Summer 2008

 

Assets

Published quarterly by UCLA Anderson School of Management

Sample features provided here. Click to download the entire issue (PDF).

An Early Warning of Trouble Ahead

Recession. It is a word that generates anxiety in many people and not without reason. The negative repercussions from its onset can be felt across the spectrum of society, from owners and executives of huge corporations to entry level jobseekers and the unemployed. Those with the most limited resources are the most vulnerable, but almost everyone will experience some loss. No wonder then that there is such a preoccupation with predicting our financial future. Complete article >

The Tail Wags The Dog

At the moment, housing is at the heart of a still unresolved debate about whether or not the national economy is technically in a recession, an issue on which even the experts disagree. However, if nothing else, growth has slowed considerably, bringing us perilously close. No one denies that we are experiencing tough times, which are not expected to improve anytime soon. Complete article >

Extending Our Global Reach

Globalizing UCLA Anderson is a key ingredient of the school's strategic plan. That means graduating students with "global brains" who have an intuitive grasp of business conditions and market opportunities around the world, awareness of international trade and policy issues, and deference to cultural differences. Included in the global agenda are faculty collaboration with peers from leading schools in various countries and the formation of key global partnerships around research and executive education. Complete article >

Visit From A Peaceful Revolutionary

Describing the work of Muhammad Yunus, winner of the 2006 Nobel Peace Prize, Bhagwan Chowdhry, professor of finance at UCLA Anderson, said, "He created a revolution which we call microfinance." Defined as a small loan given to low-income people to help them achieve self-employment and develop an ongoing enterprise, this peaceful revolution in the war on poverty is on the move worldwide. Complete article >

 

An Early Warning of Trouble Ahead
Edward Leamer on the Role of Housing in the Economic Cycle

Recession. It is a word that generates anxiety in many people and not without reason. The negative repercussions from its onset can be felt across the spectrum of society, from owners and executives of huge corporations to entry level jobseekers and the unemployed. Those with the most limited resources are the most vulnerable, but almost everyone will experience some loss. No wonder then that there is such a preoccupation with predicting our financial future.

For some time now, attention has been riveted, even more than usual, on any announcement of economic indicators. Whenever the discussion turns to the current downturn in the economy, the emphasis is on whether or not the deep drop in the housing industry will pull us into a dreaded recession. Even in the elite circles of those who study economic trends for a living, there is still no consensus. Everyone wants to know, so analysts scrutinize every bit of data with great care as soon as it becomes available, as they have since the profession began.

With so much at stake, what if in all this time and all this searching something significant has been overlooked? What if there is a reliable indicator that has been missed, which is capable of sounding the alarm to give an early warning of trouble ahead? Wouldn't this be just what is needed to help avoid at least some of the potential hardship to come? Edward Leamer, professor of global economics and management and holder of the Chauncey J. Medberry Chair at UCLA Anderson, believes he has found just that in the housing industry itself.

As director of the UCLA Anderson Forecast since 2000, Leamer has spent some time searching for patterns that will give an understanding of what is in store. When he took on the role, he expanded the Forecast's emphasis from simply providing statistics to giving analysis and guidance as well. This requires a somewhat intuitive approach to achieve insight into the story behind the numbers. (Leamer already had some skill in this, since in the classroom, the focus of his teaching is on how to turn numbers in a database into knowledge.) Under his leadership, the Forecast has been very successful at it. For example, they are known for being the first of the blue chip forecasters to accurately predict the recession in 2001.

As a result, Leamer is now a leading practitioner of the art of perceiving future trends in the economy. His impressive record has made his expertise much sought after by journalists from major business media. Recently, this renowned reputation culminated in an invitation to be one of five distinguished experts to present papers at the annual Economic Symposium of the Federal Reserve Bank of Kansas City. Its subject for 2007 was "Housing, Housing Finance and Monetary Policy." Leamer recognized this as the perfect opportunity to present his findings in support of his contention that residential investment can provide "the best early warning sign of an oncoming recession." He knew he would need a compelling narrative to go against the conventional wisdom adhered to by much of his audience.

"Both academic macroeconomists and Federal Reserve officials have neglected the fact that housing, although not very important in terms of overall growth, is the most important sector when it comes to recessions," explained Leamer. "It's the only sector in the economy where weakness consistently signals the most serious impending downturns."

In normal times, residential investment is only responsible for an average of about 5 percent of the growth in gross domestic product (GDP), Leamer noted. However, in the year prior to most recent recessions, lack of investment in housing becomes critical, contributing about 28 percent of the economic weakness. He added that it is not the price of homes that is the crucial indicator; it is the volume of building and the volume of sales. Home prices have historically been very slow to decline, whereas volumes have dropped precipitously. As a result, housing starts and changes in housing starts together form what he believes is the best forward-looking indicator. No other component of GDP offers this predictability.

Most of the other major economic weakness preceding recessions is also consumer driven, including consumer durables, services and nondurables. Adding the percentages for these to that of housing gives a total of 72 percent, a considerable contribution. Again taking a contrarian view, Leamer concludes from this that calling it a business cycle is incorrect. He explained that business spending responds to opportunities created by consumer spending, and weakness on the business side happens during recessions rather than prior to them. Housing investment, on the other hand, leads the way as the first to weaken and the first to begin to recover. To sum it up, Leamer said, "The U.S. economy is ruled not by a business cycle, as is commonly thought, but by a consumer cycle, which is significantly affected by fluctuations in housing."

In support, Leamer gives some details on the 10 U.S. recessions since World War II, eight of which were preceded by substantial problems in housing and consumer durables. He noted that the two exceptions were the Department of Defense downturn after the Korean Armistice in 1953 and what he calls the Internet comeuppance in 2001, which was driven by a collapse in business investment. Housing did not give early warnings of these events, nor should it have, he said. There also have been only two times that a collapse in housing has not led to a recession. Both were offset by a large ramp up of spending by the Department of Defense, the first in 1951 for the Korean War and again in 1967 for the Vietnam War.

The Federal Reserve Act stipulates that the Fed keep inflation low and also employment high. According to Leamer these two goals can conflict. Inflation is very persistent and needs to be fought every day. To keep employment high, the Fed should attempt to make the recessions infrequent and mild. Leamer believes that anyone interested in controlling this employment cycle needs to focus on housing, but housing requires a different timing of Fed moves than does inflation. For housing, it is the cycle that is persistent. Once the wave starts, it keeps on going.

"For maximum effect, the Fed should intervene at just the right point, when housing starts are a bit above normal and rising higher," counseled Leamer. "Then tight monetary policy should be used to cool the housing market and keep the wave from rising too high thus making the subsequent crash less."

Leamer observed that, although the collective unwanted idleness of a recession affects everyone's well being, the greatest damage is done to those who are least able to afford it. With that as the context, this conference was the chance of a lifetime for him to have an effect on U.S. monetary policy and to do some real good. Among Leamer's suggestions for the Federal Reserve Board are: keep work effort productive by limiting speculative bubbles, limit redistribution of wealth from financial market disruptions and keep balance sheets reflecting reality. Most of all, he hopes the Federal Reserve will now use the "near perfect predictor" of housing in forward-looking policy to help smooth out the whole economic cycle, at least lessening the severity of those times of trouble called recessions.

 

Housing and the Macroeconomy:
The Tail Wags The Dog

At the moment, housing is at the heart of a still unresolved debate about whether or not the national economy is technically in a recession, an issue on which even the experts disagree. However, if nothing else, growth has slowed considerably, bringing us perilously close. No one denies that we are experiencing tough times, which are not expected to improve anytime soon. That the collapse of residential real estate is the source of much of the trouble is also generally agreed upon. As a result, the real estate industry has captured the attention of financial experts everywhere, even at the highest levels of government.

Stuart Gabriel is the UCLA Anderson Arden Realty Chair, a professor of finance and the director of the Richard S. Ziman Center for Real Estate at UCLA. When speaking of the current situation, he is careful to differentiate between housing and the real estate sector Housing and the Macroeconomy: as a whole. He explained that real estate encompasses a wide range of assets, including those in both the property and debt markets. He points out that housing itself connects to a number of other industries as well. He cites its links to construction, construction materials, home furnishings, brokerage and financial services, for example. In addition, evidence shows that consumer spending in general is affected. As a result, though housing makes up only about 4 percent of gross domestic product, housing is capable of being either a major driver or a major drag on the economy at large.

"Housing is the tail that wags the dog," Gabriel said. "Despite its limited absolute size, it is an interest sensitive sector that can lead the rest of the economy into an economic downturn or out of an economic downturn, as it often has before."

A Crisis in the Making
For much of the recent past, the news about real estate seemed to be nothing but good. During earlier years of the decade, house prices soared, making homeowners feel wealthy. Anyone who purchased a house did so with confidence that their investment would immediately grow in value. So, the consumer economy prospered as property owners spent the money their homes "made" them. Further fueling the frenzy was the fact that it was easier than ever to purchase a home. With creative loan-making by financial institutions and very affordable interest rates, it seemed that almost anyone could qualify for a home loan.

As long as home prices continued to rise, the risks appeared well contained. If homeowners couldn't afford their mortgage payment (or their second or their third), they could simply elect to sell at a profit to someone who could. Everyone, from the homebuyer to the lender to the foreign investor putting their money into securities backed by all these loans, was making money.

As always happens in the real world, the good times couldn't last forever. They never do. Economic cycles are a fact of life. Real estate values not only stopped their assent, they began to decline, triggering skyrocketing mortgage defaults. The wealth everyone thought they had began to disappear.

"In the wake of ever-rising defaults and foreclosures and related downward adjustments in house prices, the housing sector at the moment is in a state of very significant dislocation," Gabriel said. "We are currently in the midst of the worst downturn of the post-World War II era and perhaps the worst downturn ever documented by U.S. economic data."

Beyond Creative Lending
The explanation of how it all went so wrong is what Gabriel calls a "long and sordid story." Since last summer, the Ziman Center has convened a number of both public and private conferences to help make sense of the evolving situation. Appropriately, some of these conferences have been in conjunction with the UCLA Anderson Forecast, since real estate is so central to what is happening now in the larger economy. (For the record, the Forecast continues to assert that the nation is not in recession.) As Gabriel sees it, there were mistakes made at every point in the process, including those by borrowers, lenders, rating agencies, loan securitizers, developers, investors and regulators. In significant measure, however, the problem can be traced back to substantial pent-up demand for housing.

"We experienced considerable problems of housing affordability in many of our metropolitan areas," said Gabriel. "This led to innovations in mortgage design, including subprime, deeply-discounted adjustable rate mortgages and the like; all facilitated by sale of related securitized mortgage pools in the secondary market. These new instruments allowed many people to qualify for homes without much equity in the house. Further, payments on adjustable rate instruments have in many cases substantially been upward adjusted. As a result, with the downward movement in home prices, we're now seeing a tsunami of defaults and foreclosures washing across our shores."

Financial institutions lending money to too many unqualified borrowers clearly contributed to the problem, but it's not quite as simple to understand the reasons for it. Howard J. Levine, a founding member of the Ziman Center, sees behind-the-scenes changes as a source of the difficulties. As founder and senior consultant of ARCS Commercial Mortgage Company and one of the most respected executives in the real estate arena, Levine is a veteran of numerous real estate cycles.

"I think we went beyond creative lending in this last cycle, because the people making the decisions no longer took the risks of those decisions," said Levine. "The risks were turned over to Wall Street as mortgages were securitized. Today, lenders are just intermediaries."

The Transfer of Risk
Walter Torous, UCLA Anderson's Lee and Seymour Graff Professor, finance area chair and the first faculty director of the Ziman Center, agrees with Levine. He has been studying the issue of securitized loans, also known as collateralized debt obligations (CDOs). In the simplest terms, these are loans or mortgages that are bundled into investment vehicles, which are then sold off as shares.

"One thing that has to be addressed is that those who issue mortgages - the bankers and the brokers - have little financial interest in performance," Torous said. "Once they make the home loans, they immediately sell them off as securities. The investors, who have a financial interest in the loans, have little involvement in how those loans are made. There's a fundamental disconnect."

It was not always so. In the past, a bank or a savings and loan carried the loans they made on their own books and so bore the risk associated with any bad loans. The advent and subsequent popularity of CDOs eliminated those potential consequences and with them the incentive to take care in originating the loans.
As Torous points out, some large financial institutions weren't carrying any of their loans on their own balance sheets.

The Influence of Interest Rates
In addition, the government also, presumably unwittingly, participated in creating the housing bubble. Specifically, as suggested by Gabriel, "The Federal Reserve held short-term interest rates very low for a very long period of time." This fostered the environment in which people who typically should have been renters were suddenly qualified for homeownership.

Lewis G. Feldman, partner at Goodwin Procter LLP and another Ziman Center founding member, also sees the same economic policy decisions as adding to the problem. He thinks the lowering of underwriting standards took place in order to make investment vehicles available as a response to the enormous amount of capital which was being generated worldwide.

"So much liquidity existed as a result of (then Federal Reserve Chairman Alan) Greenspan's and (President George W.) Bush's response to 9-11, which was to push interest rates down further and further with all of those cuts," Feldman said. "This created a great amount of liquidity, because more and more assets could be financed. And prices, as you drop rates, begin to go up, because people buy on the basis of a payment, instead of buying on the basis of value." Feldman cites Las Vegas as an example of the results. He explains that it has the highest foreclosure rate in the United States right now, because so many subprime mortgages were given to homeowners there. They made the same mistake that others did everywhere else; they counted on value continuing to go up and up.

"It was a market force generated problem," Feldman explained. "Certainly you could blame it on various segments of people being dishonest and ask why the lender would issue a mortgage that wasn't properly documented. But the fact was that just the sheer amount of money seeking yield and the availability of that cheap money and the pressure to put that money out to create earnings were all keyed on the basis of that transaction being successful."

Ultimately, nobody believed they could afford to sit on the sidelines while money was being made - not the homebuyers, not the homeowners taking out second mortgages, not the lending institutions hotly competing with each other and certainly not the global investors who were more flush with capital than at any other time in history.

The Value of the Demonized Subprime
One can't help but wonder why more people didn't see this current crisis coming. It is especially true for the often-mentioned subprime segment, which seems to be where much of the blame is focused. Torous explains that subprime loans have always been in use, just not to the extent that they are now, which he also attributes to the greatly increased volume of funding involved. However, he does find it fascinating that the recent history of the delinquency rate for subprime loans did not cause more concern.

"You have to ask what the rating agencies for the CDOs were doing," Torous said. "Since five years ago these mortgages were defaulting at a 16 to 17 or 18 percent rate, when they were evaluating their credit worthiness today, why didn't they think that maybe they were going to be delinquent at the same rate?"

Nevertheless, Gabriel points out that there are legitimate reasons for the continued availability of credit to other than prime borrowers. After all, the mortgage business is not just about investing in real estate. Home ownership is an important part of the American dream, and finding new and innovative ways to make loans has been and will continue to be part of the equation.

"There must be room in our menu of mortgage instruments for lower credit quality borrowers to obtain loans," said Gabriel. "Assuming that the pricing of risk is appropriate, manageable and well-understood by the borrower. You want to see some ongoing availability of other than prime loans, because we want to allow households who have experienced credit difficulty to reestablish themselves. That being said, on the basis of our most recent experience, underwriters, insurers and secondary market entities (including Fannie Mae and Freddie Mac) do need to do a much better job of evaluating and pricing risk."

Recommendation for the Future
Since the real estate industry is capable of having a substantial impact on the entire economy, it is crucial to consider the lessons to be learned from this crisis. We must ask not only what can be done to pull the housing sector out of its current slump, but also how a similar situation can be prevented in the future. The intricacies of today's real estate make it a very complex subject that will continue to merit careful study.

Torous believes that resolving the present situation will be "extremely protracted and costly." He says that the affect of the bad loans made from late 2005 through 2006 and into 2007 are going to be felt for a while. Since the appetite for mortgage-backed securities has abated, there's going to continue to be less mortgage credit available. In the long run, he says that in addition to aligning the incentives of loan originators and investors, there must be a better understanding of how the whole system operates.

"We've also learned that banks aren't the sole source of credit in the economy," Torous said. "The expansion and contraction of credit operates outside the world of banks, in the world of securitization. We need to be clear about what this means in terms of future monetary policy. The Fed has to grasp the process better and understand its role and sharpen its policy tools in that context."

Feldman thinks we will see a combination of voluntary actions on the part of the mortgage industry, as well as mandated change by federal and state government. He fears that some of these attempts to stave off defaults and delinquencies will only defer the current problems rather than solve them. Specifically, he foresees that there will be added consumer protection legislation, requiring disclosure of foreclosure rates for different types of loans.

To help ensure that a downturn doesn't happen again so rapidly or so severely, Levine believes consumers need to be better educated about the process of buying a home, especially a clear understanding of loan documents. He points out that it is understandable if they are somewhat unsophisticated. A mortgage transaction is a once or twice in a lifetime occurrence for most. As a result, he contends that mortgage brokers, the borrower's main contact, should become licensed nationally. Otherwise, due to the nature of the industry and the potential for extraordinary commissions, there is significant opportunity for brokers to take advantage of consumers.

In summing up his hopes for the future, Gabriel reflects on the many financing choices home buyers once had access to and contrasts that with the current situation. "Today, our menu of mortgage instruments is extremely constrained. In contrast to recent years, we see significant rationing of credit. Interventions undertaken by the Federal Reserve Board and by other agencies of government should ultimately aid in the rebuilding of lender balance sheets and in the enhancement of liquidity in the capital markets. Those steps will ultimately work to improve the pricing and affordability of mortgages," he said. The Ziman Center will continue its efforts to promote an understanding of the complex nature of real estate to help make that better future possible.

 

Extending Our Global Reach
Dean Olian Connects UCLA Anderson with Alumni and Strategic Partners Worldwide

Globalizing UCLA Anderson is a key ingredient of the school's strategic plan. That means graduating students with "global brains" who have an intuitive grasp of business conditions and market opportunities around the world, awareness of international trade and policy issues, and deference to cultural differences. Included in the global agenda are faculty collaboration with peers from leading schools in various countries and the formation of key global partnerships around research and executive education.

Because of its size and focus, UCLA Anderson must be strategic and selective in its global expansion initiatives and partnership relationships. Led by Chris Erickson, senior associate dean for global initiatives, and the Board of Visitors Global Task Force, the school has developed a focused global strategic plan. The plan identifies learning, research and outreach priorities in the most promising areas for programs and partners. With these goals in mind, Dean Judy D. Olian has traveled to Asia, Europe and Latin America.

"We are in the midst of global shifts in the power regions of the world," Olian said. "Over the next 20 to 25 years, there will be a transition of economic activity toward Asian and Latin American countries. If you look at the top five countries in terms of gross domestic product today, only two are projected to be there in 2040, the United States and Japan. The others will be replaced by China, India and Brazil."

With the global strategic plan as a guide, Olian meets with alumni, business and university groups in the countries she visits to describe UCLA Anderson programs and distinctions and to explore points of collaboration. She meets with university and business leaders to understand the critical market and resource needs in the region and to explore potential educational and business partnerships with both universities and major employers.

A highlight of UCLA Anderson activities in Asia is the dual EMBA degree program with National University of Singapore (NUS). The program is designed to both educate students and to increase Anderson's visibility and exposure in the region. Olian says we are examining the feasibility of a similar program in Latin America.

"We've formed a partnership with the Indian School for Business, India's most prominent private business school, to launch a Certificate in Financial Engineering (CFE)," Olian said. "It is an addition to our new one year Master in Financial Engineering program, which will be delivered in Los Angeles starting January 2009. The shorter CFE program will be taught by our faculty traveling to India, and several UCLA students will join them to participate in the courses. They will not only study advanced finance but will have the experience of learning in Hyderabad with Indian students, experiencing also the Indian culture."

The UCLA Anderson global strategy has targeted other regions as well. Olian explained that the school has begun to initiate contacts within Latin America. Several student exchange programs have long operated between UCLA Anderson and leading business schools in Mexico, Brazil, Argentina and Chile. Later this year, over 50 Fully Employed MBA (FEMBA) students will travel to Chile for an intensive one-week immersion in Chilean business and policy issues.

Other FEMBA students have been working with Chilean companies for about eight years through the Global Access Program (GAP). In turn, UCLA Anderson hosts many student groups from abroad. The dean traveled recently with Bob Pettit, executive director of alumni relations, to Argentina, Brazil and Chile where they met with business leaders and the school's GAP partners, as well as with our many alumni in the region.

Executive education is another key dimension of UCLA Anderson's globalization strategy. As an example, the school is currently considering the creation and delivery of a corporate governance program in targeted regions of the world, e.g., in Hong Kong.

Olian's global activities extend beyond her UCLA Anderson position. She is involved with two organizations where she considers her roles complementary to her position as Anderson's dean. She is the chair of the Association to Advance Collegiate Schools of Business (AACSB) International. The association has been the premier accrediting and thought leadership organization for management education since 1916. In her AACSB role, she is able to connect with many of the 1,200 member deans from around the world, creating partnership opportunities and raising UCLA Anderson's visibility in the process. She is also a member of the International Advisory Council of Guanghua School of Management, the business school at Peking University.

"I joined the board at Peking University, because I saw a great fit with our values and culture, as well as the intellectual interests of both students and faculty," said Olian. "There are opportunities for collaboration around our research centers. I see many potential ties and benefits in both directions. Already, Peking University's EMBA students spent a week with us in classes and visiting Los Angeles-based global businesses. The board provides a remarkable learning experience that helps me understand a bit more about major market and policy shifts in a region that is so important to us."

Essential to the global strategy is the connection to the UCLA Anderson alumni abroad. Olian says that the alumni she meets have a desire to see the school become more visible. "We need to build programs that have a presence in their region on a continuing basis," said Olian. To that end, during her visits to these countries, she routinely meets with the local press in order to raise the school's profile.

"Our alumni feel emotionally connected to us," Olian explained. "They want to see us, and they also recognize what builds a brand. You can't do it from afar. You have to be there with products and programs that are valued and with a visible physical presence."

"There's no doubt in my mind that any leading school of management must be global throughout its degree and executive programs, its students and faculty, and in the intellectual content of the research it disseminates," Olian said. "Travel alone does not make a school global, but it is an important tool that adds to our thinking and credibility as a leading management school for the 21st century."

 

Visit From A Peaceful Revolutionary
Nobel Laureate Muhammad Yunus at UCLA Anderson

Describing the work of Muhammad Yunus, winner of the 2006 Nobel Peace Prize, Bhagwan Chowdhry, professor of finance at UCLA Anderson, said, "He created a revolution which we call microfinance." Defined as a small loan given to low-income people to help them achieve self-employment and develop an ongoing enterprise, this peaceful revolution in the war on poverty is on the move worldwide.

Micro-lending began in the mid-1970s as a response to the famine in Bangladesh. Yunus was head of the economics department at Chittagong University. He had assumed the post when he returned home to Bangladesh after receiving his doctorate in the United States. With so many dying of hunger around him, Yunus felt there was little point to the theories he had learned. He eventually decided that a bank for the poor could be an effective solution. With his own money, he made a personal loan to a group of destitute basket weavers in a small village.

From this humble grassroots beginning, a global movement has grown that inspired the Norwegian Nobel Committee to commend his "efforts to create economic and social development from below." They went on to cite their belief that, "Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means."

The Anderson students in Chowdhry's class were expecting a lecture on franchising microfinance that day. However, they were not expecting to hear it from the concept's creator. Nevertheless, after Chowdhry's introduction, Yunus entered with cameras from the Emmy Award-nominated mtvU program, "Stand In." Designed to bring surprise guest lecturers to college campuses, the series has included participants as varied as Madonna and Sen. John McCain. Robert Spich, faculty director of the Center for International Business Education and Research (CIBER), made the producers aware of the course and facilitated the filming of the program.

As planned, Yunus spoke about extending the reach of the microfinance movement, noting that it is gradually becoming known throughout the world. However, the idea has been met with some resistance. One basic issue that has been repeatedly raised is whether microcredit should be in the business of "making money off the poor." Yunus said he always argues that its purpose should be to do something good for others.

It is perhaps not surprising that the subject creates some confusion in our profit-conscious world. The announcement of the Nobel Prize said that Yunus' proposal to grant unsecured loans "had appeared to be an impossible idea." Acknowledging its uniqueness, Chowdhry summarized it this way: "Thirty years ago, nobody would have dreamed of giving loans to poor people." The genius of Yunus' idea was to challenge this prejudice and demonstrate the true credit worthiness of the poor. While loans are made to individuals, the collateral backing these loans is guaranteed by the community of borrowers of which they are members.

During the class, Yunus also shared another obstacle he has encountered in gaining acceptance for microfinance. There is a pervasive attitude that the kinds of problems micro-lending attempts to address are beyond the scope of individuals. He told the students that people often say, "Oh, government should do it. We are busy making money and so on." However, Yunus counters with, "I am saying, no, citizens have lots of innovative talents and creativity to do it themselves."

Despite opposition, Yunus continued the fight to achieve his vision. In 1983, he formally established Grameen Bank, meaning village bank, which shared the Nobel Prize with him. Its operations are based on the idea that the disadvantaged can become successful entrepreneurs if they are given funding on appropriate terms and taught a few sound financial principles. He is convinced alms destroy initiative and creativity, but that is not the only reason he doesn't believe in them. He explained to the students that, "A charity dollar has only one life. Use it. Achieve the goal, and then it's done. But if you design it as a social business, a social business dollar has endless life, because it recycles."

For Yunus, micro-lending is about trusting people, and his trust has been well repaid. Having lent almost $6 billion since its founding, Grameen Bank is the largest of its kind with almost seven million borrowers. Ninety-five percent are women. Self-financing and profitable, it lends $800 million a year at an average of about $100 for each loan. The percentage of repayment is very high. At work in the overwhelming majority of villages in Bangladesh, the institution also serves as the model for similar organizations in more than 100 countries. In their announcement, the Nobel committee said, "Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development." They added, "Microcredit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions."

Still far from satisfied, Yunus hopes to further the cause. He shared some of his ideas in response to students' questions. They asked about how to apply their MBA skills in the effort and what can be done to change attitudes about reward in our capitalist society. Yunus said a reorientation of our thought process away from the return on investment focus is needed. Instead, he posed the question: "What do we measure in a social business?" He suggested the answer is found in asking another question: "Are we making more impact on people's lives for each dollar that we have?"

Yunus also envisions creating an alternate stock market. "This stock market is about making money. So we create another stock market called a social stock market, where we'll be listing all the social businesses that are around," he proposed. "So someday, if I feel or you feel or anybody feels that I would like to put my money into taking care of this terrible problem that I see in my neighborhood or in the country that I love, I say, here's my investment in it."

The need is great. The speech awarding the prize to Yunus not only praised the success of microfinance but also underscored its importance, recommending increased use of it in the future. Some progress has been made. In ensuing decades, Bangladesh has enjoyed significant economic improvement, thanks in part to microcredit. However, the majority of the earth's inhabitants are poor. Roughly half of them live on less than $2 a day with more than one billion in extreme poverty, living on less than $1 a day. "This may be the greatest challenge confronting the world over the next few decades," the presentation said.

Many UCLA Anderson students are interested in social issues, including microfinance. This interest has prompted CIBER to help fund field study projects in other countries, microcredit applications among them. Spich said that there have been about 20 of these projects in the four years since Chowdhry began teaching his microfinance course. So it is not surprising that student reaction to Yunus' visit was enthusiastic. "Everyone was really excited by the lecture," said Ann Le (FEMBA '08). Yunus was pleased as well and summed it up by saying, "I was very happy. This was a good interaction. This is what I'm looking for, and these are the people who will make a difference in the world."

As a peaceful warrior, Yunus has revolutionized the war on poverty. He and the Norwegian Nobel Committee invite everyone to join in the struggle, using the weapon he has provided. So armed, we can help those in need to lift themselves out of their impoverished circumstances, one at a time.

 

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