Category: Economic

Risk and Financial Collapse

On the issue of objective vs subjective information, you will always need the right balance of both.  I addressed a similar topic on the subject of militar’s  Effect Based Operational concept.

Did managers of risk outsmart themselves? Joe Nocera, New York Times magazine, Jan 4, 2009.

The story that I have to tell is marked all the way through by a persistent tension between those who assert that the best decisions are based on quantification and numbers, determined by the patterns of the past, and those who base their decisions on more subjective degrees of belief about the uncertain future. This is a controversy that has never been resolved.’

— FROM THE INTRODUCTION TO ‘‘AGAINST THE GODS: THE REMARKABLE STORY OF RISK,’’ BY PETER L. BERNSTEIN

Toyota: First Operating Loss Since 1941

Toyota projects first operating loss since 1941, By YURI KAGEYAMA, AP Business Writer, Dec 22, 2008.

Toyota forecast an operating loss of 150 billion yen ($1.66 billion) for the fiscal year ending March 2009. Toyota has never reported an operating loss since it began disclosing such figures in 1941. But it did have an operating loss in unofficial, internal calculations for the year ending March 1938 a year after the company was founded.

Operating income reflects a company’s core business performance and does not include income taxes and certain other expenses. Last fiscal year, Toyota had an operating profit of 2.27 trillion yen.

Defense/IG Report: Financial Mismanagement- Common or special?

You make the call … does the headline reflect a new event or a problem that’s been around awhile?

IG’s Report Highlights ‘Material Weaknesses,’ Financial Mismanagement At The Pentagon, (Washington Post)…Walter Pincus. Dec 15, 2008. Most critiques of the Defense Department’s spending focus on macroeconomic issues that are so large, readers can only groan and move on. Last week provided yet another example: The Pentagon’s deputy inspector general for auditing released a 140-page independent auditor’s report on the department’s financial statements for fiscal 2007 and 2008.

Iraq Rebuilding: Cost of Poor Quality

Official History Spotlights Iraq Rebuilding Blunders, (New York Times)…James Glanz and T. Christian Miller, Dec 13, 2008.

Poor planning, waste and deception led to $200 billion failure, report says

An unpublished 513-page federal history of the American-led reconstruction of Iraq depicts an effort crippled before the invasion by Pentagon planners who were hostile to the idea of rebuilding a foreign country, and then molded into a $100 billion failure by bureaucratic turf wars, spiraling violence and ignorance of the basic elements of Iraqi society and infrastructure.

Among the overarching conclusions of the history is that five years after embarking on its largest foreign reconstruction project since the Marshall Plan in Europe after World War II, the United States government has in place neither the policies and technical capacity nor the organizational structure that would be needed to undertake such a program on anything approaching this scale.

James Glanz reported from Baghdad, and T. Christian Miller, of the nonprofit investigative Web site ProPublica, reported from Washington.

Financial (man-made) Crisis: Recovery Projected 2nd half 2009

POST: CNN on post-Great Depression recessions suffered by US, by Thomas P.M. Barnett on December 4, 2008

Interesting bit: Average US recession (11 since 1930s) lasts less than a year (or 6-12 months) except for two (early 1970s and early 1980s) that were global ones, in addition. Global ones run 12-18 months.

Now we are told (rather retroactively, I might add) that the advanced Old Core world has really been in recession for close to a year, so the thinking becomes we’re about halfway through this.

That corresponds to a lot of predictions I’ve seen that say the recovery doesn’t begin until the second half of 2009.

Financial Crisis: Background – Systems Perspective

POST: Bankers, you have nothing to gain but your chains! by Thomas P.M. Barnett on November 29, 2008

A good rendition of the argument that says we’re at the end of an extended period of deregulation that has logically run its course.

ARTICLE: A short history of modern finance: Link by link; The crash has been blamed on cheap money, Asian savings and greedy bankers. For many people, deregulation is the prime suspect,” The Economist, 18 October 2008.

It would be a mistake to argue that, had politicians rather than bankers been in charge, policy would have been more prudent. Indeed, politicians encouraged banks to make riskier loans. This was particularly true in America, where a series of measures, starting with the Community Reinvestment Act of 1977, required banks to meet the credit needs of the “entire community”. In practice, this was social policy: it meant more lending to poor people. Fannie Mae and Freddie Mac, the two government-sponsored giants of the mortgage market, were encouraged to guarantee a wider range of loans in the 1990s.

The share of Americans who owned their homes rose steadily. But more buyers meant higher prices, making loans even less affordable to the poor and requiring even slacker lending standards. The seeds of the subprime crisis were sown, and the new techniques of securitisation allowed banks to make these loans and then offload them quickly.

Could the crisis have been avoided or minimized? Can the next crisis be prevented?   I believe the answer to both question is  yes but a new paradigm is needed. 

Financial Crisis: Analysis and Projections

POST: Revealing charts on losses in the financial crisis, Thomas P.M. Barnett on November 28, 2008.

Post provides a synopsis and links to four articles in Economist magazine.

FINANCE AND ECONOMICS: “Global finance: Lifelines; A special section on the crisis looks at prospects for the global economy, individual countries and markets. It begins with the tricky job of saving the financial system,” The Economist, 11 October 2008.

FINANCE AND ECONOMICS: “Fiscal implications: Deep pockets; State backstops work best if banks are small and borrow at home,” The Economist, 11 October 2008.

FINANCE AND ECONOMICS: “The world economy: Bad, or worse; At best, the world economy is on the brink of recession,” The Economist, 11 October 2008.

SPECIAL REPORT: “When fortune frowned: A special report on the world economy,” by Zanny Minton, The Economist, 11 October 2008.

Toyota Gets It … Why does U.S. Auto Industry Choose Not To?

POST: Extreme Toyota’s Lesson for American Auto, November 19th, 2008 by Hal

While American Auto go hat-in-hand to Washington, I thought it might be instructive to take a look at what those firms have missed while Toyota has steadily out-invested, out-innovated and racked up more profits than all three combined. Who’s got the answer? How about three professors from a Japanese business school.

Deming’s advice to the Japanese in the 1950’s was to adopt a systems perspective where the consumer was the most important part of the production line, and to reduce variation — Advice that is relevant to any industry.

Budget Politics

Dogfight Over F-22 Requirement Reveals DOD Schisms, (Aerospace Daily & Defense Report)…David A. Fulghum, Nov 18, 2008.

The battle over how many F-22 Raptors the U.S. Air Force requires is revealing some nasty infighting as the White House administration change nears. The Defense Secretary staff has told Air Force planners not to talk to congressional staffers and to work only through the offices of Deputy Secretary of Defense Gordon England and acquisition chief John Young.

A new study from the Center for Strategic and International Studies — whose CEO, John Hamre, has been mentioned as a possible candidate for President-elect Barack Obama’s defense secretary — contends that war costs, manpower costs, underfunded operations and procurement crises in every service will force the new administration to reshape almost every aspect of current defense plans, programs and budgets.