FT.com / Columnists / Martin Wolf - Why it is so hard to keep the financial sector caged
Why it is so hard to keep the financial sector caged
By Martin Wolf
Published: February 5 2008 20:06 | Last updated: February 5 2008 20:06
When will the next financial crisis come? We do not know. Yet of one thing we can be sure: unless we learn from this crisis, another one will put the world economy back on to the rocks in the not too distant future.
The FT has published a number of contributions on the lessons: Charles Goodhart of the London School of Economics and Avinash Persaud of Intelligence Capital offered “a proposal for how to avoid the next crash” (January 31); Francisco González of BBVA discussed “What banks can learn from this credit crisis” (February 4); and Daniel Heller of the Swiss National Bank argued for three ways to reform bank bonuses (February 4). The substance of Mr Heller’s argument was similar to a contribution of my own (“Regulators should intervene in bankers’ pay”, January 15), but without the regulatory coercion.
The big question, indeed, is whether lessons must be embedded in regulation. Optimistic opponents of regulation argue that the banks have learnt their lesson and will behave more responsibly in future. Pessimistic opponents fear that legislators might create a Sarbanes- Oxley squared. The Act passed by the US Congress in 2002, after Enron and other scandals, was bad enough, they say. The banks might now suffer something worse.
“Dream on” is my reply to the optimists. To the pessimists, I respond: yes, the danger of over-regulation is real, but so is that of doing nothing at all.
Two points shine out about the financial system over the past three decades: its ability to generate crises, and the mismatch between public risk and private reward.
It is true, on the first point, that none of the financial crises of this period has gravely damaged the world economy, although some have devastated individual economies. But it is probably just a matter of time. What would be happening now if US inflation were out of control or foreign official support for the US dollar were withdrawn? A deep and prolonged US recession would be probable, with devastating economic and political consequences.
It also true, on the second point, that the banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilities seem to be contingent claims on the state; and central banks create an upward- sloping yield curve whenever banks are decapitalised, thereby offering a direct transfer to any institution able to borrow at the low rate and lend at the higher one.
In addition, banking institutions suffer from massive agency problems – between clients and institutions, shareholders and management and management and other staff. All this is also exacerbated by the difficulty of monitoring the quality of transactions until long after the event.
Consider, for example, the process that brought subprime loans to investors in special investment vehicles (SIVs). In between the ultimate borrowers and the risk-takers were loan-originators, designers and packagers of securitised assets, ratings agencies, sales staff, managers of banks and SIVs and managers of pension – and other – funds. Given the number of agents and the wealth of information asymmetries, it is astounding how little went wrong.
Yet big risks have indeed been run. The US itself looks almost like a giant hedge fund. The profits of financial companies jumped from below 5 per cent of total corporate profits, after tax, in 1982 to 41 per cent in 2007, even though their share of corporate value added only rose from 8 to 16 per cent. Banking profit margins have been strong, until recently. Now, at long last, earnings per share and valuations have collapsed.
Yet can anything effective be done to contain the risk-taking this implies? To answer this, we must distinguish “micro-prudential” controls over institutions from “macro-prudential controls” over the entire system.
On the former, the consensus of regulators seems to be that we need tweaks to the existing system. This could include: greater attention to liquidity management, alongside the focus on capital requirements in Basel II; more stress-testing of “value at risk” models; greater transparency throughout the businesses; and greater independence of ratings agencies from issuers.
I would argue, however, that none of this will make a sufficient difference. Regulators must also pay attention to the incentives – particularly the structure of pay – within the businesses. I would argue, in addition, that regulators would have to take a tougher approach than most did in the past cycle.
The bigger point still, however, concerns macro-prudential regulation. As William White of the Bank for International Settlement has noted, banks almost always get into trouble together.* The most recent cycle of mad lending, followed by panic and revulsion, is a paradigmatic example.
One response would be to raise capital requirements counter-cyclically, in response to the growth of credit, as Profs Goodhart and Persaud suggested. They also suggest a variable maximum loan-to-value ratio for mortgages. Mr White adds the need for tighter monetary policy.
These are all reasonable ideas. Yet, as Mr White also notes, the strength of the pressures against taking “away the punchbowl just as the party gets going”, in former Fed governor William McChesney’s famous phrase, is formidable. In addition to bureaucratic inertia, such action is subject both to unavoidable uncertainty about the dangers of current trends and to resistance from private interests. Furthermore, regulators are in constant danger of losing sight of the systemic wood for the institutional trees. I would add to all this the simple fact that freedom of US monetary policy is constrained by the monetary and exchange-rate policies of others, notably of China.
In the end, we are left with a dilemma. On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it.
Yet we have no obvious alternative but to try to do so. A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run. Those who want market-led globalisation to prosper will recognise that this is its Achilles heel. Effective action must be taken now, before a still bigger global crisis arrives.
Sources for charts: Smithers and Co; Thomson Datastream
* Making Macroprudential Concerns Operational, 2004, www.bis.org
martin.wolf@ft.com
Wednesday, February 06, 2008
Thursday, November 29, 2007
SAP - German SMEs' Recipe for Success
SAP - German SMEs' Recipe for Success
German SMEs' Recipe for Success
By Bernd Venohr, Institute of Management at the Berlin School of Economics, Germany
Globalization has brought great benefits for many German SMEs. In an interview with SAP INFO online, Professor Bernd Venohr from the Institute of Management at the Berlin School of Economics describes the strategies, management structures and processes that pave the way for global success.
Which companies are you referring to when you claim that SMEs have benefited from globalization?
Venohr: The term “SME” refers to a broad range of companies, covering everything from small corner shops to companies with annual sales of several hundred million euros. It is primarily the “high end” medium size companies that are benefiting from globalization. These are international companies with annual sales of between 50 million and a billion euros. There are around 3,200 of them in the German industrial sector. Companies such as the door technology supplier Dorma, the cooking system manufacturer Rational, and the packaging machinery producer Krones may not be household names but each boasts a global market share of 50 percent and above in its market sector.
Is this type of company particularly prevalent in Germany?
Venohr: The breadth and capacity of Germany’s SME sector is unique, although there are comparable sectors in Switzerland and Austria too. I receive inquiries from many European countries, such as France, Ireland and Belgium, where companies want to learn from Germany’s example of succeeding on the fiercely competitive global market despite being in a high-cost location.
What opportunities does globalization offer high end SMEs?
Venohr: For one, these companies can step up their activities on markets like China, India and Russia that until recently were not open to them. The range of products and services offered by many German SMEs ideally matches the demand profile in these countries – quality products for developing the infrastructure are as sought-after as premium consumer goods for the burgeoning elite. The sharp decline in transportation and IT costs has also boosted worldwide opportunities for SMEs.
Which criteria are used to evaluate the performance of German SMEs on the global market?
Venohr: The 3,200 companies in the high end SME sector are responsible for some 30 percent of Germany’s total export volume. Around 1,300 of them are ranked in the top three in their market sector worldwide. These companies have been returning above-average sales and revenue figures for many years. Double-figure growth rates are the norm.
What’s the secret of this global success?
Venohr: I attribute this success to the special “Made in Germany” management model, consisting of the strategies, management structures and processes typical of German SMEs.
What typifies this model? What strategies do SMEs pursue?
Venohr: The companies dominate niche markets worldwide. They achieve this by developing high-quality products and services, covering everything from machine tools to kitchen appliances and software. This is made possible by the capacity to innovate, something which cannot simply be plucked out of thin air. Consequently, the level of spending on research and development is well above average. It is twice as high as the international norm for the sector. The companies reap the rewards of many years’ cooperation and knowledge transfer with suppliers and research facilities at their own site. Added to this is a meticulous approach and the persistence required to set up worldwide sales and service networks. Whenever possible, the companies favor direct customer contact via their own branches. This ensures outstanding service and provides a vital source of innovations.
What role do management structures play?
Venohr: I would call the structure most commonly found among successful SMEs “intelligent family capitalism”. The companies are family-owned, but they are often run by managers outside the family from the second generation onwards. This arrangement is more common in Germany than in countries such as the U.S., the United Kingdom or France. It combines the advantages of private ownership, such as long-term objectives and independence from short-term capital market expectations, with innovative management methods. It also overcomes the Achilles heel of the “traditional” family-owned company, that is, a lack of management expertise among the generations succeeding the founder.
Which processes perfect the “Made in Germany” management model?
Venohr: It’s not only product quality that’s crucial, but also excellence in the company’s core processes, from R&D to production, marketing, sales and service. The manner in which successful SMEs have taken the principles of Total Quality Management to heart to continuously improve all these processes has been exemplary.
How important is IT in globalization for SMEs?
Venohr: Globally standardized and IT-based company processes play a vitally important role. In smaller SMEs, managers can “keep an eye” on things by moving around the company and identifying problems. However, in companies with several international locations, it is crucial to have clearly defined and standard processes, otherwise control is quickly lost and there will be impending efficiency losses. Global standardization of processes also ensures consistently high product quality and the increasingly important exchange of “best practices” between sites. This is where Germany’s top-performing software industry comes in. Germany – and not the U.S., as many believe – is the world market leader in exporting software. In addition to SAP, there are a number of highly specialized software companies, e.g. in the logistics or production sectors. IT also plays an increasingly important role in the supply of additional services, such as remote maintenance of plants online. The Internet is also a key sales channel, particularly for smaller companies. For example, I know of a small Hamburg-based company called Windpilot with two employees which sells its products exclusively online and is the world market leader in wind vanes for sailboats.
What prompted you to conduct research into SMEs?
Venohr: As a consultant, I developed strategies for large companies and SMEs. I then went on to run a venture capital fund and became familiar with start-ups. Of these three types of company, I found SMEs particularly exciting on account of their specific management models and outstanding products and services, coupled with the strong desire to perform that marks all company processes. What’s more, research into SMEs had not gone into much detail before then, mainly because these companies are often privately-owned and reluctant to disclose their figures. That meant there was fertile ground for pioneering research work.
Source: SAP Insider-->
Source: SAP INFO
Source: www.netweavermagazine.com-->
German SMEs' Recipe for Success
By Bernd Venohr, Institute of Management at the Berlin School of Economics, Germany
Globalization has brought great benefits for many German SMEs. In an interview with SAP INFO online, Professor Bernd Venohr from the Institute of Management at the Berlin School of Economics describes the strategies, management structures and processes that pave the way for global success.
Which companies are you referring to when you claim that SMEs have benefited from globalization?
Venohr: The term “SME” refers to a broad range of companies, covering everything from small corner shops to companies with annual sales of several hundred million euros. It is primarily the “high end” medium size companies that are benefiting from globalization. These are international companies with annual sales of between 50 million and a billion euros. There are around 3,200 of them in the German industrial sector. Companies such as the door technology supplier Dorma, the cooking system manufacturer Rational, and the packaging machinery producer Krones may not be household names but each boasts a global market share of 50 percent and above in its market sector.
Is this type of company particularly prevalent in Germany?
Venohr: The breadth and capacity of Germany’s SME sector is unique, although there are comparable sectors in Switzerland and Austria too. I receive inquiries from many European countries, such as France, Ireland and Belgium, where companies want to learn from Germany’s example of succeeding on the fiercely competitive global market despite being in a high-cost location.
What opportunities does globalization offer high end SMEs?
Venohr: For one, these companies can step up their activities on markets like China, India and Russia that until recently were not open to them. The range of products and services offered by many German SMEs ideally matches the demand profile in these countries – quality products for developing the infrastructure are as sought-after as premium consumer goods for the burgeoning elite. The sharp decline in transportation and IT costs has also boosted worldwide opportunities for SMEs.
Which criteria are used to evaluate the performance of German SMEs on the global market?
Venohr: The 3,200 companies in the high end SME sector are responsible for some 30 percent of Germany’s total export volume. Around 1,300 of them are ranked in the top three in their market sector worldwide. These companies have been returning above-average sales and revenue figures for many years. Double-figure growth rates are the norm.
What’s the secret of this global success?
Venohr: I attribute this success to the special “Made in Germany” management model, consisting of the strategies, management structures and processes typical of German SMEs.
What typifies this model? What strategies do SMEs pursue?
Venohr: The companies dominate niche markets worldwide. They achieve this by developing high-quality products and services, covering everything from machine tools to kitchen appliances and software. This is made possible by the capacity to innovate, something which cannot simply be plucked out of thin air. Consequently, the level of spending on research and development is well above average. It is twice as high as the international norm for the sector. The companies reap the rewards of many years’ cooperation and knowledge transfer with suppliers and research facilities at their own site. Added to this is a meticulous approach and the persistence required to set up worldwide sales and service networks. Whenever possible, the companies favor direct customer contact via their own branches. This ensures outstanding service and provides a vital source of innovations.
What role do management structures play?
Venohr: I would call the structure most commonly found among successful SMEs “intelligent family capitalism”. The companies are family-owned, but they are often run by managers outside the family from the second generation onwards. This arrangement is more common in Germany than in countries such as the U.S., the United Kingdom or France. It combines the advantages of private ownership, such as long-term objectives and independence from short-term capital market expectations, with innovative management methods. It also overcomes the Achilles heel of the “traditional” family-owned company, that is, a lack of management expertise among the generations succeeding the founder.
Which processes perfect the “Made in Germany” management model?
Venohr: It’s not only product quality that’s crucial, but also excellence in the company’s core processes, from R&D to production, marketing, sales and service. The manner in which successful SMEs have taken the principles of Total Quality Management to heart to continuously improve all these processes has been exemplary.
How important is IT in globalization for SMEs?
Venohr: Globally standardized and IT-based company processes play a vitally important role. In smaller SMEs, managers can “keep an eye” on things by moving around the company and identifying problems. However, in companies with several international locations, it is crucial to have clearly defined and standard processes, otherwise control is quickly lost and there will be impending efficiency losses. Global standardization of processes also ensures consistently high product quality and the increasingly important exchange of “best practices” between sites. This is where Germany’s top-performing software industry comes in. Germany – and not the U.S., as many believe – is the world market leader in exporting software. In addition to SAP, there are a number of highly specialized software companies, e.g. in the logistics or production sectors. IT also plays an increasingly important role in the supply of additional services, such as remote maintenance of plants online. The Internet is also a key sales channel, particularly for smaller companies. For example, I know of a small Hamburg-based company called Windpilot with two employees which sells its products exclusively online and is the world market leader in wind vanes for sailboats.
What prompted you to conduct research into SMEs?
Venohr: As a consultant, I developed strategies for large companies and SMEs. I then went on to run a venture capital fund and became familiar with start-ups. Of these three types of company, I found SMEs particularly exciting on account of their specific management models and outstanding products and services, coupled with the strong desire to perform that marks all company processes. What’s more, research into SMEs had not gone into much detail before then, mainly because these companies are often privately-owned and reluctant to disclose their figures. That meant there was fertile ground for pioneering research work.
Source: SAP Insider-->
Source: SAP INFO
Source: www.netweavermagazine.com-->
Wednesday, November 28, 2007
Google steigt in Markt mit Öko-Energie ein - Nachrichten - computerwoche.de
Google steigt in Markt mit Öko-Energie ein - Nachrichten - computerwoche.de
Der Suchmaschinengigant Google hat eine "strategische Initiative" gestartet, um Strom aus erneuerbaren Energiequellen billiger als aus Kohle produzieren zu können.
Der Suchmaschinengigant Google hat eine "strategische Initiative" gestartet, um Strom aus erneuerbaren Energiequellen billiger als aus Kohle produzieren zu können.
Tuesday, November 27, 2007
FT.com / Companies / IT - Why nobody wants to see inflation with no clothes on
FT.com / Companies / IT - Why nobody wants to see inflation with no clothes on
Why nobody wants to see inflation with no clothes on
By John Kemp
Published: November 27 2007 02:00 | Last updated: November 27 2007 02:00
The Emperor's New Clothes, Hans Christian Andersen's fairy tale about the fear of challenging mass delusion, is a story with resonance today.
Nowhere in economic debate does such power of perception play a bigger role than in the alleged disappearance of inflation. Central banks have switched the focus of public and media attention away from the full set of "consumer prices" to a subset that excludes some of the fastest-increasing items and therefore understates the true rate of price increases. The US Federal Reserve, for example, focuses on "core inflation" - which excludes food and energy.
There is no harm in focusing on core measures to smooth out month-to-month volatility - provided the core measure and the broader inflation gauges track one another roughly over time. But during the past 10 years the US core rate has been on average 0.3 percentage points lower than the broader one. And the discrepancy is growing. Over the past two years it has been minus 0.7.
There is a perception that central banks are focusing on core measures because they are more expedient. Commentators are querying the reliability of the numbers. For most households, the published inflation rates do not accord with their own experience of rising living costs, causing a growing credibility gap that is fuelling criticism of the data.
The statistical authorities have also been "adjusting" the inflation numbers downwards to take account of improvements in quality. Most people would accept the logic of making quality adjustments for computers. But once they started going down this route, the government's statisticians have found it hard to stop. The US government is now making "hedonic quality adjustments" to a whole range of items: clothes dryers, microwave ovens, camcorders, DVD players, even college textbooks.
The problem is that no one is making any negative adjustments to take account of declines in quality. Because the data are being adjusted only for improvements, never for declines, it is arguably biasing the published inflation numbers downwards.
There is also the problem that published measures of inflation do not include the price of assets. But it is not obvious why they should be excluded. As incomes rise, households start to devote a much higher proportion of their income to the acquisition of assets (from bigger houses to larger stock portfolios and saving plans for retirement and college education). As household consumption patterns shift, so the traditional consumer price index captures a diminishing proportion of expenditure.
Crucially, asset price inflation can create just as many inefficiencies as the inflation in goods and services prices. If all financial asset values are rising rapidly, it may be hard to discern where capital can be employed most profitably, leading to indiscriminate capital allocation.
And as the financial side of the economy has grown in relation to the real one, the potential for instability arising on the financial side to spill over has grown. Excess liquidity has piled into the asset markets. Instead of excess liquidity chasing up the price of goods and services (inflation), it has chased up the price of assets (which is not inflation by the conventional definition).
There is a sense that commentators and policymakers are engaged in the collective delusion of the emperor's new clothes. Excess liquidity created by the Federal Reserve and other central banks during 2001-2005 did indeed result in faster inflation - but in asset prices rather than goods and services. It also created distortions - but in property prices, subprime mortgages and securitisations.
Even as the US housing bubble has deflated, inflationary pressures within the global economy remain strong. High commodity prices are no longer offset by declines in the price of computers, cars or imports from China.
The "death of inflation" was predicted by one economist in the 1990s. He might have characterised it better as the "disappearance" of inflation. The question for policymakers and investors alike is whether and when the little boy will shout from the crowd and break the illusion. If it happened, interest rates would have to be much higher.
The writer is the economist at Sempra Metals
Copyright The Financial Times Limited 2007
Why nobody wants to see inflation with no clothes on
By John Kemp
Published: November 27 2007 02:00 | Last updated: November 27 2007 02:00
The Emperor's New Clothes, Hans Christian Andersen's fairy tale about the fear of challenging mass delusion, is a story with resonance today.
Nowhere in economic debate does such power of perception play a bigger role than in the alleged disappearance of inflation. Central banks have switched the focus of public and media attention away from the full set of "consumer prices" to a subset that excludes some of the fastest-increasing items and therefore understates the true rate of price increases. The US Federal Reserve, for example, focuses on "core inflation" - which excludes food and energy.
There is no harm in focusing on core measures to smooth out month-to-month volatility - provided the core measure and the broader inflation gauges track one another roughly over time. But during the past 10 years the US core rate has been on average 0.3 percentage points lower than the broader one. And the discrepancy is growing. Over the past two years it has been minus 0.7.
There is a perception that central banks are focusing on core measures because they are more expedient. Commentators are querying the reliability of the numbers. For most households, the published inflation rates do not accord with their own experience of rising living costs, causing a growing credibility gap that is fuelling criticism of the data.
The statistical authorities have also been "adjusting" the inflation numbers downwards to take account of improvements in quality. Most people would accept the logic of making quality adjustments for computers. But once they started going down this route, the government's statisticians have found it hard to stop. The US government is now making "hedonic quality adjustments" to a whole range of items: clothes dryers, microwave ovens, camcorders, DVD players, even college textbooks.
The problem is that no one is making any negative adjustments to take account of declines in quality. Because the data are being adjusted only for improvements, never for declines, it is arguably biasing the published inflation numbers downwards.
There is also the problem that published measures of inflation do not include the price of assets. But it is not obvious why they should be excluded. As incomes rise, households start to devote a much higher proportion of their income to the acquisition of assets (from bigger houses to larger stock portfolios and saving plans for retirement and college education). As household consumption patterns shift, so the traditional consumer price index captures a diminishing proportion of expenditure.
Crucially, asset price inflation can create just as many inefficiencies as the inflation in goods and services prices. If all financial asset values are rising rapidly, it may be hard to discern where capital can be employed most profitably, leading to indiscriminate capital allocation.
And as the financial side of the economy has grown in relation to the real one, the potential for instability arising on the financial side to spill over has grown. Excess liquidity has piled into the asset markets. Instead of excess liquidity chasing up the price of goods and services (inflation), it has chased up the price of assets (which is not inflation by the conventional definition).
There is a sense that commentators and policymakers are engaged in the collective delusion of the emperor's new clothes. Excess liquidity created by the Federal Reserve and other central banks during 2001-2005 did indeed result in faster inflation - but in asset prices rather than goods and services. It also created distortions - but in property prices, subprime mortgages and securitisations.
Even as the US housing bubble has deflated, inflationary pressures within the global economy remain strong. High commodity prices are no longer offset by declines in the price of computers, cars or imports from China.
The "death of inflation" was predicted by one economist in the 1990s. He might have characterised it better as the "disappearance" of inflation. The question for policymakers and investors alike is whether and when the little boy will shout from the crowd and break the illusion. If it happened, interest rates would have to be much higher.
The writer is the economist at Sempra Metals
Copyright The Financial Times Limited 2007
Monday, September 17, 2007
Sachbuch - Feuilleton - FAZ.NET - Sachbuch: Erst kommt die Katastrophe, dann der Kapitalismus
Sachbuch - Feuilleton - FAZ.NET - Sachbuch: Erst kommt die Katastrophe, dann der Kapitalismus
17. September 2007
Im September 2005 hatte Naomi Klein einen Autounfall. Sie war in die wenige Tage zuvor vom Hurrikan „Katrina“ verwüstete Stadt New Orleans gereist, um sich den Stand der Hilfsleistungen anzusehen. Auf den überschwemmten Straßen, die niemand mehr kontrollierte, herrschte Anarchie, und als der Wagen der kanadischen Globalisierungskritikerin von einem anderen Fahrzeug gerammt wurde, zog sie sich Schnittwunden und Prellungen zu.
17. September 2007
Im September 2005 hatte Naomi Klein einen Autounfall. Sie war in die wenige Tage zuvor vom Hurrikan „Katrina“ verwüstete Stadt New Orleans gereist, um sich den Stand der Hilfsleistungen anzusehen. Auf den überschwemmten Straßen, die niemand mehr kontrollierte, herrschte Anarchie, und als der Wagen der kanadischen Globalisierungskritikerin von einem anderen Fahrzeug gerammt wurde, zog sie sich Schnittwunden und Prellungen zu.
Tuesday, July 10, 2007
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