Volcker rule -- great in theory but ...

Recent piece in WSJ finance section about how it might be difficult in practice to ban banks from trading on their own accounts. Sometimes a bank customer wants to sell a security and there is no buyer. Now the bank can buy the asset and sell another one to, in effect, create a market. If the new legislation is not thought through carefully enough, this sort of non-proprietray trading may be banned as well.

Volcker on regulation

Agree or not, Paul Volcker's op-ed piece today makes as solid an argument as I have seen for financial re-regulation. Well worth reading. My guess is that a critical mass of Republicans will go along with this initiative because of public hostility to the bailout and fear of attack ads in the fall. But how will the legislation change as it works its way through Congress?

Technology applications at b-schools

I am attending an annual meeting of MBA deans and directors and some of the talk has centered on technology, especially with yesterday's launch of the new iPad. New devices are coming out that promise to combine all texts, cases, spreadsheets and simulations in a single platform. Experience suggests that we will see competition between different devices regarding which one will become the standard (remember HD DVD players?) and that prices will come down -- a lot -- over the next two to three years. I don't expect the used text market to dry up anytime soon (although this is one reason publishers are pushing digital platforms).

Business Week online reports some wide-ranging experiments at other universities, including virtual classrooms at Warwick, iPod Touches at HEC Paris, e-learning resources at iTunes U, and various video channels. I am especially intrigued with the potential that gaming will provide; if students can learn to slay dragons, they ought to be able to use the same platforms to develop leadership skills.

I was shaking my head at one so-called revolutionary development:

Traditional history-based case studies, the bedrock of so many MBA programs, would disappear, replaced by real-time, real-life case studies in which organizations work with students and academics to solve problems and meet challenges on a day-to-day basis.

We have been doing live cases at NC State for a long time; sorry to hear it is news at some other schools.

Obama's new financial regulation proposals

Rather than leave financial re-regulation to Chris Dodd and Barney Frank, the President has come up with his own proposals, largely based on the ideas of until-now-unseen economic advisor Paul Volcker. (Aside: Greg Mankiw's blog has a post that suggests the proposal has been in the works for months and that the release last week had nothing to do with the Massachusetts tea party.) The proposal would prohibit banks from running hedge funds or trading on their own accounts if they accept deposits covered by FDIC insurance. It also would impose new limits on bank size. Saturday's WSJ "Intelligent Investor" column by Jason Zweig points out some complications related to the new proposals and summarizes some interesting research by Boston College finance professor Ed Kane on how regulation can become more effective. One idea I liked: send the regulators to bootcamp to instill "a sense of honor and duty" and pay the regulators like bankers -- bonuses for fewer meltdowns on their watch.

More on tax deductions for part-time MBA

Today's Bucks blog on the NYT website runs a story that explains in more detail the circumstances in which MBA tuition becomes tax deductible. The key issue is that the MBA student must prove that the degree "maintains or improves the skills required for the taxpayer's current trade or business."

It turns out the rules for M.B.A.’s depend on whether individuals can prove that they were already established in a certain trade or business before going to get an M.B.A. and that the degree will help them maintain or improve their skills in that specific trade or business.

If they can demonstrate both, they can deduct whatever tuition costs their employer didn’t reimburse or offer to reimburse. And if they can’t — say they are switching careers or didn’t have qualifying work experience before heading to school — they can’t.

Charitable giving and Haiti

Citizens, nonprofits and governments have stepped up quickly to donate funds to help the earthquake victims in Haiti. But before you write a check, think about (1) doing some research to see how much of the money will go to the victims versus how much will go to overhead and (2) strongly considering making an unrestricted gift to your nonprofit of choice as opposed to a gift earmarked to Haitians. The reason for the latter is that donors in this type of situation historically have tended to give more than is needed at the time. Blogger Felix Salmon raises some additional points in his post "Don't Give to Haiti" (disclaimer: I saw the link in Andrew Sullivan's blog). Final thought: also consider upping your gifts to the charities you normally support. Why? The principle of substitution: gifts to Haiti are likely to displace other forms of charitable giving this year.

How much is your fandom worth?

Yesterday's WSJ contains a front page article summarizing economic research that attempts to put a price upon an emotion, in this case how much is it worth to be a fan of the Minnesota Vikings. Some fans put their money where there feelings by buying tickets and merchandise. But many fans simply follow a team, so how much is it worth to them?

The research reported here revolves around a survey done at the time the owner was threatening to move the Vikings to another city (would they still call them Vikings in San Antonio?). Citizens were asked how much they would be willing to pay to subsidize a new stadium to keep the Vikes in M-town and the average answer came to $530 per household. In a cost-benefit analysis, this information would be used along with tangible economic benefits (such as extra sales of tickets, hotel rooms and viking helmets) to determine if the city should subsidize a new stadium.

This same type of research is used to determine the value of such items as maintaining a pristine wilderness that most people will never visit but value nonetheless. The obvious criticism: it is one thing to say you would voluntarily spend $500 in a survey and quite another to actually part with the $500. The researchers might get a better answer if they posed the question this way: mayoral candidate X proposes raising your taxes $500 to pay for a new stadium -- does this make you more or less likely to vote for this candidate?

Economists gone wild

The American Economic Association recently held its annual meetings in Atlanta. WSJ reports that this was probably bad news for Atlantans whose livelihood depends on the convention trade because --- economists tend to be cheapskates. My favorite anecdote in the article was the one about Milton Friedman returning reporters calls collect. My own claim to fame: I continue to cut my own grass. But is it because I am a cheapskate, or because I have so few earnings opportunities on the weekend?

On a more serious front, there was much talk about the current economic crisis. Ben Bernanke's speech got the most attention, as one would expect. Bernanke warned that the Fed may very well act to pop any future bubbles. Last week WSJ ran another article that gave some interesting perspectives on how to deal with the financial crisis, growing federal debt and our old friends Fannie Mae and Freddie Mac. Money quote from Stanford economist Robert Hall:

If the banks really feel that they are insured, then we have a dangerous situation. The incentives are to take a very risky position. They get to pocket it if they win and it's the federal government's problem if they lose.

MBA tuition now tax deductible?

Last weekend's WSJ reports that a Maryland nurse won a case in US Tax Court that will allow her to deduct MBA tuition from her federal taxes. The IRS ruling cites the finding that the MBA was necessary for her current job, as opposed to some future position, as the decisive factor. This could be a tremendous boost for part-time and executive programs. ADVICE TO NC STATE MBAS: Please read both articles and strongly consider consulting with a tax accountant or attorney before claiming your 2009 MBA tuition as a tax deduction.

Critical thinking skills in b-schools

Interesting page one story in NYT business section about how some b-schools are starting to put more emphasis on critical thinking skills in their curricula. Most of the article focuses on the Rotman School of Management at the University of Toronto. At NC State we certainly are guilty of not having any courses with "critical thinking skills" in the title. But we do have courses in innovation management that are fairly similar to those at Darden, Rotman and Stanford that are mentioned in the article. Is this an area where NC State students would like to see more activity?

MBA students as customers

Columnist Greg Burns takes on this touchy subject in Sunday's Chicago Tribune, while NYT online has five guest columnists expressing their views. Business schools face a much more competitive environment in student recruitment than other units on campus, as indicated by their aggressive marketing efforts. To make talk match walk, b-schools definitely need to have current students and alums say good things about the program. But what is the best way to do this? Clearly different schools have chosen different paths. Ed Snyder, dean at Chicago, thinks the obligation of the school is to provide a challenging educational experience with excellent professional support. David Bejou, dean at Elizabeth City State, has a different take:

The goal should be shared governance, he said, with faculty, students and staff working together. "You need to understand what this new generation wants," he said. And it's not "a faculty member with white hair and a tie standing at a blackboard trying to write a formula."

At NC State, we certainly take student feedback from focus groups, teaching evaluations and the annual student survey very seriously. But I do not expect to add any students to voting slots on the curriculum committee any time soon.

If Paul Volcker had a hammer ...

According to NYT blogger Simon Johnson (Sloan MIT prof and former chief economist at IMF), former Fed chair Paul Volcker is going rogue on the Obama administration by pushing for much tighter regulation of the financial services industry. Although Volcker was originally going to be a senior economic advisor to the President, he has been eclipsed by Larry Summers and Treasury Secretary Tim Geithner. Now that financial services regulation is moving to the front burner in both the House and the Senate, Big Paul (he is 6'7" in case you wondered) has picked the perfect time to make his pitch.

Monday's WSJ had an interview with the former fed chairman where he shared the following insights: (1) forget CDOs, the most important financial innovation in the last 20 years is the ATM; (2) there are huge moral hazard issues; and (3) commercial and investment banks need to be separated. It will be interesting to see how Volcker's arguments influence the upcoming deliberations.

Is this the end?

NYT today reports that the European Union is dropping its antitrust case against Microsoft. Microsoft has agreed to give Windows customers a choice of 11 web browsers. Future users of Microsoft products will no doubt that the EU antitrust group for making the Windows installation process last a little bit longer.

Apple to re-engineer iTunes?

Potentially good news for iTunes customers -- last week WSJ reported that Apple is considering going to a web-based platform for iTunes. Confession: I received an iTunes gift certificate from my staff last year when I was in the hospital. My immediate thought -- I will never use this; they really should not have bothered. Trying to avoid any deadweight loss, I dutifully downloaded iTunes and made a purchase or two of things I was about to buy anyway. Then I got it -- no need to buy an entire album, no need to produce more paper and plastic, plus instant gratification (even Amazon takes at least overnight). I ended up burning through the gift quickly and now run a decent monthly tab while in the process discovering groups like Death Cab for Cutie, Kings of Leon and Portishead.

My problem, however, is that I have bought music on three different computers and it is not easy to keep all the selections synced with each other and the iPhone I purchased about eight months after getting iTunes. Why, I kept asking myself, haven't they figured out how to use the cloud to fix this? Now that Apple has purchased La La Media, which runs a web-based streaming audio business, service is likely to improve.

One would think that making customers happier with better service is totally noncontroversial. However, some antitrust economists and lawyers are already making noises about the anticompetitive consequences of iTunes gaining a larger market share of online music distribution services.

Mankiw on fiscal policy

Greg Mankiw's Sunday NYT column summarizes recent research comparing the size of the tax cut and government spending multipliers. The Obama stimulus to date has relied mostly on government spending; all indications are that the next round of "job stimulus" will be more of the same. Mankiw finds that most of the research shows that tax cuts generate a bigger bang per buck. This is contrary to what textbook Keynesian models imply. Mankiw cautions, however, that

economists should remain humble and open-minded when considering how best to fix an ailing economy.

Cooley on financial market regulation

Scary piece by NYU Stern School dean Thomas Cooley in Forbes today about the prospects for genuine changes in regulation of financial markets. Cooley points out that the draft bills in both the House and Senate exempt large portions of the financial sector from the proposed new regulations on consumer protection.

What are the major financial decisions made by households? The purchase of durables like automobiles and appliances, the purchase of homes and retirement planning. But the house bill H.R. 3126 exempts financing provided by automobile dealers, any person regulated by the Securities and Exchange Commission, any person regulated by a state insurance regulator, smaller banks and credit unions (those with $10 billion or less in assets), mortgage, title, credit insurance, real estate brokers and agents, attorneys and most retail transactions involving credit. The Senate proposal has fewer carve-outs but does exclude small banks and credit unions, merchants, retailers and other non-financial institutions that extend credit to consumers. So who is left to regulate?

Another area to watch is whether the final versions of the bill will allow the federal government the ability to break up the largest financial services companies into smaller components. Normally I am a free market sort, but as long as there is an implicit contract that the government will continue to bail out failed firms, there needs to be some mechanism to cap the liability.

What they fear more than anything else is losing access to the tremendous money pump they have at present. The large complex financial institutions, in case you haven’t noticed, are making money hand over fist. They are greatly enabled this by the fact that they have a very low cost of funds. Why? Because they have unpriced too-big-to-fail guarantees and access to the Fed. This means taxpayers are underwriting the low internal cost of funds that these firms have. They can turn around and invest these in their own proprietary trading, hedge funds and asset management businesses--things they're afraid of losing.

Friday's jobs report

Much encouraging news in the jobs report released last Friday. Most news reports focused on the very modest decline in employment (11k instead of 100k+). Other good news: unemployment edged down slightly from 10.2 to 10.0 percent; average weekly hours worked increased by 0.2 (so maybe some people are getting more overtime?); and temporary employment rose by over 50k. It is way too early to claim that the labor market has bottomed out, but this report was much more optimistic than any we have seen this year.

Data now show unemployment is highest since Great Depression

Confession: I had been holding out hope that unemployment in the current recession would not be higher than it was in the last severe recession of my lifetime 1981-82. I had taken solace in the fact that even at 10.2% in October, unemployment remained below its peak of 10.8% in late 1982. Yesterday's WSJ reports that the aggregate numbers really are not comparable because of changes in the labor market over the last 25+ years. Today's workers are more highly educated; there are more college graduates and fewer high school dropouts. Once you look inside educational categories, Princeton economist Hank Farber shows that unemployment rates are at record highs (at least since 1976 when the data series were created). For instance the unemployment rate for high-school dropouts is 14.9%, up from 13.6% in late 1982-early 1983; the rate for college-grads is 4.9%, up from 3.6%. A sad note on the day of the jobs summit.

Do extra MBA concentrations help job seekers?

Business Week online just posted an article with the provocative title "Business School Concentrations: Is More Better?" Full-time students at NC State have enough flexibility in their program to take two full four-course concentrations, and we have definitely seen a trend toward more students taking multiple concentrations even before the current recession. Although students might see a second concentration as an effective hedging strategy, recruiters are often not impressed.

"If you think about it from the recruiter's perspective, especially in a job market that's not particularly robust, the recruiter has more choice," says Julie Morton, associate dean of career services at Chicago Booth. "If I am a recruiter and I have more choice, I'm always going to home in on the student who is really gung-ho about my company, about my industry, and about this function of the job." An easy way for recruiters to sift through the increasingly competitive applicant field is to eliminate students without both academic course work and prior experience related to the job opening.

Price controls in Iran

Today's NYT has a front page article on Iran's debate about phasing out subsidies for gasoline. Despite being an exporter of crude petroleum, Iran has to import a large share of its gasoline because of insufficient expertise and capacity. Three immediate reactions: (1) Iran must realize that sanctions are on the way and that they need to start making adjustments now; (2) the subsidies are being withdrawn and replaced by a new scheme that tends to favor supporters of Iran's theocracy and penalize the mullahs' political opponents; and (3) most shockingly it shows that NYT news reporters understand basic economics:

There is widespread agreement that selling everyday goods at far below market prices, which costs the Iranian government an estimated $100 billion a year, makes little economic sense. It encourages over-consumption of gasoline and other products, discourages domestic production and makes Iran more dependent on imports, economists say. The subsidies are also regressive, because the rich pay the same artificially low prices as the poor and consume far more. And they encourage smuggling.

Maybe we will see the same understanding the next time NYT runs an article on the minimum wage or subsidies for "next-generation" fuels. Maybe not.