Eurozone Leaders still don’t get it

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Eurozone policymakers have put together another plan to save the euro.  Will it work – only time will tell?  Charles Wyplosz, in a communiqué They still don’t get it (VOXEU, 25^th Oct.) reviews recent progress.  He is not optimistic they will take the necessary steps.  He notes that by rejecting an ECB role, leaders have guaranteed that any package will fail as too little too late.  They are addressing two of the three needed steps: putting Greece on a sustainable path and backstopping banks.  The last stop still needed is to backstop all European sovereign debt to avoid contagion. 

 

The author identified three issues in an earlier VOXEU column (22^nd Aug 2011) for policymakers: a clear misunderstanding of the situation, understanding the danger ahead, and unwilling to take the necessary steps to resolve the situation.  The real danger is contagion has spread to Italy and Spain pass the point of no return and the risk of spreading to core countries.

 

The European Financial Stability Facility (EFSF) is too small to deal with the amounts involved, even under the new proposal.  The authorities must move ahead of the curve and put together policies to contain the crisis and avoid further contagion – the new proposal may not be enough.  This can be accomplished by placing a floor under public debt valuation.  This can be accomplished two ways: the ECB can act as a guarantor of public debt as maturing debt is rolled over and the second approach is to replace maturing Eurozone debt with Eurobonds. 

 

The ECB is the only institution that can deal with the amounts involved and provide breathing space to address bank recapitalization.  The continued rescue packages for banks and government are creating moral hazard problems.  Long-term, authorities must address the weakness of the Stability and Growth Pact and enact restrictive fiscal policies with monitoring.  Wyplosz notes that recapitalizing Greek banks is a temporary solution, but could undermine its purpose by increasing debt levels.  The only solution is to tap the EFSF short-term and involve the ECB to provide a backstop for public debt.

 

The worst outcome is to reject a role for the ECB.  The lack of a backstop for public debt prices will allow the crisis to fester and deepen pushing up the cost of resolution. 

 

For more on this follow the link:  http://www.voxeu.org/index.php?q=node/6845

Stupid Interview Question

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Working with MBA students is always busy this time of year.  Students are in the final round of interviews and they are always anxious and looking for any advice they can get that will give them an edge.  To that end, I often see a fairly large number of students in my university office looking for interview tips.

 

Interviews have changed a bit since I was in the middle of looking for a job after graduation.  In my day an interview was assessing your skills and trying to ascertain if you were a likable person or not.  When I was interviewing, it was always a line manager that did the initial interviews, and they were often inconsistent in how they went about things.  Now it is human resource professionals who supposedly have much more systematic and objective interviewing techniques.  The goal now is to assess behavioural traits.  Competence and the ability to do a good job are on the list – but quite far down the list.

 

In my day interview questions were along the lines of what do you know, and what have you done.  Now that ask questions like “If you were a tree, what type of tree would you be?” I understand why they ask that type of question, but ultimately it has become such a common question (or style of question), that in my opinion it is just plain stupid.  I am not a tree, I have no immediate plans to become a tree, and if I was a tree I am quite confident that no one would want to pay me a salary.

 

That may be considered cynical however.  So just to show that I can be open minded, I will ask the question of risk professionals; “If risk management were a tree, what type of a tree would it be?”  That’s just stupid, but a hell of a lot of fun to discuss at the water-cooler!

Rick Nason project described in recent Canadian Business article

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

In a recent Canadian Business article on October 20, 2011, "What's your thesis?" by Michael McCullough, RSD Solutions Partner Rick Nason had his thesis: "Financial regulation isn’t rocket science" described in the article.  Rick's thesis is one of five quoted in an article that looks at the latest academic thinking being applied to the business world.  Rick's background of physics allows him to bring a unique perspective to business solutions and in particular the area of risk.  

 

To read the article follow the link:  http://tinyurl.com/3clb8m2

Lessons for European and US politicians – How not to create jobs

by Don Alexander, MBA

RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

A striking feature of recent equity market volatility is that politicians and government bureaucrats are making the news.  It seems that statements about bailouts, restructuring, budgets and regulatory reforms are driving stock market volatility.  Policymakers’ and bureaucrats choices are dominating headlines in the global crisis.

 

Policy uncertainty and the stalled recovery (Scott Baker, Nicholas Bloom & Steve Davis, VOXEU, October 22^nd).  The authors distinguish between economic uncertainty and economic policy uncertainty, constructing an index to measure policy-related uncertainty and argue that reducing policy uncertainty would add dramatically to job creation.  Prior to the financial crisis of 2008, stock markets moved in response to economic numbers such as GDP or employment and corporate earnings.  But today, it is politicians and government bureaucrats.  They cannot agree, generating massive economic uncertainty.  This policy uncertainty is a key factor in stalling the recovery and contributing to the risk of a double dip.

 

Baker et al constructed a new index of US policy uncertainty by combining three types of information: frequency of articles that reference economic uncertainty and policy, references to expiration of various federal tax code provisions and disparity among forecasts about inflation and government purchases of goods and services.  In addition, the authors are able to separate an indicator of economic uncertainty from that of policy uncertainty.  They note the key drivers of policy uncertainty are dominated by monetary and tax issues.

 

When businesses and investors are uncertain about taxes, health care costs, budget prospects and regulatory initiatives, they adopt a cautious stance.  They find it costly to make a hiring or investment mistake, waiting for calmer times to expand or consider riskier investments.  As a result, the recovery never takes off as business remains cautious on making investments in capital goods, research and worker training – key determinants for long-run sustainable growth.

Investors remain on the sidelines in “safe” investments avoiding risk.

 

The lessons for European and US policymakers are clear.  They need to take action that will reduce policy uncertainty for business and investors.

 

For more on this follow the link:  www.voxeu.org/index.php?q=node/7137