How do we break free from the ratings entanglement?

In December, Treasury Secretary Dr Martin Parkinson took a swipe at the global ratings agencies.

They were, he is reported to have said, “becoming mechanistic and excessively simplistic, running the risk of moving from excessive optimism to excessive pessimism every time they look at a country or firm.”

It’s worse than that. The global credit rating agencies have become a cancer eating away at the global economy, one that affects every business.

In the lead-up to the global financial crisis, they gave triple A credit ratings to institutions and securities that were clearly not. That helped fuel a global financial bubble.

As the crisis unfolded, the variations the agencies made to country and institutional rankings added to market instability.

We saw the same thing in the unfolding crisis with the Euro.

The credit rating agencies provide no new information to the market. The standard of their economic and financial analysis is clearly suspect. Yet despite all this, a shift or threat of a shift in a county’s credit rating can have damaging or even catastrophic market effects even though it tells us nothing that we didn’t already know.

It’s actually our own fault, yours and mine. Let me explain.

Our problem, and it is our problem because it affects us all, lies in the way that we awarded the ratings agencies authority without responsibility. We created the cancerous monster.

Back in a now dim and distant past when I was working in the Commonwealth Treasury, I remember discussions on the possibility that Australia might get a triple a credit rating for the first time. We did, lost it in 1986, then finally got it back in 2003.

Australia’s original concern with its credit rating at state and Federal level made a lot of sense.

In those days, both State and Federal Governments borrowed to fund infrastructure. We needed access to global capital for both private and public purposes. A high credit rating made it easier for a small relatively remote country like Australia to access funds and at a lower cost.

Sadly, from being a means to an end, the maintenance of a triple A credit rating became an end in itself. All Australian Governments preached this as a badge of honour.

Those in the business community nodded their heads and made approving noises, even though it was obvious even to Blind Freddy that much of the ratings shifts actually didn’t matter very much.

Governments throughout the world then did something worse. They built the ratings into policy, procedures and regulation. Business and especially the finance sector followed.

This institutionalisation of agency ratings, their incorporation into so many regulations and arrangements, meant that variations in credit ratings had direct flow on market effects in ways that no-one had foreseen. The ratings system itself had become a direct cause of market instability and on a large scale.

You would think that we would learn, but no! Even as Treasury Secretary Parkinson is complaining about the agencies, we see Federal Treasurer Swan, NSW Treasurer Baird, quoting rating changes approvingly as evidence of their good economic management.

Politicians respond to their electorates, that’s part of their job. But surely it’s time for the Australian business community as a whole to say enough is enough, that Australia and the world must break free from the ratings entanglement that we have created?

Note to readers: This column appeared in the January/February 2012 edition of Australian Business Solutions magazine. It's not on-line, so I have pre-published it here.

Management Perspectives merges with Managing the Professional Services Firm

Note to readers: I have left this post up for reference purposes, but posting on this blog has resumed!

I have been mulling over how best to maintain my professional blogging. I have found it increasingly difficult to maintain two professional blogs with any semblance of regular posting.

After a lot of thought, I have decided to merge this blog with Managing the Professional Services Firm.

The two blogs were intended to serve two different purposes, one a specialist blog, this one with a broader management and economics focus. Given that I can't do both, I have decided to broaden my professional services blog. I hope that this will add interest without completely losing the professional services focus.
Feel free to visit.

Problems with maintenance

I had hoped that Paul Barratt as a former head of the Australian Department of Defence would comment on this one. However, while he has tweeted on it, he has so far not said anything substantive.

The Australian Navy faces a problem, quite a large one. Maintenance on its main transport ships was so neglected that it is now too expensive to fix them, so that they have to be taken out of service. While the Minister is, rightly, blaming the Defence organisation, the Navy's problems are a symptom of a bigger issue.

Let me illustrate with two Australian examples.

When funds for social housing were reduced, Housing NSW diverted funds from maintenance to new supply. That was fine, it maintained its performance measures for new housing stock. Then, suddenly, the maintenance backlog go so large and so urgent that the Department had to seek special funding.

Or take the University of New England. There funding cut-backs led the University to divert money from building maintenance to other activities. The university now faces a a huge bill for back maintenance for its residential colleges that it has no way of funding.

These are public sector examples, but I am sure that you can think of private sector equivalents. The electricity industry comes to mind.   

As managers at whatever level, we all face immediate short term performance demands. We also face budget constraints and cut backs. The problem with periodic maintenance is that is is one of those areas that is easy to cut back, to defer to meet an immediate need. Gain now, pay later.

I mention this one now because it seems to have become something of a pattern over the last ten years.

Changing hats and looking at it from the perspective of an investor whether private or business, it creates another uncertainty in judging immediate business performance that has to be properly investigated.

Google targets Australian web service providers

I see from IT Wire that Google Australia is offering free training in its products and free AdWords advertising to companies and individuals that offer web services to SMBs in a bid to get them promoting Google's offerings to their customers. I quote:

In a blog posting, product marketing manager, Richard Flanagan, said: "If you're a webmaster, digital agency, freelancer, IT consultant, or provide any other web services to Australian small businesses, you can apply to join the program starting today.

I am a bit surprised that Google hasn't tried this before. The web has become a very crowded place. While Google dominates the search marketplace in Australia, the range of competitor offerings on different platforms grows all the time. Facebook is an obvious example.

Back in January 2008 in Google's growing market share I made a passing reference to Google's business model, including the way that Ad Sense arrangements provided a pool of working capital. I have a strong feeling that Google's revenue from Ad Sense has been under a degree of pressure.

Blog performance November 2010

The attached graphic shows visitors (yellow) and page views ) yellow plus red) for the year to the end of November.

Over the last month, the most popular posts were:

• The Importance of Demography and Demographic Change - update 84 page views
• Slow posting 39 page views
• Economic implications of the Australian Government's Nation Building package 27 page views
• Hilary Clinton and web 2.0 24 page views
• Digital Intelligence 20 page views
• Changes in Public Administration and their Impact on the Development of Public Policy 1 - Introduction 18 page views
• Common Management Problems Series 1 - managing up 16 page views
• A thought for Andrew Laming  14 page views
• A continued apology for slow posting 14 page views
• Paul Kelly's The Hawke Ascendancy 14 page views

A thought for Andrew Laming

Andrew Laming is the LNP member for Bowman in the Australian Parliament. Checking my stats, I found a visitor from Andrew's site. Checking, I found that Andrew had listed one of my posts, The Rudd Stimulus Package - Andrew Laming's view, under the In the Press segment on his web site.

I was very pleased. Let me explain why.

Back in February 2009, More economics 101 - the economics of Malcolm Turnbull looked at the differing economic approaches of the Rudd Government and the opposition. I said then that I was not especially interested in the differing rhetoric of the two sides, just trying to understand the variations in the economics.

This post drew a long and thoughtful comment from Andrew, so thoughtful that I actually turned it into a guest post without inserting my own views. This was the post listed above. Andrew then, rightfully, included it in his In the Press segment.

Now from my experience it is fairly unusual for a politician to treat a blog post sufficiently seriously to engage in discussion. As a blogger, I am obviously pleased. However, I also have a thought for Mr Laming.

He clearly has ideas. He is also prepared to support individual causes such as home birth. I wonder whether it might not be worth his while to do more writing.

I wonder whether Mr Laming is aware of the case of the NSW Parliamentarian Davis (Bill) Hughes. First as a back bencher and then as Leader of the NSW Country Party, he found it a little difficult to get publicity in the Sydney media. However, he did not respond with a multiplicity of press releases of that short form we love so well. Instead, he focused on more substantive material.

He did not get immediate publicity, indeed he wasn't seeking it. What he did do, was build a reputation with journalists as a thoughtful man who actually had something to say.

Later, when he wanted publicity he got it because he had built a reputation.

Just a thought.       

Australia capex stats September 2010

Yesterday the Australian Bureau of Statistics released Private New Capital Expenditure and Expected Expenditure, Australia, Sep 2010.

This graph shows volume estimates. You can see how the numbers climbed and then dropped, only to recover.

On the surface, the expectations data also shows strength.

The release includes a range of other information that I am currently working through. However, to cut straight to the chase.

On the surface, the numbers are good. However, the growth appears to be driven pretty much just by WA.

More later.

State of the Blogosphere 2010 a note

Just a short note so that I can delete the email and not lose the link.

Technorati has release its annual survey of the blogosphere, in this case State of the Blogosphere 2010. From a quick scan, the survey's results contains a range of interesting material.

Paul Kelly's The Hawke Ascendancy

I use the term train reading to describe the reading I do travelling to and from work. This applies even where the travelling is by bus!

The thing about my train reading is that, quite consciously, I use it as an opportunity to read things that I might not otherwise look at. Inevitably, this translates into a series of posts under the train reading banner.

My present train reading is Paul Kelly's The Hawke Ascendancy: A definitive account of its origins and climax 1972-1983 (Allen & Unwin, Crows Nest, paper back edition, 2008). I originally bought this book as a present for my wife because I knew that she would be interested; she worked as one of the advisors to Minister John Button, a key player in the events of the time.

Originally published in 1984, the book itself is a  gripping account of the rise to power of Bob Hawke as leader of the Australian Labor Party and then, from March 1983, as Australian Prime Minister. It is also the story of the rivalry of three men: Hawke, Liberal leader and PM Malcolm Fraser and Bill Hayden, leader of the Labor Party before Mr Hawke. I found the book especially interesting because it is entwined with elements of my own life, providing a very personal perspective. 

I will write about some of the personal elements in due course in a post on my personal blog. Here I want to deal briefly with two professional elements: the way in which our differing positions affect  our perceptions, along with the rise of professional campaigning and what it means.

I have spoken before about the way our position in an organisation affects our views.

For the individual manager, I have emphasised the need to manage up and sideways as well as down. In so doing, I have also emphasised the need to understand the perception from the other side.

For the senior manager, I have emphasised the need to recognise that their perception of the world is almost certainly not shared, or shared only in part, by their staff. They actually need to know what their people think, not just assume.

How does this fit with Paul Kelly's book? Well, for part of the time I was a player in events.

In 1976, for example, I was an acting branch head in the Commonwealth Treasury when Malcolm Fraser decided to split the Department into two. In my acting role, I attended the last drinks put on by Secretary Sir Frederick Wheeler for senior staff of the combined department. I still remember Sir Frederick's distress and anger.

Later I was Assistant Secretary Economic Analysis in the Department of Industry and Commerce. Here my role was to act as a sort of Treasury in Exile for our Minister Sir Philip Lynch, a former treasurer who still wished to play an economic policy role. When Paul Kelly talks about the mining boom of 1980 and the way it affected policy, I was there as one of the official players.

By contrast, at other times I was a mere external observer, back at University undertaking post grad studies. Here I saw events from afar.  

Reading the book, I realised just how little I knew of certain developments, but was also struck by the way my varying positions affected my perceptions of the time. 

I have also written a fair bit on organisational change, most recently in Scoping the decline in organisational performance. As part of this, I have looked at the professionalisation of politics, and the way that this has adversely affected public policy. Many of these posts have been on my personal blog where I can be more opinionated, less objective.

As I write, NSW Parliamentarian Joe Tripodi has announced his intention to resign. Mr Tripodi is a NSW Labor numbers' man, part of the group that has effectively controlled the party and has led it to almost terminal decline. He is, in fact, the fifteenth NSW Labor Party Parliamentarian to announce retirement in recent months. Everybody knows that this Government will go in next March's elections, but the scale of retirements is still staggering.

In his book, Paul Kelly reports approvingly of the strength and professionalism of the NSW right. He also reveals clearly the way in which opinion polls plus qualitative research including focus groups affected policy and approaches. Mr Hawke became leader because polls showed that he had the best chance of winning.

Reading the book, I was struck not by the rise of professionalism in politics, but by the way each of the key protagonists had different views and values.

Each was an ambitious man, each wanted to win, but their views and values affected their approach. Professional political approaches including market research set a context, but the outcomes were determined by the interaction between individuals and the market research. This is very different from an environment where the market research itself comes to set, to control, the political and policy agenda.

I will finish here. I know that I will have more to say later.

Hilary Clinton and web 2.0

A short post to record something for later reference.

Over at Club Troppo, Nick Gruen has long been banging the drum for web 2.0 as a way of making more Government information available and in a more useable form. For reasons that I will discuss in a later post, I think that the work done by enthusiasts such as Nick is very important.

At this point, I simply want to note that that Danielle Cave's post on the Lowy Institute blog, Chasing Hillary Clinton,  provides an interesting example of the use of various web tools for political and public policy purposes.