Why I’m Against the Bailout

John Paglia, PhD

The recently approved bailout is yet another attempt to prop up the markets with an election around that corner that will only delay and worsen the inevitable pain ahead…

There is definitely a lack of trust and confidence in the markets, but it is due to the blatant lies and unethical representations. How many times have we heard an NAR (National Association of Realtors) economist call the bottom in housing? How many times have we heard the reporters on CNBC call a bottom in the equity markets? How many times have we heard phrases like “subprime is contained,” “we’re comfortable with our capital position,” “we have adequate liquidity,” and “the economy is fundamentally sound?”

The benefits of this package are being oversold to Main Street. And many don’t realize that a large part of this funding will be channeled to foreign banks through our domestic institutions. Furthermore, distribution of funds will not be exclusively through reverse auction; therefore preferential distribution—both in funds provided and responsibilities assigned to select agents—is a negative consequence. It is a disaster in the making and we will be left with a really bad hangover in a few months once we realize what happened.

During the early phases of this crisis, capital providers were buying these representations and investing billions of dollars of fresh capital in troubled financial institutions only to find out that portfolio values were not as represented. After sustaining large losses and with the inability to adequately assess risk due to lack of transparency and misrepresentation, capital providers, for the most part, have decided to sit on the sidelines with trillions in capital.

What we really needed was a market solution. I would rather have seen these institutions be forced to mark their portfolios (and their level 3 assets and off-balance sheet assets) to fair value and then raise private capital to fund any solvency gaps. Only when this happens can we truly assess the risks and raise the appropriate capital. Adding capital to these financial institutions may shore up solvency, but we’re still in a recession and lending always tightens when that is the case.

Unfortunately, we are headed for a nasty recession and the bailout will not stem the tides. In my opinion, it’s about time. Economic recessions are the natural cleansing process of an economic cycle and come as a result of excesses that have been built in periods prior. The longer we delay, the worse it will be.

John K. Paglia, PhD, MBA, is an Associate Professor of Finance of the Graziadio School of Business and Management of Pepperdine University.

Related in the GBR

Doing Business in a Volatile World: Graziadio School faculty reflect on ways in which business perspectives have changed since September 11

Using Asset Allocation Strategies to Recover from a Bear Hug by John K. Paglia, PhD, FRM, CFM and Ivan C. Roten, PhD

Has the Dow Really Escaped the Bear? by John K. Paglia, PhD,

America’s Financial Crisis

Joetta Forsyth, PhD

The United States is facing the greatest financial crisis since the Great Depression. Financial institutions are failing, as is confidence in the financial system.

U.S. Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson have testified that Congress must act immediately to bail out troubled financial institutions, or we could face a financial collapse. There is much furor over the proposed $700 billion bailout, which didn’t get the required number of votes today to pass the House. Why, taxpayers ask, should people who were responsible and didn’t buy a house that they couldn’t afford, pay to bail out people who did, along with Wall Street fat cats? Exacerbating the problem is the fact the some of the people who are viewed as contributing to the crisis are now asking Americans to trust them to solve the crisis, using what could be an enormous amount of taxpayer dollars.

I share the same fury. And there is plenty of blame to go around. However, I would like to focus on the immediate problem. We are being told that something has to be done immediately, or we might have a financial collapse.

The key questions are:

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9 comments See also in America's Financial Crisis, Economics, Finance, In the News, Public Policy

Thoughts from the 2008 World Ageing & Generations Congress

This is a guest post by Don Atwater, PhD, practitioner faculty of economics. It is a companion piece to Dr. Atwater’s GBR article, “Where Do Older Workers Go?”

Don Atwater, PhD

At the World Ageing & Generations Congress 2008 in Switzerland last month, I had the opportunity to talk to many people about older workers. John Martin, OECD Director for Employment, Labour & Social Affairs spoke about a “conundrum” :

Why don’t employers recognize that ageing is an important labor supply change process that needs a timely response?

My response was that the demographers assume that labor supply changes drive changes in labor demand. But a case can be made that businesses are creating new business models around new technologies and innovative ways of keeping up the dynamic markets and competition. These changes are supported by emerging financial plans but few if any have up-to-date workforce plans for workers of all ages. The older worker issue is part of a bigger problem with workforce planning in business. It is broken.

What do you think? More

No Child Left Behind—A Blueprint for Success

Owen P. Hall, Jr., PE, PhD, is Editor-in-Chief of the Graziadio Business Report and a professor of decision and information systems at the Graziadio School of Business and Management.

The No Child Left Behind (NCLB) Act 0f 2001 was designed to improve student performance at both the primary and secondary levels by increasing standards of accountability and providing parents with more flexibility in school selection.

The NCLB act is currently up for renewal and there are many questions as to what has been accomplished to date.[1] The title of the reauthorization proposal from the Department of Education, “Building on Results,” underscores this growing concern.

Approximately one-fifth of adults in the United States are functionally illiterate,[2] that is, they have difficulty performing simple tasks such as understanding bus schedules, reading maps, and filling out job applications. This estimate has not improved in the five years since the act was signed into law.

Even more unbelievable is the continued poor performance of U.S. students compared to their international counterparts. For example, in 2003, shortly after the NCLB was enacted, the United States ranked 28^th among Organization for Economic Co-Operation and Development (OECD) member countries in mathematics proficiency.[3] Unfortunately, three years and nearly 75 million dollars later, nothing much has changed—U.S. performance in mathematics remained “broadly unchanged” when the OECD repeated its survey in 2006.[4]

A lack of resources does not seem to be the problem. The United States spends an estimated $10,000 per student per year.[5] In some cities as much as 10 percent of that amount is associated with administration! A number of OECD countries ranked higher than the United States spend considerably less per student.[6]

The NCLB budget for Fiscal Year 2007 is approximately $25 billion.[7] That equates to about $500 per student based on the nearly 55 million students in primary and elementary schools.

What can you do with $500?

How can $500 per student make a difference? It can provide every elementary school student in the country with a laptop.

With a price tag moving toward $100 per machine per student, the total estimated cost is about six billion dollars—only 20 percent of the NCLB annual budget!

Initiatives to provide $100 laptops to children are already well under way in developing nations[8] so why not in the United States? There are a number of school districts throughout the United States that are in desperate need of a new strategy. For example, the high school graduation rate in Detroit, the country’s 11th largest school district, is less than 25 percent.[9]

What difference will laptops make?

Education can be parsed into three distinct and interconnected phases: content, delivery, and outcomes. The laptop serves to connect each of the phases.

First, laptops provide content that can be modified and updated quickly, while print text books are revised every few years at best.

Second, laptops provide content at a convenient time and place, whether it be in or outside the classroom.

Third, the student can be tested on a daily basis and the test records saved for subsequent analysis and content development.

The beauty of the laptop is that it offers each child a “customized” learning environment.

The Know-How is There

The United States already has extensive and growing experience in e-learning. According to a report from the Sloan Consortium,[10] institutions of higher education reported 3.2 million students enrolled in online classes during the fall of 2005.

This marked an increase of more than 800,000 students and a growth rate of 35 percent from the previous year. The NCLB should use this experiential base and in effect “download” this capability to the primary and secondary levels.

A first step in this proposal is to conduct a number of pilot programs with select school districts throughout the country. Performance data can be collected and assessed to fine tune the roll-out of the laptop program on a nationwide basis.

Rapid E-Learning

To be productive, e-learning systems must be cost-effective, but developing e-learning material and content can be expensive. Cost estimates can range as high as $50,000 per hour of content delivery.

Obviously, this cost level could preclude many school districts from fully exploiting the fundamental advantages of e-learning. This is where rapid e-learning solutions can make a difference.

There are many definitions of rapid e-learning. In general, however, rapid e-learning can be viewed as the development and deployment of web-centric training content in a fast and cost-effective manner, often through the use of subject matter experts. The use of a rapid e-learning approach is particularly suited to educational development projects with budget limitations, critical timelines, and frequent updates.

By using proven developmental tools from the college level and adapting existing learning formats, content development times can be reduced from months to weeks along with a comparable reduction in costs.

We Live in a Digital World

It is our duty to provide the next generation with the tools to be successful in this increasingly digital-based global economy. A first step would be to conduct a number of pilot programs with select school districts throughout the country. Performance data would be collected and assessed to fine tune the roll-out of the laptop program on a nationwide basis.

Most of our children already live in a “click and go” world—a laptop per child program is a cost-effective way to use this training to their advantage and improve their educational experience. A laptop per child program is the best, most cost-effective way to fulfill this responsibility.

This editorial first appeared in the Graziadio Business Report, Volume 11, Issue 1 .

[1] U.S. Department of Education. No Child Left Behind Reauthorization, http://www.ed.gov/nclb/overview/intro/reauth/index.html.

[2] Lovetoread. Learning About Literacy, http://www.lovetoread.org/dev/literacy.html.

[3] Programme for International Student Assessment. “First Results from PISA 2003, Executive Summary,” Organization for Economic Co-operation and Development, http://www.oecd.org/dataoecd/15/13/39725224.pdf, 8.

[4] Programme for International Student Assessment. “PISA 2006: Science Competencies for Tomorrow’s World, Executive Summary,” Organization for Economic Co-operation and Development, http://www.oecd.org/dataoecd/1/63/34002454.pdf, 52-3.

[5] Educational CyberPlayGround Teachers Channel. Online Teacher and Educator Resources for K12 Teachers, Administrators & Parents, http://www.edu-cyberpg.com/Teachers/Home_Teachers.html.

[6] Organization for Economic Co-operation and Development, “Annex 2 – Reference Statistics,” Education at a Glance, http://www.oecd.org/dataoecd/45/55/37370984.xls.

[7] U.S. Department of Education. Fiscal Year 2007 Budget Request Advances NCLB Implementation and Pinpoints Competitiveness, http://www.ed.gov/news/pressreleases/2006/02/02062006.html.

[8] One Laptop Per Child. Mission, http://laptop.org/en/vision/mission/.

[9] Patricia Hawke. “Dismal Drop-Out Rates for Detroit Schools,” Ezine Articles, http://ezinearticles.com/?Dismal-Drop-Out-Rates-for-Detroit-Schools&id=642244.

[10] I. Elaine Allen and Jeff Seaman. “Making the Grade: Online Education in the United States, 2006,” The Sloan Consortium, http://www.sloan-c.org/publications/survey/pdf/making_the_grade.pdf.

Related in the Graziadio Business Report

Enhancing Government Productivity Using Rapid E-Learning: Closing the Gap. by Owen P. Hall Jr., PE, PhD

Business and Universities Moving to Collaborative Technologies by Chuck Morrisey, PhD

California Greening: Boom or Bust?

Owen P. Hall, Jr., PE, PhD, is Editor-in-Chief of the Graziadio Business Report and a professor of decision and information systems at the Graziadio School of Business and Management.

The ongoing dust-up about global warming has brought front and center a number of new opportunities and threats to California’s currently fragile economy. Whether man-made global warming is real or not, the debate is having a growing impact on business. California’s influence, as is the case with many issues, is at the forefront. The Golden State’s Greenhouse Gas (GHG) initiative is receiving worldwide attention. One goal of this initiative is to cut industrial CO₂ emissions by 25 percent by 2020.[1]

As a follow-up to the GHG initiative, the state of California sued six major automobile manufacturers for contributing to the global warming crisis by specifically failing to cut car and truck exhaust emissions.[2] Not resting on its laurels, the state followed up with a lawsuit against the U.S. Environmental Protection Agency for failing to act on California’s new limits on greenhouse vehicular gas emissions.[3] A number of other states have joined in the action. Most likely, there will be a protracted legal process—perhaps lasting many years. Interestingly, the proposed CO₂ standards will have, at best, only a modest impact on California’s overall air quality due to continued regional and worldwide population growth.[4]

Voices from the business community argue that more stringent environmental and energy regulations will simply chase more businesses from the state at a time when the overall economy has cooled off and the state government is having an increasingly hard time balancing the budget.

The state has already lost many businesses to Nevada, Arizona, Mexico, and beyond.[5] Losing businesses means losing jobs, which translates into less state income. While driving businesses out of the state could have a positive impact on air quality, it seems like a misguided solution to the problem.

Historical evidence suggests that well-crafted environmental and energy policies can have a positive impact on the state’s economy if managed correctly. A 2000 Rand report indicated that personal income was approximately $1,000 higher per year at the end of the century as a result of energy conservation programs that were implemented beginning in the late 1970s.[6] A second Rand report issued in 2006 suggests that with rising conventional energy costs (e.g., oil) and falling unconventional costs (e.g., renewables), the state could see around 25 percent of its energy supplied by unconventional, minimally polluting sources by 2025.[7] This projection, of course, assumes that the requisite infrastructure can be developed over this time period.

Any viable solution must recognize that energy consumption and environmental quality are both related to the job market.

What should be called for is a long-term approach that balances growing environmental awareness and increasing energy dependency from unreliable sources with the need to grow the economy and generate more jobs. Tax relief and tax credits represent an important aspect of this comprehensive plan. For example, the state should drop the minimum tax for small-to-medium-sized businesses (SMBs) engaged in either energy conservation or environmental quality businesses or in implementing energy conservation practices.

A substantial increase in tax credits for firms that 1) adopt unconventional energy sources, 2) reduce the energy signature of their products and services, and 3) switch to unconventionally-powered vehicles (e.g., hybrids) should lead to more significant outcomes compared to continuous litigation, which often yields questionable results.

A similar set of significant tax incentives for individuals engaged in like practices would go a long way to addressing the dual issues of environmental quality and energy independence. Another incentive package could be to encourage organizations to implement work-at-home policies. We are living in the digital age where the Internet has transformed the way organizations operate. The above incentives would not only create new jobs, but also help cut emissions and reduce reliance on unstable energy sources. It’s a win-win scenario.

Regardless of the pending litigations and potential incentives, many of California’s businesses are scrambling to prepare for potentially changing market conditions brought on by the threat of new regulatory requirements and increased consumer interest in “going green.”

Wouldn’t it be better to approach the problem from a positive job-creating perspective rather than a one-sided litigious one? How many jobs are created by lawsuits?

Firms that might be considering California as a new home—much like the gold miner did 150 years ago—could be deflected away after seeing the onslaught of regulations and lawsuits. There is new “new gold” to be mined in California, but the question remains:

What is the best way to extract these green nuggets?

This editorial first appeared in the Graziadio Business Report, Volume 11, Issue 2.

Related in the Graziadio Business Report

The California Electricity Crisis: Economic Lessons from a Failing Deregulation Process by David Smith, PhD, and Al Hagan, PhD

Launching an Effective Citizen Advisory Panel by John Milliman, PhD, and Ann Feyerherm, PhD