MAXMISING SHAREHOLDER VALUE: The By-product of Good Business Management and Not a Business Strategy.

On April 20th 2010 an oil well operated by British Petroleum in the Gulf of Mexico, deepwater horizon, exploded killing 11 men and injured 17 others. The oil well head was only capped 3 months later after it had released 4.9 million barrels of crude oil and caused extensive damage to marine and wildlife habitats, as well as the regions vibrant fishing and tourism industry. The disaster resulted in a 100 billion dollars loss in BP market capitalization and a 7.8 billion dollar settlement. 

The report published by the United States commission of enquiry into the disaster concluded that in an attempt to save $1 million a day, the company cut safety corners resulting in a defective cement job that ultimately caused the disaster. The example was highlighted by Professor Lynn Stout of the University of California, Los Angeles (UCLA) as a product of what she called “shareholder value thinking”, where executives aim to drive up the value of the share prices in the shortest time possible without considering the cost of their actions to society.

The concept of maximising shareholder wealth may have its roots in Adam Smith’s celebrated passage;

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

The ideology was propagated in the 1970’s by Milton Freidman who argued that there is only one social responsibility of business, “to use its resources and engage in activities designed to increase its profit so long as it stays within the rules of the game”.

This ideology is based on the concept that businesses are entities and not individuals, whose sole purpose of existence is to make profits and maximize shareholder value over time. The proponents of this ideology argue that when corporations are run to maximise shareholder value the performance of the economy as a whole and not just the intent of the shareholder will be enhanced. This ideology was supported by the economic boom of the 1990’s and the success of Silicon Valley during the same period, gave powerful support to this concept, but the financial crisis of 2008 has made many economists to begin question the concept. Bob Berry on the other hand noted that the 2008 financial crisis was not a result of shareholder value maximisation but rather the companies (Banks) were being managed in the interest of the directors. Uwe Reinhardt in attempting to simplify how business should create wealth pointed out that for a corporation to contribute to national wealth it must go beyond increasing shareholder value and increase the “total gross value”. Only then will all the players (consumers, shareholders, employees and society) benefit from the added value.

Steve Denning writing in Forbes, noted that Jack Welch (CEO of General Electric from 1981-2001) said that the concept of maximizing shareholder value was not a smart idea rather “it turned out to be a disease it purported to cure”. 

He further noted that companies must shift focus back to the customers, away from shareholder value and rather focus on delighting their customers while earning acceptable returns for the shareholders. Michael Jensen argued that “we cannot maximise the long-term value of an organisation if we ignore or mistreat any important constituent” while Jack Welch argued in an interview with the Financial Times that shareholder value is a result NOT a strategy.

The main constituent of any business are its employees and customers. The point highlighted by Jack Welch is one which I believe. The concept of maximizing shareholder value, though noble in its intent to improve the company’s margins, becomes a misplaced intent when it becomes the sole purpose of the company. It takes life form of its own driving the executives to adopt a myopic shareholder centred view of management, neglecting the core of any business which is its customers and its ‘heart’ which is the employees. The argument here is that shareholder value should be the by-product of good business management and not the strategy. When adopted as a strategy, business executives may compromise standards as seen in the BP oil spill, adopt unsustainable environmental practises or be out rightly unscrupulous in their production methods. This argument does not suggest in any way that if shareholders obtain maximum returns from their investment, society must suffer. Rather it’s an argument on the merits of shared benefits by adopting a holistic approach to business management in contrast to the one-track shareholder centred management style.

The Global Financial Crisis; Causes and Effects on The UK Economy (Four Years After)

On December 7^th 2006, Ownit Mortgage Solutions Inc., a California based home lender part owned by Merril Lynch and Co., closed its doors and told more than 800 workers not to return just days before Christmas. The collapse of this wholesale mortgage lender, 11^th largest United States (US) issuer of subprime mortgages, marked the beginning of the global financial crisis (GFC) which would later turn out the largest global economic downturn not seen since the great depression.

The GFC took roots in the second quarter of 2008 with estimates from the International Monetary Fund (IMF) putting the cost of the crisis at a staggering £7.1 trillion. At the epicentre of the crisis, tensions continued to mount all over the world and in March 2008, the US Federal Reserve brokered a deal that allowed JP Morgan to acquire Bear Stearns, and by September 2008, Lehman Brothers (the fourth largest investment bank in the US) filed for chapter 11 bankruptcy protection following drastic losses in its stocks and devaluation of its assets.

In the United Kingdom (UK), the Northern Rock was the first high profile victim of the crisis as it was forced to apply to the Bank of England for emergency financial support on 13^thSeptember 2007 (Hoson and Quaglia, 2009) after it became the first run on a British bank since 1866 (Hodson and Mabbett, 2009).

More than four years into the crisis, the global financial system still remains in turmoil and recent data has shown a renewed slowing down of the global economy US first quarter 2012 Gross Domestic Product (GDP) dropped to 2.2% from 3% seen in the last quarter of 2011 and below projected estimates of 2.5%. News of China’s first quarter GDP result was not better as the economy grew at 8.1%, the slowest in more than three years. The report from the Office of National Statistics in the UK were even gloomier as GDP contracted by 0.2% in the first quarter of 2012, putting the economy back in recession and compared to the Great Depression of the 1930’s, the weakest recovery from any financial crisis in modern history.

Causes of Global Financial Crisis

The factors that led to the GFC are varied and complex Acharya and Richardson (2009) noted the fundamental causes of the crisis was the combination of a credit boom and the housing bubble.

In attempting to examine the factors we use the findings identified by the US government appointed Financial Crisis Inquiry Commission as our template.

a) Behaviour of Large Complex Financial Institutions (LCFI)

Diamond (1984) noted that the simple theory of banks was to act as intermediaries between depositors and borrowers, and in order to protect depositors from losses banks were required to hold a minimum amount of“Capital” which is defined by regulators. Under the Basel accord, banks must maintain 8% capital buffer against risk adjusted measures of their assets and in the US 10% capital buffer was designated to “well capitalized banks”. In an attempt to circumvent this capital adequacy requirement the LCFI turned to securitization,which is the pooling together various types of contractual debt (e.g. mortgages) and selling them as standard securities. This allowed the banks to avoid holding costly capital by turning them into underwriters that still originate the loan but sell them off to others (Acharya and Richardson, 2009). This behaviour of banks altered the original idea of banking; banks are now intermediaries between investors (rather than just depositors) and borrowers.

The process of securitization allowed the banks to reduce their reliance on deposits and obtain funding for their loans through the capital markets by using asset-backed securities (ABS) that could be sold to investors (Wilmarth, 2009). The ABS were created from pool of mortgages and sold in tranches called Collateralised Debt Obligations (CDOs). The tranches were accorded different ratings and the ratings were supposed to be based on the riskiness of the debts. Another benefit of securitization was that it offered banks with less than a “AAA” to create ABS that qualified for “AAA” ratings, while also earning sustainable fees for originating and securitising loans.

The period 2002 to 2007 saw a staggering increase in structured securities as banks extended the prime-mortgage securitisation model to other riskier asset classes. This allowed banks to transfer risk from the balance sheet to the broader capital market including pension funds, mutual funds, insurance companies and foreign based institutions (Financial Crisis Inquiry Commission, 2011). With the loans placed in conduits rather than on the banks’ balance sheet, the banks did not need to maintain capital against them and these conduits funded asset backed securities through asset-backed commercial papers (ABCP). Conduits are entities set up by the financial institutions to enable then more easily sell their loans to investors in the secondary market; they are also known as special purpose vehicles. To be able to sell the ABCP, the bank would have to provide the buyers with guarantee of underlying credit – essentially bringing the risk back onto itself. The aggregate securitization worldwide went up from $767 billion at the end of 2001 to $1.4 trillion in 2004 and by 2006 (at the peak of the bubble) had reached $2.7 trillion (Acharya and Richardson, 2009).

During the period preceding the crisis, conglomerates significantly expanded their presence in the securitization market as Lehman Brothers and Bear Stearns were the top underwriters for residential mortgage-backed securities (RMBS) during 2004 to 2007, while Citigroup was the top underwriter for ABS backed by other types of consumer debt (Wilmarth, 2009).

Financial conglomerates aggravated the risks of nonprime mortgages by creating multiple financial bets based on those mortgages. LCFIs re-securitized lower-rated tranches of RMBS to create Collateral Debt Obligations (CDOs), and then re-securitized lower-rated tranches of CDOs to create CDOs-squared. Some of these tranches were then rated again and some were given “AAA” ratings, thus adding to the risk and complexity of the debt instruments. LCFIs also created synthetic CDOs and wrote Credit default Swaps (CDS) to create additional financial bets. One of the major problems with CDS is that CDS can be purchased without having an underlying security. Goldman Sachs played a major role in the trading of CDS. By the end of 2007, outstanding CDS amounted to $62.2 trillion (Wilmarth, 2009).

When the collapse occurred the ABCP could not be rolled over and the banks had to return the loans to their balance sheets which effectively wiped out significant bank capital and thereafter the bank solvency. The chart below shows movement in securitisation in the UK between 2000 and 2009.

b) Widespread failure in financial regulation and supervision

The scenario highlighted previously was able to take place because of what FCIC succinctly described as “the sentries were not at their post, in small part due to the widely accepted faith in self-correcting nature of markets and the ability of financial institutions to effectively police themselves” (Financial Crisis Inquiry Commission, 2011).

After more than fifty years without a financial crisis, financial firms and policy makers began to see regulation as a barrier to efficient functioning of capital markets rather than a necessary precondition for success (Congressional Oversight Panel, 2009). The change in attitude resulted in more than 30 years of deregulation and reliance on self-regulation championed by Alan Greenspan, the former Federal Reserve chairman (Financial Crisis Inquiry Commission, 2011). This hands-off approach gave rise to a nearly unrestricted marketing of increasing complex consumer financial products which was even poorly understood by the regulators. The net effect was the failure to effectively manage risk as well as ensure transparency and fair dealings in financial transactions, all culminating volatile practices by the financial industry that led to the global crisis.

The United States special report on regulatory reform (2009) noted that markets have become opaque in multiple ways as some markets such as hedge funds and credit default swaps, provide virtually no information, while off balance sheet entities and complex financial instruments reveal the lack of transparency resulting from wrong information disclosed at the wrong time and in the wrong manner. Mortgage documentation was also highlighted as problematic as borrowers were intentionally thrust with reams of technically worded contact too difficult for them to understand the complexity. The panel identified eight specific areas most urgently in need of reform.

• Identify and regulate financial institutions that pose systematic risk.
• Limit excessive leverage in American financial institutions.
• Increase supervision of the shadow financial system.
• Create a new system of state regulation of mortgages and other consumer credit products.
• Create executive pay structures that discourage excessive risk taking.
• Reform the credit rating system.
• Make establishing a global financial regulatory floor a US diplomatic priority.
• Plan for the next crisis.

TheDodd-Frank Wall street reform and consumer protection act was passed by the US congress and signed into law by president Barack Obama on July 21 2010, in response to the loop holes that led to the global financial crisis with the aim of “creating sound economic foundation to grow jobs, protect consumers, rein in Wall street and big bonuses, end bailouts and prevent another financial crisis (Dodd-Frank Wall Street Reform And Consumer Protection Act, 2010).

c) An unsustainable Credit Boom

The United States experienced an enormous credit boom between 1991 and 2007 as credit markets owned by all sectors tripled from $1.4trillion in 1991 to $46.9 trillion in 2007 (Wilmarth, 2009), while non-governmental domestic debts quadrupled and rose by $29.6 trillion accounting for ninety percent of the overall growth. In the UK similar picture was observed and this resulted in a sharp increase in household debt and disposable income.

The credit boom was facilitated by a combination of low interest rates and large inflows of foreign funds with net increase in availability of credit to higher-risk consumers and commercial real estate developers (Wilmarth, 2009).The Financial Crisis Inquiry Commission noted that many mortgage lenders exploited the availability of cheap funds and set the bar so low that lenders took eager borrowers qualification on faith, often with wilful disregard for the borrower’s ability to pay (Financial Crisis Inquiry Commission, 2011). When these borrowers stopped making mortgage payments, the losses – amplified by derivatives – rushed through the pipeline, and as it turned out, these losses were concentrated in a set of systematically important financial institutions that kicked off the global financial crisis.

d) Poor Credit Rating

The FCIC indicted the credit rating agencies as key enablers of the financial meltdown as the mortgage-related securities at the heart of the crisis could not be sold without their seal of approval (Financial Crisis Inquiry Commission, 2011). Investors relied on their approval and in some cases were obligated to use these rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havocs across markets and firms. FCIC identified flawed computer models, pressure from financial firms that paid for the ratings, relentless drive for market share, lack of resources and absence of meaningful public oversight as reasons for rating agencies in-appropriately awarding AAA-ratings to securities that were ultimately downgraded.

e) Systemic Breakdown in Accountability and Ethics

The soundness and the sustained prosperity of the financial system and the economy rely on notions of fair dealing, responsibility and transparency. But a close examination of the actions of financial institutions in the periods prior to financial crisis revealed a systematic lack of accountability and a relaxation of ethical standards. The FCIC (2009) catalogues the rising incidence of mortgage fraud, which flourished in an environment of collapsing lending standards and lax regulation. Reviews by the FCIC (2009) showed that the percentage of borrowers who defaulted on their mortgages within just a matter of months doubled from the summer of 2006 to 2007 indicating that they likely took out mortgages they never had the capacity or intention to pay. The report summarises that the crisis was as a result of human mistakes, misjudgements and misdeeds that resulted in systematic failure of the financial industry.

Effects on the UK Economy

The UK economy has been hit hard by the financial crisis with early casualties being the first run on a British bank since 1866 and a near melt down in the banking system afterwards. Business in the UK have since struggled to stay afloat but the economic news keeps tracking in the wrong direction despite the government’s effort to spur economic growth while also attempting to control the deficit. The UK economy which is the 7^th largest in the world as measured by GDP (International Monetary Fund, 2012) officially entered a recession in the second quarter of 2008 according to the Office of National Statistics (ONS) and exited it in the 4^th quarter of 2009, only to enter a double dip recession in the first quarter of 2012 (Office for National Statistics, 2012). The graph below shows UK GDP growth rate from 2006 to 2011.

As of the end of November 2009 the UK economy had shrunk 4.9% from the pre-recession level with the ONS reporting that in the 3^rd quarter of 2009, the economy experienced a 0.2% negative growth compared to 0.6% fall experienced in the previous quarter with further improvements seen in the third quarter of 2010 as the economy grew by 0.8%, the fastest third quarter growth in 10 years. But the positive news was short lived as by the fourth quarter of 2010 the economy had shrunk 0.5% with mixed results seen in 2011 and by the 4^th quarter of 2011 the economy shrunk by 0.3% culminating in a double dip recession in the first quarter of 2012 after a decline in GDP of 0.2% (Office for National Statistics, 2012).

The effects can also be seen in the unemployment figures which have been very disappointing. When the GFC hit, the unemployment rate was a little over 5.6% (1.6 million people). By the end of 2009 it was almost 8.5% (about 2.5 million people unemployed), and by the end of 2011, 2.7 million people were unemployed, the highest in more than 17 years. At the individual level, about 13.5 million people in the UK are currently living in households below the low income threshold representing an 11% increase compared to 2004/2005.The UK manufacturing sector also suffered a big blow from the recession. According to the Markit Purchasing Managers Index (MPI), this surveys business conditions, dipped to 50.5 in April 2012 down from 51.9 in March, raising fears of the weakness of the sector. The ONS notes that even though the manufacturing sector recovered following the recession, it returned to contraction in June 2011 with overall manufacturing output down by 2% as at April 2012 when compared to this period (Office of National Statistics, 2012).

Following the recession in 2008, bank lending to small businesses dropped significantly, but in the last 12 months, compared 2009 and 2010, it has improved significantly only to drop 10.9% in March 2012, down from 11.7% figure reported in February 2012. Small bank lending remains flat at a 47.6% approval rate, alternate lenders picked up slightly (0.5%) to a 63% approval rate and loans made by credit unions barely increased (up 0.1%) to a 57.9% approval rate by March 2012 (Arora, 2012). Under project Merlin, banks agreed with the government to increase lending to SMEs to £76bn, an increase from £10billion compared to 2010, however the first quarterly lending data report of 2011 showed that five banks lent £16.8billion instead of the targeted £19 billion per quarter (Broughton, 2012). The chart below shows reduction in lending to small and medium scale enterprises in the UK between 2008 and 2011. Financial Institutions are becoming even more cautious in their lending particularly with the not so rosy economic outlook (Arora, 2012).

Conclusion

 

The issues highlighted above were some of the major activities that led to the financial crisis and the effect is still being felt worldwide today. The UK economy has experienced negative growth in GDP as various sectors of the economy have been affected by the GFC, also it is becoming more difficult for businesses to access funding to grow their business as a result of reduced lending by financial institutions.

In order to overcome the financial crisis it is imperative that a long-term, non-ideological realistic approach be adopted by all governments else we might see the global economy slide into a double-dip recession.

References

Acharya, V. V. and Richardson, M. (2009). Causes of the Financial Crisis. Critical Review Foundation. vol 21(2-3). pp 195-210.

Arona, R. (2012). March Drop in Loan Approval Rate at Big Banks is a Cause for Concern. Small Business Trends. Available: http://smallbiztrends.com/2012/04/drop-loan-approval-rates-big-banks-cause-concern.html. [Accessed 30 April 2012].

Broughton, N. (2012). Lending to Business. Economic Policy and Statistics. January.

Chu, B. (2012) Gloomy manufacturing survey and fall in exports stoke fears of prolonged recession. The Independent Online. May. Available: http://www.independent.co.uk/news/business/news/gloomy-manufacturing-survey-and-fall-in-exports-stoke-fears-of-prolonged-recession-7704369.html. [Accessed 30 April 2012].

Congressional Oversight Panel (2009). Special Report on Regulatory Reform. 125(b)(2) Title 1, Emergency Economic Stabilisation Act. Pub. L. No. 110-343.

Diamond, D. (1984). “Financial Intermediation and Delegated Monitoring.” Review of Economic Studies 51: 393–414.

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010). Brief Summary of The Dodd-Frank Wall Street Reform And Consumer Protection Act. Available: http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf. [Accessed 30 April 2012].

Financial Crisis Inquiry Commission (2011). Final Report Of The National Commission On The Causes Of The Financial And Economic Crisis In The United States.

             Hodson, D. and Mabbett, D. (2009). UK Economic Policy and the Global Financial Crisis: Paradigm Lost? Journal of Common Market Studies. vol 47.5 pp 1041-1061.

Hoson, D. and Quaglia, L. (2009). European Perspectives on the Global Financial Crisis: Introduction. Journal of Common Market Studies. vol 47.5 pp 939-953.

International Monetary Fund (2012). World Economic Outlook. Growth Resuming, Dangers Remain.World Economic Outlook Database. April.

Keohane, D. (2012). US GDP: slacking off but let’s not get too dramatic. Financial Times Online. April. Available: http://www.haver.com/      http://ftalphaville.ft.com/blog/2012/04/27/978191/us-gdp-slacking-off-but-lets-not-get-too-dramatic/. [Accessed 30 April 2012].

Keohane, D. (2012). The UK is back in recession. Financial Times Online. April. Available:http://ftalphaville.ft.com/blog/2012/04/25/973731/the-uk-is-back-in-recession/. [Accessed 30 April 2012].

Keoun, B. (2006). Ownit Mortgage, Part-Owned by Merrill, Shuts Down This Week. Bloomberg Online. Available: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKO4CvD700gI. [Accessed 30 April 2012].

Office for National Statistics (2012). Available: Statistics.gov.uk.

Solomon, J. and McCluskey W. (2010). Commercial Mortgage Backed Securities: Resurgence or Demise. Journal of Property Investment & Finance, Vol. 28 Iss: 6, pp.398 – 419. Available: http://www.emeraldinsight.com/journals.htm?articleid=1886257&show=html. [Accessed 30 April 2012].

Wilmarth, A. E. (2009). The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis. Connecticut Law Review. May. Vol. 41.4.

Jobs or Debt: The U.S. Experience

Apple became the world’s most profitable company edging out Exxon after it announced that its last quarterly profits more than doubled to $13.1bn. The result announced by this American company hides the fact that net US manufacturing as apercentage of GDP declined from 23% in 1970 to just above 11% in 2010; a whopping 47% drop. The stats highlightedtell the hidden story of Apple’s success; the R&D (research anddevelopment) takes place in the U.S. while the real production takes place in China where conditions of work are so bad that two workers withFoxconn (manufacturers of Apple products in China) commit suicide everymonth.

Enough of numbers; debt or jobs which should be tackled.

If youlisten to politicians on both sides of the Atlantic you may be tempted to believethat the debt in the G8 ($15 trillion in the U.S. and now £1 trillion in the UK) is about to drop on us like a rock. But the markets tell a different tale. Thecost of borrowing in the U.S. has been the lowest in more than 25 years (10year bonds) hitting a record low of 1.83% in September 2011 (down from 15.84%in September 1984), indicating investors strong confidence in the ability ofthe U.S. to pay its debt while offering cheap funds for economic resurrection. Thisconfidence is hinged on the strong showing of the U.S. economy which has seen22 straight months of private sector growth and in the final three months of 2011showed a robust growth of 2.8%.

Inthe U.K. the picture has been gloomier, as the economy shrank by 0.2% in the last quarter of 2011, experiencing the slowest recoveryfrom recession since the 1930s.  This decline in the U.K. economyhas been catalyzed by the slump in manufacturing and construction, and this canbe attributed to the policies of the current U.K. conservativegovernment. It campaigned and adopted the austerity budget as soon as they weresworn into office, with massive and painful cuts in government expenditure withthe aim of reining in the deficit. But the results obtained have been opposite withrising debt-to-GDP ratio as a result of a shrinking GDP in the face of astagnant debt.

The ‘U.S.vs. U.K.’ approach described above highlight the ‘Jobs vs. Debt’ debate which has engulfed the Obama administration and the strong showing of the U.S. economy in the last quarter to 2011 further emphasizes the jobs imperative. Obama in the 2012 State of the Union address rightly hinged the future of America onenergy independence and the resurrection of the manufacturing sector  based on high-tech jobs which the U.S. has acomparative advantage. This may be a lofty dream but it is the starting point ifa long lasting sustained recovery of the U.S. economy is desired.

TheU.S. debt which stands at a staggering $15 trillion must be tackled over the long-termif the U.S. is to maintain its competitive edge and the dollar remain as the currencyof choice. The big question here is “how” and “when” this will be done?  The Bowles -Simpson Commission(The National Commission on Fiscal Responsibility and Reform) has the best blue print on how to tackle the deficit as it embraces reining in the coredrivers of the deficit (Medicare, Medicaid, Social security and defence spending), whileproposing a revamped pro-growth tax structure with savings that pay down thedebt.

The U.S. is on a rocky road to recovery which, with the right political will andbipartisan team work will see the world’s largest economy overcome the worst economic downturn since the great depression.

Obama An Intellectual NOT A Cowboy.

“We reject as false the choice between our safety and our ideals. Our founding fathers, faced with perils that we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience's sake.” With those words on inaugural day Obama assumed the mantle of leadership but he has since left many confused as they have tried to define his leadership style or explain the Obama Doctrine.

Leadership style is the manner and approach of providing direction, implementing plans, and motivating people (Nel  et al., 2006).

Obama (Leadership style) has embodied the epitome of a true intellectual where actions are not determined by precedent or policy but by practicality and prudence, generously garnished with thoughtful insight. He has shown that instincts are not a substitute for fact. This approach may have alienated him from his base, emboldened his opponents to go for his jugular and weakened his position.

The first major issue he tackled shortly after taking the oath of office was the financial down turn that started in 2008. He adopted a similar package already started by G. Bush by passing the stimulus package which was less than what most leading democrats had suggested but contrary to the “no-action policy” the republicans wanted. On the health care debate he adopted the same attitude by outlining the frame work for the bill while leaving the specifics for the congressional leaders to iron out resulting in compromises in key components he would have wanted such as the single payer system. When it came to Afghanistan, he took his time (6 months) to make up his mind and his final decision was a troop surge less than was requested but sufficient to do the job. One year later (in June this year) he announced the objectives had been broadly achieved and troop withdrawal would begin in earnest at a pace too slow for the democrats and contrary to republican wishes that want more season of fighting at huge costs to the tax payer. In his Afghanistan draw down speech he (Obama) acknowledged this fact when he said, “Some would have America retreat from our responsibility as an anchor of global security, and embrace an isolation that ignores the very real threats that we face. Others would have America over-extend ourselves, confronting every evil that can be found abroad. WE MUST CHART A MORE CENTRED COURSE.”

What has emerged over the last two and half years of Obama leadership is a man who is willing to lead by broad consensus. One who tries to appease all except himself, ever willing to accept the middle-road in dealing with issues and happy to accept criticism from the public. Prime Minister Benjamin Netanyahu in his address to the congress with a condescending tone literally belittled Obama before a congress yet Obama’s response was conciliatory and as always optimistic of two State solution of the Israel-Palestine conflict.

 
Obama’s leadership style is definitely not one that we are used to from politicians but at a time when America is divided, with deep economic and social problems, he sure stands as the only beacon of sensibility in the confused world of partisan politics.

Why Obama Is NOT Likely to Lose in 2012; A Response to Karl Rove

In Washington very few are as trusted as Karl Rove in predicting political futures and organising the political machine to see it through. Even George Bush acknowledged him as the "Architect" of his 2004 re-election victory. 

In his article (Why Obama Is Likely to Lose in 2012) in the Wall Street Journal Mr Rove highlighted four serious reasons why Obama will lose in 2012.  I will attempt to debunk these facts as wishful thinking and uniformed insight.

The first point highlighted by Rove is the high unemployment rate of 9.1% with 14 million Americans currently unemployed. It is true that figures don’t lie but sometimes they don’t paint the complete picture. 

When Obama took office in January 2009 the economy was haemorrhaging 800,000 jobs monthly, jobless claims was hovering around 1 million monthly, the stock market index was below the 7000 mark while retail sales were down. Today the picture is different with over 2 million private sector jobs added, the stock market is at a high of above 12000 and non-farm payrolls have consistently been positive for 15 straight months and jobless claims down to 400,000 monthly.   

The reasons for the consistently high unemployment which are dependent on facts beyond any president’s control include:

1.     The cost of crude oil has been consistently high (due to the Middle-East conflict)  and this along with other factors such as the Japanese Tsunami and reduced global industrial output has gradually resulted in a sustained increase of consumer price index which currently stands at a 12month high translating to reduces retail sales.

2.    The 900 billion dollar economic stimulus package (AKA TARP- Troubled Assets Relief Program) resulted in a boost to the economy by preventing cuts in jobs of middle class folks (teachers, fire fighters etc.). As these funds have run out State and Local governments have been steadily shedding jobs faster than the private sector can pick them up resulting in a net unemployment.

3.     Though business confidence is at an all-time high and US corporations are making record profits while sitting on substantial cash reserves, the rate of hiring has been quite poor. The companies after the economic decline have instead invested heavily in machinery which are at their cheapest level as they are now sourced oversees notably from China and they have the added advantage of writing off the expenditure as capital investment against business taxes.

4.    Finally unemployment is always the first to be hit and last to recover during an economic downturn. 

While the above factors may work against Obama’s re-election bid it’s my prediction and that of Federal Reserve chairman, Ben Bernanke, that the economic outlook for next year will be more positive as business confidence reaches new levels and the housing market bottoms with subsequent increase in hiring by the private sector with a decline in unemployment rate to about 8% or better by election day.

Mr Rove also pointed out that President Obama has a problem with his base; highlighting the fact that even Jewish voters were deserting him. This to me is pure speculation. But flipping the coin over (to the GOP side); Mitt Romney or his mirror image (Jon Huntsman) will win the GOP nomination. This will alienate the far right in the GOP, who have always felt that these candidates have flip-flopped on social issues such as abortion, strong national security stance, health care and are seen to be weak on their resolve to insensibly cut government spending.  

As the GOP nomination field currently stands, no single candidate has a strong personal persona or policy to gain the hearts of the independents that form the deciding voting bloc. As per Obama’s base I have a strong confidence that it’ll take the GOP candidate nomination to spur them into action.

The health care reform passed into law was highlighted by Mr Rove as an achilles heel for President Obama re-election bid. This is an incomplete truth. 

As provisions of the law start to kick in next year through 2014, it will offer more than 30 million people with access to health care while preventing discrimination of people from access to health insurance due to pre-existing conditions, providing Obama the biggest boost to his re-election bid. It has to be noted that the rising cost of health care which is being experienced as result of wider coverage will mostly affect a large population of the electorate who wouldn’t have voted for Obama in the first place.

An icing on the cake of health care debate is the Paul Ryan’s health care overhaul which has targeted the seniors by attempting to turn Medicare into a voucher program as a means of reducing cost. This is a gift to Obama’s election bid as the seniors have traditionally been known as the most reliable voting bloc.

The last point raised by Mr Rove that Obama should not be campaigning is simply BS and need not be justified. Obama is set to raise a record 1 billion dollars surpassing the 750 million dollars raised during his last campaign. This puts him far ahead of the pack of wolves that form the current GOP nomination field.

Obama is on a sure path to re-election in 2012 and I hope Mr Rove will clearly read the writing on the wall and not be blind-sided by wishful thinking.

Revolutions: Europe & Middle East; Similarities and Prospects

Max Weber (1864 –1920) a German sociologist and political economist argued that for economic change to take place Cultural Revolution had to occur first. He was of course referring to Europe not Tunisia or Egypt and certainly not Libya.

A little History (Europe): The end of the Middle Ages at the end of the 14th century was precipitated by the Black Death that wiped out a large portion of the population creating labour shortages and increases in wages. This ushered in “The Renaissance (14th  to the 17th century)”, a period of increased individuality and the church which was the pinnacle of knowledge saw a decline in its power.  This period was characterized the resurgence of the interest in the arts and intellectual re-awakening. The rise of “individualism” was a force too strong to contain and dovetailed into “The European Revolutions”, catalyzed by poverty but lubricated The Enlightenment (the period which led to many European writers to criticise the Monarchy and espousing democratic, liberalist, nationalist and socialist ideas). This series of changes laid the frame work for the industrial age that brought about economic liberation of Europe.

In an attempt to understand the current uprising in the Middle East, what struck me was the similarity between the changes in the Middle East and the changes that swept Europe leading to their economic liberation; the only difference was the timeline.

When Mohamed Bouazizi, the 26-year-old Tunisian fruit seller, set himself on fire he only kick-started the next phase of a process that was already in the works. 

Over last 50 years the demo-graphical picture of the Middle East and North Africa (MENA) has been transformed from a pyramid shaped one to a pear shaped demographic picture as a result of the explosion of the youth population. In the MENA region as a whole, age 20-24s have grown steadily from 10 million in 1950 to 36 million today, and will grow steadily to at least 56 million by 2050.

 

This bulging middle class is a highly literate one with literacy rates as high as 91.3% in Jordan and 50.2% in Yamen. Only Iraq has an explainable literacy rate less than 50% at 40.4%. Transformation in technology has provided this educated young populace with the strongest tool they require “information”. They have realised like the Europeans did (during the Period of The Renaissance) ; “They are first individuals (individualization) and they have a voice”. Just like the decline of the strangle hold the church had on intellectual thinking during The Renaissance so have the people of this region realised that their religion “is a part of their life” not “all of their life".

World Bank chief Economist Mustapha Nabli and Farrukh Iqbal noted that “one in every five persons in the region could be considered poor at living on less than $1 per day and this proportion stayed roughly constant for most of the 1990s”. This level of poverty (like happened Europe) catalysed the revolutionary change which was also lubricated by Enlightenment.

If my theory of the change is right, the Middle East and North Africa is on a sure path to economic transformation that has not been matched. Unlike Europe that lacked resources, this region boasts massive reserves that are can drive economic growth and a highly literate young population that can effect the change.

We have seen the cultural change, the political change is in the works and now we await the economic transformation.