A less wonderful life for bankers - Jimmy Stewart is Dead

A less wonderful life for bankers
Review by Martin Sandbu



Jimmy Stewart is Dead
By Laurence Kotlikoff
Wiley ($27.95)


A reader of Jimmy Stewart is Dead could be forgiven for thinking that its author is an angry young man. The book describes the financial crisis in prose of populist wrath that would not be out of place in the “tea party” movement. It parades a procession of villains, from deposed Wall Street titans to Uncle Sam himself, and sends them packing in verbal tar and feathers.

In fact, the author is Laurence Kotlikoff, a Boston University professor whose research record extends to such rarefied topics as Ricardian non-equivalence in strategic altruism. But here his tone is more the agitator’s than the academic’s as he explains “in plain English and simple terms the big con underlying the big game”.

Hardly any part of finance escapes Kotlikoff’s whip. Executive compensation, subprime mortgages, derivatives, credit rating, bail-outs, even deposit insurance are so many forms of theft or snake oil, which only deliver so long as people believe they can. The basic problem, he says, is “multiple equilibria”: economies shift from growth to paralysis depending on whether consumers and investors expect things to hum along nicely or fear a collapse.

This is what almost kills the Bailey Building and Loan Association in It’s a Wonderful Life, the feelgood film starring James Stewart as an honest banker. Faced with a run on his bank, Stewart’s character educates shocked savers in the realities of fractional reserve banking: deposits are not held in a vault but recycled in loans to the community. If enough depositors worry about a bank’s safety, they cause the very failure they fear by demanding more than it has at hand.

Kotlikoff sees the current crisis as such a flip from good to bad expectations. In the film, Stewart regains the trust of the townspeople, who avert disaster by putting their money back in. But in our world, faith cannot be restored: Jimmy Stewart – or the kind of finance he represents – is dead.

If you cannot have trust, it helps to know that what you see is what you get. Kotlikoff has a simple and radical substitute for trust. “Limited purpose banking” would turn every financial product into a mutual fund and every limited-liability financial institution into a mutual fund provider.

Under LPB, mortgage lending, for example, would be done through “mortgage mutual funds” whose managers would pick loans to invest in. Mortgage applicants would provide the information they do today, and different funds could bid for their custom. The lenders would be investors owning shares in the mutual funds. At no point would any bank actually hold the mortgage on its books.

Indeed, banks would not hold anything on their books at all except the modest assets needed to manage a fund – computers and offices – and the matching equity. They would not be allowed to borrow and certainly not to trade with borrowed funds.

In LPB “cash mutual funds”, fully backed by cash, take the place of deposits. If this sounds like narrow banking, it is because it is – but LPB extends the principle to all of finance. Insurance and derivatives are replaced by funds issuing different shares, whose claims on the funds’ holdings depend on how specified events turn out. Crucially, this means all contingent liabilities are fully backed by capita!l.

Kotlikoff also wants independent custodians and a single agency verifying and publishing details on every investment: one would be able to look at each mortgage a fund holds before choosing to invest in it.

LPB would in one sense change a lot; in another, very little. Virtually every financial product in use today could be recreated as a mutual fund. But with all warts and blemishes exposed and no doubt that end-investors carry the losses, some would be priced out of existence. No bad thing with value destroyers presently masquerading as triple-A – but the worry is that LPB would take us from too much credit to too little.

“Financial life will be . . . smoother”, writes Kotlikoff, “because LPB will [reduce] the risk of fraud and systemic collapse.” Perhaps, but risks remain. It would be hard to stop non-financials from engaging in financial activities. Nor are mutual funds immune to runs: when a money market fund broke the buck in 2008, the US government rushed in with a backstop. But one big source of panic disappears under LPB. Banning leverage in financial intermediation makes it impossible for intermediation itself to collapse if a leveraged bubble bursts.

LPB may not be the answer, but it is a serious attempt to seek solutions at the required scale. Kotlikoff does us a great service by pointing out that only radical reform can fix finance. For that reason alone the ideas in this book deserve to be taken seriously.

Earth Hour 2010

Eddy said: Not only I'm an atheist and a no-nonsense pragmatist who worship frugality and modern economics, I strongly disbelieve about the effectiveness and efficiency of "saving-the-world/-green/-climate" through decentralized and consumer based non-profit compaigns. So, just like you folks who think that these campaigns are contributing to the so called awareness creation and standstill with this dogma, I shall hold up with my disobedience and say "No" to this non-sense!


Earth Hour: TNB Encourages Prudent Energy Usage

TNB's comments about Earth Hour 2009.

Earth Hour on March 27 Sends the Wrong Message

Earth Hour 'will not cut carbon emissions'

Unite in darkness with the world for one hour

Activities flare up as Earth Hour 2010 comes closer

Breakfast, The Happy Meal

By Sakina Mohamed

KUALA LUMPUR, March 15 (Bernama) -- Want to know the secret to a smarter, happier and slimmer you? Eat breakfast!

Many people do not realise this, but eating the first meal of the day is vital in helping them think, feel and even look better. It also sets the tone for the rest of the day.

"Recent studies indicate that people who eat breakfast regularly enjoy a more positive attitude, and they are slimmer and have better mental performance," says Nestle Malaysia's Nutritionist Cher Siew Wei to Bernama.

This is because our body uses sugar, or glucose, in the blood for energy. When we wake up, our blood sugar level is low because we've been fasting overnight. So, eating a nutritious and balanced breakfast helps to provide enough energy to kick-start the day.

BREASFAST BRINGS POSITIVE IMPACT

Cher says starting the day with a nutritious balanced breakfast has a positive impact on alertness, concentration and helps students and employees establish a positive attitude towards studies or work.

"This is not surprising, given breakfast, especially one that is rich in complex carbohydrates such wholemeal bread, whole grain cereal drinks and whole grain breakfast cereals, boost brain glucose levels," she says.

Furthermore, micronutrients such as B vitamins are commonly added to whole grain cereal drinks and breakfast cereals. These vitamins encourage production of brain chemicals like serotonin, which send "feel good" messages that ultimately make you happier throughout the day.

In contrast, those who skip breakfast may find themselves moody and irritable throughout the day.

EATING TO LOSE THE KILOS

Eating to lose weight may be a paradoxical concept to some. But studies have proven time and again that eating breakfast helps curb your appetite for the rest of the day and revs up your metabolism. These will undoubtedly help you shed the kilos.

Cher says a revved up metabolism helps to burn the maximum number of calories to fuel your activities.

Are you a carb-addict trying to lose weight? Breakfast is the best time to eat carbohydrates since you will have the rest of the day to burn them off and use them as fuel to keep your body and your brain working. Just be sure to opt for whole grains with lots of fiber.

It is an easy, guilt-free way to sneak in some carbohydrates into your day without jeapordising your slimming efforts.

BREAKFAST SKIPPERS AT THE LOSING END

But that is not all. Have you noticed how some people tend to have "cravings" and load up on lunch because they have missed breakfast? Eating breakfast may correct this as it curbs the hunger seen later in the day, which usually results in overeating.

Conversely, those who skipped breakfast may trick their bodies into believing that it is starving, and thus cause the body to go into "survival mode" and start storing fat. This makes it easier to gain weight.

Cher says breakfast skippers also tend to choose higher-calorie foods at the next meal. In the long term, this may lead to the development of chronic health issues.

"Many studies have shown the association between breakfast consumption and weight management. The Journal of Obesity Research in 2002 reported that of the 3000 volunteers studied in the United States, 78 percent who successfully lost excess body weight and then maintained their weight ate breakfast every day of the week.

"This result suggested that eating breakfast on a regular basis is one of the common behaviours to maintaining weight loss," she says.

In addition to that, a study by the University of Texas, El Paso in U.S. also shows that eating breakfast can increase the output of leptin, a hormone that suppresses appetite.

BUT I HAVE NO APPETITE IN THE MORNINGS

So breakfast is indeed the most important meal of the day but many people still claim that they could never eat breakfast, although they know how important it is.

The Malaysian Adults Nutrition Survey (2003) showed that 1 out of 10 Malaysian adults skipped breakfast.

A joint research conducted by Universiti Kebangsaan Malaysia (UKM) and Nestle on the Nutritional Status and Dietary Habits of Primary School Children in Malaysia (2007-2008) revealed that 1 out of 3 Malaysian primary school children leaves home for school with empty stomach.

The reason? Of the 11,371 primary school children surveyed, 45 per cent said they missed breakfast because they had "no time", 22.2 percent cited "not hungry" as their reason while 17.6 percent said they had no appetite.

"The "no appetite" or "no time" for breakfast excuse is similar to the "I've got no time for exercise" excuse," says Cher.

"If you want to re-establish the breakfast-eating habit, but "no appetite" is the obstacle, start with something small and easy to prepare, and concentrate first on making it part of the morning routine."

Parents can buy buns and leave it on the table for the kids or themselves to grab in the morning, she says.

For those unable to eat something solid in the morning, Cher suggests them to start the habit by having a cup of hot drink like milk, Milo, or even a cereal drink.

"The fibre content in cereal drinks can keep you full for some time. It may not be as heavy as a full meal, but something is better than nothing."

SPONSOR BREAKFAST TO BOOST PERFORMANCE

The 2007-2008 Nutritional Status and Dietary Habits of Primary School Children in Malaysia survey revealed that 10.6 percent of the children said they skipped breakfast because there was no food available.

Lack of food for energy in the morning may not only adversely affect a child's learning and performance in school, but studies show that it can also cause behavioural problems among them.

Similarly, employees'performance and productivity in the workplace will also be affected if they missed breakfast.

Therefore, Cher points out that it would be a good idea for schools or workplaces to sponsor simple, nutritious breakfast.

"This can be just a sachet of instant cereal drink, a bun, a cup of yogurt or a sandwich. Even a glass of milk will help," she says.

BUT I WOKE UP TOO LATE..

Never too late for breakfast! Breakfast is defined as the first meal of your day, which you should have within an hour of waking up.

"So even if you wake close to lunch time, eat something. It's still considered breakfast," says Cher.

Some of us may opt to wait for lunch time and go for "brunch". Cher advises against this.

"You cannot compensate breakfast by eating a bit more at lunch, because it doesn't work that way. This can be dangerous to your figure and health," she says.

VARIETY AND MODERATION IS KEY

Although eating breakfast is encouraged, some breakfasts may tip the scales the other way.

Cher says popular Malaysian breakfasts like nasi lemak and roti canai can be dangerous to the health if taken regularly.

"It is okay to have nasi lemak occasionally. But make sure you take the basic nasi lemak, and avoid adding on rendang meat, fried chicken or other fat-laden condiments," she advises.

Cher also advises people to take different types of food for breakfast so that they may benefit from different types of nutrients.

For those rushing in the early mornings, she recommends taking with them a muesli bar, a fruit or a wholegrain bun. They can also opt for dairy products like cheese and yogurt or choose wholewheat crackers and biscuits.

-- BERNAMA

PM: First stage of NEM out on March 30

Eddy said: Let's wait and see.




By MAZWIN NIK ANIS
mazwin@thestar.com.my

PUTRAJAYA: The first stage of the highly-anticipated New Economic Model (NEM) will be unveiled on March 30, quashing speculation that there is a delay in its launch.

Prime Minister Datuk Seri Najib Tun Razak said announcements on the matter would be made in two stages, with the second stage to be revealed during the tabling of the 10th Malaysia Plan.

“We want to engage all stakeholders,” he told reporters after meeting with members of the Special Taskforce to Facilitate Business (Pemudah) yesterday.

Asked on concerns raised by certain quarters over the NEM, particularly over bumiputra issues, Najib declined to comment, saying that it was too early for him to elaborate on the matter.

“I don’t want to jump the gun. I don’t want to address the New Economic Model. Otherwise I will be speaking prematurely and letting the cat out of the bag,” he said.

The Malay Consultative Council recently expressed its concern and urged the Government to ensure the proposed NEM was within the framework of Article 153 of the Constitution in preserving the rights of the Malays and natives of Sabah and Sarawak.

On another matter, the Prime

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Minister said the Cabinet had given the green light to the International Trade and Industry Ministry to study the possibility of Malaysia entering the US-initiated Trans-Pacific Partnership (TPP), adding that the ministry had embarked on a deep and comprehensive study to look into the matter.

“The Cabinet will make its decision if the study by MITI shows that (TPP) benefits Malaysia,” he said.

Najib said the United States had informed the Government that it had put plans for a Free Trade Agreement on the backburner, adding that the current administration was more keen to work on multilateral trade initiatives.

The current TPP members are Singapore, Chile, New Zealand, and Brunei. The members are also part of the much larger 21-member economies under Apec.

Najib said the Government would not take too much time to decide whether it would want to be part of TPP, adding that he might be able to give some indication on the matter to US President Barack Obama if “a bilateral meeting is on the cards” when he visits the US next month.

The Prime Minister is scheduled to attend the World Nuclear Conference to be held in Washington on April 12 and 13.

Asked if this was an indication that he would be going to the White House, the Prime Minister declined to confirm, adding that 45 leaders were expected to attend and “if there is one (bilateral meeting), it will be held in the margin.”

Declare minimum wage, union urges GLCs

Eddy said: Nope, it's not going to happen, Even it does, more damages shall be than ensuring economic progress.




The Malaysian Airline System Employees Union (MASEU) has urged all government linked companies (GLCs) to publicly declare their minimum wage.

The union said the GLCs should be more transparent and fully comply with the corporate social responsibility (CSR) in managing their staff.

"The GLCs are currently competing against each other in declaring their huge profits publicly but at the same time, exploiting and harassing local workers," it said in a statement here today.

MASEU suggested Malaysia should have a statutory minimum wage to safeguard workers in the country.



"In the absence of a statutory minimum wage, employers often insist that it must be determined by market forces, which in several cases, falls below the poverty line of income," MASEU noted. -- Bernama

Improvise and Impromptu

Googol -> 1 x power(10,100) or 1 followed by 100 zeroes

Boisterous -> ... rough and noisy; noisily jolly or rowdy; clamorous; unrestrained: the sound of boisterous laughter. 2. (of waves, weather, wind, etc.) rough and stormy....



It is both interesting and enlightening if we try to analyze corporate related matters using an economics context.

Most organizations adopt a team coordination method of organizing economic activities within the firm, though more recently the trend of moving towards BPO, KPO, LPO and other sorts of process outsourcing bring us some sights that structure, size and scope of a firm may hinders healthy growth.

A well known problem, the Principal Agent problem must be taken of if a firm is going to work towards maximum efficiency, that is to maximize profits.

The problem is ubiquitous.

Shareholders (Principal)- Board of Directors (Agent)
Board of Directors (Principal) - CEO (Agent)
CEO (Principal) - C level management (Agent)
C Level (Principal) - Senior Management (Agent)
Senior Management (Principal) - Middle Management (Agent)
Middle Management (Principal) - Senior Executive (Agent)
...
...

And the list goes on, depending on the organizational breakdown structure.



Basically, the idea is if you appointed someone to conduct certain duties for you, it is your own self interest that these duties are carry out successfully and your representatives might not have the same self interest as you. Thus, we absolutely positively shall have conflict of interests, though these conflicts might not be so obvious most of the time.

When we have OBS what we effectively try to achieve is to establish chain of commands. Command oriented activity organization requires close monitoring and it is this kind of monitoring that decreases the effectiveness of decision making.

I am not implying that command oriented management style is irrefutably bad. It is very suitable where 1.) Close monitoring is valid, possible and low cost or 2.) The cost of irreversible decisions and actions is unacceptably high.

Armies, production workers, bank tellers, students in exam room and so on can be efficiently controlled using command style.

However what about top management executives, R&D personnels, sales person? Frankly speaking, it's about incentives!

People often misinterpret the statement "maximizing profit". It doesn't mean that the firm shall be able to maximize profit at the expense of human, process and product. We all know (do you?) that it is possible that by spending more you could earn more. That's right!

Let's take an example of human productivity in a firm. Ceteris paribus, employee's non-monetary demand of incentives is elastic and using this knowledge every extra 1,000 dollar spent as non-monetary benefits to employees can turn out to churn more productivity and thus increases the total output, i.e. more man hours and completed projects, which eventually leads to improved profit. If you spend 1,000 bucks and get back 5,000 bucks worth of employee's time, it's a superb deal!

Ok, but remember the assumption here, this only works if the demand is elastic!



And more importantly, the demand curve is sloping downward. The effect of every additional unit of benefit spent on a particular employee shall have less goodness effect than the previous unit. For example, let's say you provide 100 dollar of telephone service allowance to an employee, the incentive effect of providing another 100 dollar of such allowance to the same fella will be so insignificant because 1.) Human loves varieties and choices 2.) The fella will perceive the value of spending the same 100 dollar on let say, meal allowance higher than 100 dollar extra on telephony.

Rule of thumb: The more you have something, the less you value it.

Another obvious example is the effect of 500 dollar increment on a person who earns 1,000 dollar currently and one who earns 5,000 dollar. You see it now?

To amplify the matter, imagine a mid sized firm with 500 employees, how the heck you are going to cater into everyone's need? Simply stated, it doesn't worth the time to microly manage and reward but then you need to ensure the efficiency of the firm. Phew!

The good news is this dilemma faced by firms is just a minuscule version of the one happening in most markets.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.
~ Adam Smith

If the same invisible hand can naturally regulate a market, why can't the same principle be used to optimize firm's efficiency?

If every stakeholder have a strong interest in the success of the firm, why not we formalize such an interest and make it a norm, a culture and a driver into the firm.

If the firm's success is measured by the economic profit it earns, then everyone must be measured by this metric explicitly.

Emmm... my initial thought is

(3P) People, Process, Product -> Things to manage
(4P) Professionalism, Performance, Predictability, Profit -> Aspects to manage

For example, Employee A (People) must be reviewed and appraised based on the 4P above.

Professionalism, Performance and Predictability can be aggregated to firm level qualitatively since I haven't know any working quantitative methods for them. But Profit definitely shall be aggregated quantitatively.

My model is Profit determines the total (extra) benefits a person entitled and other aspects decide how much actually they will get. To achieve this end, a proper project and task level accounting is needed and must be enforced firm wide for consistency, comparability and compatibility.

Let's work out an example.




Project: CMMI Internal Implementation
Customer: Internal
Budget: 1 million dollar, 1 year

Imagine the PM worked out a plan with 100 tasks and each task is costing 3 days and 5k. If everything works out according to this plan, the profit shall be 1 million - 500k = 500k (Wow, this seems like overbudgeted, LOLX). Say, 10% of the profit will be distributed as monetary/non-monetary incentives to the staffs, that's 50k (Total entitlement). Of course, some lazy staffs will get less due the results of appraisal based on Professionalism, Performance and Predictability. But the fact is that people know very clear of the benefits of working efficiently, i.e. saves cost thus increases their personal profit.

This game will have the elements of collaboration and competition. People will work together to achieve a coherent goal and compete against each other to maximize the value of the firm's scarce resources. Turnovers and dropouts are occuring because of inefficiency and this is encourageable because it helps to eliminate the inefficiency naturally from the firm. Equilibrum is not far from us...

I think I will stop here today. More to come when improvise again in the future!