Tag Archives: economics

Accountants to Cause the Banking Crisis

accountant

Via Martin Varsavsky, I find a WSJ article where Steve Forbes gives a provoking view on the roots of the Banking Crisis. Mark-to-market or “fair value” accounting for financial institutions was re-established in 2007 in USA. The Financial Accounting Standards Board (FASB) rules that the balance sheet must reflect the “market” value of the financial assets.

With the market value of financial assets  falling after the system credibility crisis, banks are dragged close to bankruptcy only due to the need to account for assets at today’s market valuation.

Quoting Mr. Forbes:

Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn’t matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven’t actually been impaired.

Mark-to-market accounting does just the opposite. When times are good, it artificially boosts banks’ capital, thereby encouraging more investing and lending. In a downturn it sets off a devastating deflation.

Mark-to-market accounting is the principle reason why our financial system is in a meltdown. The destructiveness of mark-to-market — which was in force before the Great Depression — is why FDR suspended it in 1938. It was unnecessarily destroying banks.

And a proof point of this thesis can be that while American banks like Citibank are near-bankrupt, other banks in Europe like Santander, less exposed to American accounting rules, seem healthier even though the fundamentals of Spanish economy are much worse than in US.

Markets are so volatile that the idea to use them for accounting is a recipe for system instability.

Take Santander stock price as an example. Why Santander PER is currently 4 (with a 11% yield), when during last 7 years it had always been above 20, with a mere 2% yield? Which valuation is “fair” for accounting? the one of last 7 years? or that of last 7 months? Isn’t the valuation just reflecting how optimists or pessimists are investors? should “optimism” be accounted in the books??

Economics is far from exact science, and it is remarkably incapable of predict, sometimes even explain a posteriori, events such as the current crash. What we know from economists is that people expectations are the most reliable indicator to predict the growth or slow down of economic activity. The credibility of the financial system is now below limits. Fear (panic) to a banking system collapse is reducing consumer spending, companies forecasts are revisited and unemployment surges as companies prepare for the downturn. A vicious circle that the accounting rules strangely help accelerate.

An accounting system based in market valuations, under the current gloom, makes the simple possibility of bankruptcy a self-fulfilling prophecy. 


Telecom Slowdown? Seven Reasons for Hope

mobilephonespenetration

We have seen recent announcement of job cuts in almost all Telecom and Tech companies, including Microsoft and Google only to name those that are new to those announcements.

GigaOm recently echoed a recruitment firm report that estimated almost 200,000 job cuts in the tech industry in 2008.

Still there are reasons for hope that the downturn will be less severe with the Telecom and Tech industries as with others:

  1. On a global scale, the demand for communications and computing is far from decelerating. As can be seen in the chart above, the penetration of mobile subs is still low in regions such as China,  India or South East Asia that are adding an aggregate of 150 million new mobile subs each year!
  2. The rise of netbooks should contribute to fulfilling the demand for affordable computing in emerging countries and also on Wireless Broadband penetration in mature markets, as netbooks are a great opportunity to bundle more 3G mobile data plans. Laptops will outsell desktops for the first time in 2009 and that is good news for mobile operators.
  3. Broadband stimulus package. As President Obama said in the inauguration speech, it is time to “dust ourselves off” and begin the work  “to lay a new foundation for growth”, building “digital lines that feed our commerce and bind us together” [...] “to meet the demands of a new age”. Broadband infrastructure is a must to incentive innovation and competitiveness, and other countries are pursuing similar initiatives, including UK, Singapore and Malaysia to name a few.
  4. Airlines should be worried about the slowdown, not telcos. Telcos have a great opportunity to sell more Telepresence and more Enterprise Communication tools to help enterprises save travel costs.
  5. How can consumers save more than staying at home watching IPTV, facebooking or browsing the web? Purchasing online cheaper and better (more informed at least), can save a few dollars for families.
  6. Telecom equipment vendors have not given yet prove of slowdown in telcos investment. Ericsson CEO said when announcing Q4 results “To date, our infrastructure business is hardly impacted at all”. Huawei even dares to predict 29% growth in 2009. Nortel filing bankruptcy is not a bad news for the surviving equipment makers, as one competitors disappears
  7. It will not be worse than the Internet/UMTS licenses crash in 2001. The Economist says “It cannot defy gravity, but the technology industry is faring better than it did in the previous downturn.” The article explains why IT investment is no longer a luxury for enterprises and how innovations such as SaaS that make companies more efficient can only grow.

That the slowdown is affecting the Telecom and IT industries is out of  question, as the drama of thousands of people losing jobs demonstrates. But there are reasons to hope that these sectors will be the ones to lead the recovery, and we hope that will happen soon.

Some interesting reading and charts from The Economist:
Technology stimulus plans – Paved with good intentions
Computers per person per region in 2009 – Chart
The outlook of mobile phones in 2009 – Chart (Origin of  chart above)


How much Governments need to intervene in business?

The Economist.com debate of this week was about Governments making things worse by intervening to regulate business and financial risk. I am surprised by the result of the debate, with “interventionist” winning by a slight difference. 

In my view, we have not discoverd  yet any method better than Free-Market to regulate markets by the law of supply and demand. Yet, the governments have a fundamental role to make free-market work:
- ensure Competition
- ensure the rule of law
- intervene in key social areas, to guarantee minimum coverage for all: education4all, health4all, justice4all
- protect basic goods (including housing and medicines) from speculation
- invest and manage public infrastructure making them available for all: roads, railways..(and why not, Broadband Internet Access)

Free-market and healthy competition are the true engines for innovation. Successful innovation not only rewards the innovators, but the society overall. e.g Internet and Mobile Phones are affordable to the lower income population, thanks to private investment and intense competition driving prices down.

Excess of regulation can never stimulate innovation and progress in the long run, even if in the short term it seems to work.
e.g. Protectionism in the car industry, as Argentina or Brazil suffered and Malaysia still does, may seem as a good practice to protect domestic car-makers. The reality is the domestic car industry becomes uncompetitive, car prices rise and the lower-income population ends up not being able to afford a car in those countries.

I agree the financial market might need some extra regulations, as a credible banking system is key for the economy. But that should not be further than establishing mechanisms to protect the savings of their customers from a bankrupt.