LQD: Growth, debt, and the World Bank | 17 comments (17 topical, editorial, 0 hidden)

Re: LQD: Growth, debt, and the World Bank (3.50 / 2)

The most remarkable thing about this is that "low returns" oe "not bankable" means "returns below 10% per annum".

The required rate of return strikes again...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Carrie (migeru at eurotrib dot com) on Mon Dec 19th, 2011 at 07:35:53 AM EST
[ Parent ]

Re: LQD: Growth, debt, and the World Bank (none / 1)

By way of comparison, we kept savings in CDs until the rate dropped below 2%, so, empiracally, our "required rate of return" would be >2%. Rates at local banks are below 1%. Really, one needs about 4% just to maintain purchasing power. I have seen comments to the effect that real returns are about negative 2%. Food has certainly become more expensive in stores and the cost of medical care and education keeps rising.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 19th, 2011 at 08:29:22 AM EST
[ Parent ]

Re: LQD: Growth, debt, and the World Bank (3.80 / 5)

From the comments to Short termism is hurting us by Jerome a Paris(May 23rd, 2011)

... Poterba and Summers (1995) surveyed Chief Executive Officers (CEOs) at Fortune-1000 firms. They found that the discount rates applied to future cash-flows were around 12%, much higher than either equity holders' average rate of return or the return on debt. This excessive discounting implied that some firms were rejecting positive net present value (NPV) projects. Echoes, here, of Pigou's defective telescope.
(...)
Most recently, in 2011 PriceWaterhouseCoopers conducted a survey of FTSE-100 and 250 executives, the majority of which chose a low return option sooner (£250,000 tomorrow) rather than a high return later (£450,000 in 3 years). This suggested annual discount rates of over 20%. Recently, Matthew Rose, CEO of Burlington Northern Santa Fe (America's second biggest rail company), expressed frustration at the focus on quarterly earnings when locomotives lasted for 20 years and tracks for 30 to 40 years. Echoes, here, of "quarterly capitalism".

If even the World Bank requires 10% return on its development projects...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Carrie (migeru at eurotrib dot com) on Mon Dec 19th, 2011 at 08:56:16 AM EST
[ Parent ]

Re: LQD: Growth, debt, and the World Bank (3.75 / 4)

Though that is very easy to achieve when you're a bank because of leveraging and the fact that banks, being banks, put almost none of their own capital into a project, generally 10% or less at most. A loan with a 1% margin can easily generate an irr over 25% if you borrow 90% of your funds for the loan from others.

by santiago on Mon Dec 19th, 2011 at 01:55:16 PM EST
[ Parent ]

Re: LQD: Growth, debt, and the World Bank (4.00 / 3)

That works great until you are caught highly leveraged when suddenly everyone has severe doubts about the counterparty quality of both creditors and debtors.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 19th, 2011 at 02:06:07 PM EST
[ Parent ]

Re: LQD: Growth, debt, and the World Bank (3.50 / 2)

That's true, but that's always the problem of banks, which are in the business of making commitments to some and accepting the commitments from others -- they are in the social relationship, or governance, business, not the work of building and risking actual things. So business school measures like NPV and IRR really don't mean the same thing for banks that they might for actual investors of one's own capital.

by santiago on Tue Dec 20th, 2011 at 12:11:47 PM EST
[ Parent ]

LQD: Growth, debt, and the World Bank | 17 comments (17 topical, 0 editorial, 0 hidden)

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