Jackson’s Blog

For whatever reason, I’ve been thinking about businesses-to-customer and business-to-business relationship. I came to the realization ultimately, even if two industries are not competing in the same market, they are still competing against each other. They simply might not have realized it yet. Am I saying that if you work in the restaurant business, you’re also competing with the guy who runs the jewelry business? Yes. Is Disneyland competing against book publishers? Yes.

The truth that is easily forgotten is the fact that every business is taps into the same grand pool of consumer residual income and time. This resource is finite. No matter what the activity, they must decide how many hours to allocate to it. No matter what they’re spending their money on, they must still make cost-benefit decisions from that pool of limited resources.

The web has changed a lot of things. It has allowed storefronts to not compete against the shops in their immediate proximity, but draw crowds from places great distances away. This means that not only are they competing with their immediate neighbors, they’re potentially competing with a company half the world away.

The web enables companies to compete globally, this means more customers, and this also means more competition. They can be making 10 folds what they were making yesterday, and then for weeks have no customers. For example, in “The Search” by the CEO of Wired Magazine, he cites a case of how a shoe company was making money hand over fist because they were the first link on Google for shoes. Then their link lost its place and instantly, the company lost that revenue flow. The modern age provides a lot of potential for income, but also comes with a higher potential for volatility.

Companies need to keep track of their industry, what type of product they’re selling whether it is luxury, or normal goods, whether they make their money locally, or non-locally, and whether or not their consumers still have the time and money to spend on their products. They’ll also need to make sure they maintain even better customer relationships because there are simply more options out there. With all this competition amongst producers, it’s a great time to be a consumer, unless that producer is paying your bills……

I have great respect for the Federal Chairman, Professor Bernanke. I understand the fact that he’s proposing the 700 billion dollar bailout to protect a tool of regulating the economy.

The only reason why I think an economist might even think about bailing out a bank should be for personal profit, or because he honestly believes it’s the best course of action. Hopefully, it’s the not former. Banks are an important part of the tools for economy regulation, you increase the interest rate, it’ll take the money out of the economy because it’s better to save than to spend. You lower the interest rates and it’ll inject money into the economy because spending/investing money makes more sense than saving it. It’s proven to be more effective than fiscal policy, although fiscal policy if applied correctly is still effective.

One of the things that probably contributed to this crisis is the accounting standards and possibly the Sarbanes Oxley Act. Due to the new rules in the account standards and what is considered to be GAAP (Generally Accepted Accounting Principles) securities, depending on the type, is priced at fair market value. Now given the fact that the fair market value of houses are dropping like crazy, these highly valued securities are worth less and less every day. This drop in value is creating a loss on their books, and in accordance with accounting principles, they must record it. This drop in financials is definitely noticeable and causes a panic with the shareholders and prompts and rapid sale of said company’s stocks.

What Chairman Bernanke is proposing is to save the banks by having a huge buyer buy all the undervalued securities, that way, the panic is removed, and the price of the house will go back to it’s original pre-burst value; assets purchased pre-burst won’t be selling for a loss.

It makes sense, but still doesn’t justify a 700 billion dollar blank check that can’t be review or subjected to oversight, that, I simply can’t agree with. What I also can’t agree with is the fact that if housing doesn’t tank when will people like me be able to buy a house? Although I definitely do believe Bernanke is in a tough spot, the economy isn’t as simple as, “1+1 = 2″, it’s more like “n + x + y + z = a”. I think there will be issues in letting the banks fail and issues with not letting the banks fail. If the banks fail, there will be fewer banks on the market, which might lead to an oligopoly. If the banks don’t fail then it can possibly encourage reckless investment, keep housing prices inflated, and etc. Either way, it’s going to be a tough call, but apparently Bernanke believes that former is the worst of the two. Given the fact that he pretty much writes the book on this sort of thing he might be right, and given his position, I hope he is, but only time will tell.

Economically speaking, I understand why Bernanke might make a move to save banks, due to the fact that banks are critically tied into the economic tool of monetary policy. Not to mention the fact that a lot of companies, business, and the liquidity of the economy can be impacted by a big bank’s disappearance. That said, our government’s move to save a non-bank entity (AIG) on the other-hand, I don’t quite understand. Overall in the scheme of things, although great for saving our economy now, I hope it doesn’t set the precedent that if you get big enough, and you fail, the government will bail you out. If that mentality ever gets established it’ll encourage a lot of corporations to not properly manager their organization and take risks that they shouldn’t be in the first place.