Sunday, December 21, 2008
Free trade rapidly becoming an endangered species?
This week the economist writes about a growing concern regarding the safety of free trade around the world. With calls throughout the world calling for greater government regulation in result of the current crisis, protectionist trade policies are rapidly becoming more popular. This is terrible news, especially to nations who have widely relied on exports to increase economic growth (i.e. China, Germany, Japan). The precedent of isolationism has been proven and widely promoted as a false hope to nations seeking an advantage. The Economist provides the incident of the infamous Smoot Hawley Tariff Act of the 1930's, which caused massive destruction to employment and a massive price increase of foreign goods. With many firms and consumers reeling from the crisis, the last thing needed is an impact on prices and employment. With the rapid political shift in attitude within governments around the world , it is a dangerous conception that free trade will be pushed aside in favor of more mercantilist policies. http://www.economist.com/opinion/displaystory.cfm?story_id=12815617
Saturday, December 6, 2008
Deficits and Debt
As the government contemplates pushing the budget deficit for 2009 to nearly a trillion dollars, the question of who will or even who can buy that debt is being asked in an article by The Economist.
Government bonds are well known for their value as stable investments, even if not known for being otherwise large-returning investments. But as more governments run deficits and are financing it with debt, will there be a glut, driving returns even lower?
The model they point to is japan, where for nearly 20 years investors have taken government debt despite it returning an even lower amount than US debt is presently. But this option is unlikely as the primary market for this was not foreign investors.
The US, it looks right now, may not have to be too concerned. With the entire world facing challenges, the American dollar has actually risen against major currencies, while previously strong currencies such as the pound, have lost value. But there may still be a need for domestic purchasing of government bonds, a more realistic event if central banks continue to lower rates and make government bonds more attractive investments comparatively.
The real issue they see, is in economic recovery, which will likely come well before any return to balanced budgets, meaning that then government debt will be competing against more competitive investments, making running deficits at that point more expensive.
Government bonds are well known for their value as stable investments, even if not known for being otherwise large-returning investments. But as more governments run deficits and are financing it with debt, will there be a glut, driving returns even lower?
The model they point to is japan, where for nearly 20 years investors have taken government debt despite it returning an even lower amount than US debt is presently. But this option is unlikely as the primary market for this was not foreign investors.
The US, it looks right now, may not have to be too concerned. With the entire world facing challenges, the American dollar has actually risen against major currencies, while previously strong currencies such as the pound, have lost value. But there may still be a need for domestic purchasing of government bonds, a more realistic event if central banks continue to lower rates and make government bonds more attractive investments comparatively.
The real issue they see, is in economic recovery, which will likely come well before any return to balanced budgets, meaning that then government debt will be competing against more competitive investments, making running deficits at that point more expensive.
Housing Prices Still The Problem
In an article for National Journal, the challenge of an economic recovery is linked directly to the still pressing need for stability in the housing market.
The article praises the action that the government is taken, there are definite criticisms with how slowly they came around to begin and the nature of what they've done, but they have certainly not been timid or idle once they began.
But the article believes that for all the attempts to stabilize banks and infuse liquidity, they have not focused enough on where the problem began - the housing market. The effort to modify loans in order to allow people to stay in them and avoid foreclosure has not been nearly wide enough, in part the author feels, because companies are paid for foreclosing, but not for arranging modifications.
The notion that there is a floor in the housing market, the article says is misleading one. Home prices will fall as far as the economy falls, there is no fixed floor. As the banking crisis is linked to recession in the economy, the circle of unemployment and home foreclosures will continue.
There are ideas to break this cycle. They include incentives for refinancing by mortgage companies, offering money to banks that modify loans for those facing foreclosure. The concern is that this could encourage more people who are close to default, costing the program more, but this seems to be less costly overall than a wave of foreclosures which has so far left banks unable to survive.
The article praises the action that the government is taken, there are definite criticisms with how slowly they came around to begin and the nature of what they've done, but they have certainly not been timid or idle once they began.
But the article believes that for all the attempts to stabilize banks and infuse liquidity, they have not focused enough on where the problem began - the housing market. The effort to modify loans in order to allow people to stay in them and avoid foreclosure has not been nearly wide enough, in part the author feels, because companies are paid for foreclosing, but not for arranging modifications.
The notion that there is a floor in the housing market, the article says is misleading one. Home prices will fall as far as the economy falls, there is no fixed floor. As the banking crisis is linked to recession in the economy, the circle of unemployment and home foreclosures will continue.
There are ideas to break this cycle. They include incentives for refinancing by mortgage companies, offering money to banks that modify loans for those facing foreclosure. The concern is that this could encourage more people who are close to default, costing the program more, but this seems to be less costly overall than a wave of foreclosures which has so far left banks unable to survive.
Sweden's Bank Bailout
There was a banking crisis in Sweden during the 90's which has many parallels to the current crisis, even if not nearly the same in size.
In the Swedish crisis there was a great amount of assets being described as 'toxic,' much like the assets that banks around the world are holding today. In both situations, the response was to guarantee banks and to make liquidity a priority.
The difference was that the swedish created 'bad banks' to take ownership of non-performing assets and then manages them to restore their value. This idea had begun early during the US crisis under Indymac, with the focus being on mortgage loans - where most of the distressed loans are. But this idea goes beyond restructuring loans while they are still a part of these companies, it involves separating them so that the original bank can start to function again. The loans were then dealt with by that separate company
Complexity is a bigger issue with the current crisis, and so is pricing the assets. In the swedish situation both banks, good and bad, were owned by the state. The US government has taken an investment in some of the banks, but does own or run any.
The article is in favor of doing more to separate out the bad assets, which the treasury supposedly is trying to do, but while in sweden private investment lagged for several years, they believe the current US crisis is trying to make the capacity for new private investment a focus.
In the Swedish crisis there was a great amount of assets being described as 'toxic,' much like the assets that banks around the world are holding today. In both situations, the response was to guarantee banks and to make liquidity a priority.
The difference was that the swedish created 'bad banks' to take ownership of non-performing assets and then manages them to restore their value. This idea had begun early during the US crisis under Indymac, with the focus being on mortgage loans - where most of the distressed loans are. But this idea goes beyond restructuring loans while they are still a part of these companies, it involves separating them so that the original bank can start to function again. The loans were then dealt with by that separate company
Complexity is a bigger issue with the current crisis, and so is pricing the assets. In the swedish situation both banks, good and bad, were owned by the state. The US government has taken an investment in some of the banks, but does own or run any.
The article is in favor of doing more to separate out the bad assets, which the treasury supposedly is trying to do, but while in sweden private investment lagged for several years, they believe the current US crisis is trying to make the capacity for new private investment a focus.
Job Losses Worst Since '74
Job Losses Worst Since '74. The Wall Street Journal reported that according to US Dept. Of Labor statistics, the country lost 533,000 jobs in November. Also, they revised the September losses up from 284,000 to 403,000 jobs, potentially indicating that the November numbers could end up being worse and passing the '74 mark of 602,000 jobs lost in a single month.
But they note that there is some reason for optimism, the US economy is 75% larger, so the jobs lost, while rivaling those months in size do not nearly have the scope in today's economy that they did then. Also, in the last 5 recessions, the US lost about 2% from its peak workforce, which would translate to "only" another 900,000 jobs. They are imagining the unemployment to rise into mid-2009 before it stabilizes.
But the job loss is amid a struggling banking and credit market. People who've lost savings and home values are now facing unemployment. The wsj believes that the credit and economy will rebound at some point in the second half of 2009, but in the meantime people are facing a bleak unemployment.
But they note that there is some reason for optimism, the US economy is 75% larger, so the jobs lost, while rivaling those months in size do not nearly have the scope in today's economy that they did then. Also, in the last 5 recessions, the US lost about 2% from its peak workforce, which would translate to "only" another 900,000 jobs. They are imagining the unemployment to rise into mid-2009 before it stabilizes.
But the job loss is amid a struggling banking and credit market. People who've lost savings and home values are now facing unemployment. The wsj believes that the credit and economy will rebound at some point in the second half of 2009, but in the meantime people are facing a bleak unemployment.
Credit Problems Continue
Even with all the emphasis on stabilizing banks, large corporations are still having problems getting loans. An article in The Economist finds that as banks begin scrutinizing companies more thoroughly, they are making loans to smaller companies easier than those to larger companies, going against the usual trend. The article stops developing this point, and goes off on a tangent about the continuing uncertainty regarding how deep of a recession there will be and to what extent companies will be able to keep up with loans.
The slowdown that is being predicted for the next year will put strains on all companies, big and small, and projections of companies likely to default in the next year are increasing. The concern of riskiness of companies that turn to banks for help in the meantime has increased as there is less available help with less credit. I gather from the article that a recession is a bad time to have a credit crisis, and a greater challenge is the unknowns with larger companies that may have more exposure than they let on. Distress for them may be a short distance from disaster and the larger companies may be a greater risk to aid.
The slowdown that is being predicted for the next year will put strains on all companies, big and small, and projections of companies likely to default in the next year are increasing. The concern of riskiness of companies that turn to banks for help in the meantime has increased as there is less available help with less credit. I gather from the article that a recession is a bad time to have a credit crisis, and a greater challenge is the unknowns with larger companies that may have more exposure than they let on. Distress for them may be a short distance from disaster and the larger companies may be a greater risk to aid.
Friday, December 5, 2008
China Blames Policies
In this article, Thomas Omestad highlights the session between U.S. and China's government officials.
China was quite blunt: "China's central bank governor, Zhou Xiaochuan, blamed 'the U.S. financial crisis' on 'excessive consumption and high leverage,' telling the U.S. delegation that Washington needed to 'raise its savings rate and reduce its trade and fiscal deficits.'"
China was quite blunt: "China's central bank governor, Zhou Xiaochuan, blamed 'the U.S. financial crisis' on 'excessive consumption and high leverage,' telling the U.S. delegation that Washington needed to 'raise its savings rate and reduce its trade and fiscal deficits.'"
Thursday, December 4, 2008
Automakers try to sell Congress on rescue Thursday
The heads of huge American car companies General Motors Corp., Ford Motor Co. and Chrysler LLC are requesting huge funds and bailouts from Congress today. Its interesting to note that the incidence of bailouts has extendted to even the auto industry. Rent seeking has increased considerably and will probably continue to increase as the Democrats take hold of Congress and the Executive branch.
http://www.google.com/hostednews/ap/article/ALeqM5gbjFY-o07QeryRxtFR3oC1w_v1PwD94RUQH81
http://www.google.com/hostednews/ap/article/ALeqM5gbjFY-o07QeryRxtFR3oC1w_v1PwD94RUQH81
Wednesday, December 3, 2008
Fiscal Stimulus Concerns
An editorial published in the Financial Times expresses optimism at the new President's plan for making sure that the United States only suffers a shallow recession, but also expressed concern in problems that could present themselves, and in the limitations to any stimulus attempt not just with the US but also world response.
It agrees with the size of the plan, if for no other reason than that the US is very big and would likely have/need a large stimulus, and partly because monetary policy is at or near its limits. Fear has siezed the credit markets, and the benefits of the lower interest rates have limited effect.
They also are concerned that while the US has the luxury of borrowing vast amounts without investor fear of a destablizing currency, they don't want to see the limits of this tested as the result could be devastating.
They want to see some of the stimulus be in the form of federal aid to states in order to balance their budgets. Also, lowering payroll taxes and rebates would directly help those most effected.
Finally, they warn that this is a global slowdown, and the US shouldn't be too optimistic, that while there may be success at managing the worst of a recession, growth may lag as the rest of the world will be slower to pull itself out of the downturn.
It agrees with the size of the plan, if for no other reason than that the US is very big and would likely have/need a large stimulus, and partly because monetary policy is at or near its limits. Fear has siezed the credit markets, and the benefits of the lower interest rates have limited effect.
They also are concerned that while the US has the luxury of borrowing vast amounts without investor fear of a destablizing currency, they don't want to see the limits of this tested as the result could be devastating.
They want to see some of the stimulus be in the form of federal aid to states in order to balance their budgets. Also, lowering payroll taxes and rebates would directly help those most effected.
Finally, they warn that this is a global slowdown, and the US shouldn't be too optimistic, that while there may be success at managing the worst of a recession, growth may lag as the rest of the world will be slower to pull itself out of the downturn.
Tuesday, December 2, 2008
Negative Savings Rate?
Consumption-Savings decision dealt with an entire chapter this year in our Econ 311 class. I remember the graph being a line that arced out from the origin. On the graph you had a total amount of money split between savings and consumption. It would typically be assumed you have a maximum amount of 100% to spend. In 2007 consumers actually had a negative savings rate. To have a negative savings rate, a person would have to spend more money than they have. Perhaps that is the reason why our economy has not become a top producer. Instead of investing our money, we have spent more money than we have and will not have a positive savings rate until we are able to pay off all of our bills and reduce consumption. In a slide show we saw that investment was necessary for a country to grow. Our country does not grow as fast as we need it to because the average American has a negative savings rate.
http://www.cbsnews.com/stories/2006/02/07/business/main1293943.shtml
http://www.cbsnews.com/stories/2006/02/07/business/main1293943.shtml
Fed Wrestles With Alternatives to Spur Economy
http://community.marketwatch.com/
In the article it mentions the Fed trying to come up with new ideas to spur the economy instead of rate cuts. With rate cuts down to, I believe 1%, it seems rather unnecessary to lower it anymore. We have been cutting rates for a year now and obviously it is not working as planned. We need new ideas and economic theories on how to deal with recessions and repairing the damage they cause.
In the article it mentions the Fed trying to come up with new ideas to spur the economy instead of rate cuts. With rate cuts down to, I believe 1%, it seems rather unnecessary to lower it anymore. We have been cutting rates for a year now and obviously it is not working as planned. We need new ideas and economic theories on how to deal with recessions and repairing the damage they cause.
Sunday, November 30, 2008
"Neanderthal" Economics
This article by Chris Brown serves mainly to critique the views and theories of Paul Krugman. Krugman has an absurd idea that economic stability and the end of the current recession can be cured by a stimlus package. The crux of Krugman's argument is that in times of recession and economic hardship and new type of analysis must be adopted and traditional methods of alleviating economic downturns must be abandoned. Krugman argues that "depression economics" is the key to curing the slump, usual economic analysis becomes useless, "virtue becomes vice, caution is risky and prudence is folly". The author is quick to correct most of Krugman's arguments which are incorrect to say the least. The explanations and counter arguments presented in the article are quite effective and very interesting.
http://mises.org/story/3221
http://mises.org/story/3221
Work Will Set You Free
Archbishop Celestino Migliore is calling for an expansion of the public sector so that human dignity can be preserved. I wonder if this is anything like the "human dignity" that existed during the heyday of the Soviet Union?
*I just thought this was an interesting/ disturbing claim related to the financial crisis.
Injecting Failure
The "injections" into the financial system will not lead to an economic turn around, but they will lead to massive increases in the national debt. In September, the National Debt Clock in NYC ran out of digits as the figure ticked over $10 trillion. In this article Jim Puzzangherra states that:
"Interest rates remain low because of the crisis, but they will rise, particularly when the U.S. Government starts borrowing more money to cover its growing debt..[this] could cause inflation to increase as well."This is all just part of the "win-at-any-cost approach" that has been adopted by the current (as well as the future administration) in response to the "financial crisis".
These injections are demolishing the financial system because they are destroying the very forces that allow it to be effective. In doing this the government is also creating a mountain of debt that will eventually have to be paid off.
Wednesday, November 26, 2008
An Austrian Take on Recessions
In the article 'An Open Letter to Gary Becker re: Depressions', Robert P. Murphy explains why Austrian economists reject the current meddling with the market (especially during recessions) and explains how Gary Becker misunderstands Austrian theory.
He explains first "that the business cycle is an unintended consequence of government intervention in the monetary and banking system." He then gives a simplified analogy of the Austrian theory: "To adopt a biological metaphor: Of course nobody likes vomiting. But if someone has ingested poison, throwing it up is a good thing. Efforts by physicians to numb the person's gag reflex and settle his stomach will lead to disaster."
He then points out the flaws in Becker's blog post, later giving another metaphor, this time explaining what the current government actions are doing to the economy:
"Further "stimulus" efforts can postpone the recession, to be sure, but that just means that when it does hit, it will be all the more severe. Using fiscal and monetary policy to stave off an impending downturn is the economic analog of giving another fix of heroin to an addict in order to avoid the painful period of withdrawal. Such treatment isn't doing the patient a favor, and only ensures that the adjustment back to a sustainable lifestyle will be all the more difficult."
He goes on much longer and in much more detail on Austrian theory, misconceptions, and the current crisis.
He explains first "that the business cycle is an unintended consequence of government intervention in the monetary and banking system." He then gives a simplified analogy of the Austrian theory: "To adopt a biological metaphor: Of course nobody likes vomiting. But if someone has ingested poison, throwing it up is a good thing. Efforts by physicians to numb the person's gag reflex and settle his stomach will lead to disaster."
He then points out the flaws in Becker's blog post, later giving another metaphor, this time explaining what the current government actions are doing to the economy:
"Further "stimulus" efforts can postpone the recession, to be sure, but that just means that when it does hit, it will be all the more severe. Using fiscal and monetary policy to stave off an impending downturn is the economic analog of giving another fix of heroin to an addict in order to avoid the painful period of withdrawal. Such treatment isn't doing the patient a favor, and only ensures that the adjustment back to a sustainable lifestyle will be all the more difficult."
He goes on much longer and in much more detail on Austrian theory, misconceptions, and the current crisis.
Monday, November 24, 2008
Sunday, November 23, 2008
Forgotten Lessons
The article, Business Cycles, Not Our Fault, makes mention of the fact that people have not learned from their past mistakes. The mistakes the article is discussing is that of the current plans for bailouts. People blame the current crisis on greedy capitalists or financial deregulation but fail to realize that these bailouts will further exacerbate the problem. There have been many lessons throughout the early 20th century given by world renowned economic thinkers and their teachings have been discarded and replaced by flawed methods of thinking government intervention, protectionism and other such ridiculous policies.
This is an article about the loss of business in the restaurant industry. This signifies that we are indeed in a bad recession. this is an interesting article because it explains what the restaurants are going to do to stay in the black during these hard times.
http://www.nytimes.com/2008/11/16/fashion/16consumption.html?ref=economy
http://www.nytimes.com/2008/11/16/fashion/16consumption.html?ref=economy
Japan’s Economy, World’s Second Largest, Is in Recession
This article written in the NY times on nov. 16 by Martin Fackler is all about what it means when the second largest economy in the world goes into recession. the Article also compares Europe's recession to the rest of the world and what impact it has. This article basically states how bad the world economy is.
http://www.nytimes.com/2008/11/17/business/worldbusiness/17yen.html?ref=economy
http://www.nytimes.com/2008/11/17/business/worldbusiness/17yen.html?ref=economy
Citigroup Plans to Sell Assets and Cut More Jobs
This article is about the downsizing that Citigroup is planning on instituting. This is a huge statement since according to the article Citigroup is already outsourcing over 23,000 jobs to India and Germany. The article was written by Eric dash and was published in the NY Times on Nov. 17.
The article goes on to talk about what this means relative to the rest of the investment banks that are also in trouble.
http://www.nytimes.com/2008/11/18/business/18citi.html?ref=business
The article goes on to talk about what this means relative to the rest of the investment banks that are also in trouble.
http://www.nytimes.com/2008/11/18/business/18citi.html?ref=business
"Entreprendre" means "To Undertake"
The role of the entrepreneur remains to be of paramount value to the resilience of the US economy. Amidst the current financial crisis, the landscape has shifted tremendously for entrepreneurial activity. The Global Entrepreneurship Monitor (GEM) is a research program that compiles statistical data to create an annual assessment of the national level of entrepreneurial activity in specific countries. Their methods of collecting data include global comparisons, national reports, and special topic reports based on their annual cycle. Despite the overwhelmingly regurgitated use of the word "entrepreneur" in their assessment (that makes you almost car sick), it is worth taking a look at some of the current trends and motions their data has been showing, here is their latest report on the United States for 2006-2007.
Saturday, November 22, 2008
Bush attempts to rally calls to free trade, stifles yawn.
In what might (hopefully) become his final international address, Mr. Bush lauded the importance of international free trade. While describing the benefits, in the same speech Pres. Bush warned about the dangers that a deregulated economy could bring and also raised calls for more government intervention. While the call for a greater understanding and adoption of free trade is justifiable, the ignorance in asking for it while introducing the concept of greater government regulation in the economy is not.
http://online.wsj.com/article/SB122736599036150771.html
http://online.wsj.com/article/SB122736599036150771.html
Friday, November 21, 2008
Financial System Suffers Relapse
This article by Neil Irwin and Renae Merle, addresses how after a slight improvement in the financial system, it is all unraveling again. Many investors are moving their money to U.S. Treasury debt where it will be safer. The market has hit its lowest level since 1997 and financial companies are being hit especially hard. Citigroup shares lost half their value this week, something truly alarming considering their importance in the financial industry. The broader economic picture also darkened last week as more americans filed for unemployment insurance benefits than any other week since 1992.
Thursday, November 20, 2008
You Go Girl! The Wisdom of Michele Bachmann
It's not often that you hear members of congress straight-talking on the issues. However, during yesterday's hearing for the House Financial Services Committee, Minnesota congresswoman Michele Bachmann released an extremely candid statement about her views on the proposed bailout of the automobile industry.
In her statement, Bachmann vehemently opposed the bailout on the grounds that the American taxpayers simply can't afford to keep these failing companies afloat. For years the auto companies have been becoming progressively less competitive in the world market, so bailing them out would simply be sanctioning their poor business practices - and sanctioning them at the expense of the taxpayer.
Bachmann enumerates the taxpayers current bailout tab:
$29 billion for Bear Stearns, $200 billion for Fannie and Freddie, $300 billion to expand the
Federal Housing Administration (FHA), $150 billion for AIG, and $700 billion for the Paulson
Plan -- plus $110 billion in sweeteners to pass that plan.
Since American taxpayers are already overwhelmed with subsidizing these companies, piling another burden on them would have disastrous effects.
In her statement, Bachmann vehemently opposed the bailout on the grounds that the American taxpayers simply can't afford to keep these failing companies afloat. For years the auto companies have been becoming progressively less competitive in the world market, so bailing them out would simply be sanctioning their poor business practices - and sanctioning them at the expense of the taxpayer.
Bachmann enumerates the taxpayers current bailout tab:
$29 billion for Bear Stearns, $200 billion for Fannie and Freddie, $300 billion to expand the
Federal Housing Administration (FHA), $150 billion for AIG, and $700 billion for the Paulson
Plan -- plus $110 billion in sweeteners to pass that plan.
Since American taxpayers are already overwhelmed with subsidizing these companies, piling another burden on them would have disastrous effects.
The New Domino Effect
In the article 'Pass the Plate', the differences between the U.S. and European auto-bailout situations are discussed. In regards to the Big Three, their economic situation is much more serious than those auto companies in Europe. While GM claims to be in dire need of the bailout, Ford seems like it will be able to survive for a longer amount of time - unless of course GM does go under, impacting parts suppliers. In Europe, auto companies are doing much better (still not exactly good), but still wish for a bailout, or subsidies rather, for the harsh carbon dioxide emission regulations that will go in effect by 2012. German manufacturers, producing cars that will be most effected by these regulations, are in favor of the bailout; while French and Italian auto companies (who will not be as effected by these new rules) do not feel a subsidy from taxpayers is necessary when benefiting a portion of the auto industry.
In any case, Europe will be waiting to react. The European Investment Bank will consider bailouts more seriously after seeing what happens in Detroit; if the auto-bailout does occur here, there is a good chance the 'bailout-plate' will be passed to Europe.
With all these bailouts occurring, a new domino effect is emerging. Bear Stearns fell, then Fannie Mae and Freddie Mac, then American International Group, then the $700 Billion bailout, then the UK rescue package. Now the auto-bailout dominoes are quivering.
In any case, Europe will be waiting to react. The European Investment Bank will consider bailouts more seriously after seeing what happens in Detroit; if the auto-bailout does occur here, there is a good chance the 'bailout-plate' will be passed to Europe.
With all these bailouts occurring, a new domino effect is emerging. Bear Stearns fell, then Fannie Mae and Freddie Mac, then American International Group, then the $700 Billion bailout, then the UK rescue package. Now the auto-bailout dominoes are quivering.
Sunday, November 16, 2008
Same As History?
The article Don’t Bail Them Out, by Llewellyn H. Rockwell, Jr., is addressing the reasons for why we should not bailout companies or business that put themselves in situations that lead to their own crisis. Rockwell also goes into addressing about how the Great Depression would have, at most, lasted 18 months but instead it lasted 16 years because the government decided to help bailout the companies and business that affected the stock market. He predicts that this would be the same outcome if the government tries to help these companies, such as Freddie and Fannie, by giving them money to help them out. There is one paragraph in the article that I believe summarizes what Rockwell has to say. “What should have happened in 1929 is precisely what should happen now. Let the price system prevail! The government should completely remove itself from the course of action and let the market reevaluate resource values. That means bankruptcies, yes. That means bank closures, yes. But these are part of the capitalistic system. They are part of the free-market economy. What is regrettable is not the readjustment process, but that the process was ever made necessary by the preceding interventions.”
US Auto Market
This article was about the current financial crisis and its effect on the auto industry. Auto industries are a major part of the economy and the bankruptcy of the American automakers would devastate the economy. General Motors is asking for a $25 billion dollar loan in order to make assets more liquid and get through these rough times. Seeing how the market ha yet to bottom out, some people predict the recession may continue well into the coming year.
http://www.reuters.com/article/ousiv/idUSTRE4AF1W920081116
http://www.reuters.com/article/ousiv/idUSTRE4AF1W920081116
Friday, November 14, 2008
As the status of the finacial crisis fluctuates, Paulson rethinks strategy
In a form insight into what amounts to crisis control for the United States, Treasury Secretary Hank Paulson, announced plans to refit the Treasury's strategy to help solve the economic crisis. The fact that the change was announced is nothing new; such announcements that pronounce a change to fix the current financial crisis are indeed common. However, as Paulson himself has said, that such changes are indeed neccassary as the extent of the damage and the scope of neccessary repairs become more evident. In some cases, Secretary Paulson has been accused for not acting quicker in responding the dynamic nature of the crisis, referring to the delay in the recapitalization of certain finacial instututions that the government has agreed to assist.
In some cases, Mr. Paulsons tempid attitude to a quick reaction to the crisis is well warrented. By not rushing into the scene and taking a step back to reassess the environment, the government is able to ensure that the plan can be executed as well as possible.
One prime example of this is the limited response to the American Auto industry. Unlike the banks, the US auto firms were already in touble before the economic crisis, and with the loans that some in the government are proposing as well as president elect Barak Obama, the gaurentee that these loans will be paid back to the gov. in the future is limited. http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=12597500&source=features_box3
In some cases, Mr. Paulsons tempid attitude to a quick reaction to the crisis is well warrented. By not rushing into the scene and taking a step back to reassess the environment, the government is able to ensure that the plan can be executed as well as possible.
One prime example of this is the limited response to the American Auto industry. Unlike the banks, the US auto firms were already in touble before the economic crisis, and with the loans that some in the government are proposing as well as president elect Barak Obama, the gaurentee that these loans will be paid back to the gov. in the future is limited. http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=12597500&source=features_box3
Granting Immortality
After briefly discussing F.A. Hayek's ideas (from Law, Legislation, and Liberty) in class today (Nov.14,08') about political culture, democracy, and negative long-term effects of the bailout, I found this recent article by David Brooks relevant. Brooks describes Obama's plans for the Big Three Automobile companies as "the creation of an auto czar with vague duties" and that the larger principle is, in fact, over "the nature of America’s political system." Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later...Simply put, bad behavior is rewarded, concentrated benefits to the few at the expense of our tax dollars, and capital that could have gone to successful companies and programs will be directed toward companies with a history of using it badly.
Bankruptcy is the least horrible option.
Bankruptcy is the least horrible option.
The threat of deflation
The name of the article is called The threat of deflation and it goes into detail about how the theory of spending among people in the world economy. Thanks to the fall in oil prices the economists expect for consumer prices to fall up to 2.5 percent. It seems as if prices in different markets will fall as a result but central banks would prefer that they fall at a steady pace as opposed to a large initial decrease because falling prices make debt much more expensive. Also, the United States has a reason to look forward to the summer as inflation prices are expected to be negative by July. This was a very interesting article because it shows the psychology behind the spending and addresses what the state of the economy will be once prices fall.
http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=12607235
http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=12607235
Feeding Frenzy: Rent Seeking on Capitol Hill
A November 11 article for the New York Times could be used as a textbook example of rent seeking.
Since the passage of the first bailout plan, lobbyist groups have been flooding the treasury with requests that they too receive a piece of the federal pie. Groups such as the National Marine Manufacturers Association find it unfair that the government is only allocating money to certain interests while arbitrarily ignoring other struggling businesses. Obviously, the government can't just give handouts to every business that has been hit by the financial crisis - yet this situation might cause one to wonder how the government, without being able to draw information from the price system, chooses which interests it thinks worthy of helping and which it does not.
Furthermore, the government is using my tax dollars to help prop up businesses they deem worthy. I have no say in whether I think the businesses should be given money or not. The whole system seems not only arbitrary then, but also unjust to the taxpayers.
Since the passage of the first bailout plan, lobbyist groups have been flooding the treasury with requests that they too receive a piece of the federal pie. Groups such as the National Marine Manufacturers Association find it unfair that the government is only allocating money to certain interests while arbitrarily ignoring other struggling businesses. Obviously, the government can't just give handouts to every business that has been hit by the financial crisis - yet this situation might cause one to wonder how the government, without being able to draw information from the price system, chooses which interests it thinks worthy of helping and which it does not.
Furthermore, the government is using my tax dollars to help prop up businesses they deem worthy. I have no say in whether I think the businesses should be given money or not. The whole system seems not only arbitrary then, but also unjust to the taxpayers.
Toward a New International Capitalism
This article by Steven Pearlstein addresses the decisiveness of the financial crisis and how it is the most important moment in American Capitalism since 1944, when leaders of 44 nations came up with a blueprint for a new world financial order based on principles of free market, free trade and the free flow of capital. In recent years the US has gone from being the world's largest creditor to being the world's largest debtor and can no longer expect to dominate the international financial institutions. The current crisis in America has contributed to global instability, proves that the current unregulated US system has many flaws and does not necessarily produce the best outcome.
Thursday, November 13, 2008
Another Bailout and the 'Money Hole'
Now an auto industry bailout for the 'Big Three' - General Motors, Ford, and Chrysler - is being discussed by congressmen. In this article, the lack of Republican votes in Senate is expected to cause the bailout to fail.
On the topic of increases in government spending, this video from The Onion features comedians discussing the need for the U.S. government 'Money Hole.' According to these experts, it would be 'alarmist and irresponsible' to talk about closing the National Money Hole. The creation of private money holes is another option discussed. In any case, it will at least make you laugh.
"If you love America, you throw money in its hole!"
On the topic of increases in government spending, this video from The Onion features comedians discussing the need for the U.S. government 'Money Hole.' According to these experts, it would be 'alarmist and irresponsible' to talk about closing the National Money Hole. The creation of private money holes is another option discussed. In any case, it will at least make you laugh.
"If you love America, you throw money in its hole!"
Friday, November 7, 2008
R.I.P. European Free Market? The Evolution of Government intervention in its markets.
On October 30, the Economist posted an article (http://www.economist.com/world/europe/displayStory.cfm?story_id=12510261) proclaiming the looming danger of European governments response to the looming recession that is rapidly becoming more widespread across global markets. The dangerous response in question was that regarding the notion that a greater form of government control and regulation over what is already seen as a somewhat recognized socialist style market system. Some European governments have institutionalized many important commodities such as healthcare, and now many European leaders are taking the viewpoint that this new crisis is a sign that the economy is not regulated enough. While it is not surprising that some nations have adopted this notion, such as France, a notable advocate to a more government regulated economic system, others have comletely reversed their stance. One example of this is Italy's prime minister, Silvio Berlusconi, a former communications tycoon and former staunch advocate of a deregulated economy, has completly done an about-face on his position and is now standing with French President Sarkozy on the idea that more government regulation is now the best solution to fix this crisis. That is not to say that all European leaders agree with this idea. Germany's economic minister, Michael Glos, has made several statements warning that this idea could be even more catastrophic to the economy. As the economist magazine editor notes that history shows that state run industries often fail to match their purpose of existence and might even backlash.
I think that it is vital that European leaders rethink any strategy they might have to revamp the eocnomy via government regualtion and rule in favor instead of further de-regulating the economy, away from government control. The magazine has another point, that while politicians may accuse the symbolic corporate "fat cat" for the cause of the crisis, and that politicians themselves portray themselves as saviors, the politician's motives may also be in league with that of the corporations themselves rather than the public interest. What do you think?
I think that it is vital that European leaders rethink any strategy they might have to revamp the eocnomy via government regualtion and rule in favor instead of further de-regulating the economy, away from government control. The magazine has another point, that while politicians may accuse the symbolic corporate "fat cat" for the cause of the crisis, and that politicians themselves portray themselves as saviors, the politician's motives may also be in league with that of the corporations themselves rather than the public interest. What do you think?
Beyond Crisis Management.
When there is a crisis there are many debates of what measures need to be done to correct the problems. There is usually is a battle between tacticians and strategists. The tacticians dash from skirmish to skirmish trying to control a crisis, deciding in each case whether taxpayers should bail out a distressed bank, firm or country. The strategists call for a more comprehensive approach to resolving the mess—often involving new government bodies to recapitalise banks or take over troubled assets. It seems as if there are two different philosophies and the tacticians seem like they are more so respnsible for the huge bailouts we have become familiar with. The article goes on with showing us what strategies need to be implemented to smoothen the financial crisis the corporations have dug us into. The article is called Beyond Crisis Managment and is very intuitive because it shows the financial side of the economy. http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=12262103
The Green Span
Was Alan Greenspan's Fed "innocent of any role in encouraging the housing boom" and did he actually manage to "solve the monetary-central-planning problem" ?
A briefing paper from the CATO institute by David R. Henderson and Jeffrey Hummel has posed a challenge to those who insist that a persistently sound central-banking policy is not only unlikely but beyond what Selgin argues, the "ken of mere mortals, and that even the best of possible central bankers must eventually steer the economy he is piloting into disaster." They pose an eloquent defense of Alan Greenspan and his FED. Out of the many recent critiques of the paper in blogs and articles, Selgin does a thorough job in evaluating the problems with some of their claims,he gives insight into the Monetary Misunderstandings and logic of the Housing Boom and Fed Policy. However in conclusion, he says that it is a valuable service not just to Greenspan himself but to monetary economics- surely a paper that has caused some recent debate.
A briefing paper from the CATO institute by David R. Henderson and Jeffrey Hummel has posed a challenge to those who insist that a persistently sound central-banking policy is not only unlikely but beyond what Selgin argues, the "ken of mere mortals, and that even the best of possible central bankers must eventually steer the economy he is piloting into disaster." They pose an eloquent defense of Alan Greenspan and his FED. Out of the many recent critiques of the paper in blogs and articles, Selgin does a thorough job in evaluating the problems with some of their claims,he gives insight into the Monetary Misunderstandings and logic of the Housing Boom and Fed Policy. However in conclusion, he says that it is a valuable service not just to Greenspan himself but to monetary economics- surely a paper that has caused some recent debate.
Thursday, November 6, 2008
Was the Origin of the Central Bank Corrupt?
The article “The Corrupt Origins of Central Banking”, written by Thomas J. DiLorenzo, is about original foundation of the corrupt central bank. The article addresses Robert Morris as the person who desired to establish the American version of the British mercantilist system. The article further addresses Morris’s desire "to organize and head a central bank, to provide cheap credit and expanded money for himself and his allies.” Alexander Hamilton is suggested as helping Morris in his schemes. The article concludes by stating how the method of Morris and Hamilton failed to function because it violated primary American rights, which are liberty alongside prosperity. It is a very interesting article to read.
Wednesday, November 5, 2008
Fifth of November Irony
Today commemorates the 403rd anniversary of Guy Fawkes' attempt to blow up the British parliament. Though today he is considered a villain for attempting to subvert the British authority, his resistance of coercive power has recently gained him a heroic reputation amongst libertarians and other anti-authoritarian factions. The 2005 movie V for Vendetta even makes Fawkes into a symbol of resistance to oppressive rule, saying that "people should not be afraid of their governments, governments should be afraid of their people."
To learn more about this unlikely hero, check out this article from today's Time. Ironically, Fawkes was a last-minute add to this plot, yet his is the personality most remembered in connection to what has become to be known as the "Gunpowder Treason." Even more ironic, however, is the fact that this year, the holiday takes place the day after the election of our new president - a man who has promised to institute a plethora of new "egalitarian" measures. Yet in trying to promote equality, he will effectively be denying some individuals of their hard-earned property in order to redistribute it to those who did not work to earn said property. This idea of "egalitarianism" sounds just a little unjust to me...
To learn more about this unlikely hero, check out this article from today's Time. Ironically, Fawkes was a last-minute add to this plot, yet his is the personality most remembered in connection to what has become to be known as the "Gunpowder Treason." Even more ironic, however, is the fact that this year, the holiday takes place the day after the election of our new president - a man who has promised to institute a plethora of new "egalitarian" measures. Yet in trying to promote equality, he will effectively be denying some individuals of their hard-earned property in order to redistribute it to those who did not work to earn said property. This idea of "egalitarianism" sounds just a little unjust to me...
A Word on Obama's Brilliant Spending Proposals
With the economy in shambles, President Elect Barack Obama has a great plan to fix our fiscal problems: more federal spending (hint my intended sarcasm). Among other items on his agenda, Obama plans to sink at least $15 billion into renewable energy research, which he says will create 5 million new jobs, and to put upwards of $50 billion per year into a universal health care plan (with some independent estimates offering much higher figures). According to an article in this morning's LA times, however, the first bills Obama will likely pass will be those which will gain overwhelming support from both parties - showing the world that this young senator from Illinois is really ready to be the nation's leader. Yet with the financial system in such a shaky condition, Obama must be extremely careful with how much federal money he spends, for the article warns that if the federal budget deficit reaches a trillion dollars, this will likely send the economy into an even worse shock than the one we recently experienced.
Monday, November 3, 2008
Stimulus Packages and Bailouts around the World
In the article 'Overseas, More Nations Assemble Stimulus Plan', authors Burnett and Wassener describes the stimulus plans being organized in Australia, where interest rates are being lowered, South Korea, where a $10.9 billion stimulus package is being constructed, and Spain, where complex mortgage payment plans are forming.
In the article 'German Bank Seeks $10.5 Billion in Bailout Aid', author David Jolly highlights the German bank, Commerzbank, asking the government for a bailout. He also describes the trouble a French bank is having with business.
In the article 'German Bank Seeks $10.5 Billion in Bailout Aid', author David Jolly highlights the German bank, Commerzbank, asking the government for a bailout. He also describes the trouble a French bank is having with business.
Quantitiative Easing??
In the article, A Rate of Zero Percent From the Fed? Some Analysts Say It Could Be Coming, author Edmund L. Andrews claims that in order for the Fed to spark up the economy, it might have to set the target federal funds rate at 0 %.
A government induced zero interest rate would be odd enough; banks loaning to one another overnight for zero-interest because of the free-market equilibrium rate would be even weirder, and Andrews claims that rates might be close to that.
What the Fed is really focusing on is expanding the money supply of course. If and when they do reach the zero mark, Bernanke claims that they will buy up Treasury securities with longer maturities, then privately-issued debt if that didn't work.
"In effect, the Federal Reserve would be printing more money and injecting it into the economy — a strategy of 'quantitative easing,' in Fed jargon."
Great.
A government induced zero interest rate would be odd enough; banks loaning to one another overnight for zero-interest because of the free-market equilibrium rate would be even weirder, and Andrews claims that rates might be close to that.
What the Fed is really focusing on is expanding the money supply of course. If and when they do reach the zero mark, Bernanke claims that they will buy up Treasury securities with longer maturities, then privately-issued debt if that didn't work.
"In effect, the Federal Reserve would be printing more money and injecting it into the economy — a strategy of 'quantitative easing,' in Fed jargon."
Great.
Bubble
In the article, Was There a Loan It Didn't Like?, Gretchen Morgenson interviews mortgage underwriters at WaMu.
The underwriters were repeatedly pressured to 'restructure' subprime loans: they were offered paid vacations when they reached certain loan amounts and threatened with "letters of complaint" in personal files for rejecting loans.
Although the article does not delve into why WaMu would ever endorse such heinous acts, I wonder if the government had anything to do with it... The Community Reinvestment Act and similar legislation could be to blame..
The underwriters were repeatedly pressured to 'restructure' subprime loans: they were offered paid vacations when they reached certain loan amounts and threatened with "letters of complaint" in personal files for rejecting loans.
Although the article does not delve into why WaMu would ever endorse such heinous acts, I wonder if the government had anything to do with it... The Community Reinvestment Act and similar legislation could be to blame..
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLx_ufXAnIqE&refer=home
The U.S. Treasury more than tripled its planned debt sales for this quarter to help finance a 2009 budget deficit that bond dealers advising the department estimate may swell to almost $1 trillion. The sale of debt would hope to thaw the frozen credit market. This increase in the projected deficit has been icing on a cake of financial turmoil.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLx_ufXAnIqE&refer=home
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLx_ufXAnIqE&refer=home
Thursday, October 30, 2008
Bankruptcy
The method in which the banks make money is by browning from lenders with a low interest rate and then lending to borrowers for a higher interest rate. As it is seen, the money circulates. If borrowers cannot pay the banks back what they borrowed, then the banks would go bankrupt. In the article "In Praise of Bankruptcy", Henry Thompson points out different reasons to why many have gone into bankruptcy and gives reasons as to how to make these situations better. The article addresses the effects of Fannie Mae in the present situation of our economy. It also addresses the negative effects of the government meddling with the mortgage market. I believe that the article is written in an effective way. The article ends with one valuable thought: "The present financial problems would disappear quickly if the government let the markets operate and let inefficient firms go bankrupt. The irony is that the government is stepping in to solve the problems it created. The solution might "work," but the underlying disincentives in the mortgage and insurance markets will persist. Increased government meddling in the financial markets will only make the financial problems linger."
Wednesday, October 29, 2008
Bulls and Bears
Yesterday the Dow Jones closed up 889.35 points, or 10.9 percent - the biggest rally in 69 years, excepting the upswing of October 13th earlier this year. With stock prices at an all time low, individuals will be naturally interested in buying stocks at these low prices; yet lack of faith in the weak US markets still has some skeptics worried. For more on this issue, see this article from yesterday's New York Times.
Tuesday, October 28, 2008
As finacial crisis expands into eastern europe, the IMF plans damage control
Today the International Monetary Fund announced that it would begin a movement to invest more funding into eastern Europe, starting with Hungary. The developing countries of eastern Europe have been beginning to fall into a massive recession, largely due to the developing situation of their western neighbors, the abrupt change in investor confidence, and the large scale inflation plaguing the nation. The 1.25 billion euro, 17 month duration loan is expected to be put into effect pending a ruling by the board of directors. Hungary is not the only nation that has begun to beg for emergency assistance from the IMF or the World Bank. Nations such as Belarus, Ukraine, and Iceland (whom has already received the loan to the urgency of the situation in the country) have all raised requests for emergency financial capital. With many developing nations struggling to gain traction in global financial markets, this news could not come at a worst time.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aaaSfRlzU_Us&refer=home
http://www.bloomberg.com/apps/news?pid=20601087&sid=aaaSfRlzU_Us&refer=home
Monday, October 27, 2008
Capital One, Key Among 19 Banks Getting $35 Billion
The article discusses the 35 Billion dollar package given to SunTrust and Capital One by the U.S. Treasury in their two part plan to cure the frozen credit markets. Treasury Secretary Henry Paulson is giving out cash to recapitalize struggling lenders and jump-start takeovers in an industry suffering from the worst housing crisis since the Great Depression. SunTrust, Capital One, KeyCorp and PNC are among regional lenders that have agreed to take cash so far by selling preferred shares to the U.S.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aBUai2jr11BM&refer=home
http://www.bloomberg.com/apps/news?pid=20601087&sid=aBUai2jr11BM&refer=home
analogy to G. Depression
In an article by Larry Elliott, economics editor in the Gaurdian.co.uk. the author explains how the current crisis in 2008 is parallel to the great depression. the article also discusses the role that J.P. Morgan played back then and what the bank is doing now to stem the crisis.
http://www.guardian.co.uk/business/2008/mar/18/creditcrunch.marketturmoil1
http://www.guardian.co.uk/business/2008/mar/18/creditcrunch.marketturmoil1
Is the yen dangerous?
in an article in th NY Times Oct. 27, written by By BETTINA WASSENER and CHOE SANG-HUN, thye discuss the Yens rise in exchange rate relative to other currencies and what this means for Japan and for the united states. The article also discusses the role of the G7 in trying to lower the exchange rate of the yen. Finally theb article explains what impacgt this has on the other large economies in asia, such as S. Korea.
http://www.nytimes.com/2008/10/28/business/worldbusiness/28g7.html?_r=1&ref=business&oref=slogin
http://www.nytimes.com/2008/10/28/business/worldbusiness/28g7.html?_r=1&ref=business&oref=slogin
Sunday, October 26, 2008
As Global Prices Soar, More People Go Hungry
An article in Sunday's Washington Post discussed the effects the global financial crisis is having on poorer countries around the world. There was already a food crisis, as grain prices were increasing so rapidly that many third world countries struggled to keep up, but now that the wealthier nations are suffering, they haven't been able to come through with the humanitarian aid that they promised to help deal with these troubles.
Commodity prices have decreased, but they are coming down so fast, that there is some concern that it could effect decisions to plant for next season, leading to shortfalls that would only worsen the problem.
Amid the confusion of dealing with the sudden shift in economic climate, some countries such as China, have begun putting up export tariffs in order to make sure that goods which are needed domestically, remain there first, before they are sent abroad. One of the items they mentioned was fertilizer, something China makes and routinely exports to other countries. Specifically, poorer countries are struggling to deal with this protectionism. They don't have the domestic production to turn to, and they rely on foreign countries for these tools. With the higher prices there may be additional agricultural shortfalls in countries where there isn't the room for it.
Commodity prices have decreased, but they are coming down so fast, that there is some concern that it could effect decisions to plant for next season, leading to shortfalls that would only worsen the problem.
Amid the confusion of dealing with the sudden shift in economic climate, some countries such as China, have begun putting up export tariffs in order to make sure that goods which are needed domestically, remain there first, before they are sent abroad. One of the items they mentioned was fertilizer, something China makes and routinely exports to other countries. Specifically, poorer countries are struggling to deal with this protectionism. They don't have the domestic production to turn to, and they rely on foreign countries for these tools. With the higher prices there may be additional agricultural shortfalls in countries where there isn't the room for it.
Indicators
Credit Crisis Indicators Oct
From: sarzi, 4 days ago
An updated version of the presentation I embedded in my blog at http://www.investmentbankeronlife.com
SlideShare Link
Indicators
Credit Crisis Indicators Oct
From: sarzi, 4 days ago
An updated version of the presentation I embedded in my blog at http://www.investmentbankeronlife.com
SlideShare Link
Indicators
Credit Crisis Indicators Oct
From: sarzi, 4 days ago
An updated version of the presentation I embedded in my blog at http://www.investmentbankeronlife.com
SlideShare Link
Indicators
Credit Crisis Indicators Oct
From: sarzi, 4 days ago
An updated version of the presentation I embedded in my blog at http://www.investmentbankeronlife.com
SlideShare Link
Friday, October 24, 2008
As signs of a global recession begin to show, markets begin to show signs of things to come.
This week the WSJ (http://online.wsj.com/article/SB122489105149968665.html) reports of a massive domino effect occurring across the globe within the markets of largely leading industrial nations as they hunker down for the long haul. This morning (Friday the 24th), markets in the US, Asia, and Europe tumbled amongst a growing sense of trouble that has begun to instill itself in the mind of investors. The only exception being Japan whose yen currency reached a new high in market value, however even with this small victory, even the Japanese will suffer somewhat within trade overseas due to the widening gap with the dollar.
Other signs of trouble are coming into focus with the rapid decrease in earnings forcasts. Everything from retailers such as Liz Claireborne to major car manufacturers such as Citroen are announcing sharp cuts in their production for the future, due to a decrease in sales.
Countries in Latin America are also beginning to feel the credit squeeze as many have begun to fear a repeat of the crisis of 1997.
Overall this is only the beginning, until consumer confidence is restored, and the credit squeeze begins to slaken, any hopes of a sudden remedy are unlikey at best.
Other signs of trouble are coming into focus with the rapid decrease in earnings forcasts. Everything from retailers such as Liz Claireborne to major car manufacturers such as Citroen are announcing sharp cuts in their production for the future, due to a decrease in sales.
Countries in Latin America are also beginning to feel the credit squeeze as many have begun to fear a repeat of the crisis of 1997.
Overall this is only the beginning, until consumer confidence is restored, and the credit squeeze begins to slaken, any hopes of a sudden remedy are unlikey at best.
Greenspan Ambivalent about Beliefs
In the article 'Greenspan Concedes Error on Regulation', by Edmund L. Andrews, discusses Greenspan's role in the current economic crisis. Greenspan, influenced by Ayn Rand, had always considered himself a 'Libertarian Republican' and often stuck to his non-intervention beliefs throughout his time as Fed Chairman.
When California Representative Henry A. Waxman asked Greenspan in a recent Congressional hearing, "Do you feel that your ideology pushed you to make decisions that you wish you had not made?” Greenspan conceded, “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”
Low and behold, the one (semi) libertarian ambassador to the two-party system lost his belief in the free-market. Apparently, he has started to rethink his decisions to keep regulations lax and interest rates (naturally) low during what is now often viewed as the beginning of the current economic crisis.
When California Representative Henry A. Waxman asked Greenspan in a recent Congressional hearing, "Do you feel that your ideology pushed you to make decisions that you wish you had not made?” Greenspan conceded, “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”
Low and behold, the one (semi) libertarian ambassador to the two-party system lost his belief in the free-market. Apparently, he has started to rethink his decisions to keep regulations lax and interest rates (naturally) low during what is now often viewed as the beginning of the current economic crisis.
Treasury Pulls in Different Direction over ID Card Technology Timetable
Different parts of Whitehall have opposing views on the role of technology in establishing the identity card scheme, according to insiders.
The procurement, originally scheduled for October 2005, has only just begun, but the timetable for rolling out biometric identity cards to citizens remains largely unchanged.
Identity and Passport Service (IPS) chief executive James Hall said that cards will be issued gradually, giving both the technology and the physical processes time to settle in.
‘The intention is to start with small volumes but then scale up during 2010,’ said Hall.
However, the IPS plans are expected to be contradicted by a report by former HBOS chief executive Sir James Crosby on potential private sector involvement in the scheme. The report, commissioned by Gordon Brown, will be published later this year, and according to sources, Crosby will recommend that the scheme reaches a critical mass of citizens as soon as possible (Computing, 9 August).
But Hall warns that faster rollout will place an unnecessary strain on both budgetary planning and the physical enrolment infrastructure.
‘I agree with the point of view that if it is a worthwhile scheme then it is beneficial to implement it sooner rather than later,’ said Hall.
‘But the challenge is that if we enrol more people in a given year we need a bigger infrastructure to do it.
‘And it becomes important to find ways of driving down costs so we avoid a massive cost in a short period of time.’
Insiders say the different timescales point to a fundamental divergence between the IPS and Crosby’s Treasury team.
The IPS view is of a scheme defined by the technology implementation. But Crosby thinks that the cards can be rolled out quickly, relying on facial identification from photographs rather than having a full biometric technology infrastructure.
‘IPS hopes to proceed on the basis of a gold standard where-as Crosby is arguing for a silver standard that is, drop in the technology incrementally but get cards out fast,’ said a source close to the programme.
‘It would be a way to get the scheme going without the full technology infrastructure.’
The procurement, originally scheduled for October 2005, has only just begun, but the timetable for rolling out biometric identity cards to citizens remains largely unchanged.
Identity and Passport Service (IPS) chief executive James Hall said that cards will be issued gradually, giving both the technology and the physical processes time to settle in.
‘The intention is to start with small volumes but then scale up during 2010,’ said Hall.
However, the IPS plans are expected to be contradicted by a report by former HBOS chief executive Sir James Crosby on potential private sector involvement in the scheme. The report, commissioned by Gordon Brown, will be published later this year, and according to sources, Crosby will recommend that the scheme reaches a critical mass of citizens as soon as possible (Computing, 9 August).
But Hall warns that faster rollout will place an unnecessary strain on both budgetary planning and the physical enrolment infrastructure.
‘I agree with the point of view that if it is a worthwhile scheme then it is beneficial to implement it sooner rather than later,’ said Hall.
‘But the challenge is that if we enrol more people in a given year we need a bigger infrastructure to do it.
‘And it becomes important to find ways of driving down costs so we avoid a massive cost in a short period of time.’
Insiders say the different timescales point to a fundamental divergence between the IPS and Crosby’s Treasury team.
The IPS view is of a scheme defined by the technology implementation. But Crosby thinks that the cards can be rolled out quickly, relying on facial identification from photographs rather than having a full biometric technology infrastructure.
‘IPS hopes to proceed on the basis of a gold standard where-as Crosby is arguing for a silver standard that is, drop in the technology incrementally but get cards out fast,’ said a source close to the programme.
‘It would be a way to get the scheme going without the full technology infrastructure.’
Calamity averted, but the credit crisis continues
This article Rescuing the banks speaks about the current banking crisis in the United States and whether or not it is a good decision to bail out banks. THe article also described the current crisis in England and describe how the English will go about solving their financial crisis. On October 14th it was announced that the government would lend assitance to the banks in dollar amounts up to 250 billion dollars. The article was well written and gave us an idea of how other nations are dealing with the financial global crisis and how our economy directly affects other nations.
http://www.economist.com/finance/displaystory.cfm?story_id=12432432
http://www.economist.com/finance/displaystory.cfm?story_id=12432432
World Markets Sink as Recession Fears Spread
This article is about the fears of recession will cause a huge cut in profits and will put developing economies to the brink of collapse. The recession has been described as short periods of panic followed by a short calm. Investors are fleeing smaller countries and all eyes are on the IMF. The recession has also caused the dollar to strengthen against smaller countries, including the euro. Emerging economies are the pressure points in this fragile situation and must be protected and insulated accordingly.
http://biz.yahoo.com/ap/081024/world_markets.html?.v=21
http://biz.yahoo.com/ap/081024/world_markets.html?.v=21
FED Prepared to Prop Up Money Market Funds
This article by Neil Irwin discusses the Federal Reserves new program to provide cash to money- market mutual funds. Mutual-funds invest by lending money on a short-term basis to companies, banks and other financial institutions. They are normally considered safe places to park cash because they only buy debt that us highly likely to be paid back. Government official hope that this measure will help ensure that lending remains available to banks.
This program is yet another safety net for the financial system. More government intervention to prevent and even steeper fall of the economy. The FED is not only willing to lend money directly to banks but also ready to back up their funds in the future.
Thursday, October 23, 2008
The Limelight
On GMU Economics...
There are a number of students at George Mason University that go throughout their academic careers without knowing the high level of reputation and world renowned professors they have access to. Mason's Economics department has a long history of prestige, two Nobel laureates (James Buchanan and Vernon Smith), pioneering intellectual movements and discourse (within the economics field), and world-wide acclaim. People are turning to many of our professors on board at Mason on various media networks, journals, blogs, and podcasts to inquire about the current financial crisis, and a wide-range of economic issues of all types. The following is online footage of Dr. Walter E. Williams speaking on behalf of the government bailout, and also a link to Dr. Peter J. Boettke at the inaugural lecture for The Future of Freedom Foundation’s “Economic Liberty Lecture Series,” where he analyzed the current credit crisis from an Austrian perspective. These are two extremely well respected scholars/intellectuals of the current GMU Econ department that we should absorb as much knowledge, wisdom, and understanding of our discipline.
There are a number of students at George Mason University that go throughout their academic careers without knowing the high level of reputation and world renowned professors they have access to. Mason's Economics department has a long history of prestige, two Nobel laureates (James Buchanan and Vernon Smith), pioneering intellectual movements and discourse (within the economics field), and world-wide acclaim. People are turning to many of our professors on board at Mason on various media networks, journals, blogs, and podcasts to inquire about the current financial crisis, and a wide-range of economic issues of all types. The following is online footage of Dr. Walter E. Williams speaking on behalf of the government bailout, and also a link to Dr. Peter J. Boettke at the inaugural lecture for The Future of Freedom Foundation’s “Economic Liberty Lecture Series,” where he analyzed the current credit crisis from an Austrian perspective. These are two extremely well respected scholars/intellectuals of the current GMU Econ department that we should absorb as much knowledge, wisdom, and understanding of our discipline.
Are We Going to be in a Depression?
The Article “How to Avoid Another Depression” by Mark Thornton, emphasizes the fact that the government should stop interfering with the economic crises that has affected America. The article first addresses the definition of a country being in a depression. Then the article points out some of the reasons as to how we ended up in this. Lastly the article gives reasons to why we should not have the government interfere with the economic crises. Thornton emphasizes the fact that businesses, such as Fannie Mae and Freddie Mac, should face bankruptcy and go through the hardships like every other business. I think this Article was well written. It really is not a long article and it states the facts straightforwardly.
Wednesday, October 22, 2008
The Central Prank? Panama is right on the Money
"There will be no forced fiat paper currency in the Republic. Thus, any individual can reject any note that he may deem untrustworthy."
This is a statement in article 114 in the 1904 constitution of Panama.
The citizens of the new (at the time) country, in distrust of the 1886 experiment of forced fiat Colombian paper notes, decided to include this as a caveat and prevention of any impediments to open trade and transport. Panama's unique macroeconomic and monetary arrangements embody freedom of choice in the capital markets, as they have no central banking mechanism.
The U.S. dollar has been Panama's legal tender for 100 years...
The absence of a central bank in Panama has created a completely market-driven money supply. Panama's market has also chosen the US dollar as its de facto currency. Successive governments have chosen to maintain this "self-denying ordinance" because the dollar anchor has given the country a degree of monetary stability. The absence of a central bank ensures no monetary intervention, so Panama essentially has a private monetary system in which the stock of money is determined by the decisions of private agents and banks. The unified currency system eliminates foreign exchange risk, currency mismatches, and speculative attacks so common in other countries with central banks and "sovereign" money. The absence of "policy decisions" regarding monetary or exchange rate affairs reduces risk because less information is needed by outside investors. These features are at the core of a consistent free-market institutional system that has produced a stable economic order and an efficient macroeconomic adjustment mechanism.
For further interest, Murray Rothbard's The Case for a 100 Percent Gold Dollar can supplement a better understanding of how currency, the dollar, and markets shape and transform a movement towards economic freedom.
This is a statement in article 114 in the 1904 constitution of Panama.
The citizens of the new (at the time) country, in distrust of the 1886 experiment of forced fiat Colombian paper notes, decided to include this as a caveat and prevention of any impediments to open trade and transport. Panama's unique macroeconomic and monetary arrangements embody freedom of choice in the capital markets, as they have no central banking mechanism.
The U.S. dollar has been Panama's legal tender for 100 years...
The absence of a central bank in Panama has created a completely market-driven money supply. Panama's market has also chosen the US dollar as its de facto currency. Successive governments have chosen to maintain this "self-denying ordinance" because the dollar anchor has given the country a degree of monetary stability. The absence of a central bank ensures no monetary intervention, so Panama essentially has a private monetary system in which the stock of money is determined by the decisions of private agents and banks. The unified currency system eliminates foreign exchange risk, currency mismatches, and speculative attacks so common in other countries with central banks and "sovereign" money. The absence of "policy decisions" regarding monetary or exchange rate affairs reduces risk because less information is needed by outside investors. These features are at the core of a consistent free-market institutional system that has produced a stable economic order and an efficient macroeconomic adjustment mechanism.
For further interest, Murray Rothbard's The Case for a 100 Percent Gold Dollar can supplement a better understanding of how currency, the dollar, and markets shape and transform a movement towards economic freedom.
To Regulate, or Not To Regulate - That is the Question
In an article from May 5 of this year, recent Nobel Prize winner Paul Krugman argues his case for more regulation of the financial system. While noting the merits of allowing the free market's ability to solve banking crises, Krugman argues that without regulation, though the market may provide short-term solutions, ultimately the financial system is doomed to failure unless the government steps in.
The recently-appointed president of the Foundation for Economic Education, Lawrence Reed, counters this claim in an article that will be coming out in this month's issue of the Freeman. In his article, Reed argues from an historical standpoint, showing how countries with less regulation have tended to have stronger banking systems, and vice versa.
The recently-appointed president of the Foundation for Economic Education, Lawrence Reed, counters this claim in an article that will be coming out in this month's issue of the Freeman. In his article, Reed argues from an historical standpoint, showing how countries with less regulation have tended to have stronger banking systems, and vice versa.
Tuesday, October 21, 2008
The Massive Growth of Islamic Banking in 2007
Islamic Banking in 2007 Set for Massive GrowthMushtak Parker, Arab News
DUBAI, 1 January 2007 — There seems to be no letting up of the massive growth of the global Islamic banking and finance sector in the coming New Year. Never mind the estimated year-on-year growth of between 15 percent to 20 percent of the global Islamic finance sector, which are usually being bandied around.
In reality, on the ground, the balance sheets, the deposits, the number of branches, the assets under management in selective individual Islamic financial institutions (IFIs) are growing by between 25 percent to 40 percent.
With oil prices and liquidity projected to be sustained at roughly the same levels during 2007, the budget surpluses of Gulf Cooperation Council countries will continue to be high. The Saudi budget for 2007 is projected at a staggering SR160 billion. This is important for the Islamic finance sector given that it will further drive both the public and private sector involvement in the sector.
In some respects, 2006 was a watershed year for the increasing involvement of GCC utilities and corporates in Islamic finance especially in Sukuk issuance and in syndicated Murabaha facilities, raised for general corporate purposes or for expansion activities. This trend will be reinforced during 2007 and beyond, with majors such as Saudi Aramco, SABIC, Emirates, Qatar Gas 7 Petroleum Company, Alba, Dubal among others setting the pace. While the GCC and Malaysia are no doubt the mainstay of the Islamic finance pool of funds and product innovation, there are signs that new markets will emerge during 2007.
These include Indonesia, the most populous Muslim nation with over 210 million people. Indonesia is in the process of launching its debut sovereign Sukuk in the first quarter of 2007. Other countries include Singapore, which has aspirations of being the International Islamic Capital Markets center. The Singapore Stock Exchange (SGX) together with Barclays Capital and others are working toward issuing the first exchange traded fund off the SGX/FTSE Asia 100 Shariah Index.
Turkey is another market, which is ripe for Sukuk and other more complex Islamic finance structures. Following the first Sukuk issued out of the US by gas company, East Cameron Partners in Houston in 2006, Western corporates in the US, UK, the EU and Central Europe are also showing much interest in utilizing the structure to raise funds to refinance existing corporate debt or to finance working capital and expansion activities, including acquisitions.
Other markets on the margin include South Africa, Russia and China. South Africa already has a history of Islamic finance spearheaded by Bahrain-based Albaraka Banking Group. But more recently the local banks such as ABSA, First National, Nedbank and Standard Bank have entered the market in a much more committed drive especially in retail banking and asset management. The Oasis Group, with its Crescent family of Islamic equity, balanced and property funds, have a lead start in Islamic asset management. With its tie-up with Malaysian, Saudi and Dubai partners, its overall aim is to provide seamless Shariah-compliant brand products, which transcend borders and can equally be sold to customers in Riyadh, Kuala Lumpur, Cape Town, Dubai, Istanbul, London etc.
This will also be an increasing trend in 2007 as Islamic finance becomes increasingly globalized. Here the banking majors such as Citigroup, HSBC, UBS, Standard Chartered, BNP Paribas, Societe Generale, Credit Suisse and Deutsche Bank should have a natural advantage because of their global reach and marketing expertise.
Similarly, the next phase of industrialization, even in the GCC, cannot be financed solely out of equity or the government budgets. There will increasingly be a reliance on the debt markets for Sukuk and other capital markets instruments and financial markets for syndications. Islamic finance is set to leverage its position because of its competitive pricing and now increasingly acceptable structures.
The extra tier of Shariah compliance is no barrier to entry for Islamic finance, as witnessed by the subscription of an increasing number of conventional banks in Europe, the US, Asia and South Africa to Islamic instruments such as Sukuk and Murabaha syndications. These banks are now increasingly comfortable with the risks associated with these instruments.
The three main market growth trends for Islamic banking in 2007 will be expansion in retail banking; the continuing march of the Sukuk but with more emphasis on hybrid complex issues and the beginning of a secondary market in the GCC subject to one of the Western banking majors being prepared to take on this role; wealth management such trusts and private equity.
In the UAE, for instance, Dubai Holdings has already announced that it is in the process of setting up the AED3.6 billion Al-Noor Islamic Bank. At the same time Dubai Bank is also set to complete its conversion into a fully-fledged Islamic bank in 2007.
In the two major markets in the GCC and Malaysia growth will be different yet complementary. In Malaysia, growth will be vertical as opposed to lateral in the GCC markets. Malaysia’s establishment of the Malaysia International Islamic Financial Centre (MIFC) in September 2006 heralds a new concerted effort by the Badawi government to consolidate the existing 12 Islamic banks in the country (both local and foreign) and to pave their globalization by encouraging them to venture into new markets and to attract investors into Malaysia by passing enabling legislation which transcends current foreign exchange and capital control regulations. CIMB Islamic Bank, for instance, has acquired a license to set up an Islamic finance company in Manama in Bahrain in a joint venture with a local partner.
The Malaysian emphasis now is on capacity buildings; on investment in human capital development (partly through the nascent INCEIF (the International Center for Education in Islamic Finance); enhancing the financial soundness and compliance of IFIs; enhancing Shariah compliance and governance; and the internationalization of the sector beyond the Muslim countries.
In contrast, the GCC states will see more lateral expansion of the market through new banks and companies and more products. This is partly because of the huge liquidity in the market which impacts more directly on demand dynamics for financial products. It is also because the GCC and other regions are playing “catch-up” with Malaysia in terms of Islamic financial architecture; regulations and legislation.
In some areas, such as Takaful (insurance), market penetration, however, will be frustratingly slow, simply because the starting base is much lower, and there still remain huge barriers to entry — low capitalization of Takaful companies; poor marketing; lack of reinsurance (Retakaful); ambivalent Shariah views on insurance; and poor market education.
DUBAI, 1 January 2007 — There seems to be no letting up of the massive growth of the global Islamic banking and finance sector in the coming New Year. Never mind the estimated year-on-year growth of between 15 percent to 20 percent of the global Islamic finance sector, which are usually being bandied around.
In reality, on the ground, the balance sheets, the deposits, the number of branches, the assets under management in selective individual Islamic financial institutions (IFIs) are growing by between 25 percent to 40 percent.
With oil prices and liquidity projected to be sustained at roughly the same levels during 2007, the budget surpluses of Gulf Cooperation Council countries will continue to be high. The Saudi budget for 2007 is projected at a staggering SR160 billion. This is important for the Islamic finance sector given that it will further drive both the public and private sector involvement in the sector.
In some respects, 2006 was a watershed year for the increasing involvement of GCC utilities and corporates in Islamic finance especially in Sukuk issuance and in syndicated Murabaha facilities, raised for general corporate purposes or for expansion activities. This trend will be reinforced during 2007 and beyond, with majors such as Saudi Aramco, SABIC, Emirates, Qatar Gas 7 Petroleum Company, Alba, Dubal among others setting the pace. While the GCC and Malaysia are no doubt the mainstay of the Islamic finance pool of funds and product innovation, there are signs that new markets will emerge during 2007.
These include Indonesia, the most populous Muslim nation with over 210 million people. Indonesia is in the process of launching its debut sovereign Sukuk in the first quarter of 2007. Other countries include Singapore, which has aspirations of being the International Islamic Capital Markets center. The Singapore Stock Exchange (SGX) together with Barclays Capital and others are working toward issuing the first exchange traded fund off the SGX/FTSE Asia 100 Shariah Index.
Turkey is another market, which is ripe for Sukuk and other more complex Islamic finance structures. Following the first Sukuk issued out of the US by gas company, East Cameron Partners in Houston in 2006, Western corporates in the US, UK, the EU and Central Europe are also showing much interest in utilizing the structure to raise funds to refinance existing corporate debt or to finance working capital and expansion activities, including acquisitions.
Other markets on the margin include South Africa, Russia and China. South Africa already has a history of Islamic finance spearheaded by Bahrain-based Albaraka Banking Group. But more recently the local banks such as ABSA, First National, Nedbank and Standard Bank have entered the market in a much more committed drive especially in retail banking and asset management. The Oasis Group, with its Crescent family of Islamic equity, balanced and property funds, have a lead start in Islamic asset management. With its tie-up with Malaysian, Saudi and Dubai partners, its overall aim is to provide seamless Shariah-compliant brand products, which transcend borders and can equally be sold to customers in Riyadh, Kuala Lumpur, Cape Town, Dubai, Istanbul, London etc.
This will also be an increasing trend in 2007 as Islamic finance becomes increasingly globalized. Here the banking majors such as Citigroup, HSBC, UBS, Standard Chartered, BNP Paribas, Societe Generale, Credit Suisse and Deutsche Bank should have a natural advantage because of their global reach and marketing expertise.
Similarly, the next phase of industrialization, even in the GCC, cannot be financed solely out of equity or the government budgets. There will increasingly be a reliance on the debt markets for Sukuk and other capital markets instruments and financial markets for syndications. Islamic finance is set to leverage its position because of its competitive pricing and now increasingly acceptable structures.
The extra tier of Shariah compliance is no barrier to entry for Islamic finance, as witnessed by the subscription of an increasing number of conventional banks in Europe, the US, Asia and South Africa to Islamic instruments such as Sukuk and Murabaha syndications. These banks are now increasingly comfortable with the risks associated with these instruments.
The three main market growth trends for Islamic banking in 2007 will be expansion in retail banking; the continuing march of the Sukuk but with more emphasis on hybrid complex issues and the beginning of a secondary market in the GCC subject to one of the Western banking majors being prepared to take on this role; wealth management such trusts and private equity.
In the UAE, for instance, Dubai Holdings has already announced that it is in the process of setting up the AED3.6 billion Al-Noor Islamic Bank. At the same time Dubai Bank is also set to complete its conversion into a fully-fledged Islamic bank in 2007.
In the two major markets in the GCC and Malaysia growth will be different yet complementary. In Malaysia, growth will be vertical as opposed to lateral in the GCC markets. Malaysia’s establishment of the Malaysia International Islamic Financial Centre (MIFC) in September 2006 heralds a new concerted effort by the Badawi government to consolidate the existing 12 Islamic banks in the country (both local and foreign) and to pave their globalization by encouraging them to venture into new markets and to attract investors into Malaysia by passing enabling legislation which transcends current foreign exchange and capital control regulations. CIMB Islamic Bank, for instance, has acquired a license to set up an Islamic finance company in Manama in Bahrain in a joint venture with a local partner.
The Malaysian emphasis now is on capacity buildings; on investment in human capital development (partly through the nascent INCEIF (the International Center for Education in Islamic Finance); enhancing the financial soundness and compliance of IFIs; enhancing Shariah compliance and governance; and the internationalization of the sector beyond the Muslim countries.
In contrast, the GCC states will see more lateral expansion of the market through new banks and companies and more products. This is partly because of the huge liquidity in the market which impacts more directly on demand dynamics for financial products. It is also because the GCC and other regions are playing “catch-up” with Malaysia in terms of Islamic financial architecture; regulations and legislation.
In some areas, such as Takaful (insurance), market penetration, however, will be frustratingly slow, simply because the starting base is much lower, and there still remain huge barriers to entry — low capitalization of Takaful companies; poor marketing; lack of reinsurance (Retakaful); ambivalent Shariah views on insurance; and poor market education.
Monday, October 20, 2008
Bernanke: It's time for stimulus plan
Federal Reserve Chairman Ben Bernanke testified Monday that Congress should consider passing a new stimulus package to try to jump start the economy. The news is quite surprising because this has been noted by some economists to be Bernanke's most dire assessment of the current financial crisis yet. When asked whether the United State's was experiencing a "recession" Bernanke responded that it was an "economic slowdown". Bernanke agreed with lawmaker's not to pass the current bailout package but definitely sugessted that another plan be pursued.
http://money.cnn.com/2008/10/20/news/economy/bernanke_testimony/?postversion=2008102013
http://money.cnn.com/2008/10/20/news/economy/bernanke_testimony/?postversion=2008102013
http://online.wsj.com/article/SB122448973215949635.html
Opec plans to cut the supply of world oil by as much as 2 million barrels per day. This announcement comes after the price of oil began to slip over the past few weeks. Cutting the supply of oil by two million barrels a day will bring prices back up as demand weakens. President Hugo Chavez said he would like to see oil prices back between 80-90 dollars per barrel. This summer, prices reached an all time high when oil peaked at $147.27 per barrel in July.
Sunday, October 19, 2008
Factories: Drop worst in 34 years
Are we seeing signs of recession? In the article, Factories: Drop worst in 34 years explains sings or recession. According to the Federal Reserve, production from industries dropped 2.8% from the last month. This drop is dramatically low due to the many natural disasters like hurricanes Gustav, Katrina, and Rita the past years. Economist John Silva form Wachovia says, "This is consistent with a recession, there's no doubt about it,". Economist base recession on four signs: 1) production output, 2) employment levels, 3) personal income and 4) retail and wholesale sales of manufactured goods (Goldman). All the four signs have shown in a decrease especially the past couple months. Recession is something that the nation should be aware of and not taken lightly.
http://money.cnn.com/2008/10/16/news/economy/industrial_production/index.htm
http://money.cnn.com/2008/10/16/news/economy/industrial_production/index.htm
International Financial System
This is an article from September regarding the financial crisis and the stock markets taking a huge blow. The article touches on the downward spiral that ensued following a fall in stocks. At the end o the day, Morgan Stanley stated that it had massive losses and was struggling to survive. Some say that it was the day the American era of greatness came to a close. Over the past month, the initial problem has snowballed into an economic catastrophe. Will it continue to worsen and eventually bottom out or can America, and the rest of the world, recover.
'The World As We Know It Is Going Down' 9/18/2008
http://www.spiegel.de/international/business/0,1518,578944,00.html
'The World As We Know It Is Going Down' 9/18/2008
http://www.spiegel.de/international/business/0,1518,578944,00.html
Friday, October 17, 2008
A Point of Interest
After talking about George Selgin today in class, I thought it might be interesting for some of you to read today's post by Don Boudreaux on his blog Cafe Hayek. Ironic?
How Stimulating...
With the economy in its current state of upheaval and the holiday season quickly approaching, fear of a sub-par holiday spending season has been a dominating topic of conversation in Washington. In a recent article for the LA Times, staff writers Jim Puzzanghera and Richard Simon discuss several economic stimulus proposals that have been proposed by various members of congress. Much dispute over the nature of the stimulus package has been occurring, and even President Bush supports the idea of giving some sort of a boost to consumers to induce them to spend more in the coming months. However, fears of the negative implications of such a boost are also on the table, leaving the question of whether this idea will become reality or not.
Honestly, what's to say with the economy in such a rocky situation that consumers would even choose to spend all they received in government handouts?
Honestly, what's to say with the economy in such a rocky situation that consumers would even choose to spend all they received in government handouts?
What Went Wrong, And What Did Not
An editorial in the October 16th issue of The Economist details how we should not view the recent crisis as an excuse to re-regulate the market, that to do so would take us away from a path which has the ability to create crises like the present, but has otherwise benefited billions who would have been worse off. We should instead view the crisis as an opportunity to learn how to better manage the market.
This begins by how to view the bail-out, not as an ideology-driven choice, but as a pragmatic solution. The current choice of adding public capital to banks is due to the belief that it is what is necessary to allow them to provide credit, and that the cost of not doing so would be greater.
Aware of the danger that having such a clear safety net might have on behavior of future banks, they recommend clarity in the government's role. By making certain that when making this rescue, they not engage in protectionism, cronyism, and by getting out of the public sector as quickly as possible and with a profit to the public.
They also see a second battlefront as the market moves forward, and this is an ideologically contest which will attempt to undo the success of anglo-american capitalism. The first place they see it coming is in a populist response from a global public that has had the virtues of free markets preached to them for the past 30 years. The challenges could come from those countries who perceive the lessons to be learned from the credit crisis such that they apply them to non-financial sectors and create more regulation on goods and services in their countries and between countries. Even allowing for the present credit crunch, hundreds of millions of people around the world, in countries like China and India, have had their lives improved by their governments lowering barriers to trade.
The second place they see challenges coming is from those who criticize deregulation, and they give some credit to this position. The credit market and the positions that banks took in them led to situations that would be untenable the moment that problems arose or became too difficult to continue to handle. While they agree there need to be some regulations in place to prevent another credit crisis in the future, the other policies, such as the Chinese and other Asian countries keeping their currencies artificially low to such an extent that the American market was flooded with investment, and also the Federal Reserve keeping the interest rate too low for too long, need to be examined in how they contributed as a part of the revision of policies that led to the larger crisis.
Remembering the virtues of capitalism is their final point, that investors and regulators learn and seldom make the same mistakes twice. They hope to see good regulations in place, and a limit on the regulations that could end up contributing to a future crisis.
This begins by how to view the bail-out, not as an ideology-driven choice, but as a pragmatic solution. The current choice of adding public capital to banks is due to the belief that it is what is necessary to allow them to provide credit, and that the cost of not doing so would be greater.
Aware of the danger that having such a clear safety net might have on behavior of future banks, they recommend clarity in the government's role. By making certain that when making this rescue, they not engage in protectionism, cronyism, and by getting out of the public sector as quickly as possible and with a profit to the public.
They also see a second battlefront as the market moves forward, and this is an ideologically contest which will attempt to undo the success of anglo-american capitalism. The first place they see it coming is in a populist response from a global public that has had the virtues of free markets preached to them for the past 30 years. The challenges could come from those countries who perceive the lessons to be learned from the credit crisis such that they apply them to non-financial sectors and create more regulation on goods and services in their countries and between countries. Even allowing for the present credit crunch, hundreds of millions of people around the world, in countries like China and India, have had their lives improved by their governments lowering barriers to trade.
The second place they see challenges coming is from those who criticize deregulation, and they give some credit to this position. The credit market and the positions that banks took in them led to situations that would be untenable the moment that problems arose or became too difficult to continue to handle. While they agree there need to be some regulations in place to prevent another credit crisis in the future, the other policies, such as the Chinese and other Asian countries keeping their currencies artificially low to such an extent that the American market was flooded with investment, and also the Federal Reserve keeping the interest rate too low for too long, need to be examined in how they contributed as a part of the revision of policies that led to the larger crisis.
Remembering the virtues of capitalism is their final point, that investors and regulators learn and seldom make the same mistakes twice. They hope to see good regulations in place, and a limit on the regulations that could end up contributing to a future crisis.
The Legacy of Depression
L-shaped poverty lines
Oct 17 2008
Japan shows how long the impact of a bust can linger for ordinary people
“IT IS tough,” says Kiyoshi. As the plume of cigarette smoke dissipates, his smile exposes a single tooth. At 65, he has been homeless for six years, sleeping amid possibly hundreds of others in Ueno Park in Tokyo. At weekends they emerge from their blue tarpaulin tents (with shoes neatly placed in front, as is the Japanese custom) and queue for soup and rice.
Like many of Japan’s homeless, Kiyoshi lived a normal life during Japan’s boom years, working in a restaurant. But life became hard in the 1990s after the property and stockmarket bubble burst. He now collects empty aluminium cans to earn—“on a good day”—around ¥1,000 ($10) for food.
Whether or not the West has been saved from “depression” by the co-ordinated banking rescues of its governments, the possibility remains of a sharp economic recession around the world. Economists debate whether this recession might be “V-shaped” (ie, brief) or “L-shaped” (prolonged). People like Kiyoshi put a face to what is at stake—and the lasting impact it can have on everyday life.
Japan’s experience counts because its own credit crisis mirrors parts of what is happening elsewhere today. In the early 1990s loose lending was followed by a collapse in property and share prices, almost burying banks under mounds of non-performing loans. (Among the dissimilarities are that banks and regulators reacted slowly and hid the extent of the troubles longer than they have this time.) By 1997, seven years into the crisis, many large banks had started going bust. The government spent more than $400 billion on a bail-out (of which 70% has so far been repaid). The economy began to rebound in 2003.
The “lost decade” irrevocably changed Japan. At the start of the crisis in 1990 it was one of the most egalitarian rich nations on earth. But income inequality increased more than twice as fast as it did in America and Europe; today Japan is above the OECD average. Relative poverty is higher than in many rich countries. Long one of the safest societies in the world, street crime began to matter. Many full-time jobs were filled by cheaper, short-term and part-time workers. They do not pay pension contributions, storing up problems for the future.
BloombergStill in the soup
Moreover, homelessness became a problem. Relative to most countries, Japan has few people living on the street. But the shanty towns that mushroomed in public parks and on the banks of rivers shocked a society in which homelessness almost never existed. For example, the government only started counting the number of homeless in 2003, tallying 25,000 people. Today, the official number is 16,000—which is believed to be far too conservative. The average age is 57; around 16% have been homeless for more than a decade. On October 3rd the Supreme Court ruled that a park cannot be used as an address—all but preventing the homeless from obtaining public medical treatment, applying for a job or voting.
The government’s response was to spend. It forked out about ¥120 trillion between 1992 and 1999, mostly on useless construction projects in the hard-hit hinterland. It acted as a form of welfare. But in temporarily alleviating one problem, it created other, longer-term ones. The gross national debt soared to 180% of GDP—three times more than America’s and the largest within the OECD.
The Bank of Japan kept interest rates at zero for nearly six years. Since February 2007 they have stayed at 0.5%. This acts as a subsidy from individuals (who earn almost nothing from their massive savings) to banks. But raising rates would increase the government’s debt obligations.
Japan shows how long it can take to recover from financial collapse. Its stock prices did not hit bottom until 2003, more than a decade after they first started falling. They are still one quarter of their level at the peak. Property prices remain two-thirds below their highest level.
Even as things gradually improve, people like Kiyoshi may be left behind. Under the awning of a building to escape the rain, he finishes dinner, a ¥250 bento box of brown fish and rice. Asked whether he felt any effect when the Japanese economy recovered, he sneers. “The economy? It has nothing to do with my life.”
Oct 17 2008
Japan shows how long the impact of a bust can linger for ordinary people
“IT IS tough,” says Kiyoshi. As the plume of cigarette smoke dissipates, his smile exposes a single tooth. At 65, he has been homeless for six years, sleeping amid possibly hundreds of others in Ueno Park in Tokyo. At weekends they emerge from their blue tarpaulin tents (with shoes neatly placed in front, as is the Japanese custom) and queue for soup and rice.
Like many of Japan’s homeless, Kiyoshi lived a normal life during Japan’s boom years, working in a restaurant. But life became hard in the 1990s after the property and stockmarket bubble burst. He now collects empty aluminium cans to earn—“on a good day”—around ¥1,000 ($10) for food.
Whether or not the West has been saved from “depression” by the co-ordinated banking rescues of its governments, the possibility remains of a sharp economic recession around the world. Economists debate whether this recession might be “V-shaped” (ie, brief) or “L-shaped” (prolonged). People like Kiyoshi put a face to what is at stake—and the lasting impact it can have on everyday life.
Japan’s experience counts because its own credit crisis mirrors parts of what is happening elsewhere today. In the early 1990s loose lending was followed by a collapse in property and share prices, almost burying banks under mounds of non-performing loans. (Among the dissimilarities are that banks and regulators reacted slowly and hid the extent of the troubles longer than they have this time.) By 1997, seven years into the crisis, many large banks had started going bust. The government spent more than $400 billion on a bail-out (of which 70% has so far been repaid). The economy began to rebound in 2003.
The “lost decade” irrevocably changed Japan. At the start of the crisis in 1990 it was one of the most egalitarian rich nations on earth. But income inequality increased more than twice as fast as it did in America and Europe; today Japan is above the OECD average. Relative poverty is higher than in many rich countries. Long one of the safest societies in the world, street crime began to matter. Many full-time jobs were filled by cheaper, short-term and part-time workers. They do not pay pension contributions, storing up problems for the future.
BloombergStill in the soup
Moreover, homelessness became a problem. Relative to most countries, Japan has few people living on the street. But the shanty towns that mushroomed in public parks and on the banks of rivers shocked a society in which homelessness almost never existed. For example, the government only started counting the number of homeless in 2003, tallying 25,000 people. Today, the official number is 16,000—which is believed to be far too conservative. The average age is 57; around 16% have been homeless for more than a decade. On October 3rd the Supreme Court ruled that a park cannot be used as an address—all but preventing the homeless from obtaining public medical treatment, applying for a job or voting.
The government’s response was to spend. It forked out about ¥120 trillion between 1992 and 1999, mostly on useless construction projects in the hard-hit hinterland. It acted as a form of welfare. But in temporarily alleviating one problem, it created other, longer-term ones. The gross national debt soared to 180% of GDP—three times more than America’s and the largest within the OECD.
The Bank of Japan kept interest rates at zero for nearly six years. Since February 2007 they have stayed at 0.5%. This acts as a subsidy from individuals (who earn almost nothing from their massive savings) to banks. But raising rates would increase the government’s debt obligations.
Japan shows how long it can take to recover from financial collapse. Its stock prices did not hit bottom until 2003, more than a decade after they first started falling. They are still one quarter of their level at the peak. Property prices remain two-thirds below their highest level.
Even as things gradually improve, people like Kiyoshi may be left behind. Under the awning of a building to escape the rain, he finishes dinner, a ¥250 bento box of brown fish and rice. Asked whether he felt any effect when the Japanese economy recovered, he sneers. “The economy? It has nothing to do with my life.”
Good and Bad Credit
At the conference to honor Milton Friedman's ninetieth birthday, Bernanke apologized to Friedman on behalf of the Fed for not pumping enough money to prevent the Great Depression:
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
Did Chairman Bernanke learn the correct lesson from the Great Depression?
In an article written by Frank Shostack, an adjunct scholar of the Mises Institute and chief economist of M.F. Global, he makes the distinction between Good credit (that which would be offered in a market economy with sound money and banking) and Bad credit (that which is made possible only through a system of central banking, artificially low interest rates, and fractional reserves). He goes though what credit really is and how the introduction of money doesn't alter the fact that credit is based on "real stuff".
Shostack argues that False credit expansion via central banking, artificially low interest rates, and fractional reserves, is an agent of economic destruction. And that the Fed and Treasury cannot fix the problem with "credit injection", they can only make the problem worse by diluting the pool of real credit. The best solution, He argues, is to do nothing (and allow the interest rate to reflect reality). If the pool of real savings is still growing, then doing nothing will allow the recession to be short lived and economic recovery to emerge as fast as possible.
Thursday, October 16, 2008
Christie's Auction and the Flight to Quality
Investing in a highly volatile stock market is extremely risky, especially when the government implements new "reliefs" daily. This kind of environment will, naturally, lead the investor to swap risky stocks for relatively less risky assets that have better long term stability. Jeanine Poggi sheds some light on how this trend has been impacting auction sales in "Why Auctions Thrive in a Bad Economy".
In her article, (which was, in fact, featured in the "Style" section), she points out that just this past Wednesday, while the stock market was quivering, Christie's (Auction) in NY witnessed "$30 million of jewelry and precious stones change hands in less than 5 hours". She credits this finding to the fact that jewelry and precious stones are a dependable store of value during economic downturns. As investors feel the pinch (or wrench) of highly risky financial markets, they will seek higher quality assets. This is often referred to as a "flight to quality", which is a reaction to increasing risk in one market relative to another less risky market. She says that the fact that sale prices have been radically exceeding expectations is proof that demand for jewelry and precious stones is rising, which has the effect of bidding up the price. She also remarks that not only do these precious assets retain their value well, but they also can yield quite high returns during economic upswings!
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