Interest Rates: In Preparation for Pain

April 12, 2010 1 comment

Arrgh! The APR!!

The financial crisis and recession were the consequence of a decade-long spending spree by consumers in the US and Britain. As reprobate banker Alan Greenspan made money cheap, consumers responded to the incentive and went to town with car loans, mortgages and credit card debt. In contrast to thrifty China, the West plunged itself into a ravenous mire of debt.

The rest is history, as is the era of cheap money. Yes, the Bank of England recently voted to keep interest rates at their artificially low current levels. This kid glove policy designed to support economic recovery may have stemmed the bloodletting in late 2008, but it has not forced consumers to face up to their own financial profligacy.

That will change- and for governments too. As the New York Times points out, interest rates will rise- and they will continue to do so for a very long time. Governments will have to borrow massively to plug their fiscal holes, and their demand for debt will push rates up. Incipient inflation will have to be contained. Existing mini-bubbles in stocks, housing and gold will have to be pricked in their infancy.

The burden of higher interest payments on debt-burdened consumers will administer well-deserved doses of pain. Many will learn the bitter wisdom of living within their means. Their lessened profligacy will mean lower house and stock prices, less borrowing and less spending.

The bailouts of 2008-2009 tried to avoid the pain of economic correction. The doldrums of the next few years will show they merely postponed and protracted it.


The Only Banker You Should Hate

March 23, 2010 1 comment

The Devil wears glasses

Did you see your financial investments decimated by the credit crunch? Is your mortgage underwater or your house in foreclosure? Are you mired in credit card debt or unemployed?

If so, you are undoubtedly looking for someone to blame. Being human, you’re unlikely to attribute your plight to your own financial irresponsibility in over-borrowing, buying a house you couldn’t afford, living beyond your means or investing unwisely. To blame oneself is not human. We need scapegoats.

This is why we have settled on the world’s bankers as the objects of our righteous anger. Alas, the grey-suited men of Wall Street and the City were only acting on the incentives created by the world’s most powerful banker- The Federal Reserve Chairman. And the incumbent at the time the bubble inflated was none other than Alan Greenspan.

Greenspan is now tentatively accepting some responsibility for the excessively  low interest rates that made money cheap and plentiful, credit easy and asset prices easy to inflate. Of course, being human, he also attributes most of the blame to someone else (Chinese fiscal surpluses flooding the US with cheap money, etc).

But at least, he’s helping us out by his (however limited) mea culpa. So if you’re still angry at your lot in life, go ahead and excoriate him with the fires of wrath and blame. You’ll feel better.

What True Innovation Looks Like

March 19, 2010 2 comments

Large companies are obsessed with fostering innovation, and for good reason. Building a better mousetrap gives you, for a time at least, a leg-up on the competition. But the fact that corporations need to formalise a process for innovating suggests an obvious problem: big companies are inherently stifling of innovative thought and activity.

We know the reasons why: a bias for what has worked in the past, incentives to avoid risky initiatives (big companies love to punish failure during that soul-sapping ritual, the annual appraisal), the deadening effects of groupthink, and the inevitable ennui that sees employees just trying to survive till the next payday.

To find real innovation therefore, you have to go outside established businesses: to university design students, for example.

Min-Kyu Choi just won Britain’s most prestigious design prize with the kind of innovation overpaid corporate drones could only wish they had thought of. He solved an ubiquitous and long-standing problem in an elegantly simple way. The video is worth a thousand words:

Categories: Technology Tags: ,

Differentiation and the Power to Price

March 17, 2010 Leave a comment

It’s something of a canard, the saying that people don’t want to pay for stuff on the Internet. Information wants to be free, they say. This Utopian view of an anti-economic world of free love and produce, of course belies the hard fact that e-commerce is surging at a blistering rate ($155bn in the US alone in 2009) as more of our lives revolve around the Interwebs.

In the content world of newspapers and magazines though, there is much hand-wringing and anxious perspiration. This is, because right now, people don’t pay for most news, and as this new Pew Study shows, most people are not loyal to individual sites. Most would also switch to other sites if their preferred site started charging for news.

But of course. That is hardly unique to the Internet. If a new coffee shop opened across the street from your favorite one, and offered the same coffee for free, of course you would switch. You’re economically rational. The problem therefore is the bland sameness of news websites.

Scarcity (or the perception of same) creates price, where a thing has value. This is as true for news websites as it is for lattes. The power to price comes from having a product both deeply beneficial to your target consumer, and on which you have a perceived monopoly.

The Internet is merely a harsher taskmaster than the old economy. But the survival imperative is the same. Be good. Be different. With nowhere else to go for your juicy goodness, your customers will shell out the cash.

The Chastisement of Google

March 15, 2010 Leave a comment

Pride goeth before destruction, and a haughty spirit before a fall“- Proverbs 16:18

Organisations are like people: products of their experience and history. Some are old and wise, and take the long view. Some are young and hotheaded and certain to feel the fierce lash of society’s chastisement before long. Others are spoiled by sudden success young in life, and high on hubris, headed for a fall. One such is Google.

Google is one of the world’s most valuable brands, but an over-rated company. More than 90% of its profits come from its first product, search advertising. Google didn’t invent the search engine or its advertising model. Its success was a combination of luck, the prodding of early investors (the founders didn’t want to sully their search results with advertising but were forced to do so by VCs) and a laser focus on search. None of Google’s more than 120 other products make any money.

Nonetheless, cash mountains and rapid growth have created a monumental cultural hubris in Google. A megalomaniacal self-confidence has led to recent product debacles, unfocused diversification, privacy missteps and rash maneuvers, such as the decision to unwisely threaten to pull out of China, a bluff the Chinese government looks likely to call.

Google Groupthink is in evidence. With a leadership so spoiled by success and certain of its own divine infallibility, there is no dissenting voice to counsel caution. The tides will turn for Google, and the lessons will be hard.


Categories: Business Tags: , , ,

The Enemy of my Enemy is my Friend

March 10, 2010 Leave a comment

In business, be careful whom you offend. This salutary lesson may be a bitter one for Google as it threatens to find itself pincered between the ruthless jaws of Microsoft and the venomous claws of Apple.

Not too long ago, Apple and Google enjoyed a touching bromance. Google CEO Eric Schmidt served on Apple’s board. Both loathed Microsoft, and all was well in the world. Then Google’s hubris, stoked by their swift and sweeping success, urged a fatal error.

Google announced an operating system, Chrome OS, and later released a phone, the ill-fated Nexus One. Apple CEO Steve Jobs fumed at this direct attack on his beloved iPhone. He declared war on Google, after Eric Schmidt resigned from Apple’s board. The former allies slowly morphed into bitter competitors.

Meanwhile, Microsoft hates Google with an unforgiving and unholy passion. They too had seen their crown jewel products, Windows and Office, assaulted by Google’s Chrome OS and Google Docs products. With Apple now accusing Google of crossing the line into the competitive arena, it looks like Microsoft is making affectionate noises in Apple’s direction.

Google should have stuck to its core business of search and advertising. By casting its net in too many directions, it is picking up competitors and enemies it doesn’t need. It may learn the hard way to pick its fights more wisely.

Good Mother, or Good Manager?

March 8, 2010 Leave a comment

Why is this slacker not running a company?

If you’re a woman, and you prefer being a devoted mother to being a CEO, there must be something wrong with you. Or at least, that’s the subtext of the current woeful lamentation of the lack of women in senior management. 

This is getting a tad tiresome. The entire argument is anchored on the presumption that gender equality at all levels of business is a universally desirable- and indeed desired- goal. But we ask- says whom? 

The world of work is hardly, at the best of times, a font of joy and good cheer. Most people have to be paid to work, which suggests food for thought. If work were fun, no-one would have to be paid to do it. 

Compare cubicle slavery with helping your kids with homework, dressing them for school, sharing their jokes, foibles, pain and pleasure as their personalities unfurl into adulthood. Such is the joy of motherhood. And the desire to feel it is the primary reason many women choose not to engage in the soulless cut and thrust of corporate ladder-climbing. 

If women have been granted equal opportunity, perhaps those that choose to be good mothers rather than good managers are smarter than the activists assume. There are no immortal poems to business leadership.