The debate is highly informative in regards to points of view of how the world works, economics, the banks, housing, mortgages, innovation, and regulation.
Edward Conard, of Bain Capital, talks about innovation and risk in his book, “Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong.”
Edward Conard Bio
Ed Conard was a partner at Bain Capital from 1993 to 2007. He served as the head of Bain’s New York office and led the firm’s acquisitions of large industrial companies. He sits on several boards of directors including the boards of Waters Corporation and Sensata Technologies. Prior to Bain, Conard worked for Wasserstein Perella, an investment bank that specialized in mergers and acquisitions, and Bain & Company, a management consulting firm, where he headed its industrial practice. He is a graduate of Harvard Business School and the University of Michigan.
Extended Interview on Daily Show
This is 33 minutes of the extended interview. There is only about 5 minutes of interview in the episode that aired on television.
The last 19 minutes of the interview get to the main heart of the debate and explanation of finance.
Here are the points that are made at different points in the 19 minute portion of the interview.
I list the time in the video and provide the point that is made.
About 2 minutes in
Wall street is about mortgages. 60% of the financial business in mortgages.
From 6:50 on
There are two separate problems for world economies. They are describe the main goals of national economic policy.
1. How do you incentive innovation ?
2. How do you put short term money to work ? These are the savings deposits that put into banks. This is an issue for national economies that have a lot of savings deposits.
The point is also made that economic growth is critical to economic sustainability.
At 9:40 in the video
The difference for Canada.
US homeowner is on the hook for the down payment.
Canadian homeowner is on the hook for 100% of the value of the house.
The 100% liability
11:30 in the video
Companies are working for customers. If they do not compete to do a better job for the customers successfully then the shareholders do not get rewarded.
12:30 in the video
The last time (from about 1980 to 2009) we recycled the short term money using mortgages (securitized and with a lot of the down payments provided by third party investors.) The system was designed to handle 20% loss and there was 30% loss.
$300 billion was lost on bad loans (loan losses).
$1.5 trillion was withdrawn (withdrawal risk). In spite of $15 trillion in guarantees from the government.
It was institutional run on the banks. Institutions (stock companies, insurance companies, other banks) took money out of other banks.
14:00 in the video
1. Expose banks to withdraw risk.
2. Charge banks for the government guarantees
3. Do not have zero % money from the Fed, charge the right amount to suck profits out of speculation
Guarantees did not hold the money in place, so not it sits on the sidelines.
The World has labor at $1/hour. How much do you buy of that cheap labor ?
You buy all of it.
So then how do we maintain the wages in the United States (and other developed countries) ?
You shift to a service economy. This avoids certain competition and wage erosion. Usually services have to be delivered locally. Labor for manufacturing has global competition so it has to be competitive on a productivity per dollar basis.
The US and others have already shifted to a service economy.
Service economies are slow growth.
How do you increase the rate of growth ?
This is done with more innovation and risk taking.
Innovation and risk based economies are more volatile.
Amazon Book Description- Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong
In the aftermath of the Financial Crisis, many commonly held beliefs have emerged to explain its cause. Conventional wisdom blames Wall Street and the mortgage industry for using low down payments, teaser rates, and other predatory tactics to seduce unsuspecting home owners into assuming mortgages they couldn’t afford. It blames average Americans for borrowing recklessly and spending too much. And it blames the tax policies and deregulatory environment of the Reagan and Bush administrations for encouraging reckless risk taking by wealthy individuals and financial institutions.
But according to Unintended Consequences, the conventional wisdom masks the real causes of our economic disruption and puts us at risk of facing a slew of unintended—and potentially dangerous—consequences. This book addresses many essential but overlooked questions, such as:
* If the United States had become a nation of reckless consumers rather than investors, why did productivity soar in the years leading up to the meltdown?
* If predatory bankers took advantage of home owners, why did down payments decline, thereby shifting risk from home owners to lenders?
* If the risks were easy to spot, why did top political and financial advisers encourage lenders to make unsound investments?
* If new regulations encourage banks to hold enough capital to fund withdrawals and not just loan losses, how will the economy underwrite the risks necessary to reach full employment?
In an attempt to set the record straight and fill the void left by other analysts, Conard presents a fascinating and contrarian case for how the economy really works, what went wrong over the past decade, and what steps we can take to start growing again.
To read an excerpt from Unintended Consequences, please visit http://www.edwardconard.com/book-excerpt
For up-to-date information on everything related to Unintended Consequences, visit www.edwardconard.com
Ed Conard debates Nobel Prize winning economist Joe Stiglitz over income inequality
What others are saying
“Ed Conard provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.”
—Nouriel Roubini, Chairman of Roubini Global Economics
“This is a wonderful book, filled with wisdom by a guy who really knows what he’s talking about. It is must reading for both businessmen and politicians.”
—John C. Whitehead, Former Chairman Goldman Sachs & Co., Former Deputy Secretary of State
“Ed Conard’s book presents the most cogent and persuasive analysis of the financial crisis to date. It is deeper and likely more accurate than what we have seen so far from journalists, academics, and particularly former government officials.”
—Andrei Shleifer, 1999 John Bates Clark Medal winner, former Editor of the Quarterly Journal of Economics, Professor of Economics, Harvard University
“Ed Conard’s keen business insight and sharp eye on economic forces explain structural strengths and weaknesses of the American economy. While some of his proposed solutions are controversial, the U.S. economy can recover its mojo if policymakers understand Conard’s diagnosis.”
—Glenn Hubbard, Dean, Columbia University, Graduate School of Business, former Chairman of the President’s Council of Economic Advisers
“…I agree with much of what he writes.”
—Arnold Kling, founder and co-editor of EconLog
“…full of substance, it is one of the must-read books of the year.”
—Tyler Cowen, author and economist
“Conard’s is one of the better books written on innovation and economic growth over the past few years.”
—Nick Schulz, American Enterprise Institute