As Downside Risks Rise, Fiscal Policy Has To Walk a Narrow Path

by Don Alexander, MBA

Assocate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The IMF noted in its latest Fiscal Monitor (24^th Jan.) that countries continue to make progress on deficit reduction. 

Fiscal deficits in many advanced economies fell significantly during 2011, and most plan substantial adjustment this year. The pace of fiscal consolidation may slow as too rapid consolidation could exacerbate risks.  Continued adjustment is necessary for medium-term debt sustainability, but should ideally occur at a pace that supports adequate growth in output and employment.   Conversely, too rapid a consolidation in a slowing growth scenario could exacerbate risks.

 

Given the large adjustment already in train this year, governments should avoid responding to any unexpected downturn in growth by further tightening policies, and should instead allow the automatic stabilizers to operate, as long as financing is available and sustainability concerns permit. When economic conditions deteriorate they can cushion the impact on demand.

 

Countries with enough fiscal space (the room in a government's budget that allows it to provide resources for a desired purpose without damaging the sustainability of its financial position or the stability of the economy), including some in the euro area, should reconsider the pace of near-term adjustment. At the same time, some countries—notably, the United States and Japan—need to clarify their medium-term debt-reduction strategies. Adjustment should be supported by the availability of adequate nonmarket financing when, as in the euro area, market confidence is slow to respond to reforms. 

 

Some emerging economies with low debt and deficits and declining inflationary pressure have room to make policy more supportive of economic activity. Others have little space for more than the operation of automatic stabilizers if growth slows.  Emerging economies highly dependent on commodity revenues and external capital inflows also need to consider the risk of a large and protracted decline in these flows.

 

Corporations, like governments, should have contingency plans for meeting funding requirements as part of their risk management plans.

For more on this follow the link: www.imf.org/external/pubs/ft/fm/2012/​update/01/pdf/0112.pdf

 

 

 

 

 

Hippocratic Oath

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

While doing research for my forthcoming book on complexity I came across this modern translation of the Hippocratic Oath.  This of course is the famous oath that medical doctors take when they start their practice.  I thought it was interesting for this risk blog.  Before I explain why, simply read through the oath that I have clipped verbatim from the Wikipedia page on Hippocratic Oath.

A widely used modern version of the traditional oath was penned in 1964 by Dr. Louis Lasagna, former Principal of the Sackler School of Graduate Biomedical Sciences and Academic Dean of the School of Medicine at Tufts University:^[8] 

I swear to fulfill, to the best of my ability and judgment, this covenant:

I will respect the hard-won scientific gains of those physicians in whose steps I walk, and gladly share such knowledge as is mine with those who are to follow.

I will apply, for the benefit of the sick, all measures [that] are required, avoiding those twin traps of overtreatment and therapeutic nihilism.

I will remember that there is art to medicine as well as science, and that warmth, sympathy, and understanding may outweigh the surgeon's knife or the chemist's drug.

I will not be ashamed to say "I know not", nor will I fail to call in my colleagues when the skills of another are needed for a patient's recovery.

I will respect the privacy of my patients, for their problems are not disclosed to me that the world may know. Most especially must I tread with care in matters of life and death. If it is given to me to save a life, all thanks. But it may also be within my power to take a life; this awesome responsibility must be faced with great humbleness and awareness of my own frailty. Above all, I must not play at God.

I will remember that I do not treat a fever chart, a cancerous growth, but a sick human being, whose illness may affect the person's family and economic stability. My responsibility includes these related problems, if I am to care adequately for the sick.

I will prevent disease whenever I can, for prevention is preferable to cure.

I will remember that I remain a member of society with special obligations to all my fellow human beings, those sound of mind and body as well as the infirm.

If I do not violate this oath, may I enjoy life and art, respected while I live and remembered with affection thereafter. May I always act so as to preserve the finest 

 

Capital Budgeting

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

I do a lot of work on capital budgeting.  I teach several classes that focus on it, and of course it plays a major role in several of the training courses that we conduct for various organizations. 

 

I stress that organizations should use a lot of different techniques for capital budgeting including real option analysis, Monte Carlo Simulation, and decision analysis whenever possible.  Successful capital budgeting often is the determining point between whether a company is thriving or dying five years down the road. 

 

The capital budgeting task is filled with risk and uncertainty.  Given that, it is rare that the risk department is a fully integrated team into the capital budgeting process.  There are a variety of reasons for this; the silofication of treasury and finance functions, ignorance of capital budgeting techniques by risk managers, ignorance of risk management by the capital budgeting team, as well as a host of others.

 

I believe that if there is one area that risk managers could make a positive and significance difference it is early in the capital budgeting process.  Sad that this rarely happens.

Untitled

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The increased strains from the euro area debt crisis continue to weigh on global economic prospects and caused the IMF to sharply cut its forecast for global growth this year, have dimmed prospects and financial stability risks have increased noted in the latest market update (IMF Global Market Stability Report “GMSR” Market Update, Jan. 2012).

 

Since the last GMSR, the risks for stability have increased, despite various policy steps to contain the euro area debt crisis and banking crisis.  European policymakers have outlined significant policy measures to address the medium-term issues contributing to the crisis, and some of these have helped improve market sentiment, but sovereign financing remains challenging and downside risks remain. 

 

If funding challenges result in a round of de-leveraging by banks, this could ignite an adverse feedback loop to euro area economies.  The US and other advanced countries have homegrown challenges in the removal of financial tail risks, including overcoming obstacles to achieving an appropriate pace of fiscal consolidation.  Developments in the euro area also threaten emerging Europe and may spillover elsewhere. 

 

Further policy actions are needed to restore market confidence.  This effort will require building larger backstops for sovereign financing, assuring adequate bank funding and capital, and maintaining a sufficient flow of credit to the economy possibly establishing a “gatekeeper” charged with prevent a disorderly bank deleveraging. 

 

Emerging markets, outside of Europe, and Asian countries are exposed to downside risks as weaker macroeconomic prospects make them vulnerable to spillovers from the European debt crisis.  Authorities in advanced countries will need to address banking issues, make necessary adjustments without a large impact on growth prospects.  Policymakers in other areas may need to address issues relating to funding and credit strains, especially if global growth continues to stall

For more information on this follow the link: www.imf.org/external/pubs/ft/fmu/eng/​2012/01/index.htm

Filter

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

I was at a meeting last week and someone tried to insult me by saying “there you go, talking without your filter again”.  They may have meant it as an insult, but I take it as a compliment.  They implied that I was being politically uncouth by saying what I thought and believed, rather than by saying what everyone wanted to hear. 

 

How effective are filters in your risk department?  How often do they get changed?  How clogged are they?  Do you need them?  Do you want them?  Do they actually help?  Do they actually help in the long term?