The Financial Crisis: Lessons Learnt

Mr Phizackerley’s talk focused mainly on the Global Financial Crisis of 2008, explaining in detail - yet in understandable terms – the causes and events of the Crisis and how it connected to the current European Crisis.  This was of particular interest as it was useful in making connections to current economic problems today, such as high unemployment rates in Spain. He also touched upon the system of banks, their different sectors and how they work- again offering understandable and useful knowledge to those who attended. For those of us who were perhaps slightly too young to understand fully the reasons and consequences of the financial crisis, it was helpful in establishing an understanding of how “greed and fear” can cause so much damage. It was astonishing to see through his graphs how quickly the situation deteriorated, particularly in the housing market. Mr Phizackerley’s talk was also useful in demonstrating the different sectors that economics is needed for in banking, and therefore offering potential job ideas that were perhaps unexplored before. When answering questions at the end, especially with regards to the term “banker bashers”, he helped by offering firsthand experience that, although banking did have its downsides, he still believed it to be one of the most exciting jobs out there today. Overall, Mr Phizackerley’s talk offered us a greater knowledge of a crisis that beforehand we were perhaps vaguely aware of, but now fully understood its causes and consequences that are still occurring today.  His personal experience could be used by students to see potential careers, and as a whole was thoroughly interesting.

Microsoft`s new CEO

On February 4^th, Microsoft introduced their third ever CEO Satya Nadella (46), who was born in India, Hyderabad and has degrees in electronics, computer science and business administration. Being internally recruited, having joined the company 22 years ago (he previously ran Microsoft`s Cloud and Enterprise group), he is certainly familiar with the business, which will enable him to put his ideas into practice very soon.

He replaces Steve Ballmer the prior chief executive of Microsoft (2000-2014), a decision which in my opinion was already overdue, as Microsoft struggled to progress with new innovations and failed to keep up with rivals such as Amazon, Apple and Google.

Compared to Ballmer, who was very extrovert and outgoing, Nadella is more introverted and has both a calmer and more considerate approach. In addition, he has the ability to connect people and to understand the dynamics between them through collaboration and is able to inspire and motivate with his authenticity in a seemingly effortless way.

Still, it might seem quite surprising that he was chosen to be the new chief executive, because there were hundreds of suitable competitors, like former Nokia CEO Stephen Elop, who undoubtedly has more entrepreneurial skill.

Moreover Nadella`s main weakness is, that he has never led a company before and does not have as much of an understanding of business compared to Ballmer. This increases the likelihood, that both Ballmer and Gates, the latter having resigned from being a chairman to move to a technological advisor role, would affect and maybe even restrict Nadella in his decision making process.

On the other hand Microsoft`s new CEO has a broadly developed skill set and can definitely rely on his proficient grasp of technical know-how. Furthermore Nadella understands how Microsoft must evolve in order to compete in the modern world; he also understands that the company has to continue to push many of its older, still profitable businesses forward.              

In conclusion, it will be interesting to see in which new directions and to what extent he will independently lead Microsoft in the future, and whether we will see a more similar company to Bill Gates` time and what revolutionary innovations we can expect from him.

Reflection on Open Skies Policy: Where are the benefits?

The Open Skies agreement that came into force in 1997 promised us (consumers) an increase in competition which would drive prices down and challenge the established carriers on routes. Foolishly, we expected a surge of new airlines that would operate on the US-UK routes. We were promised a better quality product at a substantially lower price. 15 years later, I must confess: I see little change. When the agreement came into the effect, we indeed had the emergence of new low-cost long haul carries such as EOS or SkyJet that offered an all premium service for not-so premium prices. The UKs international hubs such as Gatwick and Heathrow saw the arrival of new US and European carriers. Following simple economic theory, an increase in market supply was supposed to reduce prices for tickets. It did! However, the major carriers adopted aggressive techniques to retain their market share. It's not surprising that ZOOM airliners along with EOS and SkyJet went into bankruptcy soon after commencing their services. The orthodox carriers charged prices below that of the marginal cost as their significant scale allowed them to recoup their costs. They purchased take-off/landing slots to create a capacity barrier. A sudden surge in demand for these slots drove their prices up to levels that could only be afforded by large airlines.

Let me us an example to illustrate the result of such tactics. I was hoping to book a flight to New York this Christmas at an affordable price. Prior to making a booking, I searched what carriers operate the London-New York route. To my surprise, there were only 5 airlines. Looking up prices, I was shocked. The minimum price for a return Economy Class ticket was £1200. It appears to me that all benefits from an OpenSkies agreement had insofar been limited. We now have a market whereby unconventional competition has been removed and it resembles highly a structure that is costly to the consumer. I am in favour of OpenSkies agreement but I think the government must monitor the actions of major players in the industry with more vigilance and foster start-ups such as ZOOM UK. 

"The Armchair Economist" By Steven Landsburg

In ‘The Armchair Economist’ Steven Landsburg applies a variety of basic economic principles and reasoning to human behavior. 

A chapter that particularly intrigued me was chapter 16, as Landsburg investigates into why popcorn costs so much at the cinema.  With my basic knowledge of economics, I assumed that if cinemas charged less for popcorn demand would increase.  However, I thought that the reason cinemas do not decrease the price of popcorn is because once you have entered the cinema; the cinema owner has a monopoly.   

In comparison, Landsburg illustrates that the owners’ monopoly is not the reason why popcorn prices are so high.  He states “Once you enter the theatre, the owner has a monopoly on a lot of things. He is the only supplier of rest rooms, for example. Why doesn't he charge you a monopoly price to use the rest room?[…] The answer, of course, is that a rest room fee would make the theater less attractive to moviegoers. To maintain his clientele, the owner would be forced to sell tickets at a lower price. What he collected at the rest room door would be lost at the box office”. 

Instead, Landsburg explains that popcorn is a secondary product, whereas the ticket is a primary product.  ‘Popcorn lovers’ are likely to be relatively price insensitive as they associate popcorn as being a necessity when visiting the cinema.  They are therefore likely to purchase popcorn regardless of the price.  Charging high prices for popcorn enables the cinema owner to keep his ticket prices below customers’ “reservation price”.  Allowing price sensitive customers to go to the cinema.  Contrary to my original opinion I have now realized that it is unlikely that cinema owners will reduce popcorn prices.

Overall, I really enjoyed reading ‘The Armchair Economist’ and would recommend it to anyone else interested in behavioral economics or anyone intrigued by the way economists see the world, as Landsburg covers many other interesting topics such as ‘Why do seatbelts cause accidents’ and ‘Why do they charge $35 for rock concerts when they know it could sell out at $50’.

COO of Citi, Asia-Pacific Mr Michael Borch gives his view on 'Macroeconomics trends in Asia'

On Monday 25th November, the Epsom College Economics and Enterprise Society welcomed Mr Michael Borch, COO of Citi, Asia-Pacific who gave pupils an insight into the economic development model of the Asian region; in particular China. The talk encompassed the role of trade in stimulating economic growth which subsequently has forced urbanisation in China to progress at colossal rates. Most importantly, he destroyed the perception that China's economic structure has little resemblance to that of the West. In reality, China is an active participant in globalisation that has originally been orchestrated by the forces of western capitalism. Following the Communist Party Plenum three weeks ago, China has emphasised its desire to pursue market-orientated reforms which only strengthens Mr Borch's view on China. Personally, I feel that the Chinese version of capitalism will dominate the near future. The financial crash of 2008 has shown us that market fundamentalism cannot be trusted to govern our economic senses. The post crisis era has seen an increased government intervention in all aspects of the economy, ranging from QE to bailouts. With the move towards more principle based regulation (MPBR) in the financial industry, we are bound to see ever increasing government supervision. Arguably, the Chinese version of capitalism is all the factors mentioned above; However, I feel the western economies will follow suit but without the strong ideological base present in China. So what will the future hold? My answer is: A version of capitalism that one has never witnessed before.

JPMorgan Agrees $4.5bn Mortgage Payout Deal

JPMorgan, one of the biggest investment banks in the world, has agreed to pay $4.5bn back to 21 major institutional investors who lost money on mortgage-related securities during the financial crisis. The deal is separate from the preliminary $13 billion settlement which resolved a raft of actions over mortgage-backed securities. The securities in question were supposed to be sophisticated ‘risk-free home loans’, however JP Morgan is alleged to have sold the mortgage-backed assets knowing full well of the risks involved. Recent legal costs have meant that JPMorgan have made a rare loss in this years third quarter, however the estimated share price of $60 has remained intact due to the large amount of cash they have set aside to cover these settlements ($23bn). Despite this massive reserve, the bank is still under investigation and if continued legal action is to be taken, JPMorgan could see its earnings further plummet, as well as its share price. As a result of its recent multibillion-dollar trading losses, JPMorgan’s $6bn share repurchasing program (which initially sent share prices to close at their lowest level since last year) was suspended after just 2 months. However, shareholders need not worry as dividend payouts of 30 cents a quarter are set to remain unchanged, unless losses rise to $5bn (instead of the current $2bn). JPMorgan seem to have escaped a potential disaster, however future legal investigations could increase losses further, and as a result send share prices plummeting. In my opinion, the stock buyback scheme should continue as it will enable the bank to improve shareholder value, which would offset potential future depletion of their share price due to further possible legal action.

Twitter's IPO: the Wider Picture

Last week, Twitter underwent its IPO procedures and began trading on the New York Stock Exchange. Initially valued at $26 a share, the price skyrocketed to reach $50 and later stabilising at about $45+-. Why is that Twitter, reporting a loss for the last three quarters, has been able to have such a successful listing? Recently, we have been experiencing a growth trend in the public listing of technological giants whose products are somewhat intangible. Facebook's IPO last year, Google's share passing the benchmark of $1000 per share and Twitter's listing, in my opinion, are signs of a new 'Tech bubble' that could pose potential hazards. On the other hand, we are living in societies that see technological advancement as the only way forward in future economic prosperity. Technology has seen a growth in private investment but more so from the government. The governments of the emerging economies have made technological progress a pillar of their economic development. Recently, Russia has adopted a strategy entitled 'Russia 2020' in which, the government has pledged to increase its funding in the technology and establish 20 Silicon Valley-type developments around the country to foster new ideas. Arguably, the value we place on technology is reflected in the ever growing share prices of tech companies but we need to ensure that we don't overvalue companies which provide futile services such as social networking which have little effect on the development of our economies.