Summary of business news and analysis

Keywords: US Economy, Incentives for Enterprises

read Steven Horowitz' arguments on "Coordination Problem":

Coordination Problem: Krugman's Misreading of US Banking History, by Steven Horwitz, May 14, 2012

In his NY Times column Sunday, Paul Krugman tries, in vain, to construct a case for bank regulation in light of the problems at JP Morgan. As usual with Krugman, there’s much to disagree with, but I want to focus on his utterly ham-handed version of the history of US banking, which bears shockingly little resemblance to reality.

Krugman thinks he has the critics of regulation nailed with his take on US financial history: read more on Coordination Problem

Keywords: Banking, Banking Regulation, Free Market and Banking

What Peter Thiel, paypal founder and facebook investor, said about theories on the bubble and bust economy in 2008. (For Peter Thiel a big financial event is ahead - the facebook IPO).

Keywords: Asset Bubbles, Bubble Economics

Cumming, Douglas J. and Zambelli, Simona, Private Equity Performance Under Extreme Regulation (March 30, 2012). Journal of Banking and Finance, 2012, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2056786

Abstract:

"This study investigates the impact of excessive regulation on private equity (PE) returns and firm performance. History shows that extreme regulation and prohibition reduce the supply of capital and raise returns (e.g., as with drugs and diamonds). However, for value-added investors such as PE funds, extreme regulation also reduces the quality of capital and fund involvement. The net effect on returns is therefore ambiguous and heretofore not studied. With a new unique dataset, this paper empirically examines the performance of PE investments in Italy when leveraged buyouts are strictly regulated. The data show that extreme regulation reduces not only the supply of capital, but also PE returns and firm performance, as well as the likelihood of an IPO exit."

Keywords: Private Equity, Regulation, Performance

If two overconfident testosterone loaden banker dealers dance tango for a deal, things might not turn out right. Put them in a cold shower befort starting to negotiate. Values have to do with fundamentals of the business. Take testosterone guys out of the game.

It Takes Two to Tango: Overpayment and Value Destruction in M&A Deals, November 15, 2010

Keywords: Negotiation, Fundamental Business Value

Keywords: Technology, Economic Development, Economic Growth, Stagnation

Newsweek: Niall Ferguson: The European Farce; Will the continent act to avert an economic cataclysm? May 14, 2012

With the sap rising and the governments falling, all the European powers are merrily acting in national character.

In the midst of a severe financial crisis, the French have just elected a champagne socialist on promises of a 75 percent top tax rate and a lower retirement age. The Greeks also had an election in which the established parties lost to a ragbag of splinter groups. The outcome of the election was that they need to have another election. (Cue Zorba the Greek theme music.) Meanwhile, the wailing gloom of the flamenco emanates from Spain, where youth unemployment is now around 50 percent. read more

Keywords: European Crisis, European Nationalistic Tendencies

April 2012

Keywords: Peter Thiel, Venture Capital, Start-up Activity

Fiscal Times: Reframe the 'Growth vs. Austerity' Debate, by Michael Hodin, May 11, 2012

....."The developed world’s economies are headed for social, political, and economic disaster if the terms of the debate are not transformed to include the extraordinary and untapped potential of aging populations as a central part on the growth side.

Michael W. Hodin, Ph.D., is Adjunct Senior Fellow at The Council of Foreign Relations and Executive Director of The Global Coalition on Aging."

read the whole article on Fiscal Times

Keywords: Aging Population, Social Systems

Kauffman Foundatiôn: After Fees and Expenses, Most Investors Will Do Better in Public Markets, May 7, 2012

A compelling new report out today from the Ewing Marion Kauffman Foundation describes how most institutional investors, including larger state pension funds, endowments and foundations, may be shortchanged by their investments in venture capital funds. Over the past decade, public stock markets have outperformed the average venture capital fund and for 15 years, VC funds have failed to return to investors the significant amounts of cash invested, despite high-profile successes, including Google, Groupon and LinkedIn.

The report, "We Have Met the Enemy … And He is Us," is based on a comprehensive analysis of the Kauffman Foundation's more than 20 years of experience investing in nearly 100 VC funds. It illustrates a persistent pattern of inflated early returns in funds that may be used to raise subsequent funds and shows the poor historical performance of funds with more than $500 million in committed capital. read more on the page of the Ewing Marion Kauffman Foundation

Keywords: Venture Capital, Venture Capital Returns

Questioning Homeownership as a Public Policy Goal, Cato Policy Analysis No. 696

Keywords: US Real Estate Market, Home Ownership, Financial Crisis

Motley Fool: How to Thwart the Opaque, High-Fee, Underperforming Financial Advisors Who May Be Mismanaging Your Money, May 11, 2012

It seems like there isn't much that all Americans agree on these days, but there's this: 92% of us believe in God and 97% think that financial advisors should be held to a "fiduciary standard."

We'll save the talk about the Big Guy upstairs for another venue. But as for financial advisors, nearly every American thinks that they should be held to a standard that requires them to put their customers' interests ahead of theirs, and be upfront about fees, commissions, or conflicts of interest that might influence their advice. read more

Keywords: Financial Advise, Performance of Financial Advisers

Keywords: Taxes, Corporate Income Taxes

Keywords: European Crisis, US Economy

Forbes: A Monster Real Estate Paradigm Shift Demands A New Direction for Capital, by Michael Messner, May 10, 2012

..."We are witnesses and participants to a perfect storm of enormous and unstoppable trends triggered by the Internet, by Americans downsizing their lifestyles and increasing their savings, and of dynamic technology displacing capital intensive, asset-oriented investments. As a result of this sweeping sea change, we face a trillion dollar glut of commercial property threatening our communities, businesses, hundreds of small and mid-sized banks, as well as the FDIC."...

Keywords: Technological Change, Creative Destruction, US Real Estate

NYT: Morgan Stanley’s Michael Grimes Is Where Money and Tech Meet, May 8, 2012

Silicon Valley doesn’t have much love for Wall Street, perceiving buttoned-up financiers as fee-obsessed number crunchers who don’t really understand technology.

But Michael Grimes of Morgan Stanley, a gadget enthusiast with a computer science background, has managed to become Silicon Valley’s banker of choice for initial public offerings.
read more in the NYT

Keywords: Silicon Valley, IPO

Daniel Gros has a good article on Project Syndicate expressing his views on the wrong focus of many European politicians when tackling growth:

Project Syndicate: Europe’s Misguided Search for Growth, by Daniel Gros, May 7, 2012

Here is an excerpt:

"The urge to be seen to be “doing something” is leading Europe’s policymakers to rely on the few instruments with which the EU can claim to foster growth. But they should recognize that today’s growth crisis is different. The real bargain should not be austerity plus a Marshall Plan for the south, but rather continued austerity plus labor-market reforms in the south, combined with more infrastructure investment in Germany and other AAA-rated countries like the Netherlands.

CommentsDeep service-sector reforms in Germany would also help to unlock the country’s productivity potential and open its market to services exports from southern Europe. That way, the South would have a chance to find jobs for its rather well-educated young people, whose only choice now is between unemployment and emigration." Source: Project Syndicate

go to Project Syndicate to read the whole article

Keywords: European Crisis, European Economic Stagnation, Growth Measures

Keywords: Road to Serfdom, F.A. Hayek, Milton Friedman

Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen, Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis, Atlanta Fed, Working Paper 2012-7, May 2012

Abstract:

"We present 12 facts about the mortgage crisis. We argue that the facts refute the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors. Instead, we argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. We then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly."


Keywords: Financial Crisis, Mortgage, Foreclosure, Asymmetric Information,

hat tip: Ideas matter typepad

Keywords: Decentralization, Federalism