The Keys to Walmart’s Success

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Interview with Don Soderquist from Walmart.

As the retired Chief Operating Officer of Walmart, Don Soderquist is often asked, “How has Walmart done it?” or “What’s the secret?” His response is that there is no secret, no magic formula. In fact, the principles that launched Walmart into unprecedented success are so simple it’s easy to overlook their significance.

Don Soderquist was part of the leadership team that grew the company from $44 billion in sales to over $200 billion (the largest company in the world at that time). This video is a rare, inside look at the principles that guide one of the greatest businesses of all time.

Okay, so there is one secret after all. Whether your company has one employee or a million, the principles Don shares in this video will dramatically work for you too.

Plexus: Distribution of Returns Based on Initial Valuations

http://www.investmentpostcards.com/2010/03/26/us-stock-market-returns-%E2%80%93-what-is-in-store-3/print/ US stock market returns – what is in store? Posted By Prieur du Plessis On March 26, 2010 @ 11:44 am Surging stock markets since the lows of March 2009 have caught most investors by surprise, especially as new pieces of the economics puzzle are not always rosy and do not quite seem to support an overly bullish case. In short, investors are increasingly struggling to make sense of the most likely direction of stock prices. Are we perhaps nearing the end of a cyclical bull phase in a structural bear market? Or will strong earnings growth ensure the longevity of the bull? Or is a “muddle-through” trading range in store? It seems to be a case of so many pundits, so many views. It is one thing to trade the market’s rallies and corrections, but this is easier said than done, with not many people actually getting it right with any degree of consistency. Others are of the opinion that the recipe for creating wealth is simply to follow the patient approach, saying that “it’s time in the market, not timing the market” that counts. But “buy-and-hold” investors in the S&P 500 Index are still 25.5% down from the levels of 10 years ago, the Dow Jones Industrial Index a similar 23.5% lower and the Nasdaq Composite Index a massive 52.5% under water. This gives rise to the all-important question: does one’s entry level into the market, i.e. the valuation of the market at the time of investing, make a significant difference to subsequent investment returns? In an attempt to cast light on this issue, my colleagues at Plexus Asset Management have updated a previous multi-year comparison of the price-earnings (PE) ratios of the S&P 500 Index (as a measure of stock valuations) and the forward real returns (considering total returns, i.e. capital movements plus dividends). The study covered the period from 1871 to March 2010 and used the S&P 500 (and its predecessors prior to 1957). In essence, PEs based on rolling average ten-year earnings were calculated and used together with ten-year forward real returns. In the first analysis the PEs and the corresponding ten-year forward real returns were grouped in five quintiles (i.e. 20% intervals) (Diagram A.1). [1] The cheapest quintile had an average PE of 7.7 with an average ten-year forward real return of 11.4% per annum, whereas the most expensive quintile had an average PE of 23.4 with an average ten-year forward real return of only 3.8% per annum. This analysis clearly shows the strong long-term relationship between real returns and the level of valuation at which the investment was made. The study was then repeated with the PEs divided into smaller groups, i.e. deciles or 10% intervals (see Diagrams A.2 and A.3). [2] [3] This analysis strongly confirms the downward trend of the average ten-year forward real returns from the cheapest grouping (PEs of less than six) to the most expensive grouping (PEs of more than 21). The second study also shows that any investment at PEs of less than 12 always had positive ten-year real returns, while investments at PE ratios of 12 and higher experienced negative real returns at some stage. A third observation from this analysis is that the ten-year forward real returns of investments made at PEs between 12 and 17 had the biggest spread between minimum and maximum returns and were therefore more volatile and less predictable. As a further refinement, holding periods of one, three, five and 20 years were also analyzed. The research results (not reported in this article) for the one-year period showed a poor relationship with expected returns, but the findings for all the other periods were consistent with the findings for the ten-year periods. Although the above analysis represents an update to and extension of an earlier study by Jeremy Grantham’s GMO, it was also considered appropriate to replicate the study using dividend yields rather than PEs as valuation yardstick. The results are reported in Diagrams B.1, B.2 and B.3 and, as can be expected, are very similar to those based on PEs. [4] [5] [6] Based on the above research findings, with the S&P 500 Index’s current ten-year normalized PE of 20.3 and ten-year normalized dividend yield of 2.1%, investors should be aware of the fact that the market is by historical standards expensive. As far as the market in general is concerned, this argues for unexciting long-term returns, possibly a “muddle-through” trading range for quite a number of years to come. Although the research results offer no guidance as to calling market tops and bottoms, they do indicate that it would not be consistent with the findings to bank on above-average returns based on the current ten-year normalized valuation levels. As a matter of fact, there is a distinct possibility of some negative returns off current price levels.

William White: “Anatomy of Crisis- the Living History of the Last Thirty Years: Economic Theory, Politics and Policy?”

INET C@K Paper Session 1 – White.pdf

Introduction The current economic and financial crisis, and it is both, has already imposed great costs on the global economy. Nor is there any guarantee that we have seen the worst and that recovery is now assured. The obvious question, and the topic of this session, is how we got into this mess. Answering this question is crucial if we are to move on to the next set of questions. What policies would help us get out of this mess, and would help us avoid similar problems in the future?

Cato: An Economy of Liars

http://www.cato.org/pub_display.php?pub_id=11706&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CatoRecentOpeds+%28Cato+Recent+Op-eds%29 An Economy of Liars by Gerald P. O’Driscoll Jr. Gerald O’Driscoll is a senior fellow at the Cato Institute. He has been a vice president at Citigroup and a vice president at the Federal Reserve Bank of Dallas. Added to cato.org on April 20, 2010 This article appeared in The Wall Street Journal on April 20, 2010. Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm’s accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. Thomas Carlyle, the 19th century Victorian essayist, unflatteringly described classical liberalism as “anarchy plus a constable.” As a romanticist, Carlyle hated the system — but described it accurately. Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state’s duties should be limited (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. That conception of government and its duties was articulated by the Declaration of Independence and embodied in the U.S. Constitution. Modern liberals have greatly expanded the list of government functions, but, aside from totalitarian regimes, I know of no modern political movement that has shortened it. While protecting citizens against force, both at home and abroad, is the government’s most basic function, protecting them against fraud is closely allied. By the use of force, a thief takes by arms what is not rightfully his; he who commits fraud takes secretly what is not rightfully his. It is the difference between a robber stealing brazenly on the street and a burglar stealing by stealth at night. The result is the same: the loss of property by its owner and the disordering of civil society. And government has failed miserably to perform this basic function. Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the Securities and Exchange Commission the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff’s. The SEC chose to ignore the evidence brought to its attention. Banking regulators allowed a kind of mortgage dubbed “liar loans” to flourish. And so on. We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month. Are we to believe that regulators were unaware? Last week Goldman Sachs was accused in a civil fraud suit of deceiving many clients for the benefit of another, hedge-fund operator John Paulson. The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately — not withstanding what any rule might otherwise allow. And financial institutions should have a duty of care to their customers. Lawyers tell me that would get us closer to the common law approach to fraud and bad dealing. Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve’s Jackson Hole Conference in 2008, economist Willem Buiter described “cognitive capture,” by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in “Staffer One Day, Opponent the Next.” Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door. We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith. Nobel laureate Friedrich Hayek described the price system as an information-transmission mechanism. The interplay of producers and consumers establishes prices that reflect relative valuations of goods and services. Subsidies distort prices and lead to misallocation of resources (judged by the preferences of consumers and the opportunity costs of producers). Prices no longer convey true values but distorted ones. Hayek’s mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct. In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates. Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery. If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice. Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.

NYT: Is Marriage Good For Your Health

http://mobile.nytimes.com/article?a=580572&f=37 Is Marriage Good for Your Health?   By TARA PARKER-POPE Published: April 18, 2010 In 1858, a British epidemiologist named William Farr set out to study what he called the “conjugal condition” of the people of France. He divided the adult population into three distinct categories: the “married,” consisting of husbands and wives; the “celibate,” defined as the bachelors and spinsters who had never married; and finally the “widowed,” those who had experienced the death of a spouse. Using birth, death and marriage records, Farr analyzed the relative mortality rates of the three groups at various ages. The work, a groundbreaking study that helped establish the field of medical statistics, showed that the unmarried died from disease “in undue proportion” to their married counterparts. And the widowed, Farr found, fared worst of all. Farr’s was among the first scholarly works to suggest that there is a health advantage to marriage and to identify marital loss as a significant risk factor for poor health. Married people, the data seemed to show, lived longer, healthier lives. “Marriage is a healthy estate,” Farr concluded. “The single individual is more likely to be wrecked on his voyage than the lives joined together in matrimony.” While Farr’s own study is no longer relevant to the social realities of today’s world – his three categories exclude couples living together, gay couples and the divorced, for instance – his overarching finding about the health benefits of marriage seems to have stood the test of time. Critics, of course, have rightly cautioned about the risk of conflating correlation with causation. (Better health among the married sometimes simply reflects the fact that healthy people are more likely to get married in the first place.) But in the 150 years since Farr’s work, scientists have continued to document the “marriage advantage”: the fact that married people, on average, appear to be healthier and live longer than unmarried people. Contemporary studies, for instance, have shown that married people are less likely to get pneumonia, have surgery, develop cancer or have heart attacks. A group of Swedish researchers has found that being married or cohabiting at midlife is associated with a lower risk for dementia. A study of two dozen causes of death in the Netherlands found that in virtually every category, ranging from violent deaths like homicide and car accidents to certain forms of cancer, the unmarried were at far higher risk than the married. For many years, studies like these have influenced both politics and policy, fueling national marriage-promotion efforts, like the Healthy Marriage Initiative of the U.S. Department of Health and Human Services. From 2006 to 2010, the program received $150 million annually to spend on projects like “divorce reduction” efforts and often cited the health benefits of marrying and staying married. But while it’s clear that marriage is profoundly connected to health and well-being, new research is increasingly presenting a more nuanced view of the so-called marriage advantage. Several new studies, for instance, show that the marriage advantage doesn’t extend to those in troubled relationships, which can leave a person far less healthy than if he or she had never married at all. One recent study suggests that a stressful marriage can be as bad for the heart as a regular smoking habit. And despite years of research suggesting that single people have poorer health than those who marry, a major study released last year concluded that single people who have never married have better health than those who married and then divorced. All of which suggests that while Farr’s exploration into the conjugal condition pointed us in the right direction, it exaggerated the importance of the institution of marriage and underestimated the quality and character of the marriage itself. The mere fact of being married, it seems, isn’t enough to protect your health. Even the Healthy Marriage Initiative makes the distinction between “healthy” and “unhealthy” relationships when discussing the benefits of marriage. “When we divide good marriages from bad ones,” says the marriage historian Stephanie Coontz, who is also the director of research and public education for the Council on Contemporary Families, “we learn that it is the relationship, not the institution, that is key.” Some of today’s most interesting research on the relationship between marriage and health is being led by a pair of researchers at Ohio State University College of Medicine. The duo, Ronald Glaser and Jan Kiecolt-Glaser, are also, fittingly, married to each other. Glaser and Kiecolt-Glaser’s scholarly collaboration has its roots in a chance encounter during a faculty picnic in October 1978 on the Ohio State campus. Glaser, who is a viral immunologist, spotted an attractive woman standing with members of the psychiatry faculty. Although their eyes met only briefly, he caught a glimpse of her name tag. Intrigued, he tried to track her down, calling the psychiatry department chairman to ask if he knew a petite blonde on staff with a name like “Pam Kiscoli.” The department chairman figured out that Glaser was talking about a new assistant professor named Jan Kiecolt. Glaser and Kiecolt eventually met for lunch at the university’s hospital cafeteria. They married a year later, in January 1980. The coupling resulted in more than romance. The two scientists were fascinated by each other’s work, which they often discussed over meals or while jogging together. Glaser suggested that they collaborate professionally, but finding common ground was a challenge: he studied virology and immunology; she was a clinical psychologist who focused on assertiveness and other behavior. In the early 1980s, however, Kiecolt-Glaser came across a book on the emerging field of psychoneuroimmunology, which concerns the interplay between behavior, the immune and endocrine systems and the brain and nervous system. The couple were intrigued by a science that lay at the intersection of their disciplines. Today, the two disagree on exactly how their professional collaboration began. “He says I started it,” Kiecolt-Glaser told me. “But I say he started it.” In their first research collaboration, they sought to measure the effect of psychological stress on the immune system. Although earlier studies had established that trauma and other major stress – like the death of a loved one or prolonged sleep deprivation – weakened the immune system, the Glasers wanted to know if lesser forms of stress, like those associated with the workplace or graduate school, had a similar effect. The Glasers, who worked at Ohio’s State’s medical school, had ready access to an ample supply of stressed-out students, and so they decided to study the toll exacted by school pressure. They took blood samples from a set of students early in the semester and then did so again in the middle of final exams. The Glasers discovered that the stress of examination time seemed to cause a significant weakening of the students’ immune response: by examination time, the medical students showed a significant drop in so-called natural killer cells, a type of white blood cell that battles viruses and helps prevent cancer. For their second collaboration, the Glasers turned their attention to domestic strife. They wondered about the role that relationships play in health and about the effects of marital stress, which, like school pressure, can be a source of nontraumatic but chronic strain. In what was to be the first of their many studies on marriage and health, the Glasers recruited 76 women, half of whom were married; the other half were separated or had divorced. The Glasers wanted to identify which married women were in troubled relationships as well as which of the women who were separated or divorced from their husbands were emotionall y struggling the most. They did this by using marital-quality scales, types of questionnaires that ask couples to indicate agreement or disagreement with statements like “If I had to do it over again, I would marry the same person” or “We often do things together.” Next, using blood tests, the Glasers measured the women’s immune-system responses, tracking their levels of antibody production and other indicators of immunity strength. The results showed that the women in unhappy relationships and the women who remained emotionally hung up on their ex-husbands had decidedly weaker immune responses than the women who were in happier relationships (or were happily out of them). Though pleased with this study, the Glasers knew that they had succeeded in taking the measure of marital happiness and health only at a single moment. The couple were also curious to study the effect of marital stress as it unfolded in real time. What happens to the body minute by minute, hour by hour, when couples engage in hostile marital disputes? To find this out, they recruited a study group of 90 seemingly happy newlywed couples. Each couple was hooked up to tubes so that blood samples could be drawn from the pair at regular intervals, and the husband and wife were seated face to face. Obscured by a curtain, the researchers watched the couples on video monitors; nurses took the blood samples. The participants, as they had been prompted to do, discussed their most volatile topics of marital conflict, like housework, sex or interference from a mother-in-law. “You wouldn’t think in a study situation that they would tear into each other,” Glaser, who is now the director of the Institute for Behavioral Medicine Research, told me. “But they get into it.” As expected, the couples who exhibited the most negative and hostile behavior during the conflict discussion showed the largest declines in immune-system function during the 24-hour study period. These data strongly suggested that marital stress could affect the body in striking ways, but the Glaser team had yet to prove that marital conflict had any truly meaningful or lasting effect on health. Kiecolt-Glaser had an idea for another study that would meet this higher standard. She had read about a strange tool used by her dermatology colleagues: a small plastic suction device designed to leave eight tiny blisters on the arm and allow monitoring of the immune-system response at the wound sites. Kiecolt-Glaser’s proposal was to use this blistering device to measure how quickly or slowly physical wounds healed among married couples who had undergone different levels of marital stress. The experiment had two phases. Each married couple, after their forearms were subjected to the blistering procedure, were asked to talk together for a half-hour: on one occasion they discussed topics chosen to elicit the couples’ supportive behaviors; on another day, after undergoing the blistering procedures again, they discussed topics selected to evoke conflict and tension and tried to resolve them. Before subjecting others to the blistering regimen, each of the Glasers had the device secured to his or her respective forearm to have his or her skin blistered. The sensation is comparable to “someone gently pinching your arm,” Kiecolt-Glaser told me. Nonetheless, the Glasers knew it would be a tough sell to convince others couples to undergo the blistering procedure as well as two weeks of subsequent monitoring of the wounds as they healed. A study grant allowed them to offer $2,000 in total compensation to any couple willing to take part in the experiment. They managed to recruit 42 married couples for the study. The results were remarkable. After the blistering sessions in which couples argued, their wounds took, on average, a full day longer to heal than after the sessions in which the couples discussed something pleasant. Among couples who exhibited especially high levels of hostility while bickering, the wounds took a full two days longer to heal than those of couples who had showed less animosity while fighting. Published in 2005 in The Archives of General Psychiatry, the Glasers’ findings help explain epidemiological data showing that couples in troubled marriages appear to be more susceptible to illness than happier couples. The results may also have practical relevance for surgical patients, for instance, waiting for incisions to heal. But most important, the study offered compelling evidence that a hostile fight with your husband or wife isn’t just bad for your relationship. It can have a profound toll on your body. Kiecolt-Glaser told me that the overall health lesson to take away from the new wave of marriage-and-health literature is that couples should first work to repair a troubled relationship and learn to fight without hostility and derision. But if staying married means living amid constant acrimony, from the point of view of your health, “you’re better off out of it,” she says. Last year, The Journal of Health and Social Behavior published a study tracking the marital history and health of nearly 9,000 men and women in their 50s and 60s. The study, which grew out of work by researchers at the University of Chicago, found that when the married people became single again – either by divorce or because of the death of a spouse – they suffered a decline in physical health from which they never fully recovered. These men and women had 20 percent more chronic health issues, like heart disease and diabetes, than those who were still married to their first husband or wife by middle age. The divorced and widowed also had aged less gracefully, reporting more problems going up and down stairs or walking longer distances. Perhaps the most striking finding concerned single people who had never married. For more than 100 years, scientists have speculated that single people, because they generally have fewer resources, lower income and perhaps less logistical and emotional support, have poorer health than the married. But in the Chicago study, people who had divorced or been widowed had worse health problems than men and women who had been single their entire lives. In formerly married individuals, it was as if the marriage advantage had never existed. Does marrying again benefit those who divorce, in terms of health? In the Chicago study, remarriage helped only a little. It seemed to heal emotional wounds: the remarried had about the same risk for depression as the continuously married. But a second marriage didn’t seem to be enough to repair the physical damage associated with marital loss. Compared with the continuously married, people in second marriages still had 12 percent more chronic health problems and 19 percent more mobility problems. “I don’t think anyone would encourage people to stay in a marriage that is really making them miserable,” says Linda J. Waite, a University of Chicago sociologist and an author of the study. “But try harder to make it better.” Even if marital problems seem small, Waite says, the data suggest it’s wise to intervene early and try to resolve them. “If you learn to how to manage disagreement early,” she says, “then you can avoid the decline in marital happiness that follows from the drip, drip of negative interactions.” Other researchers have also studied how the “drip, drip” of negativity can erode not only a marriage itself but also a couple’s physical health. A number of epidemiological studies suggest that unhappily married couples are at higher risk for heart attacks and cardiovascular disease than happily married couples. In 2000, The Journal of the American Medical Association published a three-year Swedish study of 300 women who had been hospitalized with severe chest pains or a heart attack; the study found that those who reported the highest levels of marital stress were nearly three times as likely to suffer another heart attack or require a bypass or other procedure. It is notable that these increased risks weren’t associated with other forms of stress. For instance, women who were stressed-out at work weren’t at any higher risk for a second epi sode of heart problems than women who were happy in their jobs. Of course, all couples – happy or unhappy – are bound to experience some form of marital conflict. Surely this does not mean everyone is doomed to ill health; some conflicts are better than others. The University of Utah psychology professor Timothy W. Smith has addressed this question, studying how what he calls the “emotional tone” of conflict affects heart risk. In one study, he recruited 150 couples, most of whom were in their 60s and married for an average of 36 years. All were in general good health with no signs of heart disease. Smith collected video recordings of the couples discussing stressful topics like money management or housework. The arguments were then “coded” to indicate the number of warm, hostile and controlling statements and words that were used in the course of the dispute. In addition, the couples were put in heart-scanning machines to measure coronary calcium levels, which are a useful indicator of heart-disease risk. Smith then compared each person’s conflict style with their coronary calcium score. Smith’s results suggest that there are important differences between men and women when it comes to health and the style of conflict that can jeopardize it. The women in his study who were at highest risk for signs of heart disease were those whose marital battles lacked any signs of warmth, not even a stray term of endearment during a hostile discussion (“Honey, you’re driving me crazy!”) or a minor pat on the back or squeeze of the hand, all of which can signal affection in the midst of anger. “Most of the literature assumes that it’s how bad the arguments get that drives the effect, but it’s actually the lack of affection that does it,” Smith told me. “It wasn’t how much nasty talk there was. It was the lack of warmth that predicted risk.” For men, on the other hand, hostile and negative marital battles seemed to have no effect on heart risk. Men were at risk for a higher coronary calcium score, however, when their marital spats turned into battles for control. It didn’t matter whether it was the husband or wife who was trying to gain control of the matter; it was merely any appearance of controlling language that put men on the path of heart disease. In both cases, the emotional tone of a marital fight turned out to be just as predictive of poor heart health as whether the individual smoked or had high cholesterol. It is worth noting that the couples in Smith’s study were all relatively happy. These were husbands and wives who loved each other. Yet many of them had developed styles of conflict that took a physical toll on each other. The solution, Smith noted, isn’t to stop fighting. It’s to fight more thoughtfully. “Difficulties in marriage seem to be nearly universal,” he said. “Just try not to let fights be any nastier than they need to be.” Researchers have also started to examine the salutary health effects of social relationships, including those of a good marriage. In one recent study, James A. Coan, an assistant professor of psychology and a neuroscientist at the University of Virginia, recruited 16 women who scored relatively high on a questionnaire assessing marital happiness. He placed each woman in three different situations while monitoring her brain with an f.M.R.I. machine, which offers a way to observe the brain’s response to almost any kind of emotional stimulation. In one situation, to simulate stress, he subjected the woman to a mild electric shock. In a second, the shock was administered, but the woman held the hand of a stranger; in a third, the hand of her husband. Both instances of hand-holding reduced the neural activity in areas of the woman’s brain associated with stress. But when the woman was holding her husband’s hand, the effect was even greater, and it was particularly pronounced in women who had the highest marital-happiness scores. Holding a husband’s hand during the electric shock resulted in a calming of the brain regions associated with pain similar to the effect brought about by use of a pain-relieving drug. Coan says the study simulates how a supportive marriage and partnership gives the brain the opportunity to outsource some of its most difficult neural work. “When someone holds your hand in a study or just shows that they are there for you by giving you a back rub, when you’re in their presence, that becomes a cue that you don’t have to regulate your negative emotion,” he told me. “The other person is essentially regulating your negative emotion but without your prefrontal cortex. It’s much less wear and tear on us if we have someone there to help regulate us.” With so much evidence establishing a link between marital stress and health, a new generation of research is set to explore the ways in which couples can mitigate the damaging effects of relationship stress. The Glasers are now conducting studies testing whether regular supplements of fish oil, rich in omega-3 fatty acids, can mitigate some of the physical symptoms of stress on the immune system. The couple are also embarking on a new study looking at the interplay between nutrition and marital stress. Earlier research at Ohio State showed that when study subjects were given intravenous fat injections during times of stress, it took longer for triglycerides, fats that are associated with heart disease, to leave the bloodstream. But Kiecolt-Glaser is more interested in the real-world equivalent of the study: What happens to the body’s ability to cope with fats when couples fight at dinnertime? To find out, she’s planning to feed married couples two types of meals – one relatively healthful meal and one high-fat meal equivalent to fast food. During the meal the couples will be asked to discuss topics of high stress, and a blood analysis will offer a glimpse of the effect that mealtime conflict has on the body’s ability to metabolize fats. “It’s an ideal way,” Kiecolt-Glaser says, “to look at what happens to couples in the real world, where so many family conflicts happen over a meal.” For the Glasers, their nearly 30 years of professional collaboration have not only given them new insights into the role of stress and health but have also helped them in their own marriage. Like every married couple, they have their disagreements, Glaser told me. But years of watching married couples interact and measuring the subsequent physical toll that conflict takes on their bodies has taught the Glasers the importance of taking time off together and making sure their disagreements don’t degenerate into personal attacks. “Don’t fight dirty,” he advised. “You never go far enough down the road where you hurt each other. We know enough to avoid those kinds of arguments.” Kiecolt-Glaser added that the couple’s research shows that some level of relationship stress is inevitable in even the happiest marriages. The important thing, she said, is to use those moments of stress as an opportunity to repair the relationship rather than to damage it. “It can be so uncomfortable, even in the best marriages, to have an ongoing disagreement,” she said. “It’s the pit-in-your-stomach kind of thing. But when your marital relationship is the key relationship in your life, a disagreement is really a signal to try to fix something.”

Economist:Spending more on education and private security are cost-effective ways of cutting crime

http://www.economist.com/business-finance/economics-focus/PrinterFriendly.cfm?story_id=15867693 The mean streets of Guildford Apr 8th 2010 From The Economist print edition Spending more on education and private security are cost-effective ways of cutting crime GUILDFORD is a prosperous town in London’s commuter belt and an unlikely setting for a seminar on crime. But one of the best sessions at the recent annual conference of the Royal Economic Society (RES), held at the University of Surrey, teased out two of the big themes on the economics of crime—deterrence (what it is that prevents crime?) and incentives (what it is that makes for law-abiding citizens?). To start, Philip Cook of Duke University unveiled a new paper, written with John MacDonald of the University of Pennsylvania, on private contributions to public order. Their paper is based in part on a study of Business Improvement Districts (BIDs) in Los Angeles. BIDs are not-for-profit bodies that provide services, such as private security guards and sanitation, on behalf of local firms. The marvel of such public goods is that one firm’s use of them does not make them less useful to others. The flaw is that businesses can benefit even if they do not bear the costs. A change to Californian law in the 1990s addressed this problem by forcing all businesses to join a collective scheme if enough local firms had signed up to it. It helps, too, that the city authority collects the levies that finance the BIDs. Private security turns out to be a cost-effective way of cutting crime. The study compares crime rates in 30 BIDs set up after 1995 with those in neighbouring districts. BIDs tend to be high-crime areas, so the authors adjust for this. They find that each $10,000 spent by an average BID resulted in 3.4 fewer crimes per year. To work out whether this was money well spent, the authors surveyed the public to put a cash value on each crime prevented. People were asked whether they would vote for a scheme that reduced a particular crime by 10% at a particular cost in tax dollars (the range of “offers” varied from $25 to $225). The authors used the responses to assign a social cost to different crimes. They calculate that preventing a robbery is valued at $263,000, an assault at $79,000 and a burglary at $21,000. Given the reduction they bring about in each sort of crime, every $10,000 spent by the average BID bought some $200,000-worth of crime prevention. A benefit-to-cost ratio of 20 to one is impressive, though it does not tell us whether the schemes directly benefit the firms that pay for them—through increased custom, fatter profits, higher property values, and so on. It is clear, however, that private security is good value for society as a whole. So good, in fact, that one suspects that some of the costs have been left out. Perhaps crime was not stamped out but merely shifted elsewhere. Or perhaps BIDs work so well because they draw on extra support from the police. That is not the case, says Mr Cook. Establishing a BID leads to fewer arrests and so reduces the cost of policing. Nor is there evidence that crime increases in neighbouring districts after BIDs are set up, he says. If anything, crime nearby falls. Why is private security apparently so cost-effective? One reason, says Mr Cook, is simply that guards are paid less than police officers. Another is they are dedicated to a single district and are directly responsible for making it safe. Guards can specialise. They know which shifty characters to look out for and which policing works best in their area. Unlike policemen, they are not called away to supervise a parade or protect a dignitary. The research also shows how effective “target hardening” (ie, self-protection against crime) can be. Mr Cook noted that there were twice as many cars in America in 2008 as in 1989, but fewer car thefts. Steering locks, engine immobilisers and tracking systems have made newer cars harder to steal. In a similar vein, a paper presented by Ben Vollaard of Tilburg University showed that newly built homes are harder to burgle. Mr Vollaard and his co-author, Jan van Ours, reckon that homes put up after a change in the Dutch building code in 1999 were 26% less likely to be broken into than those built beforehand. To comply with the code, builders had to fit high-quality locks and burglar-proof windows and doors. These may not put off a determined thief but are enough to slow down an opportunist, said Mr Vollaard. Too cool for school Are there ways to prevent people from becoming criminals in the first place? In principle, a lengthier education ought to reduce crime by raising people’s future earning power from legitimate work, making a criminal career less attractive. School also keeps would-be criminals in touch with the right sort of peers and social attitudes. There is plenty of evidence that a lack of education goes hand in hand with criminal behaviour. Studies of America’s jail population in the 1990s showed that most inmates had not finished high school. But few studies have established that less education is actually a cause of crime. A third paper presented at the conference, written by Stephen Machin of University College London, Olivier Marie of Maastricht University and Suncica Vujic of the London School of Economics, uses a statistical trick to find a causal link between low education and crime. The authors looked at the crime rates of a cohort of British school-leavers, some of whom were forced to stay in school for longer because of a legal change to the school-leaving age. They found this group was less likely to engage in criminal behaviour than an earlier cohort. The authors calculate that one year of extra education reduces property crimes by 1-2%, and that the cost of the extra schooling is outweighed by the benefits of reduced crime. These results echo a study of American crime by Lance Lochner of the University of Western Ontario and Enrico Moretti of the University of California, Berkeley, which found the biggest benefit from extra education was in fewer violent crimes. That result is not replicated in the newer study, perhaps because there are too few murders in Britain to show up statistically. After all, Guildford is a long way from Los Angeles. The article refers to the following papers: “Mobilising Private Inputs for Crime Prevention.” NBER working paper (forthcoming) “Does Regulation of Built-in Security Reduce Crime? Evidence From a Regression Discontinuity Approach.” Univesity of Tilberg (mimeo) “The Crime-Reducing effect of Education.” Center for Economic Performance working paper (forthcoming) “The Effect of Education on Criminal Activity: Evidence from Prison Inmates, Arrests and Self-Reports” by Lance Lochner and Enrico Moretti, American Economic Review (2004) The presentations from the RES special session on the economics of criminal behaviour can be found at: http://www.resconference.org.uk/index.php?option=com_content&task=view&id=29&Itemid=36

Economist: A surprising number of companies spend some time in the clinic

Brand rehab Apr 8th 2010 From The Economist print edition A surprising number of companies spend some time in the clinic THE venerable Augusta National Golf Club has been playing host to the Masters Tournament since 1934. But this year it is also playing host to another great drama, the relaunching of the most valuable personal brand in the world. Tiger Woods’s penchant for cocktail waitresses and porn actresses ended up costing an astonishing amount of money: two economists at the University of California, Davis, have calculated that his biggest corporate sponsors, such as Nike and Gatorade, saw as much as $12 billion wiped off the value of their shares in the wake of the scandal. But Mr Woods’s warm reception at Augusta suggests that he is well on his way to recovering his star power. Brand Tiger is thus likely to join a long list of brands that have come back refreshed after a spell in rehab. These include not just the predictable roster of celebrity brands such as Martha Stewart and Kobe Bryant, but also a surprising number of solid corporate citizens such as Johnson & Johnson and Coca-Cola. Brand-threatening scandals are becoming a regular feature of the corporate landscape, thanks to a toxic mixture of globalisation, which scatters corporate activities hither and yon, and the internet, which allows bad news to spread like wildfire. Oxford Metrica, a consultancy, estimates that executives have an 82% chance of facing a corporate disaster within any five-year period, up from 20% two decades ago. Indeed, just the day after Mr Woods made his return to golf, the American government fined Toyota over $16m for its tardiness in addressing safety concerns. The key to a successful relaunch lies in making a cool-headed assessment of how much the scandal damages your company. Does it involve life and limb, rather than less consequential matters? Has it spread beyond particular products or particular divisions to afflict the entire corporate brand? If the answer to both questions is yes, then companies are well advised to go into collective overdrive; if it is no, then they can experiment with more nuanced responses, such as lopping off a tainted product or sacrificing a rogue division. Marsh & McLennan and JetBlue provide good examples of companies that took a no-holds-barred approach to brand rehabilitation. In 2004 Marsh & McLennan was accused of taking kickbacks to recommend insurance providers to its clients, an accusation that went to the very heart of its identity as one of the country’s biggest insurance brokers. The firm was not content with issuing grovelling apologies and paying $850m in compensation. It also appointed a new boss, Michael Cherkasky, who was the head of its financial-investigation division, Kroll. Mr Cherkasky proceeded to de-emphasise the insurance business and boost other divisions, such as Mercer Consulting and Kroll. In 2007 bad weather presented JetBlue with a nightmare of its own. Thousands of passengers were left stranded and one planeload of unfortunates spent eight hours sitting on the tarmac, with precious little food or drink to sustain them. The company’s founder and boss David Neeleman immediately recognised that this made a mockery of his promise to “bring humanity back to air travel”. He threw himself into dealing with the problem, issuing public apologies, telling his employees to contact passengers personally by phone and e-mail, producing a retroactive passengers’ “Bill of Rights” and ponying up around $25m in compensation. The JetBlue case underlines two of the most important rules of successful crisis management. First, the boss needs to take charge. This means sidelining corporate cluck-cluckers such as lawyers (who worry that any admission of guilt will lead to lawsuits) or financial officers (who obsess about the bottom line). It also means putting the survival of the company above personal considerations (Mr Neeleman stepped down three months after the crisis). Many of the most damaging crises, by contrast, have resulted from foot-dragging at the top—as appears to be the case with Toyota today. The second rule is that crisis-racked firms should redouble their focus on their customers. One former aide to George Bush junior, David Frum, tells the story of another, Karen Hughes, who sees a small plane towing a banner reading, “Jill, please come back. I am nothing without you. Jack.” Her response is, “Wrong message. It’s too much about you, not enough about her.” Companies have a habit of acting like Jack when their brands are in trouble—talking endlessly about how they are fixing this or reorganising that. But most successful decontaminators look at the world’s from Jill’s point of view. Johnson & Johnson’s handling of the Tylenol crisis (when an unidentified attacker poisoned some bottles of the painkiller) is the gold standard of crisis management because the company simply recalled all Tylenol without hesitation or demur. Similarly, Edward Breen, the boss of Tyco, rescued the conglomerate’s reputation after his predecessor, Dennis Kozlowski, was imprisoned, by launching a public-relations campaign that focused on what the company’s products do to improve people’s lives. Never waste a crisis Crises can even give brands a long-term boost, provided the rehabilitation is properly handled. Coca-Cola emerged stronger from its disastrous recipe change in 1985. In response to widespread outrage from customers, it reverted to the original formulation within three months. The whole episode reminded consumers of their fierce attachment to Coke, and thus ended up increasing sales. Tiger Woods, too, could well emerge with added lustre from his own debacle. There is nothing Americans like more than a redemption story—particularly when the man being redeemed is supremely good at his job.

Grant and Rosenberg Debate the Value of US Treasuries

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Brookings Overview of Financial Reform and the Role Derivative Dealers Play

Brookings Litan Derivatives Reform Failure.pdf

http://www.brookings.edu/%7E/media/Files/rc/papers/2010/0407_derivatives_litan/0407_derivatives_litan.pdf Executive Summary of the Essay and its Central Recommendations For readers who want the bottom lines right now, I provide them in this initial Executive Summary. In the body of the essay itself that follows I begin by giving readers a brief overview of the basics of derivatives, the institutional characteristics of the markets in which they trade, and both their benefits and risks. I then turn to the major reforms now being considered by the Congress and that regulators have suggested or have been urging to reduce the risks of OTC derivatives. I am uncomfortable, however, with one set of “reforms” that some have urged to reduce systemic risks in derivatives — a ban or severe restriction on “speculative” purchases of derivatives, “naked CDS” in particular, and outline those concerns in a separate section.

Roubinin: The Debt Death Trap

http://www.project-syndicate.org/commentary/roubini24/English The Debt Death Trap Nouriel Roubini 2010-04-16 NEW YORK – The Greek financial saga is the tip of an iceberg of problems of public-debt sustainability for many advanced economies, and not only the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain). Indeed, the OECD now estimates that public debt-to-GDP ratios in advanced economies will rise to an average of around 100% of GDP. The International Monetary Fund has recently put out similar estimates. Within the PIIGS, the problems are not just excessive public deficits and debt ratios (in different degrees and measures in the five countries). They are also problems of external deficits, loss of competitiveness, and thus of anemic growth. These are economies that, even a decade ago, were losing market share to China and Asia, owing to their labor-intensive and low value-added exports. After a decade that saw wages grow faster than productivity, unit labor costs (and the real exchange rate based on those costs) appreciated sharply. The ensuing loss of competitiveness manifested itself in large and growing current-account deficits and slowing growth. The final nail in the coffin was the appreciation of the euro between 2002 and 2008. So, even if Greece and other PIIGS had the political resolve to reduce massively their large fiscal deficits – and that is a big if, given the political resistance to spending cuts and tax increases – fiscal contraction may, at least in the short run, make the current recession worse as higher taxes and lower spending reduce aggregate demand. If GDP falls, achieving a certain deficit and debt target (as a share of GDP) becomes impossible. This, indeed, was the debt death trap that engulfed Argentina between 1998 and 2001. Restoring sustained growth requires real currency depreciation. There are only three ways that this can occur. One is deflation that reduces prices and wages by 20-30%. But deflation is associated with persistent recession (see Argentina again), and no country’s society and political system can accept years of recession and fiscal austerity to achieve real depreciation. Default and an exit from the euro would occur well before that. The second path is to follow the German model of accelerating structural reforms and corporate restructuring to increase productivity growth while keeping wage growth moderate. But it took a decade for Germany to reduce its unit labor costs that way; if Greece or Spain were to start today, the short run costs of resource reallocation would be large, while the benefits in terms of higher growth would take too many years to achieve. Finally, the euro could fall sharply in value. But the main beneficiary would be Germany. And, in order for the euro to fall far enough, the risk of default in Greece would need to be so large, and the contagion to sovereign spreads of PIIGS so severe that the widening of those spreads would cause a double-dip eurozone recession before currency depreciation could yield benefits. Short of a miracle, Greece looks close to insolvency. At the onset of its crisis, Argentina’s budget deficit, public debt, and current-account deficit (as a share of GDP) were about 3%, 50% and 2%, respectively. Those ratios for Greece are far worse: 12.9%, 120% and 10%. So it will take a Herculean effort, luck, and support from the European Union and the IMF to reduce the probability of an eventual default and exit from the eurozone. Greece is currently too interconnected to be allowed to collapse: since it has about $400 billion of public debt – three-quarters of which is held abroad, mostly by European financial institutions – a disorderly default would lead to massive losses and risk a systemic crisis. Moreover, the contagion to the sovereign spreads of the other PIIGS would be massive, tipping over several of these economies. So, despite revulsion on the part of Germany and the European Central Bank at the idea of a “bailout,” Greece needs large official financial support this year at rates that are not unsustainable to prevent its current illiquidity from devolving immediately into insolvency. But official support will only kick the can down the road until next year. The magic trifecta of sustainable debt and deficit ratios, a real depreciation, and restoration of growth looks unlikely to be achievable even with official financial support. All successful rescues of countries in financial distress – Mexico, Korea, Thailand, Brazil, Turkey – require two conditions: the country’s credible willingness to impose the fiscal austerity and structural reforms needed to restore sustainability and growth; and massive amounts of front-loaded official support to avoid a self-fulfilling rollover crisis of maturing public and/or private short-term debts. Reform without money on the table does not work, as nervous and trigger-happy investors would rather pull their money out if the country lacks the foreign-currency reserves needed to prevent the equivalent of a bank run on its short-term liabilities. So, after a totally flawed plan that would have given money to Greece too late – only when the country risked a refinancing crisis – and at market rates that would make its debt unsustainable, the EU regained its senses and designed a new scheme that is closer to typical IMF conditionality: tranched support with some early front-loaded support and a semi-concessional interest rate. Only time will tell if this plan will work: i.e. whether Greece will turn out to be illiquid but solvent, conditional on credible fiscal austerity and structural reforms and with the help of large amounts of financial support. But, as with Argentina, Russia, and Ecuador, Greece may also be insolvent if adjustment fails to restore debt sustainability and growth. For now, the official community has decided to stick with Plan A; if that fails, Plan B is default to reduce unsustainable debts and a Greek exit from the eurozone to allow depreciation and restoration of competitiveness and growth.