Is deposit insurance the real problem in banking?

Former Citibank CEO Sandy Weill garnered headlines last week when he said that the megabanks (one of which he created) should be busted up into smaller units.  Two WSJ columnists (Zweig and Jenkins) point out that size may not be the real problem -- instead, they argue, we need to take a closer look at deposit insurance. 

Currently the FDIC insures deposits up to $250,000.  Zweig quotes Rutgers economist Eugene White, who thinks the insurance could be cut back to a limit of $100,000.  This would protect the deposits of middle class investors, while forcing those with larger balances to pay more attention to the security of their deposits.  Bankers -- of all shapes and sizes -- would be less willing to take risks if they knew they could not count on the FDIC to bail them out with their depositors. 

Of course it would be hard, without full disclosure of compensation formulas and balance sheets, to know how risky a bank might be.  But maybe such info should be disclosed?

Sensible analysis of the gold standard

We continue to have a small but vocal minority (I'm talking to you James Grant and Ron Paul) that blames virtually all of our macroeconomic problems on our departure from the gold standard in 1971.  Chicago Booth finance professor John Cochrane has a great WSJ op-ed this weekend that does a great job explaining why the traditional gold standard would fail miserably in today's world: the price of gold fluctuates much more than the CPI, it would do nothing to stop the Fed from buying and selling securities and would readily be abused by governments facing piles of debt.  Best line: "This isn't theory.  It's history."

Cochrane argues that the idea behind the gold standard has one virtue: it commits the government to exchange each unit of currency for something real.  He argues this could be done more easily by having the government commit to buy and sell CPI-indexed bonds at fixed prices.  The key words in this idea are "at fixed prices;" it does not take much cynicism to imagine a debtor government welching on its side of the deal.  

Bernanke's midyear report

Fed chair Ben Bernanke gave his midyear report on the state of the economy to Congress yesterday, and the news is not encouraging: "The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year."  Investment by businesses in plant, equipment and inventories is especially worrisome, Bernanke said.

Some lawmakers encouraged Bernanke to do more to stimulate the recovery.  However, his means to do so appear extremely limited.  The Fed's main tools are lowering interest rates and buying bonds to create more liquidity.  Yet banks have mountains of excess reserves and have decided it is better to keep them at the Fed to earn 0.25% than to loan them out. 

Grammar matters

In an increasingly informal world where much written communication takes the form of texts and tweets, WSJ reports managers are becoming increasingly concerned with the writing skills of employees.  This becomes a business problem when communications become unclear, customers or suppliers are offended, or internal processes are improperly documented. 

Think you are up on your grammar?  Then look at these sentences from the article, decide which ones are correct and identify the error in the other sentences:

• The fire at XY Corp. damaged three buildings and all the building's records were lost
• Chocolate has a positive affect on his mood
• There was a heated discussion between the three engineers
• The principle strategy she offered was about gathering data

Surprise -- all four sentences contain mistakes: replace building's with buildings', affect with effect, between with among, and principle with principal.  

Good news for incoming NC State MBA students -- we are going to help you with your writing this year at orientation and MBA 500.  

Housing on the rebound

So says WSJ economics columnist David Wessel.  The evidence, at least on the national level, is compelling: sales are up by 10% over a year ago, inventories are down to a more normal six months, and prices are ticking upward. 

Wessel is careful to point out that bottoming out should not be confused with happy-days-are-here-again.  Housing starts are more than 50% below the pace of 2002, which is well before the bubble days.  One in four mortgages is underwater.  Still, this qualifies as very good news.  Housing will not drive this or any other recoveries over the next 10 years.  But it if can stop being a drag that would be a big overall plus. 

It's hard to compete with free

Everyone employed by a university needs to take a look at an NYT Online column by David Bornstein on free online courses.  Most undergraduate courses -- and no small number of graduate courses -- can be broken into digestible bits that meet the needs of an adult learner looking to improve his or her skill set.  Look at Khan Academy, TED talks and the growing number of elite universities that are making entire courses available online for free.  There now is a lot of good stuff out there for the self-motivated, well-directed learner. 

Until reading Bornstein's article, I was not aware of a new threat to us ivory tower types: ALISON.  ALISON (Advanced Learning Interactive Systems Online) is an Irish company that offers certifications in 400 vocational courses.  For free.  ALISON makes money by charging for advertising; those who wish to avoid the ads can pay a modest amount for ALISON'S premium services (where have we seen this business model before?). 

If a critical mass of employers decide that ALISON's credentialing service provides a reliable signal of knowledge, it is not hard to envision a future where students tailor their education to meet their career needs.  In such a world institutions such as NC State will need to provide value through other mechanisms, such as access to preferred networks (our alums, corporate contacts, and faculty) and tailored learning experiences.  Lecturing about supply and demand or debits and credits is not going to cut it in this world. 

On the other hand the certification services provided by the for-profit colleges have not proven to be reliable, so maybe ALISON (a "for-profit social enterprise," according to Bornstein) will not be any different. 

Bank runs coming to Europe?

A definite possibility, says Fortune columnist and former FDIC director Sheila Bair.  If withdrawals massively overwhelm deposits over a short period, bank reserves are depleted and, in the absense of deposit insurance, the last depositors in line are left with nothing.  Deposit insurance is designed to mitigate that risk and in the US it has largely served its purpose.  However, each country in Europe runs its own deposit insurance system and the ability of the Greek, Italian or Spanish governments to take on more debt to bail out their citizens is limited at best. 

A further complication: if a country such as Greece decides to leave the euro, it will end up converting all accounts to drachmas which will no doubt be worth much less than the euros they would be replacing.  Fear of such a currency conversion could in and of itself launch a bank run as Greeks move their assets to safer countries. 

Bair endorses the creation of a EU-wide deposit insurance fund.  We will see how this plays out over the coming weeks. 

Online program featured in TBJ

Nice feature in today's TBJ about the online MBA programs at NC State and UNC (p. 3 on hard copy, link only gives part of story, rest is gated).  The article focuses on the experiences John Willis has had so far in our program, plus it makes some cost comparisons.  We will be welcoming another cohort of 30 students to the online Jenkins MBA next month.

Changes for grad student loans

Big changes for government-sponsored student loans became effective July 1.  Graduate students will no longer be eligible for federal subsidized loans that are taken out on or after this date.  This will be quite a shock for those who could demonstrate financial need and were eligible for lower interest rates and postponing interest payments until after graduation.  Students can still borrow up to $20500 per year but the interest rate will be 6.8%. 

Two obvious consequences: (1) Expect students to borrow less, whether they use the loans for school expenses or to upgrade their wheels.  (2) Some students will reconsider whether they should go to graduate school, which is definitely not good news for MBA programs. 

Near-sourcing finance jobs

Front pager in today's NYT about the growing trend in the financial services industry to near-source jobs out of New York City to places like Raleigh and Jacksonville.  This may be news to NYT, but it old hat to all of the Credit Suisse and Fidelity employees in NC State's MBA program.  Firms are moving functions that do not require a physical presence in NYC, especially those that are not client-facing.  NYT calls this a threat to "the vast middle tier of positions that form the backbone of employment on Wall Street."

Why the shift?  The article cites lower labor, land, and tax costs in NC and Florida.  Firms may be looking to move even more work out of NYC in the coming years to offset the regulatory burden of Dodd-Frank.