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."

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.

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

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

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

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

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.

Fed Says Bear Stearns Portfolio Declines $2.7 Billion (Update1)

GDP Probably Contracted as Spending Fell: U.S. Economy Preview

Indicators

Credit Crisis Indicators Oct

From: sarzi, 4 days ago

Credit Crisis Indicators Oct

View SlideShare presentation or Upload your own. (tags: street wall)

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Indicators

Credit Crisis Indicators Oct

From: sarzi, 4 days ago

Credit Crisis Indicators Oct

View SlideShare presentation or Upload your own. (tags: street wall)

An updated version of the presentation I embedded in my blog at http://www.investmentbankeronlife.com


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Indicators

Credit Crisis Indicators Oct

From: sarzi, 4 days ago

Credit Crisis Indicators Oct

View SlideShare presentation or Upload your own. (tags: street wall)

An updated version of the presentation I embedded in my blog at http://www.investmentbankeronlife.com


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Indicators

Credit Crisis Indicators Oct

From: sarzi, 4 days ago

Credit Crisis Indicators Oct

View SlideShare presentation or Upload your own. (tags: street wall)

An updated version of the presentation I embedded in my blog at http://www.investmentbankeronlife.com


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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.

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.

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.’

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

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

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. 

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.

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.

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.

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 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.

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://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.

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

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

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?

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.

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.”

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.

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!

U.S. Weighs Backing Bank Debt: Removing Deposit Insurance Limits Also on the Table

By DAMIAN PALETTA, CARRICK MOLLENKAMP and JOHN D. MCKINNON

WASHINGTON -- The U.S. is weighing two dramatic steps to repair ailing financial markets: guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits.

If the two moves come to fruition they would mark the government's most extensive intervention yet in the financial system, as officials ponder increasingly far-reaching measures to stem the sprawling crisis.

The top economic officials of the Group of Seven leading industrial nations will meet starting Friday in Washington where they intend to discuss a proposal from the U.K. government to bolster bank lending. Problems in the credit market have led to widespread dislocation in the financial system and the broader economy.

Under the U.K.'s recently announced plan, which it is now pitching to the G-7 members, the British government would guarantee up to £250 billion ($432 billion) in bank debt maturing up to 36 months. The British concept to expand its proposal to other countries has a lot of support from Wall Street and is being pored over by U.S. officials, according to people familiar with the matter.

White House spokesman Tony Fratto said the U.S. "is reviewing the idea and discussing it with our British counterparts."

The move to back all U.S. bank deposits, which is only in the discussion stage, would be aimed at preventing a further exodus of cash from financial institutions, including small and regional banks, some of which are buckling under the strain of nervous customers. In recent weeks, customers have pulled money out of some healthy community banks under the assumption that the government will only insure all the depositors of larger banks in the event of a failure.

To remove the ceiling on deposit insurance, multiple government agencies would first need to agree that there was a "systemic risk" to the economy, thereby invoking a rarely used legal power. Amid repeated efforts by the federal government to prop up ailing institutions, some bank regulators say the move is justified.

It's not clear that either idea will become reality, and U.S. officials downplayed expectations of any announcement this weekend. But as the crisis deepens and stocks continue to tumble, pressure is building on the Bush administration to find a solution that goes beyond the $700 billion financial rescue plan recently signed into law. Having the government back bank lending would effectively entail the U.S. being the backstop for the country's financial system.

Western industrial powers have taken various ad hoc steps to stem the global crisis. Central bankers have cut interest rates, governments have agreed to strip toxic assets out of banks, and regulators are mulling how to directly inject capital into the banking sector. So far, the moves have failed to calm markets.

They have also been mostly one-country-only solutions that lack a broad coordination, despite the fact that the global financial system is linked. A move by one country has lately forced the hands of others, as happened when Ireland moved to insure its bank deposits last week. The European Union has struggled to develop a common approach to the crisis, exacerbating the problem.

"The interdependence of the major global financial markets has been established beyond the slightest doubt," said H. Rodgin Cohen, chairman of the law firm Sullivan & Cromwell and a top adviser to Wall Street firms. "As a consequence, it is essential that the major countries act collectively and cooperatively."

One major flaw in the global banking system, and a sign that problems extend beyond whether U.S. homeowners can pay their mortgages, is the fact that banks don't trust each other enough to loan beyond an overnight period. That means that cash isn't being circulated through the financial system and banks are relying too heavily on short-term loans, which does little to help pay off looming debts. Banks are hoarding cash, both to cover their debts and to improve their year-end books.

The plan in the U.K. was hammered out by Treasury Chief Alistair Darling as well as the chief executives of major British banks earlier this week after a sharp drop in U.K. bank stocks.

In the U.S., some $99 billion in just one type of bank debt is coming due between now and the end of the year. Hundreds of billions of dollars will need to be paid in the U.S. and Europe. Government backing would make it easier to issue new debt to help pay for that.

The problems in so-called interbank lending, or short-term loans made between banks, date to August 2007. Markets froze after a little-known German lender called IKB Deutsche Industriebank AG ended up with big debts it couldn't pay. More recently, the bankruptcy-court filing of Lehman Brothers Holdings Inc. sparked a new freeze in the interbank-borrowing market when money-market funds, laden with Lehman debt, yanked their cash out of the commercial-paper market, a vital cog in how companies fund their short-term obligations.

The U.K.'s decision to guarantee bank debt sparked talk that the U.S. would need to make the same move. On Thursday, the three-month dollar London interbank offered rate, or Libor, hit 4.75%. On the Friday before Lehman filed for bankruptcy protection, the three-month rate was 2.81875%. A surging Libor could exacerbate larger economic problems because many mortgages are tied to rates that fall or rise depending on Libor.

http://online.wsj.com/article/SB122360336021121827.html?mod=googlenews_wsj

How Congress should fix Fannie Mae and Freddie Mac

How Congress should fix Fannie Mae and Freddie Mac
Congress needs to break up both Fannie Mae and Freddie Mac and allow them to be replaced with a much larger number of genuine private sector companies
Tuesday, July 15, 2008By David C. John
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Sunday's announcement by the Bush Administration and the Federal Reserve seems to have cooled the immediate crisis concerning Fannie Mae and Freddie Mac. However, their plan does nothing to resolve the fundamental cause of the problem, and without major structural reforms in the housing finance industry, it is probable that this whole situation will reoccur in a few years.While both Fannie Mae and Freddie Mac are owned by private stockholders, they are really artificial government creations that are very different from real private sector companies. Both companies are remnants of the Great Society, when big government entities were thought to be the only way to achieve social goals. The fact that both were later privatized does not change their essential nature as government-sponsored dominators of a market rather than as participants in it. Both have a history of financial and management irregularities that have caused sudden changes in senior management and often sparked congressional action. Unfortunately, these problems have not resulted in any significant reforms to the overall structure of either entity.Background to a CrisisExperts have warned for decades that both entities lack sufficient capital, made up of both investors' money and retained earnings, to protect against losses.[1] While most banks have $1 of capital for every $12 in assets, Fannie Mae and Freddie Mac only have $1 for every $20 in assets. Congress looked at higher standards in the 1990s, but many of the same congressional leaders who head their oversight committees today bowed to a sustained and high-powered lobbying campaign that took all the teeth out of the reform. Other reform efforts have been similarly stymied.Fannie Mae and Freddie Mac play a dominant role in today's housing finance market by buying mortgages from lenders, packaging them into bond issues, and then reselling them to investors around the world. The two have a roughly 70 percent market share in this area, and also both guarantee mortgages and hold about $5 trillion worth of them in their investment portfolios. To operate, both entities need to borrow billions of dollars on a continuous basis. This most recent crisis was caused by concerns that an accounting rule change would sharply reduce their capital, which caused a sharp and continuing drop in their stock prices, which in turn frightened lenders and forced the government to act.

World Finance

After a dramatic loss in the confidence of financial markets around the world, global finance chiefs have gathered in Washington D.C. to discuss crisis solutions and possibilities. The world's major industrial powers are making all of their assets more liquid, in hopes of unclogging the credit market. There have also been coordinated cuts in interest rates worldwide. Attending the meeting are ministers and central bankers from the United States, Germany, Japan, Britain, France, Italy, and Canada. President Bush spoke on the issue and blamed decreasing confidence and anxiety for the financial crisis. The British Chancellor of the Exchequer was quoted "I think the key is to ensure that governments all over the world act together, firstly to stabilize the banking system." Germany plans on coming up with a set of global rules to help stabilize the world. The global financial meltdown has become an issue that cannot be solved by individual countries. Globalization has taken hold of the world's economies. The macroeconomic model becomes more important than ever because economists around the world need to look at the financial market as a whole. Will a group of the most powerful financial officers in the world be able to come up with a solution to this crisis or will the downward spiral continue?


http://www.breitbart.com/article.php?id=081010152046.2hdfa805&show_article=1&lst=1

Remaining Calm During a Crisis

An article in today's Washington Post relayed a message from President Bush urging Americans to remain calm during this economic crisis. The article, titled "President Bush Says Markets Must Remain Calm Despite Challenges" and written by Dan Eggen, outlined aggressive steps being taken by Bush and congress to halt Walstreet's downfall and raise Americans' confidence. These measures include mortgage assistance programs for distressed homeowners and a recent increase in the federal deposit insurance. Bush also told reporters that he plans to meet with the heads of seven industrialized nations in an attempt to stabilize all markets. "Through these efforts, the world is sending an unmistakable signal: We're in this together, and we'll come through this together." This marks the 20th time this month that Bush has asked for patience from Americans.

The Economic Crisis is a world wide economic issue

Wall Street's woes extend far beyond Main Street and all the way to Law Street — the hulking headquarters of the European Union.
But the 27-nation bloc based at Rue de la Loi in Brussels, Belgium, hasn't taken sweeping joint action to deal with the global financial meltdown.
Instead, it's essentially left member countries to go it alone with a patchwork of measures aimed at keeping banks afloat.
Frustrated investors want to know why, and some have begun to question whether the EU — at its core, an economic union — will survive.
Although the EU pledged to act as one to calm roiled markets, it hasn't done much beyond a move Tuesday to boost guarantees on savings accounts.
That's led member states to take an a la carte approach, with major economic powerhouses like Britain and Germany putting together rescue packages, leaving smaller nations like Iceland to take the fall.
It's a risky business for the EU: In the short term, banks in poorer countries may flounder and fail. And by relinquishing key decisions to its members just as they're turning to EU headquarters for guidance at a time of crisis, the bloc could see decades of attempts to forge unity simply disintegrate.
Already, the 27 EU nations are divided over deploying troops to Afghanistan and deadlocked on a constitution designed to transform their union into a political super-state. Only 15 countries now use the common euro currency and the pride of the bloc — passport-free travel — doesn't apply to the entire EU.
Failure to pull together now on the financial crisis could push member nations even further apart, perhaps emboldening a resurgent Russia's influence on the fringes of the enlarged EU.
"Europe is in the midst of a once-in-a-lifetime crisis," 256 of the continent's leading economists said Tuesday in an open letter to EU leaders.
"Unless European leaders immediately unite to address this crisis before it spirals out of control, they may find themselves fighting over how best to salvage the aftermath," the economists said. They evoked "the dark years of the 1930s," adding: "It is not an exaggeration to say that it could happen again if governments fail to act."
And failure to act in unison has been an EU hallmark over the past few years.
A campaign to get all 27 nations to ratify a European constitution designed to streamline decision-making and give the expanding bloc more of a voice in world affairs remains stuck in limbo. Irish voters rejected it in June, three years after resounding "No!" votes in France and the Netherlands.
Many who backed a greater global role for the EU have consoled themselves by focusing on its roots as an economic union. Today's EU sprang from the six-nation European Economic Community established in 1957.
But the bloc designed to unify is riven by all kinds of divisions.
EU members have clashed repeatedly on deploying troops to Afghanistan or even whether to send 24 of their estimated 12,000 military helicopters to Darfur. They've bogged down completely on more thorny issues, such as how to respond to terrorism or recognize an independent Kosovo.
That makes the credit crisis now rattling markets and consumers worldwide even more of a test.
If the EU can't forge a common response to a collapse that transcends borders, involves multinational lenders and has pushed the euro currency down to its lowest level in a year, some wonder: What's the point of having an EU?

As Economy Slows, Deflation Could Loom

In this article Washington Post Staff Writer, Michael Fletcher addresses recent price drops. As consumer spending has slowed, the price of oil and other commodities has fallen sharply. Some economists are worried this could create a cycle in which weak consumer demand, falling prices and tight credit would cause even lower demand and lower prices. Some businesses would struggle to stay open, something that would trigger higher unemployment and feed the cycle.
Other economists note that a period of price adjustment does not necessarily mean the start of a deflationary period. They argue that a few months of price declines should not be a problem for the economy.
Bill Gross, co-chief investment officer at Pimco, and investment management company states that price drops shouldn't be able to last more than a few quarters as capitalism depends on mild inflation.
The article makes reference to a couple of cases. One is Japan in the 1990's, when they had prices decline about one percent per year.The result was slow growth and increasing unemployment. In the United States a similar case occured five years ago when inflation started approaching one percent. The response was a cut to the Federal Reserve's lending rate to one percent which stopped the deflation threat. This suggests that government intervention can prevent deflation from occuring.
The current drop in the level of prices does not mean that ther will be a continuous fall of prices but if the deflation threat becomes any greater, government will be forced to intervene just as it has been doing in the last few weeks. It would be needed save businesses, give people some assurance and to prevent another serious problem in the ongoing crisis.

Reasons for the Housing Bubble

The article “The Housing Bubble in 4 Easy Steps” by Mark Thornton, presents reasons to why the economy is going through a crises. The article starts out by addressing the point that the Federal Reserve lowered their interest rate to 1% while our economy was going though an inflation. This caused a negative interest rate. By having such a low interest rate, mortgage rates fell very low. People started to buy houses as a result. Many banks doubled on the amount of real-estate loans. The people who would want to buy houses at a low interest rate, would be people who cannot afford to buy a house due to their bad credit. This is where Fannie Mae and Freddie Mac and other “very smart” institutions come into the picture. They made it seem as if bad loans and investments were less risky, but in reality they were very harmful. Due to this, there was an increase in demand for houses. The increase in demand caused a increase in price. It wasn‘t long after that prices of houses started to rise at a rapid rate. One fact that the article left off was that there are new homes which are sold for very high costs, and people cannot afford to buy them. As a result, we have many homes in the market that are not bought. We are in a crises today due to many of the reasons listed above. The only logic way to solve this crises would be to let the market fix itself without government interference.

Bad Policies? By Whose Judgement?

In an article published yesterday in the Wall Street Journal (Good Policies Can Save the Economy), columnist Lee E. Ohanian asserts that the Treasury plan was absolutely necessary in order to prevent bad policies from emerging in the event of a recession. Bad policies, he says, will hurt the economy more than the Treasury plan ever could.
According to Ohanian, economic crises cause the government to produce bad policies, and he cites examples from the Great Depression to back up his claim. It was not banking panics, he asserts, but rather rising tax rates, increased tariffs, and presidential support of industry-labor cartels that caused the depression to be so sustained and devastating.
He furthers this discussion by saying that the smart thing for the US to do is to support the bailout, then pass policies that encourage immigration, stating that: "Increasing immigration would increase the demand for housing and raise home prices." Using this chain of reasoning, Ohanian concludes that the the anticipation of more individuals buying homes would cause housing prices to rise again, thereby helping to solve this sub-prime crisis.
Yet Ohanian is wrong on several counts. Firstly, it seems that he fails to realize that the Treasury plan, in and of itself, is a bad policy. It sends a signal to lenders that they can reap all of the benefits of engaging in risky behavior without incurring any of the costs. You simply can't fix one bad policy with another.
Second, while immigrants who come to the US to work will certainly need housing, it is unlikely that they will be able to buy up the homes that have been lost in the wake of the mortgage debacle. Since loans were made to US families to purchase houses that were out of their price-range, low skilled immigrants most certainly won't be able to afford these houses either.

I think the sub-prime crisis is perhaps best explained by a couple of British comedians. Perhaps Ohanian should watch this before he writes his next article.

The Bigger They Are, The Harder They Fall

With all the recent scandal surrounding Fannie and Freddie, it's sort of fun to go back in time and read about the events leading up to the current meltdown.
In a September 1999 article for the New York Times (Fannie Mae Eases Credit To Aid Mortgage Lending), columnist Steven A. Holmes praises the efforts of Fannie Mae in its relative success at allowing traditionally unqualified borrowers to receive very low interest mortgages. Yet even through the relatively economically prosperous times of the late 90s, Holmes acknowledges that, in the event of an economic downturn, there may be dire consequences to this risky behavior.

Apparently Holmes never learned about business cycles.

Article about Ben Bernanke

This Article discusses the mistakes Ben Bernakne effected. They are a little harsh.
NY Times Oct. 8
Reader Feedback: Bernanke
By David Leonhardt
Walter writes:
I just wish [Ben Bernanke] would have studied the dot-com bubble. As that feeding frenzy probably would have helped him steer us away from the housing bubble debacle. Now that we are in however, it does reassure somewhat that he is a student of history and not just some ivory tower economist.
This is an important point. Arguably, the biggest mistake that Mr. Bernanke made — first as a Fed official, then as an aide to President Bush and finally, starting in February 2006, in his early months as Fed chairman — was to believe that the housing bubble wasn’t a big problem.
During Mr. Bernanke’s confirmation hearing in late 2005, Paul Sarbanes, a Democratic Senator on the Banking Committee, asked the following: “Are you concerned about the potential for a bubble in the housing market? And specifically, does the drastic increase in the use of risky financing schemes, including interest-only and even negative amortization mortgages, concern you?”Mr. Bernanke said the Fed was reviewing its guidelines, but he suggested that he wasn’t too worried.
So, yes, Mr. Bernanke had the opportunity to keep the housing and financial troubles from getting quite so large. He deserves to be criticized for his failure to do so. Given that the housing bubble seems to have started inflating in about 2000 or so, Alan Greenspan — Mr. Bernanke’s predecessor — deserves more criticism.


I hope this is what you are looking for. I have also never blogged before so this is new to me.

Desperate times, desperate measures

In this last weeks issue, The Economist magazine published an article that gives new insight on the how the new problems that are arising will not just mean stronger measures must be taken by the american government but also those of Europe and even as far as Asia. While it is obvious  the chances of global economic superpowers taking an indifferent stance seemed quite small, it is interesting how quickly several foreign governments are taking a more collaborative stances to help shield their own economies as best as possible. With confidence in the world economy in a spiraling decline, unprecedented measures are being taken to reduce the impact and/or damage within the withering credit market (besides those being undertaken in the US). On October 8, in one unprecedented move, some key central banks such as the central Bank of Europe, the Bank of England, and The Peoples Bank of China all led a joint interest rate cuts. The interesting and positive aspect being that governments are starting an attempt to take charge of the situation. This sort of collaborative action is symbolic because most foreign nations usually tend to take a more selfish stance and wait for a big player like the US to take charge. While this change in policy is certainly a positive change, is it enough?

The main focus of all this was to restore confidence in the market before things develop into a out of control situation. Signs of such change are occurring worldwide: Iceland recently nationalized its two biggest banks, emerging markets are watching the value of their local currencies drop significantly, and those with money market funds are not taking any chances. And all of these occurrences do not even include what is happening in the United States. Another key fundamental problem that is occurring now, according to The Economist, is the fact that while we are beginning to see some decisive action from government officials, the pointless action of pointing fingers while blindly attempting to find a solution are certainly not an efficient way to help the situation get any better. So instead of looking for a culprit (which there are many) it might seem more prudent to focus on fixing the damage that has already been done instead of creating more of it. 

Government "correcting" the "failures" of Capitalism

The supply and demand of goods and services are coordinated by the price system, which is the linchpin of a Capitalist economy.  Prices will rise or fall in order to balance supply and demand, this mechanism is mutually beneficial to both the producer and the consumer.  However, when government gets involved in the market "all bets are off".  As Veronique de Rugy and Philippe Locoude point out on Reason.com:

"The $700 billion-plus bailout bill-signed into law in response to recent investment bank collapses and lack of liquidity in the economy-will likely have a similar effect by distorting basic mechanisms that would allow markets to price securities accurately and efficiently."

Government intervention in the market only serves to distort the price system either directly or indirectly, which it has been doing for many years already.  The claim that the current financial crisis is proof that Capitalism has failed is fatally flawed because the US economy is not a Capitalistic system.  Sure, the US economy has property, prices and profits, but the Government does not allow them the function freely without its meddling interference.  I think a more accurate claim is that it is, in fact, government intervention in the economy that has failed.  

Everyday new government interventions in the economy are enacted to deal with the current crisis with the assumption that one of these interventions will eventually work.  Unfortunately the only thing this will lead to is further distortions in an already misdirected financial system that has been ravaged by one policy after another.  

The nasty unintended consequences of crony capitalism are to blame for the current situation, yet how does the government respond? To further strengthen crony capitalism through bailout packages.  Sounds like a winning formula!

Is Zoning Theft?

If A is to B, then C is to D

Building with Lego blocks is to a Second Grader as ______ with individual property rights is to an Urban (Regional) Planner

a.) zoning
b.) central-planning
c.) plundering
d.) all of the above

The objective goal in SimCity (city-building simulation game created in 1989) to game enthusiasts is no different of that of the zone planner. To build and design a city while maintaining the happiness of the citizens (society) and keeping a stable budget. However one is a game, and the other deals with the lives of real people (which may be considered a 'game' to some). Though there are different details of individual planning systems, it is argued by most that urban planners possess the same all around "good-will intentions" to segregate incompatibly or unproductive uses of land. It regulates and plans the kinds of activities "acceptable" on particular lots (agriculture, commercial, industrial...etc). As a libertarian, I view this as a violation of private property rights at the click of a mouse, whose redo (ctrl-z) function is handicapped by more dead weight loss. Zoning, typically defined along the lines of a government-regulated system of land-usage imposed in order to ensure orderly development, is often misrepresented and infused with collectivist rhetoric. Jim Fedako addresses the legitimacy of zoning really well in Zoning is Theft. Essentially, zoning is the coercive use of power by government to restrict usage based on the whims of those in power. Fedako further asserts that those who advocate zoning really believe that acting man does not have the ability to create communities that are functional and prosperous. Without plans and maps drafted and drawn by the local elected elite, developers with knowledge and foresight, and a whole lot of money to gain or lose, would purposefully layout communities that are sterile and functionless. Only the marginal vote-getters — those elected — and their appointed allies are omniscient enough to peer into the crystal ball and define the perfect setting for future life and leisure. The rest of us can only marvel at their visions for a master plan a.k.a. the urban development plan. Fedako doesn't mention Hayek's theory of spontaneous order, however, that can be easily applied to the natural process of community development and coordination untainted and uninvolved with any forms of planning.

For further interest, Ben Powell and Ed Stringham have an article in the Concise Encyclopedia of Economics, Housing, that demonstrates an interesting application of zoning in the U.S. housing market from the 1970s to the present.

Mortgage Bill fostering Malinvestments in Housing

Almost 10 years ago on October 20th, 1998 the NY Times reported that a bill was passed by both houses in Congress. This bill which amounted to $93 billions allowed to Freddie Mac to "insure high-risk mortgages in new and different ways..." The aim of this bill was to "save consumers money by reducing insurance premiums." The stock prices of some private insurance companies went down after these news.

Bills like this are the ones that subsidize risk-taking, and thus encouraging individuals to buy houses that they would have not buy otherwise. Problems of 'moral hazard' and 'adverse selection' stem from this kind of regulations. It is, of course, necessary a more thorough analysis of the different regulations in the banking and mortgage sectors (even zoning) before to make a definitive conclusion about the causes of the current crisis. But the seed to foster mal-investments was there.

Early Studies on the Housing Bubble

In the paper: Is There a Bubble in the Housing Market? by Case and Shiller (2003) it is reported that housing prices across the states in the US in 2003 are explained mainly by two factors: a) household income, and b) lower interest rates. This is a robust finding for 42 of the 50 states which means that the price-to-income ratio is more stable than in the remaining states. While in the other 8 states by other non-fundamental factors; e.g. future expectations of further increases in prices. These 8 states include California, New Jersey, Massachussetts, and New York.

They asked the very important question of: 'Is [the] Housing Bubble about to Burst?' Looking at the trend of housing prices since 1995 they claim that, at least, for those 42 states the sustained increase in prices is due to 'fundamentals.' Based on a 2003 updated survey that was conducted first in 1988 by the same authors. They conclude that even though there was not a strong sign of a housing bubble (in 2003) compared to 1988. There was indeed scattered evidence in some states where housing prices were already flat.

An update of this study with data up to the first semester of 2008 may clarify some of the issues they could not when they wrote it. The housing prices were still going up until 2005 then flattened out and plummeted in 2007. But Case and Shiller (2003) report that until 2003 there was not a negative expectation of housing prices falling drastically. In fact, in their survey they reported that homeowners felt that to buy a house was a safer investment than the stock market.