automobile dealers “across the pond” are fearful about the direction sales will take when government funds run out at the end of this year.
While the European model was helpful to the US government’s implementation of CARS, it is not the first time such an endeavor has been tried in the US. President George H. W. Bush developed a “cash for clunkers” program in 1992 and touted it as a market-based approach to improve the environment. It was patterned after one that had operated in California a couple of years earlier. Neither proved very successful, and both gradually faded from public interest and memory.
Acquisitions of new vehicles through the clunkers program, which is about to expire, will likely boost aggregate retail sales for August. Further stabilization of business investment and the housing industry should also prove beneficial in enhancing the nation’s real gross product growth over the next few months. We are getting there, but recovery will come from multiple sources.
posted @ 08:05 AM CST [link]
Friday, August 14, 2009
New Rules
I’m a firm believer in the power of markets. However, there are times when they require parameters to keep them functioning properly. Well constructed regulations can enhance operations, increase efficiency, and improve general effectiveness. In the case of the recent implementation by the Security and Exchange Commission (SEC) Division of Enforcement of new rules pertaining to a select aspect of market activity—naked short selling—the potential for fulfilling these objectives is certainly present.
The rules change follows a significant number of complaints over the past several years from both investors and issuers of securities that the practice of naked short selling, if abused, could be detrimental to the market. In light of such possibilities, various groups have contended that the SEC enforcement arm has been negligent in addressing the matter, at least up until a few weeks ago.
Basically, a short sale involves selling a stock that the seller does not yet own or will borrow for delivery at some date in the future. Those who short sell are often seeking to either hedge against future price volatility in stocks they control or profit from a belief that the price of the stock will fall. If the price does fall, short sellers buy shares in the market at lower prices to fulfill their sales agreement, thus making a profit. Of course, if the price rises, the seller incurs a loss. This practice is not illegal and has been a part of market trading for some time, though not without controversy.
In a “naked” short sale, however, the underlying stock hasn’t even been borrowed, and market analysts argue that this allows market manipulators to artificially drive down prices. Abuses in short selling occur when short sellers fail to borrow and deliver securities to the buyer within the standard four-day timeframe. Federal securities laws forbid abusing or manipulating naked short selling in order to drive down the stock price, but enforcement has been difficult. Through the years, there have been numerous complaints alleging the loss of substantial sums because the SEC had not taken sufficient action to control such a practice.
The SEC did implement a short sale regulation in 2004, but little attention was paid to it over the years. The financial challenges the nation has been experiencing since December 2007 brought renewed interest by the public and led to charges that the practice played a significant role in exacerbating the crisis
As a result, the SEC instituted emergency rules forbidding short selling of stock in various financial institutions. This later was expanded to the securities of all public companies. In addition, adjustments were made in established procedures in an attempt to prevent abusive short selling and, hopefully, restore investor confidence in the market.
Violations of these requirements could lead to varying degrees of prohibition of further short sales in the same security or by the same customers. More severe penalties were authorized for short sellers who engage in deliberate deception of broker-dealers or other market participants.
Because of the possible disruptions to the securities markets that could be caused by reckless short selling and the potential for a drop in the overall confidence in the markets which could lead to panic selling, the SEC recently issued new rules to govern all such operations. Now, short sellers are required to complete the trade within four days or become subject to penalties. In addition, specific information about short-sale trades will be published (on a one-month delay) to enable investors and analysts to identify instances of improper coordination.
In introducing these regulations that call for greater transparency and the dissemination of significantly more information about the volume and velocity of sales, the SEC remains committed to ensuring that trading secrets are preserved and money manager positions remain confidential. However, the potential for abuse will be greatly reduced, and timely and accurate information always makes markets more efficient.
Hopefully, as the SEC strives to overhaul additional financial regulations in the future, damaging practices can be minimized and appreciation and confidence in market operations will be strengthened. There is always a danger of overkill, which can be counterproductive, but constraints are essential in certain areas.
posted @ 08:05 AM CST [link]
Friday, August 7, 2009
Ring On!
While communication with others is an innate human hunger and has been evident from at least the days of cave drawings, it may not have been until the invention of the telephone and the ushering in of the information age that the implications and values of communication systems were economically harnessed.
Almost a hundred years ago (95 years ago this week, in fact) when the first transcontinental call was made, probably no one could have conceptualized the development of the communication systems we have today that allow us to stay in touch around the world and even to the moon—and beyond.
Ever since Alexander Graham Bell’s famous words on March 10, 1876—“Mr. Watson, come here, I want you,” we have been pioneers on a revolutionary communication pilgrimage.
Today, it’s almost inconceivable to imagine how we ever got along without mobile communication systems. Instantaneous contact from any place in the world is now possible and practical, and the cost is a far cry from the $75 charge for a three-minute call across the Atlantic back in the 1920s when intercontinental telephone service was using “old timey” devices such as radio transmitters.
Over the past half century or so, the communications industry has grown exponentially and has become a major driver for economic development across the globe. With the ongoing advancements in digital techniques, information exchange has reached new heights and thoroughly transformed business operations.
New ways of sharing ideas and information are emerging almost daily from the minds of former “garage geniuses” who are now providing leadership to huge segments of the communications world. Speed and accuracy in transmitting data and voice commands in real time have been the rails along which we have been zooming through the Information Age.
Teenagers’ almost continuous use of the home phone certainly played a part in the proliferation of additional land lines in many houses. This proclivity was a natural fodder that led to the desire for personal phones when technology introduced us to “mobile” phones. About the same time, the Internet hit the scene and opened the world to exploration as fast as one’s fingers could move. Then “texting” came on board, and we discovered new uses for our thumbs.
Cells phones and their derivatives have almost become necessities in our daily lives, and the capabilities of these instruments—which have shrunk from the brick-size ones that were carried in a bag to those that fit conveniently in a shirt pocket or on an ear—appear almost limitless.
Texting has become a way of life and keeping in touch through blogs, twitters, and myriad other telecommunication means consumes a lot of our time and energy. Information exchange is the name of the game and everyone wants to play. New methods to do so are arriving almost daily, and many other advancements are on the drawing table or in the minds of innovators and visionaries.
Additional infrastructures and systems are continually being developed for better diffusion of information and communication, all of which have significant economic value and the potential for manufacturing growth and job creation in the future. What’s ahead for tomorrow is limited only by our imagination.
Bell probably had no idea that his request for Watson to “come here” would be the catalyst for such a unique boon to the world economy.
posted @ 08:11 AM CST [link]