From the Knowledge@Wharton blog.

Knowledge@Wharton spent a few days this week at TechCrunch’s Disrupt conference at Pier 94 in New York. The burgeoning startup scene in the Big Apple was a hot topic of discussion during the event. As the New York scene solidifies and expands, attendees said that startups are now competing for clients with larger financial institutions; employees from large companies are making career moves to smaller organizations, and major tech firms are opening offices in New York to establish an East Coast presence (i.e., Facebook, Twitter and eBay via its acquisition of Hunch).

Many panelists, including David Tisch, managing director of technology accelerator TechStars NYC, noted a shift in student interest in smaller companies versus larger Wall Street corporations and highlighted the strategy of startups banding together to recruit from top universities. He also predicted two to three major exits out of New York in the coming year by either IPO or acquisition. Fred Wilson, co-founder of New York venture capital firm Union Square Ventures, said in a conversation with TechCrunch founder Michael Arrington that he expects the “next big thing” in tech will come not out of Silicon Valley, but out of New York.

Josh Miller, co-founder of discussion platform Branch, noted in a panel discussion that more computer science students are taking post-graduation roles at startups instead of banks, and others who go to larger firms are getting “bored” within one to two years and are leaving to join a startup.

Jake Schwartz, co-founder of NYC startup incubator General Assembly, says the GA team has “worked with universities like Wharton to get students involved and introduce them to the New York tech scene.” By working together to attract talent at joint events or career fairs, he noted, startups “mirror that same recruiting power that big companies have on college campuses.”

Perhaps the biggest challenge set forth was one from Alexis Ohanian, co-founder of social news site Reddit: “We need to come up with a better name than Silicon Alley.”

Discussion at the event also revolved around Facebook’s recent IPO and what attendees considered the next major priorities for the technology industry:

– Roelof Botha, partner at Sequoia Capital, knows a thing or two about IPOs and acquisitions.  Prior to his role at Sequoia, he helped take PayPal public as CFO and later participated in negotiations for the sale of PayPal to eBay.  In a conversation about the recent Facebook IPO, Botha cautioned entrepreneurs against selling too early, encouraging them to “build something enduring” and “something that really makes a dent in the universe,” stating that Facebook’s core value is in its platform.

Despite the challenges Facebook is facing on the stock market, Botha praised the social network’s innovation around ad formats, such as sponsored stories curated by your friends, to solidify the presence of the network. “Think about what would have happened to Facebook if they had taken an acquisition offer early on from Yahoo or Google,” he noted. “We have at least 10 companies that have produced 10 times the returns after going public.”

Botha also provided insights about Sequoia’s recently uncovered “stealth” program started more than two years ago, in which the firm wires funds to dozens of individual entrepreneurs, or “scouts,” who need cash to start a venture. Botha gave the example of two engineers working at a large company who “need US$50,000 to afford to leave their jobs to get their idea off the ground” as the type of entrepreneurs who are recipients of these funds.

– Ron Conway, a prominent Silicon Valley angel investor, said the next two priorities for the technology sector should be immigration reform and reforms for H1-B visa authorization requirements, stating “We don’t have enough engineers in this country.”

Conway is involved with SF City, an organization mirroring a chamber of commerce whose members are technology companies in the city of San Francisco. The organization’s two main goals, he said, are encouraging job creation by hiring San Francisco citizens and reducing the city’s onerous payroll tax by shifting the tax burden to more of a gross receipts tax. Conway noted that San Francisco’s unemployment rate is falling faster than that of other cities in the country.

He shot down rumors that he is planning to run for mayor of San Francisco (after prodding by Arrington), but did confirm he was in attendance at Mark Zuckerberg’s surprise wedding ceremony over the weekend, revealing that it was the white flowers that tipped him off to the fact that the event was not, as advertised, a graduation party for Priscilla Chan.  Conway closed by urging every entrepreneur to read Zuckerberg’s letter to shareholders as it effectively maps out the type of “hacker” culture he would build if starting a company today.

– Jeff Jordan, general partner of venture capital firm Andreessen Horowitz, noted that his firm’s strategy is to “look for companies that can … create … value each year and be core franchises in their markets.” His message to Wall Street is that there is currently “an unparalleled opportunity for the growth of technology companies,” noting that “the addressable market has just exploded” because compared with 1999, the cost of getting products to market has plummeted.

“If you can get product/market fit, there is virtually no [limit] on how fast a product can grow,” he said, referencing Pinterest as the fastest growing Internet firm ever.  He also admitted that he spends more time in New York now than he did when he was CEO of a public company — largely because of the number of fast-growing e-commerce companies launching out of New York, including Fab.com, Warby Parker, Birchbox, and Bonobos.

This post previously appeared in the Knowledge@Wharton today blog: New York to Silicon Valley: Watch Your Back

From the Knowledge@Wharton blog.

Share prices of Indian companies have plunged. The rupee is at historic lows. Profits — barring an exception or two like the State Bank of India — are sharply down. The issuers of Foreign Currency Convertible Bonds (FCCB) are in deep trouble. People are even talking about the possibility of defaults.

The convertible bond has always been a favorite of corporate India. When the Controller of Capital Issues (CCI) decided the premium at which a company could make a follow-on public issue (FPO), the convertible bond was the instrument of choice. You could issue a bond (debt) at, say, US$10 and convert it later into a share of US$1 with a premium of US$9. The share premium account was boosted while the equity capital (which needs to be serviced by way of dividends) stayed low. The CCI would probably have allowed a premium of only US$1 on a share issue of US$1. Everyone was happy as, at the time of conversion, the promoters ensured that the market price was above US$100. Reliance Industries under Dhirubhai Ambani had several series of such debentures.

When the world was experimenting with exotic derivatives in the lead-up to the global financial crisis, Indian companies were taking tentative steps forward with FCCBs. They were very easy to understand. You just borrowed, say, US$100. The rate of interest was much lower than Indian rates. On the pre-decided date of maturity, the lender would be returned US$100 plus the interest. But that was not the principal attraction. Each debenture could be converted into an equity share; the choice lay with the lender. If the share price was higher than the principal plus interest, the lender would gain and opt for the conversion option. When the market was booming, nobody gave thought to a situation in which the FCCBs would be underwater — less than the principal plus interest.

To make a long story short, that is what has happened. Companies had realized this over the past couple of years and they were trying to make arrangements. The conversion option was out, of course; no lender wanted equity. Some companies felt they could generate the repayment funds needed through operations. But high inflation and the decision-making paralysis in Delhi have meant weaker bottomlines. The internal generation is not adequate.

Many companies saw that coming, too. So they borrowed from wherever they could and even sold assets. But the corpus they had collected in rupees is no longer enough. The rupee was 44.36 to the U.S. dollar in early May 2011. At 54.43 on May 19, 2012, the fall is nearly 23%.

“The rupee is the joker in the pack,” Rajesh Subramaniam, CEO of BPO company Firstsource, told CNBC-TV18. Firstsource has to return US$237 million by December 4, 2012. It has made arrangements for US$150 million, but now has to find the rest.

Suzlon Energy is facing a more serious issue; its redemption date is around the corner. Suzlon has to pay back its bondholders around US$360 million by June 17. This includes US$300 million in principal and US$60 million in interest. The company has asked its bondholders for more time; it says it will be able to raise the funds in an extra 45 days. Suzlon had made the FCCB issue in 2008.

Some other companies with FCCBs to pay include Tata Motors, which needs to return US$473 million (by July 12, 2012); Gayatri Projects, US$2.7 billion (August 3); Tata Steel, US$382 million (September 5); and Jaiprakash Associates, US$355 million (September 12). Some of these firms have already made arrangements.

Analysts have likened this to a time-bomb waiting to explode. According to a report by ratings agency Fitch, 20% of these FCCBs are likely to default. According to Fitch, 59 companies have to redeem FCCBs in 2012, involving an amount of US$7 billion.

The saving grace, of course, is that it is not a large figure. The Reserve Bank may allow some relaxation to tide over the crisis. It may allow companies to borrow money at a higher interest rate than earlier to facilitate rollovers.

If there is a default, it will reflect on the country’s image and rating. There were a couple of defaults in the late nineties. But that was a different situation. The wealth tax on shares had gone, courtesy then Finance Minister Manmohan Singh. But structures had yet to be unwound. The foreign borrowings were really a way of shoring up the promoter’s equity, without adding to his tax burden. Today’s lenders are genuine.

If a company has a reasonably healthy balance sheet and a good track record, it will be able to raise the money. If not, watch for fire sales. And, given the state of the rupee, foreign assets may be the first to go.

This post previously appeared in the Knowledge@Wharton today blog: A Triple Whammy for Indian Foreign Exchange Bond Issuers

Daniel Schlagwein

After the first full day of trading, Facebook shares have lost over 10% off their issue price as the enthusiasm for the social network giant has turned to scepticism, following its lacklustre initial public offering.

Why is this?

Probably over worry that users might turn to other social networks if Facebook tries to capitalise on them too much.

Facebook went public last Friday with what was forecast to be a big-bang IPO of shares that valued the company at more than US$104 billion. Alas the bang turned into a fizzle.

The Facebook IPO is a case of pricing the distant future of company based on sheer potential — and a perceived one at that.  Investors fear that Facebook will never realise its full potential. The worry is that its users – or friends – might turn to other networks if Facebook tries to capitalise on them too much. Other social networks—Friendster, MySpace or the VZ network in Germany—vanished quickly. With Wall Street in a bearish mood, it’s clear it didn’t want to take a punt on something that might not last the course.

The stock closed at $US34.03 yesterday, down 11% for the day and well below the $US38 initial public offering price

I see three major concerns.

Firstly, Google could be in a position to attack Facebook. This may seem optimistic; after all Google Buzz failed, and Google+ is only moderately successful for now. However, Google has a better business model, the cash and the clout to get a new competing network up and running: all it has to do is get enough people to like it.

There are also not-for-profit developers, who are giving established corporations a run for their money.

Open source software can move the market in unexpected ways – look at Firefox for example, which is now a serious competitor for Internet Explorer. There are likely to be new developments in the social network space. An open source system, or an otherwise non-business driven social network might emerge. Never discount software developers creating new tools for free – and that could seriously impact on Facebook.

Finally, the EU and other regimes are not shy about taking on monopolies. Right now there are legitimate concerns about how legislative systems will deal with a monopolist Facebook.

However Facebook is an excellent example of how small start-ups can become huge. I consider Facebook to be in an excellent position to benefit from the social-centric web and I would expect much social commerce to be increasingly built on Facebook. Current developments remind me of the concerns with Google’s IPO in 2004. However, the Google IPO stock price was $85 on the first day, and now it is above $600. It could all pan out for Facebook, but right now it is pure speculation to provide any estimate on Facebook’s “real value”. Investing in Facebook is a gamble.

Daniel Schlagwein is a lecturer at Australian School of Business

Professor Mark Stewart

The preferred skill set of potential leaders is evolving, just as the needs of business itself are evolving – and the challenge to leading business schools is to adapt and develop existing programs while remaining true to our role and purpose in servicing leadership education needs.

It is interesting to observe the changes currently under way within master of business administration programs at many leading international business schools. Notable shifts are occurring on two fronts – the developing needs of business and the community and the level of demand from potential MBA students.

In addition, an increasing number of substitute education alternatives continue to emerge. And of course, there are many different types of MBA programs now available.

As a consequence, the role and purpose of MBA programs are under scrutiny from several perspectives. Many business schools are redesigning their MBA products to service a more segmented market and a more sophisticated consumer. And, for the vast majority of business schools, this is occurring within an economic environment that requires more done with less.

Recent studies by Harvard Business School have identified several unmet needs as identified by business – including development of critical thinking skills, an improved understanding of risk and markets, the development of a global perspective and a heightened awareness of the role and responsibility of business in society. Each of these examples represents a broad area of knowledge that complements an underlying base in core disciplines such as finance, marketing and economics.

In order to address these unmet needs within MBA programs, business schools are faced with two significant challenges: how to include additional learning within an already full curriculum; and how to meet these requirements within existing constraints on financial and human resources.

The use of integrated learning and experiential learning courses (comprising a multidisciplinary approach to problems and projects) can help with the curriculum challenge, but invariably these types of courses are resource intensive and relatively more costly to deliver.

In any event, after allowance for necessary courses that address the core disciplines, it is unlikely that the remaining capacity within the MBA program is sufficient to meet all of the unmet needs.

But addressing the interests of business must also be considered within the context of addressing the interests of potential students. Although these requirements arguably converge, evidenced by likely job prospects being a key factor when incoming students select a preferred business school, there are many alternative paths available for talented executives seeking to enhance their careers.

The traditional MBA is now just one of several MBA alternatives. Shortened versions service a market characterised by time-poor executives seeking to progress their studies while holding full-time jobs.

Shortened versions must, by definition, have a reduced curriculum. To some extent this compromise can be offset by prior education and extensive professional experience. But it is difficult for a short course to adequately address the significant benefits that arise from learning reflection, cohort experience and network engagement – all typically associated with comprehensive MBA programs.

And potential students can also consider a variety of MBA substitutes in the form of specialised postgraduate programs and in-house training programs.

The abovementioned study by Harvard Business School also identified a change in the demand for MBA programs from 2000 to 2011. Enrolment at the leading US business schools remains stable – but at other US business schools there appears to be a shift from full-time to part-time programs and, post-GFC, there are indications that the demand for part-time programs has also weakened.

While it is not possible to present a definitive explanation for these changes, it is reasonable to argue that some factors are transitory (such as employment prospects linked with the economy) and others more lasting (the changing needs of business and the rise of substitute education programs).

But the aggregation of data obscures some outstanding success stories at several business schools that, against the trend, have grown their MBA programs. These schools acted early to innovate with a focus on developing a niche within the broader MBA landscape.

The leadership needs of our local market differ, of course, to those offshore. But there are valuable lessons and precedents available to us from offshore markets.

And, in some aspects (such as global perspective) Australia is ahead of the knowledge curve. We see increased international diversity within our cohorts and many of our graduates secure employment with firms active in global markets.

Meeting the leadership needs of the regional market, within a global context, must be the primary focus.

Just as business responds to changes in markets and products, so too must business schools in servicing the educational development needs of the leaders of the future.

Professor Mark Stewart is the academic director of MBA programs at the Australian Graduate School of Management.

This article first appeared in the AFR, 21 May 2012

Peter Swan

With the fallout from the huge losses at the bank JPMorgan being felt around the globe, it is clear non-executive directors of banks should exercise more scrutiny, and that if they had ‘skin in the game’ they would be more cautious about taking huge risks.

America’s biggest bank, and its high-profile CEO and Chair, Jamie Dimon, have announced trading losses on its derivatives position in bonds in excess of $2 billion. The blunder on risky derivatives trading has caused mammoth losses which have marred JP Morgan’s reputation for risk management – and have once again thrown a spotlight onto corporate governance, and investment banking.

Chief Investment Officer Ina Drew, who was among the highest-paid executives at the bank, will now be succeeded by Matt Zames, a trader who is well versed in risky financial bets. He was at one time employed at Long-Term Capital Management, a hedge fund whose 1998 collapse nearly caused a global crisis.

If it turns out to be anything like the disaster at ‘Long Term Capital’, unwinding its position could prove both time-consuming and very expensive. It is far from an isolated example of rogue trading. Despite having survived the Sub Prime Loan and GFC crises relatively unscathed with Jamie Dimon emerging as a hero, JP Morgan has been taking high risks with its huge bond portfolio, only 30% of which is in federally guaranteed bonds. This compares with Bank of America with 87%. JP Morgan also has depositors funds of $1,127,806 million reported in its 2011 accounts. This is reflected in its 25% return on equity of $6.5 billion. It is clear the bank is highly leveraged and has gained high returns on its equity until recently – but with high returns comes high risk. Not surprisingly, there are calls for the reintroduction of the Glass-Stegall Act that until recently separated deposit-taking banks from investment banks that take their own risky principal positions.

I have conducted research which indicates that large boards dominated by non-executives with very little of their own cash invested, pay management excessively and give far too much reign to the CEO.

JPMorgan displays all the signs of a bank dominated by one man, Jamie Dimon, who rightly or wrongly is perceived to be a hero. He reports to a huge 12 person board made up of 11 non-executive directors and he is also the chairman. Generally, in these sorts of firms, there is also very poor alignment between the interests of shareholders and management. In this case, the problem is compounded by Jamie’s dual role. The overall performance of such boards is also generally exceedingly poor. This poor performance is also borne out by top 200 companies listed on the ASX that have large boards relative to those with smaller boards in which directors have more ‘skin in the game’. Quite simply, smaller boards are better able to see what is going on and work out the risk, and directors are forced to take more responsibility for decisions made collectively by the board. If they also invest their own money, they are more cautious.

Peter Swan is a professor of finance at the Australian School of Business, University of NSW.

Fariborz Moshirian

The latest developments in the Greek crisis make it clear that there is no easy answer. Financial markets and European banks are preparing for Greece to leave the 17-member euro bloc, with the ongoing struggle to form a coalition government weighing heavily on global equity and currency markets.

The inability to form a coalition government has pushed the country closer to a costly and tumultuous exit from the euro zone. If you had asked me even a few months ago, I would have said this wasn’t a possibility, but now eurozone policymakers are ready for it, the banking system is ready for it, and the market has priced in this possibility, so it’s not going to be as bad as it would have been last year, when the possibility of one country leaving the eurozone was going to lead to a major catastrophic event. It will no longer be a disaster, but it will still be uncomfortable, particularly for Greece, which may well end up to be worse off if it exits from the Euro-zone to avoid some of the austerity measures and badly needed restructuring work.

Perhaps the Euro-zone leaders should think about policy measures other than austerity to generate economic growth and encourage private sector investment?

The parties have until Thursday to try and reach a consensus: if they don’t, there are likely to be new elections which could result in European Union officials cancelling loans required to stave off bankruptcy, forcing Greece’s ejection from the single currency.

European policymakers have worked hard to ring-fence Greece from the rest of the region and contain any fallout from its political instability – now, they are ready for what was considered the worst possible scenario. However if there is an exit, this will cause further turmoil on the world’s financial markets.

The Australian dollar is struggling to maintain parity with the United States dollar as investors return their money to safe-haven currencies amid fears Greece will exit the eurozone.

There’s is now a return to an aversion to risk in global markets, with our currency dipping below parity – the first time it has done so since December, when the collapse of the eurozone also appeared likely. Now, it looks as if it is heading towards 98 cents by the end of the week – and maybe even lower than that if there is no resolution to Greece’s political impasse.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.

Anil Hargovan

The High Court decision in the James Hardie case has put corporate boards in Australia on notice that just ‘rubber-stamping management decisions’ can result in directors unwittingly breaching their duty of care and diligence.

It will send shockwaves through corporate boards and company officers throughout Australia. The James Hardie directors face banning orders for breach of ‘duty of care and diligence’. They will also face financial penalties over their failure to pay attention to key aspects of corporate governance, including risk-management, due diligence and regulatory compliance.

The landmark High Court decision sends a strong message to all boards across Australia not to underestimate the importance of the minutes of meetings. He says “the decision sheds light on the value and importance of the proper recording of minutes.

The board’s approval and recording of a resolution, even by informal means, can have what is called ‘probative force’ in contentious disputes, such as those arising in James Hardie where the entire board failed to recollect the existence of minutes which were crucial to allegations that the directors and officers breached their duty of care and diligence.

The James Hardie judgement is a lesson for passive or compliant boards which approve resolutions, without exercising the degree of care and diligence required.  The decision signals that there is no place for a ceremonial board which merely serves to rubber-stamp management decisions. It shows the need for boards to be more vigilant and diligent in the conduct of its monitoring role, particularly in light of substantive developments in the company – such as the restructuring of James Hardie – which should be taken seriously by the board and vetted for accuracy.

The James Hardie litigation, and High Court decision, shows the need for the board to take care to avoid risks. Company officers, such as the secretary who in this case was performing a dual role as general counsel, have also been put on notice – the court will judge and evaluate their performance when determining liability for breach of duty of care and diligence, with reference to the actual tasks that they exercise, rather than by the title they wear or the capacity in which they act.

Anil Hargovan is an Associate Professor at the Australian School of Business

Peter Swan

According to the Australian Labor Government quick action to instigate Keynesian pump priming stimulus policies saved the Australian economy from the ravages of the Global Financial Crisis (GFC). In the March Quarter 2008, GDP per Capita stood at $14,651 and fell to only $14,462 in June Quarter 2009, a fall of only 1.28%. A remarkably good result for what was billed as the worst global crisis since the Great Depression. The Keating “recession we had to have” was far more severe with a fall of 3.1%.

The real story is rather different and in order to focus on the impact on Australians I report only per capita series from the Australian Bureau of Statistics (ABS). Per Capita Net National Disposable Income in real terms fell from $12,161 in the September Quarter 2008 to $11,387 a year later in the September Quarter 2009. This was a massive real deterioration in living standards of 6.4%. Australians suffered more during the GFC than for many decades.

What accounts for the divergence between these GDP and Income measures with an approximate 500% difference? In a recent issue of the Australian Economic Review, Alan Hall points out that due to a measurement inconsistency, the ABS (and other agencies) excludes the change in the terms of trade from the GDP estimates. That is, the real GDP accounts reflect values (or should reflect values) and not physical volumes.

Thus, production computed from the GDP accounts fails to equate with real incomes and expenditures because the ABS neglects the real purchasing power gain in exports relative to the price of imports (i.e., the terms of trade).

If the price of our exports doubles or import prices halve, a dollar of exports purchases twice as much. This improves our income, production, and productivity. To pretend that terms of trade changes in the real production economy are not happening is to behave like an ostrich. Having one’s head in the sand is perilous to our continued prosperity.

In the June 2008 Quarter Australia experienced a massive 15.9% improvement in the terms of trade followed by a deterioration of 13% from December Quarter 2008 to September Quarter 2009 during the GFC that contributed the most to loss in income. It is far from clear how ‘Pink Bats’ and other stimulus measures counteracted this GFC induced deterioration in the terms of trade.

It is certainly convenient for the Treasurer, Mr Swan, (no relative) that he can paper over the GFC period using misconceived GDP figures. These mistakenly attempt to measure real production changes while ignoring the relevant price changes. The resulting charge laid against the Gillard Government and its predecessors of destroying productivity growth is unfair. Dean Parham, The Australian, April 20, finds that productivity growth has disappeared in recent years, if not become negative.

The displayed Figure showing growth rates in Per Capita GDP and Income from March Quarter 2004 to the December Quarter 2011 reveals the true story. Consistent with Parham’s story of productivity failure, Per capita GDP has stagnated with almost zero growth over this period (actually about 1%) while true productivity growth as reflected in the per capita income numbers has hardly missed a beat, with the exception of the GFC period.

The overall growth rate in per capita disposable income is 2.35% over this period, comparable with the 1990s even after taking into account the GFC. This higher income and productivity growth once again reflects better terms of trade that have improved by a massive 34.1% since the September 2009 Quarter.

In fact, Parham (p.10 of the Productivity Commission Report) recognises that his pessimistic score card is largely driven by productivity improvements: “to the extent that the favourable shift in the terms of trade has brought about a productivity decline (especially via mining), that decline does not bring the usual concern in terms of its effect on the prosperity of Australians.”

Once these sustained terms of trade improvements cease, it is only then that we will find out if Parham’s “productivity-sapping regulations” have been allowed to take hold. In the meantime, the ABS needs to report a more honest and transparent set of GDP accounts in the in time to inform the forthcoming post-Budget debate.

Peter Swan is a professor of finance at the Australian School of Business, University of NSW.

This article first appeared in The Australian 7 May 2012.

Professor Chris Evans

As we look ahead to the budget, and the possible changes in the taxation that may bring, it may also be worthwhile to look at the cost of complying with tax obligations for small business.  This has increased by an average of 60% in the past seven years for the average small business owner. It is clear small businesses are spending too much time under the paperwork burden of complying with our tax system. This represents a large burden on Australian business which is impacting on profits and jobs.

Indeed, there are many special concessions introduced to benefit small business but which are too complex for their intended audience, such as the entrepreneur’s tax offset. This was a 25 per cent income tax reduction available to small businesses which was recently scrapped because the federal government argued it was ineffectual.

The various small business concessions had very little impact on the burden of compliance for small businesses, as has been shown by the way it was quickly introduced, and then scrapped. Sadly, most business owners didn’t even know they were eligible for it.

The cost of complying with tax obligations for small business has increased to almost $30,000 per company, which represents nearly 500 hours a year for the average small business owner.

Much of this is largely due to the necessity of record-keeping for GST collection on behalf of the government. It is quite clear that aspects of the tax system need to be reformed to ease the compliance burden for business owners, which is growing significantly over time.

There is however find one unexpected result in a survey of small business owners as a part of the report.

Many small business owners were used to keeping their receipts in a shoe box, and trying to work out if they had even made a profit at the end of the tax year. Now, as a result of the government’s tax laws, business owners have had to invest in proper book keeping methods to ensure their tax returns are accurate. As a result they now have a much better idea as to how their company is faring. Indeed, many may now be able to work out if they are making a loss, and if so, what is causing that loss, for the first time.

Alas small companies tell us that firms are still spending too much time under the paperwork burden of complying with our tax system.

Chris Evans is a Professor at the Australian School of Business

Tim Harcourt

Today’s comments by Prime Minister Julia Gillard – in which she said the Reserve Bank of Australia has room to lower interest rates – would counter the recent rises in mortgage rates by retail banks.

The unilateral increase by ANZ has prompted the latest round of Government-Banker tension. Whilst the Banks are claiming that funding issues have increased sharply and in the short term they have to recover costs, they should also consider the customer. The banks did receive a guarantee from the same Government at the height of the Lehman Brothers Crisis – so maybe now is the time to consider thanking the government and borrowers by not raising rates. Their reasons for raising rates become ever more tenuous as funding costs fall, and if the government does deliver a budget surplus it would provide room for more cuts by the RBA – plus giving a buffer to international economic instability and could help protect jobs.

The ANZ has raised its interest rates on mortgages and small business lending by 6 basis points, blaming continued cost pressures from deposits and wholesale funding, lifting the ANZ’s standard variable mortgage interest rate to 7.42 per cent. However no other major bank has followed this increase.

The ANZ becomes increasingly isolated in its decision to set interest rates independently of the RBA, because it is clear that although lending costs did rise earlier in the year, they also fell again recently. Funding issues have changed sharply and although in the short term they have to recover costs, there is not that much evidence to back up the latest hike – and there are questions as to whether the banks decisions are justified or wise.

We also have to ask what does unilateral action by ANZ and the others mean for the Reserve Bank’s potency in terms of monetary policy? Can the private banks ignore the RBA? In many ways the RBA has already answered this question, with one of its leading lights, Assistant Governor Guy Debelle saying in a recent speech that the RBA did take into account the funding pressures the banks are experiencing. If they have done that – there is no case for any more rate hikes by the retail banks.

Tim Harcourt, is the JW Neville Fellow in Economics at the Australian School of Business