Impact of Economic Factors on the Hotel Industry for 2012 Predicted

Here’s a response to this article, which was posted back in February of this year: http://www.hotelnewsnow.com/Articles.aspx/7463/Economic-factors-will-affect-hotel-investment.  It mentions various factors that the author believed will affect the hotel industry this year: U.S. monetary policy, the European Union debt crisis, Chinese GDP growth, and the price of oil.

Of course we all know that the industry is very dependent on macroeconomic factors that are out of anyone’s control, as the author points out. I can understand how U.S monetary policy affects them because it affects everyone and that at a macroeconomic level, the price of oil would affect whether or not people want to travel. But I am having a hard time understanding how the European debt crisis affects the hotel industry in particular. Here’s why: 

- It says “Given the unsustainable sovereign debt situation in Europe, fewer commercial real estate loans will be made in the U.S. by foreign banks in 2012. This presents an opening for U.S.-based balance sheet lenders to ramp up lending and greatly expand their market share.” So if Europe doesn’t lend us money, then US banks will since it’s obvious that they will want to take advantage of this opportunity. So then how would the EU debt crisis affect the hotel industry here? Obviously this statement implies that most of the foreign banks that make loans to the U.S are from Europe. Why are all of them from there? 

- “Additionally, the Association of Foreign Investors in Real Estate (AFIRE) reports that more than 60% of its members view the U.S. as the best market for capital appreciation. Since most of Europe finds itself in financial distress and Asian markets have not met expectations, the U.S. presents itself as a very promising and stable venue for offshore capital. Hotels, especially those in gateway markets, will be very attractive to international capital seeking a safer haven.” Maybe the author is trying to explain how the EU debt crisis affects the U.S hotel industry, but I still do not understand how it does. It’s easy to understand why foreign investors think that the U.S is a safer place to invest in, but why would they want to invest in hotels in particular?  

Federal Reserve Discount Policy

In my readings on the Federal Reserve, I have come across some things that may make others understand how the big banks exercise control over them. The discount policy in my opinion provides some insight into this. I need to give some background information first so that my points are understood and will discuss the points that are in bold later on.

BACKGROUND INFORMATION:

The discount window is a tool used by the Federal Reserve which allows commercial banks and other depository institutions to borrow at the discount rate to meet their reserve requirements. The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility.

The Fed has three programs for depository institutions – primary credit, secondary credit and seasonal credit programs.

1.      Primary credit

Typically primary credit is given on a short-term basis (overnight) to depository institutions that have strong financial positions and ample capital. Companies that qualify for primary credit do not need to exhaust other sources before using the discount window.

Eligibility for primary credit is based on the borrower’s examination ratings and capital. Supplementary information (including market-based information) can also be used. Primary credit ordinarily is extended at a rate 100 basis points above the federal funds rate with minimal administrative costs. So there are no checks and balances. I will try to explain what this rate exactly means in another post.

The Fed can extend primary credit for up to a few weeks as a backup source of funding. But if the institutions want longer-term extension of this credit then they will be subjected to more administrative requirements.

2.      Secondary credit

This is offered to institutions that do not qualify for primary credit. This too is available as a backup source of funds on a short-term basis. There are however greater administrative requirements because the borrower does need to provide proof that they can meet the terms of the loan. As of January 2003, the discount rate on secondary credit rates was 50 basis points above the federal funds rate. As with primary credit, longer-term secondary credit is also available.

3.      Seasonal credit programs

The only institutions that qualify for this are small to mid-sized depository institutions that clearly show intra-year fluctuations in funding needs. Agricultural communities are primary users of seasonal credit programs.

Discount window loans are secured by collateral that exceeds the amount of the loans.

Under extremely rare circumstances a Reserve Bank can give advanced credit to individuals, partnerships and corporations that aren’t depository institutions but they have to consult with the Board of Governors beforehand.

MY THOUGHTS:

The information above does provide a little insight into how the Federal Reserve caters toward the banks:

- Regarding the different types of credit programs: There are different qualifications for each program. The primary credit one is geared towards institutions with "strong financial capital" - this includes the banks. The fact that Primary credit is extended with "minimal administrative costs means that there are no checks and balances. If there were, then the administrative costs would increase. To me this indicates that they do not have to show proof of whether or not they need the money that the Fed lends them. However, those who qualify for the secondary program instead of the primary one need to produce more proof that they need the money that the Fed will lend them, despite the fact that they do not have as much capital as the banks.

-Conditions under which the Fed can give advanced credit: The last sentence "Under extremely rare circumstances a Reserve Bank can give advanced credit to individuals, partnerships and corporations that aren’t depository institutions but they have to consult with the Board of Governors beforehand" also basically states that they can lend money to the banks without having to prove whether or not they need the money. "Reserve Bank" are banks that belong to the Federal Reserve. The big banks of course are depository institutions, so they do not have to ask permission to obtain money.

A New Capital of Call Centers

According to the NYTimes, the Philippines is overtaking India as a hub of call centers: http://www.nytimes.com/2011/11/26/business/philippines-overtakes-india-as-hub-of-call-centers.html?pagewanted=1&_r=2&partner=rssnyt&emc=rss. This is occurring in part because the Filipinos speak English much better than Indians and "are steeped in American culture." So will all the call centers that have moved to India during the past ten years or so move to the Philippines? Perhaps so because in today's globalized world companies want to take advantage of these opportunities. It might be cheaper to set up call centers in the Philippines because companies won't have to teach their employees about American culture.

"Optimal Taxation in Theory and Practice" by Greg Mankiw, Matthew Weinzierl and Danny Yagan

Since this concerns taxes, accounting majors might find this interesting: http://gregmankiw.blogspot.com/2009/06/optimal-taxation-in-theory-and-practice.html.

"Obama, the G20, and the 99 Percent" by Jeffrey Sachs

http://www.huffingtonpost.com/jeffrey-sachs/obama-the-g20-and-the-99_b_1069030.html.

"The Super Committee's Big Lie" by Jeffrey Sachs

http://www.huffingtonpost.com/jeffrey-sachs/the-super-committees-big_b_1103700.html.

AICPA: Allow U.S. Companies the IFRS Option Now

Something of interest for accounting majors: http://www.journalofaccountancy.com/Web/20114658.