Can Americans learn something from this? … Will they?

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Trying to explain how the USA got into such an economic bind to a foreigner, is next to impossible ūüė¶ 

Having been back in the Czech Republic for about 5+ weeks (July 2011), has given me a picture of how the economic situation here, is different than in the USA. After the 2009 recession, which hit here as well, Czech growth is not as fast as its surrounding EU neighbors, but there are more encouraging factors, that the USA can only dream of. Because Czech is part of the EU, it has been able to expand (and continue to do so), its transport infrastructure program. The road construction has receded somewhat, but I can see continued progress in the building of new freeways and highways plus continued road repairs. Severe cuts have been imposed by the government as it attempts to get the budget deficit below 3% by 2013 from the 5.9 % in 2009.

The US government is just arguing, what to do about the¬†30+%¬†deficit! Yes, a 10x¬†bigger deficit, and growing…! ¬†Before that can be reduced, there will have to be a budget¬†surplus, year after year.

In the last 20 years, since VW took over the SKODA car manufacturer in Czech, SKODA has grown so fast, that it is eating into the sales of the parent (VW) brands, and SKODA exports to Germany had to be restricted. 2009-2010 were SKODA’s biggest growth years! More SKODA’s were built and sold in that period than ever before. And that in a recession?? Well, yes, SKODA built the most fuel efficient cars at a time gas prices went up, and people were looking for the best fuel-economical cars!

So much for the big 3 US automakers proclaiming they were making gas-guzzling SUV’s because¬†“the public asked for them…”. The development agency CzechInvest says that more than half of the largest global automotive suppliers have operations in the country, which provide carmakers with an almost complete local supply chain and thus, significant cost advantages. Car production is expected to reach 1.23mm by 2015 through the expansion of existing facilities. SKODA broke ground on an extension that will¬†double¬†the production of its (biggest) Octavia model.

In the Financial Times (June 21, 2011) Jan Cienski wrote an article explaining how a conservative approach has benefited the nation and banks’ (mainly foreign) owners. Martin Kraus is looking for funds to invest in his company to make toys and furniture for kindergartens, but it is difficult to persuade banks to give him money for equipment.¬†“If you want to start a new business, even one that’s invented something as great as a lightbulb, the banks won’t lend you the money, because your company has no history.”¬†However, loan portfolio’s are rising.

The conservatism of Czech banks served them well. They never dabbled in the exotic instruments that brought low US and West European institutions, preferring to remain with the staid business of taking deposits and giving loans.

Not that there aren’t any problems… the economy is open, but the institutions are weak…

More about that another time.¬†Can Americans learn something from this?¬†… Will they?

Sub-prime, Alt-A, FICO scores

Do you know the meaning of these terms? They have been common in US newspapers, but I believe very few people know what they mean, including myself ūüė¶

Egbert Kalse and Daan van Lent have written a book called Bankroet, which means bankrupt in Dutch. It is fascinating to read the perspective of outsiders. ¬†They wrote the book, starting with the Great Depression in the ’30s and following the course of events, mainly with real estate in mind. ¬†The book emphasizes the US economy for the most part, because that is where the above terms and consequences came from. ¬†But they also use European examples on how it affected there and the whole world.

 

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From the early ’70’s, the Savings and Loans industry was looking for new mortgage markets for less credit-worthy people. Out of that came the¬†“sub-prime”¬†mortgages.¬†Sub-prime¬†does not mean¬†“less than perfect”,¬†or any other idealistic form.¬†Sub-prime¬†mortgages are issued to people with a lesser credit-worthiness. Often people already have so much debt, that they cannot afford a mortgage on top of that. In the USA¬†(credit-worthiness) points are called “credit scores”¬†or “fico-scores”,¬†varying from 300-850. Potential home owners with a reasonable score of 620 or higher qualified as¬†“Alternative-A”¬†clients; in short:¬†Alt-A. Under that qualification mortgagee’s did not have to prove anymore they had a reliable income source. It also became known as a¬†“liars-mortgage”. Sub-prime¬†mortgages were issued to people with a credit-score between 500-620 points. Below 500 points, in principle, no mortgages were issued. ¬†

 

We aren’t the world

This is the title of an article very close to my heart! ¬†In the article¬†Joe Henrich and his colleagues are shaking the foundations of psychology and economics‚ÄĒand hoping to change the way social scientists think about human behavior and culture.

In the Amazon area in Peru, Joe Henrich introduced a game, pretty common in the USA. The test that Henrich introduced to the Machiguenga was called the ultimatum game. You’ll have to read the article for details. ¬†What he had great difficulty with, was explaining the rules, as the game struck the Machiguenga as deeply odd. ¬†At the heart of most research is the implicit assumption that the results revealed evolved psychological traits common to all humans, never mind that the test subjects were nearly always from the industrialized West. Henrich realized that if the Machiguenga results stood up, and if similar differences could be measured across other populations, this assumption of universality would have to be challenged.

That hits the target of my intent of this blog.  I always assumed that research in economics and psychology, was done for many different cultures, but Joe Henrich points out that he could not find much, other than what was done among western cultures which was then assumed to apply to all of mankind.

Culture Shock

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When we returned from the Czech Republic in 2009, we were in the market for a house. We had been out of the country for seven years, and had to “re-learn” what it was like to buy a home in California. ¬†What a shock! “Short sale”? What was that? Never heard of it before. A house in foreclosure? ¬†We had heard of it, but so many? … almost every house that was on the market? You had to bid on a “short sale”, and do that four or five times. Then the bank would notify you if you qualified and for which one, … after 3 months?… or more? And you want a mortgage? Good luck.