Case Weatherhead Professor Peter Ritchken speaks about the credit crisis
fast forward a few minutes into it to get to the actual presentation
fast forward a few minutes into it to get to the actual presentation
October 2008 Archives
http://www.forbes.com/forbes/2008/1110/018_3.html
FTA:
A formal strong-dollar policy is essential. Economists gag at the thought, but the best barometer of monetary disturbances is gold. The Fed should tie the dollar to a gold price range of, say, $500 to $550. Though the dollar is stronger today, markets rightly fear that monetary blunders will happen again.
My question: will a peg really work, or are we going to once again see a need to pull ourselves away from the peg like Nixon did? I have a feeling that the biggest hedge funds and international businesses would end up playing chicken with the Fed and inevitably winning. Even worse, some of the richest foreign governments, much stronger in comparison to the US than they were during Bretton Woods, might be the ones to push the Fed past its limits
Maybe we can take a simpler approach and keep fiat currency but charge the Fed with targeting zero growth in the True Money Supply?
An argument with a group of socialist-minded friends gave me a great idea for a new thought experiment. Once a month (or so) I'll post a short entry with the topic of "Business Concepts for a Free Society." In a few paragraphs, these entries will describe business ventures that could serve as replacements for "necessary" socialist programs present in our own American society. The ventures will be better equipped to deal with duties we currently delegate to the government, all through the magic of my (and most people's) desire to make money. Here goes my first attempt, a particularly applicable concept in light of my work with Fresh Fork Market, Ltd.
CONCEPT: Food Safety Rating Service -- A replacement for the sluggish, bloated, and easily influenced Food and Drug Administration.
EXECUTIVE SUMMARY:
FSRS is a leading U.S. food safety and nutrition certifier, recognized in fifty states and an increasing number of international markets. While FSRS has a small but developing market share of the baked goods segment, the Company certifies over 70% of processed meat, fruit, vegetable, and both non-alchololic and alchoholic beverage products. A diverse team of expert nutritionists, biologists, and chemists utilize their combined 700 years of health-related lab experience to maintain maximum credibility and analysis efficiency. Above-market salaries and a comprehensive benefits program make possible the Company's industry-leading 3% annual employee turnover rate.
Consumers can find FSRS-certified products on the shelves of every major food retailer in the U.S. The Company maintains and grows its market share through a three-pronged strategy: 1.) highly visible and consistent branding and advertising campaigns, 2.) concise on-label health fact descriptions, and 3.) an active approach to attacking questionable health claims of competing food certifiers. Attacking competitor claims in the baked goods market segment opened the segment up to FSRS in 2008; the Company went from 2% to 10% baked goods market share over a six month period, mostly attributable to the completion of a five-year study of the negative effects of bleached flour on the kidney, a connection long ignored by baked goods segment leader US FoodCert. Consumers have favored FSRS label certificates in the meat segment since the Company launched its Growth Hormone Indicator program in 2004, a simple "none, medium, high" rating system with transparent ratings criteria listed on their public website.
Growing, processing, manufacturing, and distribution customers all pay FSRS for certification on a percent of sales basis, with its high consumer acceptance rate allowing it to justify a 10% premium over the industry average pricing scheme. The Company ensures that customers do not selectively leave certificate labels off of poor products by entering into standard one-year agreements which mandate labels for all product segments during that period. Competitor HealthyTouch has been making inroads into FSRS's core markets by offering customers a less cumbersome three-month labeling agreement, but the resulting labeling inconsistency has been met with mixed approval from consumers since the program's launch in Q1 2007.
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I hope you enjoyed reading this. I would be glad to hear arguments against my concept, as it'll help me build my strategy skills.
CONCEPT: Food Safety Rating Service -- A replacement for the sluggish, bloated, and easily influenced Food and Drug Administration.
EXECUTIVE SUMMARY:
FSRS is a leading U.S. food safety and nutrition certifier, recognized in fifty states and an increasing number of international markets. While FSRS has a small but developing market share of the baked goods segment, the Company certifies over 70% of processed meat, fruit, vegetable, and both non-alchololic and alchoholic beverage products. A diverse team of expert nutritionists, biologists, and chemists utilize their combined 700 years of health-related lab experience to maintain maximum credibility and analysis efficiency. Above-market salaries and a comprehensive benefits program make possible the Company's industry-leading 3% annual employee turnover rate.
Consumers can find FSRS-certified products on the shelves of every major food retailer in the U.S. The Company maintains and grows its market share through a three-pronged strategy: 1.) highly visible and consistent branding and advertising campaigns, 2.) concise on-label health fact descriptions, and 3.) an active approach to attacking questionable health claims of competing food certifiers. Attacking competitor claims in the baked goods market segment opened the segment up to FSRS in 2008; the Company went from 2% to 10% baked goods market share over a six month period, mostly attributable to the completion of a five-year study of the negative effects of bleached flour on the kidney, a connection long ignored by baked goods segment leader US FoodCert. Consumers have favored FSRS label certificates in the meat segment since the Company launched its Growth Hormone Indicator program in 2004, a simple "none, medium, high" rating system with transparent ratings criteria listed on their public website.
Growing, processing, manufacturing, and distribution customers all pay FSRS for certification on a percent of sales basis, with its high consumer acceptance rate allowing it to justify a 10% premium over the industry average pricing scheme. The Company ensures that customers do not selectively leave certificate labels off of poor products by entering into standard one-year agreements which mandate labels for all product segments during that period. Competitor HealthyTouch has been making inroads into FSRS's core markets by offering customers a less cumbersome three-month labeling agreement, but the resulting labeling inconsistency has been met with mixed approval from consumers since the program's launch in Q1 2007.
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I hope you enjoyed reading this. I would be glad to hear arguments against my concept, as it'll help me build my strategy skills.
In my ignorance as a young MS Finance candidate, I destroyed an otherwise good April 2008 presentation to my Corporate Risk Management class on the mortgage and housing crisis with one small bullet point. After an analysis of the technical causes of the mortgage crunch, I offered my take on policy moving forward, with the offending point highlighted on the following slide:
The real issue here is that legislation is not a suitable tool for fixing bad broker behavior; in fact, legislation is THE CAUSE of this behavior. This statement seems counterintuitive at first, but we see it is almost undeniably true as we get to the root of the mortgage lending industry and related government policies. The best place to start is the group of organizations that together issue 70% of new mortgages and in recent years controlled 90% of secondary mortgages in the United States: Fannie Mae and Freddie Mac. (1)(2)
Known as GSEs or Government Sponsored Enterprises, Fannie and Freddie are supported in financial and regulatory form by the federal government in return for their acquiescence with mortgage-related laws created by the U.S. Congress. Between the 1990s and the mortgage crisis, Congress has been pushing Fannie and Freddie to cheapen mortgage rates so that more hardworking Americans could realize the American Dream and own their own homes (3). This was simple enough for the GSEs which, with the downside protection of the American taxpayer, could simply drop lending standards and set interest rates wherever Congress deemed "fair." This is price fixing; interest rates are simply prices expressed as annual percentages.
Since the GSEs control such a large portion of the market, their activities quickly forced their privately controlled competitors to either follow suit or die. Business would be lost to the GSEs if brokers did not change policies, and as any organization concerned with staying profitable would, the private lenders matched their government-sponsored counterparts by assuming much higher risk than the market would have otherwise dictated was acceptable. Brokers opened up no-doc, 100% financing loans to everyone at low rates, and in the process of trying to stay competitive had to compensate themselves for the increased risk by altering loan terms in their favor. This completely rational reaction to the changing regulatory environment was the creation of the Adjustable Rate Mortgage you've undoubtedly heard about recently, a product that achieved the dual role of offering competitive rates to borrowers and compensating the company, via massively ballooning interest rates down the line, for the higher risk they had to take to stay competitive.
When Judgement Day arrived in 2007, two very predictable outcomes arose from this interventionist policy in the mortgage lending market. One, the government bailed out the GSEs, creating a moral hazard problem by encouraging poor risk management practices and indicating to investors that a certain class of companies would not be allowed to fail. Two, the private lenders who were desperate to keep up with the government-backed mortgage giants collapsed as a result of the lending policies they had to adopt. Interventionism killed the biggest private players in the mortgage market. We can continue to manipulate the market since all people "deserve" to own their own homes, and for significant periods we will see homeownership rise, but it will always come crashing down when the market finally recognizes and attempts to correct the misallocation of capital. This will happen in increasingly dramatic ways.
A final note. Anyone who argues that the cause of our housing crisis was corporate greed has not considered closely enough the foundation of our capitalist economic system. Capitalism was chosen for our nation specifically because of the unavoidable greed that many individuals are angry about; this greed allows for the correct pricing of goods and services, a function that is thrown off by artificial pricing enforcement. We know that corporations will seek to maximize profits, and with that in mind, Countrywide et al did exactly what we would expect them to do in their situation. Had they not adopted more competitive rates and policies, these private organizations would have gone out of business as the GSEs soaked up more and more of the mortgage market. So, taking on enormous amounts of risk and hedging this risk with "innovations" like the ARM was a survival tool, just as a company facing near-imminent bankruptcy will take negative NPV, higher-risk projects as a survival tool. This is the inevitable unintended consequence of interventionism, agency cost paid for by the American taxpayer.
For those interested in the financial background of our mortgage crisis, I invite you to view my entire presentation.
(1) http://www.nytimes.com/2008/09/06/business/06fannie.html
(2) http://hnn.us/articles/1849.html
(3) http://www.cato.org/pubs/pas/pa528.pdf
Welcome to my new blog powered by Movable Type. This is the first post on my blog and was created for me automatically when I finished the installation process. But that is ok, because I will soon be creating posts of my own!
