Кафедра английского языка №2 Дубовская О. В., Кулемекова М. В

Jun 7th 2014 | From the print edition of the Economist

Roosevelt did so at the behest of Congress, but had deep reservations. He worried that deposit insurance would “make the United States government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future.” He was right to worry. As intended, deposit insurance made banks less prone to runs (depositors trying to withdraw their money before everyone else does). But it also reduced depositors’ incentive to monitor banks’ behaviour. With less market discipline, a heavy-handed system of regulation evolved.

Over time the scale of the government safety net grew, reaching new dimensions during the financial crisis of 2007-08. That did not involve many runs on conventional deposits, but it did feature a flight from short-term investments that had come to resemble bank deposits, such as money-market funds and asset-backed commercial paper. When these “non-bank” creditors began running for the exits, the federal government’s backstop was extended well beyond deposits. In the aftermath of the crisis the authorities imposed even heavier oversight on the financial system. Debate rages about whether these reforms have made finance safer. But few deny that any improvement in soundness has come at the price of hugely intrusive regulation.

Is there an alternative? Back in 1933 a group of economists from the University of Chicago sent Roosevelt’s administration a memo outlining one. The Chicago plan, as it became known, would split banks’ two main functions: taking deposits and making loans. Banks would have to have 100% of their deposits readily available for withdrawals. Lending, with all its risks, would be left to firms financed by private investors who were willing to countenance losses in search of big returns.

Roosevelt opted for deposit insurance, but the Chicago plan’s central idea, dubbed “narrow banking”, has intrigued economists ever since. The latest advocate is John Cochrane of the University of Chicago’s Booth School of Business. In a recent paper he proposes a system of financial regulation modelled on the original Chicago plan, with a few 21st-century bells and whistles.

Any bank or bank-like entity, such as a money-market mutual fund, financing itself with short-term fixed-value liabilities could only invest in short-term debt issued by the Treasury or the Federal Reserve. Banks could still engage in other business—handling payments, issuing credit cards, issuing derivative contracts and so on—but they would be barred from using short-term debt to fund such activities.

Leverage would not be eliminated entirely. Financial institutions would be able to borrow. But to minimise the systemic risks of this debt Mr Cochrane proposes a Pigouvian tax. Such taxes are intended to offset the harm to society of a given activity, most commonly the emission of some form of pollution. In this case the tax would be a levy of several percentage points on outstanding debts to compensate society for the systemic risks they create.

Would it work? A paper published in 2012 by two economists at the IMF concluded that the Chicago plan would result in less pronounced booms and busts. But such a plan raises huge practical questions. The first is implementation: how to get from today’s system of highly indebted banks to one in which they are financed chiefly by equity. Politically, there would be formidable opposition from vested interests. Economically, the transition would require banks to dispose of a vast stock of loans, or raise an equivalent amount of long-term debt and equity.

A second concern is whether a split between narrow banks and wider lending-and-investment firms would actually eliminate runs. If other institutions replace banks in making loans, they could end up creating fragilities of their own. Mutual funds, for example, are financed by shareholders, not creditors; but if such shares are seen as stable and safe, investors will treat them as deposits—and try to withdraw their investment if that safety is threatened. One study found that mutual funds holding illiquid assets were more likely to suffer investor redemptions because of bad performance than were funds holding liquid assets.

From runs to fire sales

“Collective attempts at liquidation to meet withdrawal requests would lead to ruinous fire sales,” write Stephen Cecchetti of Brandeis University and Kim Schoenholtz of New York University. “After this happened even once, people would simply flock to the narrow banks, and there would be no source of lending.” To prevent this, the authors argue, governments would have to intervene to save the “not-so-narrow intermediaries”.

Third, such a system would still need plenty of regulation. For instance, there is the question of how to define Mr Cochrane’s short-term liabilities and hence the scope of his Pigouvian taxes. What types of debt would be covered? One-day, 90-day or one-year debt? What about callable, convertible and floating-rate debt? Would industrial companies pay the tax? What about quasi-financial companies, such as leasing companies? All these decisions would require extensive government meddling, creating opportunities for lobbying and regulatory arbitrage.

There is no guarantee that Mr Cochrane’s plan would be simpler or safer than the current system. But given the growing cost and inefficiency of today’s regulatory regime, the concept of narrow banking surely deserves more serious consideration.

Sources:

"The 'Chicago Plan' and New Deal Banking Reform<sub>", by Ronnie Phillips, Jerome Levy Economics Institute of Bard College, 1992

"</sub>The Chicago Plan Revisited<sub>", by Jaromir Benes and Michael Kumhof, IMF Working Paper, 2012

"</sub>Payoff complementarities and financial fragility: Evidence from mutual fund outflows_{", by Qi Chen, Itay Goldstein and Wei Jiang,} Journal of Financial Economics<sub>, 2010

"</sub>Toward a run-free financial system_{", by John Cochrane, Chicago Booth School of Business, 2014}
4c

Not open for business

America’s engines of growth are misfiring badly

Oct 12th 2013 | From the print edition

START-UPS have always been at the heart of America’s economic success. Companies that are five years old or younger account for all of the country’s net job creation. They also account for the bulk of innovation. Established firms are usually in the business of preserving the old world; start-ups are under more pressure to come up with new ideas, and if they do so they usually create lots of new jobs. But these growth machines have broken down. America is not producing as many start-ups as it did a decade ago and those that have been created are providing fewer jobs—less than five each, compared with an historical average of about seven. Start-ups created 2.7m new jobs in the 2012 financial year compared with 4.7m in 1999.

The financial crisis clearly bears a lot of the blame for reducing America’s stock of capital and animal spirits. But it is only a partial explanation. The decline in the number of firms going public began in 2001. And these problems are continuing to delay the recovery despite the federal government pump-priming the economy and keeping interest rates near zero.

Three years ago John Dearie and Courtney Geduldig, who both worked for the Financial Services Forum, which represents America’s biggest financial institutions, came up with an inspired idea. Why not ask entrepreneurs themselves what is going wrong? Both big multinationals and established small firms have lots of representatives in Washington, DC. Entrepreneurs are too busy inventing their companies to spend time lobbying. The pair organised meetings and conducted lots of polls. Across a vast and diverse country they heard the same message from everyone they asked: entrepreneurship is in a parlous state. And everyone pointed to the same problems. The result is a new book, “Where the Jobs Are”, which should be dropped onto the heads of America’s squabbling politicians.

The first worry is over human capital. Entrepreneurs repeatedly complain that they cannot hire the right people because universities are failing to keep pace with a fast-changing job market. Small firms lack the resources to provide training and are consequently making do with fewer people working longer hours.

Exasperation turns to fury when it comes to immigration. Immigrants are responsible for launching about half the country’s most successful start-ups and producing a striking number of its patents. But the authorities do their best to drive them out of the country once they have been educated or to break their spirits on the visa treadmill. The system for skilled workers is skewed towards established firms because it demands guaranteed employment for a certain length of time and forces workers to leave the country if they lose their jobs. Start-ups are turning themselves upside down trying to deal with this problem. The authors came across two heterosexual men who were thinking of taking advantage of new gay-marriage rules and getting hitched so that the foreign-born one could stay in the country. They also found Max Marty, who is raising money to moor a ship in international waters off San Francisco. Foreign-born entrepreneurs will work in the floating office-park and make trips to Silicon Valley.

The second problem is the complexity and cost of government. Entrepreneurs the world over complain about regulations and taxes. But America’s have lots to gripe about: in 2009-11 the Obama administration issued 106 new regulations each expected to have an economic impact of at least $100m a year. Besides this business founders suffer from the constant political uncertainty generated by a combination of ambitious new legislation, such as Obamacare, and ideological trench warfare. The Vanguard Group, an asset-management firm, calculates that since 2011 Washington’s bickering politicians have imposed, in effect, a $261 billion uncertainty tax that has cost up to 1m new jobs.

The financial crisis has worsened the third problem: raising money. Over 70% of new businesses are launched using savings or assets—particularly houses. The crisis reduced the average net wealth of American households by about 40%. Business founders repeatedly mention other problems too. Venture capitalists are increasingly risk-averse. The Sarbanes-Oxley act imposes additional costs of $1m a year on public companies. Investors no longer bother with “growth stocks” because there is more money to be made in making lots of big trades in established firms. The dramatic decline in the number of firms going public since 2001 is worrying because, over the past four decades, more than 90% of jobs created by start-ups came into being after they went public.

Stop start-up

Congress tried to fix some of these problems with last year’s JOBS act: for example new firms can now apply for exemption from the most onerous parts of Sarbanes-Oxley for five years. But problems such as political uncertainty have worsened. Mr Dearie and Ms Geduldig suggest other, more ambitious reforms such as giving entrepreneurs a special status, under which their new firms would be subject to a flat 5% tax on their income for the first five years. But these reforms will make an absurdly labyrinthine tax system more complicated still. There is a stronger case for reducing regulations and taxes across the board: American firms now pay the highest corporation taxes in the world, for example. Start-ups would gain disproportionately from such reforms.

Fixing the small-business problem should be at the top of the political agenda. Some 22m workers are either unemployed or underemployed, or have given up looking for work. If it continues to generate new jobs at its current anaemic rate, America will not return to pre-recession employment levels until 2020. The country is lucky that entrepreneurship is part of its DNA. It seems perverse to put unnecessary obstacles in the path of people whose ambition is to found businesses and hire new workers.

Jul 27th 2013 | From the print edition of the Economist

THE epic struggle between two billionaires over the future of Dell has gone to another round. Michael Dell, the ailing computer-maker’s founder and biggest shareholder, has now been forced twice to postpone a vote on his proposal to buy out the firm and take it off the stockmarket, for fear that the deal’s critics, led by Carl Icahn, a veteran shareholder activist, may have enough support to scupper the plan.

On July 24th, having stopped the ballot as it was about to take place, Mr Dell and Silver Lake, a private-equity firm that is backing him, said they would add $150m to their offer of $24.4 billion. But in return they want a special committee of Dell’s independent directors to change the rules of the vote, now scheduled for August 2nd, so that any abstentions would be ignored rather than counted as votes against the buy-out. (Mr Dell cannot vote his own 15.6% stake.) As we went to press the committee was considering the request. It is unclear if the extra cash will pull enough doubters away from the Icahn camp.

All’s swell that ends Dell?

If the buy-out eventually fails, a war for control of Dell’s boardroom is likely to ensue. Although much of the squabbling is over price, also at issue is whether Mr Dell should remain at the helm of the firm he set up in 1984. Mr Icahn has already stated publicly that he has a replacement in mind, as yet unnamed. After this week’s vote was delayed, he took a pot shot at Mr Dell, tweeting: “All would be swell at Dell if Michael and the board bid farewell.”

But would it? Whether founders or professional managers parachuted into firms are the best people to lead them over time is a hotly debated topic in many industries. Nowhere is the discussion more lively than in the tech world, where venture capitalists often back start-ups run by spotty adolescents and where older businesses such as Dell frequently face dramatic shifts in technologies and markets.

For years the conventional wisdom in Silicon Valley was that most founders ought to be replaced at some point by grizzled veterans. But that outlook has changed somewhat, as financiers have studied the industry’s record and noticed that many of the best technology companies have been run by their founders for a long time. In America that list includes Oracle (run by Larry Ellison), Amazon (Jeff Bezos) and Facebook (Mark Zuckerberg), as well as lesser-known firms such as Nvidia (Jen-Hsun Huang), a chipmaker. There are notable examples in Europe and Asia, too, where outfits such as Iliad (Xavier Niel), a French telecoms company, and TSMC (Morris Chang), a Taiwanese semiconductor firm profiled in our next story, have flourished with founders at the helm.

Some tech firms’ fortunes have faded after their founder’s departure. Tim Cook has failed to put a shine on Apple since taking over from Steve Jobs. On July 23rd Apple said it made a profit of $6.9 billion in its latest fiscal quarter, a 22% drop compared with the same period of 2012. (Its shares nevertheless rose as investors took some heart from news of record iPhone sales.) Steve Ballmer, Bill Gates’s successor as boss of Microsoft, is also failing to impress: on July 19th the firm’s shares tumbled more than 11% after it revealed a $900m write-down related to its Surface tablet business and said revenue from its core Windows software fell in its latest quarter.

Of course, founders running firms come a cropper too. Two former darlings of Silicon Valley—Groupon, an online-coupon business, and Zynga, a social-gaming company—have both removed founders from chief-executive roles this year after poor financial results. And plenty of professional managers have enjoyed success in techdom. Witness Eric Schmidt’s tenure as the boss of Google from 2001, where he worked closely with the firm’s two founders, Larry Page and Sergey Brin, before handing over to Mr Page in 2011; and LinkedIn’s rise under Jeff Weiner, who became boss of the social network after working at Yahoo. In Google’s case with Mr Schmidt, and Facebook’s with Sheryl Sandberg, bringing in a “grown-up” to work with youthful founders has proved to be a good compromise.

Some research also supports the case for bringing in professionals. In a paper titled “Rich versus King”, Noam Wasserman of Harvard Business School studied 457 private tech firms between 2000 and 2002 and found that entrepreneurs who relinquished the most control, either by vacating the boss’s chair or loosening their influence over the board, tended to maximise the value of their own equity stakes. “Kings” who kept a tight grip on their firms did worse. The less regal, the richer.

Other studies, however, have found that private tech firms run by founders tend to outperform those run by imported bosses. Ben Horowitz of Andreessen Horowitz, a venture–capital firm that likes to back founder-CEOs, is convinced the creators of companies make better long-term leaders of them because their knowledge of the technology helps them spot imminent shifts in product cycles that professional managers miss. He thinks it may be easier for founders than incomers to convince staff to abandon cherished ways of doing things, when that is necessary.

What does all this mean for Dell? Some sceptics note that Mr Dell’s biggest innovation was more to do with business processes than technology. The firm’s heyday saw it prosper thanks to a flexible, “build to order” system, a hyper-efficient supply chain and a strategy of selling direct to companies. But those advantages have eroded and since Mr Dell returned to the helm of Dell in 2007 (after standing down as chief executive in 2004) the firm has been hammered by the epochal shift from PCs towards tablets and smartphones.

Mr Dell bears some blame for this. But since 2008 he has greatly expanded the company’s software and services business, spending $13 billion on deals. Craig Stice of IHS, a research firm, reckons Dell has “a really good chance” of minting money in these fast-growing areas. Mr Dell’s authority as the firm’s founder should also help him force through painful decisions in its PC business. Mr Wasserman notes that Dell’s boss has been one of those rare cases of a founder who has been “rich and regal”, combining value maximisation with tight control. Committing regicide at Dell now would not be smart.

May 4th 2013 | From the print edition of the Economist

IN THE entertainment world spin-offs are the offspring of hit shows. You take popular characters and give them their own programmes, or mature franchises and give them a new twist. Thus “Friends” gave birth to “Joey” and “Are You Being Served” to “Grace and Favour”. Such spin-offs usually flop.

In business, spin-offs are the offspring of established companies. You take a division and turn it into a free-standing firm. Thus Bristol-Myers Squibb, a drug firm, spawned Zimmer, a maker of artificial joints, and Tyco, a conglomerate, sired ADT, a maker of security systems. These spin-offs have a much better record.

So far this year there have been 11 big American spin-offs, a number that has steadily inched up in recent years, according to Spin-Off Advisors, a consultancy. Two more loom: Time Warner is preparing to jettison its magazine business, which includes Time, and News Corporation is preparing to spin off its publishing division, which includes the Wall Street Journal, the Sun and the Times of London.

Investors like spin-offs because they prefer focused companies to diversified ones. Financial engineers like them because, under American law, they are more tax-efficient than straight sell-offs, which incur capital-gains tax. Spin-offs represent a welcome alternative to initial public offerings, which are rare and unpredictable. They also offer tasty returns. Forbes calculates that American companies completed more than 80 spin-offs worth at least $500m each between 2002 and 2012. The parent companies (or “spinners”) have delivered a return of 35%, compared with 22% for the S&P 500. The “spun” have delivered a return of 70%. Returns for firms in the Bloomberg Spin-Off Index were 47% over the past 12 months compared with 16% for the S&P 500.

Managing spin-offs is tricky, however. Companies can appear to be tossing out the “trash” and keeping the “cash”. They can damage long-standing relations with employees, investors and suppliers. Both spinners and spun are odd hybrids: new companies with long histories; independent entities that have close ties with each other. How to manage these problems? One of the biggest spin-offs of recent years offers hints.

ITT (née International Telephone & Telegraph in 1920) was once one of the world’s leading conglomerates. In the 1970s it had more than 2,000 units, in every business from rental cars (Avis) to baking (Wonder Bread) to hotels (Sheraton). But in the past two decades it has seen more splits than an amoeba porn flick, to borrow an image from Gary Larson, a cartoonist. In 1995 ITT divided into three firms, including an industrial group that retained the name. In October 2011 the surviving ITT split into three again: ITT Corporation, a maker of sophisticated pumps, brake pads and valves; Xylem, a water-technology company; and ITT Exelis, a defence company.

Veterans of the various ITT splits are justly proud. Managers boast that they have been engaged in corporate regeneration, not just rebranding. They had a rare chance to ask what businesses they were in, and why. They can now focus on their prize products (such as Exelis’s night-vision goggles) as never before. Yet the splits were as emotional as any divorce; or as scary as leaving the parental home. To make it all go smoothly, managers have had to make some delicate calculations.

The various companies involved have had to think hard about establishing their new identities. In many ways creating new companies out of existing ones is harder than creating new companies out of nothing. Each spawn of a spin-off must avoid disparaging its aged parents. And each spinner must give the impression that it is a new organisation, not the trash the dustman left behind. All must think carefully about their relationships with each other and with their existing suppliers.

ITT’s offshoots summoned all the dark arts of brand management to establish their new identities. The energy they put into inventing new names and tag lines would have lit up every Sheraton on Earth. Xylem considered 1,000 different names and agonised endlessly about its tagline, “Let’s Solve Water”. (Unkind observers wish they had agonised a bit longer.) Exelis announced its arrival by choosing a daring corporate colour—orange—in an industry where everybody deals in black, blue or red. But at the same time the spin-offs emphasised their common roots (“One history, three futures”) and their hybrid nature as start-ups and veterans (“a start-up with a 50-year past”).

You spin me right round

The various ITT companies have to work out how to handle their established relationships. They don’t want to alienate people they have been doing business with for years. Nor, however, do they want to be trapped in their old skins. The most ticklish relationship is with employees. Managers have been at pains to explain what was going on, partly to bolster morale but also because employees are the most important brand ambassadors. No detail was too small to bother with. Exelis made its employees hand in their old knick-knacks—such as pens and mugs that bore the old logo—and issued them with new ones. It also held parties to celebrate the birth of the new firm.

The impending spin-offs of News Corp’s newspapers and Time Warner’s magazines have made journalists gloomy. The scribblers fret that they are being consigned to dead-end companies—a fear hardly soothed by analysts who refer in private to “Good Corp” (new media) and “Crap Corp” (print). They also worry that they will have to cope with managerial chaos and technological disruption. But history shows that everyone involved in a spin-off can benefit. And ITT’s experience suggests that good managers can minimise the disruption involved. Breaking up may be hard to do, but it is sometimes necessary.