This article draws many parallels between the U.S. financial crisis and post-1945 banking crises in the world. But it mainly focuses on how U.S. is doing the opposite of what it advised the Asian economies to do during its 1990 financial crisis.
1. The US Treasury encouraged Asia to tighten its fiscal policy during the 1990's, but has today adopted a fiscal stimulus package.
2. U.S. advocated that the only way to clean up the Asian economy, particularly Japan, was to close or absorb insolvent banks and regenerate the financial system through Schumpeterian “creative destruction.” They strongly opposed the governments’ rescue plans to inject public money into faltering financial institutions to stop the crisis from spreading. It was argued that governments should not intervene in the markets, and that "sick" institutions should be allowed to die according to market principles, because saving them would only encourage moral hazard. Today, U.S. is trying very hard to ensure that none of its major commerical banks and other financial institutions fail.
4. If public money were injected, the governments should let all investors take the loss, and all CEOs of failed companies should be replaced and their compensations be removed (because it does not make sense to reward a CEO for allowing the failure of the financial institution). Yet, there is no specific rule that places a cap on CEO's salaries today in U.S. despite the failure of many financial institutions.
3. For years, foreign governments complained about American hedge funds, arguing that their non-transparent behavior posed unacceptable risks to stability. Now, many US politicians are complaining about the transparency of sovereign wealth funds (big government investors mainly from Asia and the Middle East), which are taking shares in American assets such as Citibank and Merrill Lynch.
So the article concludes by saying that maybe its time for America to listen to the experts from these emerging economies who have already faced and dealt with a similar crisis.
Saturday, November 15, 2008
G-20: Seven Issues at Stake
1. Financial Regulation and Supervision
The need to redesign regulatory structures for increasingly complex financial systems and to increase transparency in the operation of specific markets and financial institutions.
2. Stabilize Emerging Economies
The need for emerging market policymakers to deploy countercyclical policies in the face of depressed global demand and falling commodity prices and lays out several measures in support.
3. Reform the Aid System to Fix the Slow-Burning Global Poverty Crisis
Leaders must look to maintain aid flows now more than ever at this critical financial inflection point, particularly as developing nations may be hit hardest and long-term global stability depends as much on reducing poverty as it does on fixing the regulations governing global private capital.
4. Beyond the G-20: Why the WTO Is More Important than Ever
The financial crisis proves the World Trade Organization is more relevant than ever for avoiding the beggar-thy-neighbor trade wars that deepened the Great Depression, and recommends that leaders use the summit as an opportunity to reinvigorate the multilateral trading system and refrain from any actions that would undercut the vitally critical contribution of trade to restarting growth.
5. Now Is the Time for Permanent Governance Changes
There is a call for a permanent shift to the G-20 from the G-8 in order to make the governance of the global financial order more representative and more effective.
6. Keep the IMF at the Center
Its been argued that the IMF must stay at the center of the international financial architecture. But this is only possible if its responsibilities, funding, and governance are reformed to reflect the growing importance of emerging powers and to apply its powers of surveillance to all members including the United States.
7. What Should the U.S. and Asia Do: Establish a Global Financial Crisis Secretariat and an Asian Financial Facility
Asia should adopt a regional financial swap facility to complement the IMF, much as the regional development banks complement the World Bank.
The need to redesign regulatory structures for increasingly complex financial systems and to increase transparency in the operation of specific markets and financial institutions.
2. Stabilize Emerging Economies
The need for emerging market policymakers to deploy countercyclical policies in the face of depressed global demand and falling commodity prices and lays out several measures in support.
3. Reform the Aid System to Fix the Slow-Burning Global Poverty Crisis
Leaders must look to maintain aid flows now more than ever at this critical financial inflection point, particularly as developing nations may be hit hardest and long-term global stability depends as much on reducing poverty as it does on fixing the regulations governing global private capital.
4. Beyond the G-20: Why the WTO Is More Important than Ever
The financial crisis proves the World Trade Organization is more relevant than ever for avoiding the beggar-thy-neighbor trade wars that deepened the Great Depression, and recommends that leaders use the summit as an opportunity to reinvigorate the multilateral trading system and refrain from any actions that would undercut the vitally critical contribution of trade to restarting growth.
5. Now Is the Time for Permanent Governance Changes
There is a call for a permanent shift to the G-20 from the G-8 in order to make the governance of the global financial order more representative and more effective.
6. Keep the IMF at the Center
Its been argued that the IMF must stay at the center of the international financial architecture. But this is only possible if its responsibilities, funding, and governance are reformed to reflect the growing importance of emerging powers and to apply its powers of surveillance to all members including the United States.
7. What Should the U.S. and Asia Do: Establish a Global Financial Crisis Secretariat and an Asian Financial Facility
Asia should adopt a regional financial swap facility to complement the IMF, much as the regional development banks complement the World Bank.
Is Bailout the Best Plan to Rebuild the Housing Market?
Allan Meltzer gives out interesting plan to rebuild the current housing market in this article.
BUYER:
There is an excess supply of unsold houses in U.S. (surplus), so the housing prices will contine to fall as a result of that. The high risk associated with mortgage bundles will remain until the market knows how far the housing prices will fall. But in reality, no one can confidently say how far housing prices will fall (and the value of mortgages depends on those prices). The steeper the fall in housing prices, the more homeowners will default. Anyone buying a bundle of mortgages knows that part of the bundle is becoming worthless and, as prices fall, more will continue to be worthless. That's the risk that buyers of mortgage bundles have to accept.
SELLER:
Contrary to much public comment, sales of mortgage bundles are still occurring, that is, the mortgage market is still functioning. Usually, mortgages sell for less than 50 cents on the dollar of original value. Merrill Lynch sold a big stake for 22 cents on the dollar. Most financial firms that have large holdings would wipe out their capital if they sold at prevailing prices. Therefore, they expect to get a better price from the Treasury.
FLAWS OF PAULSON'S PLAN:
Allan Meltzer has found a number of flaws with Treasury Secretary, Hank Paulson's bailout plan.
The seller's problem is that selling most of his mortgage inventory will wipe out his equity. Purchases by the Treasury will not help. Unless the Treasury decides to "stick it" to the taxpayers by paying much more than the market price, the seller is no better off than if he sold in the market. That is one flaw in the Paulson plan.
Also, the plan only helps banks and lenders. It does not address the problem of an excess supply of housing. Eliminating excess supply will end the housing problem and help the mortgage market. Buying or adjusting mortgages will not do much for house prices. And any programme to rewrite mortgages in default encourages more defaults.
PLAN:
He proposes that the Congress and the administration should take actions that increase the current demand for housing.
For a limited time, the should allow buyers to use the value of their down-payment as a tax deduction. Or, reduce the tax rate for qualified buyers who purchase a house between now and January 2010.
Increased housing demand will work to stabilize prices -- it will reduce defaults by slowing price decline and brings nearer the time when homebuilding increases.
Some proposals urge the government to buy mortgages. This does little to remove the excess supply of houses, although it may reduce the number of defaults. But reducing defaults does not stimulate the demand for housing. It helps some who are hurt and may keep the problem from growing, but it does not relieve the problem of existing excess supply.
Congressional leaders talk about helping states with their budget problems or rebuilding infrastructure. The latter takes time to implement. Whatever the merits of these proposals, it is more important now to try to solve the main problem we face. We have to set priorities. Encouraging job growth by financing infrastructure may be in the long-run interests of taxpayers and the public, but there can be no full recovery without an end to the housing problem.
BUYER:
There is an excess supply of unsold houses in U.S. (surplus), so the housing prices will contine to fall as a result of that. The high risk associated with mortgage bundles will remain until the market knows how far the housing prices will fall. But in reality, no one can confidently say how far housing prices will fall (and the value of mortgages depends on those prices). The steeper the fall in housing prices, the more homeowners will default. Anyone buying a bundle of mortgages knows that part of the bundle is becoming worthless and, as prices fall, more will continue to be worthless. That's the risk that buyers of mortgage bundles have to accept.
SELLER:
Contrary to much public comment, sales of mortgage bundles are still occurring, that is, the mortgage market is still functioning. Usually, mortgages sell for less than 50 cents on the dollar of original value. Merrill Lynch sold a big stake for 22 cents on the dollar. Most financial firms that have large holdings would wipe out their capital if they sold at prevailing prices. Therefore, they expect to get a better price from the Treasury.
FLAWS OF PAULSON'S PLAN:
Allan Meltzer has found a number of flaws with Treasury Secretary, Hank Paulson's bailout plan.
The seller's problem is that selling most of his mortgage inventory will wipe out his equity. Purchases by the Treasury will not help. Unless the Treasury decides to "stick it" to the taxpayers by paying much more than the market price, the seller is no better off than if he sold in the market. That is one flaw in the Paulson plan.
Also, the plan only helps banks and lenders. It does not address the problem of an excess supply of housing. Eliminating excess supply will end the housing problem and help the mortgage market. Buying or adjusting mortgages will not do much for house prices. And any programme to rewrite mortgages in default encourages more defaults.
PLAN:
He proposes that the Congress and the administration should take actions that increase the current demand for housing.
For a limited time, the should allow buyers to use the value of their down-payment as a tax deduction. Or, reduce the tax rate for qualified buyers who purchase a house between now and January 2010.
Increased housing demand will work to stabilize prices -- it will reduce defaults by slowing price decline and brings nearer the time when homebuilding increases.
Some proposals urge the government to buy mortgages. This does little to remove the excess supply of houses, although it may reduce the number of defaults. But reducing defaults does not stimulate the demand for housing. It helps some who are hurt and may keep the problem from growing, but it does not relieve the problem of existing excess supply.
Congressional leaders talk about helping states with their budget problems or rebuilding infrastructure. The latter takes time to implement. Whatever the merits of these proposals, it is more important now to try to solve the main problem we face. We have to set priorities. Encouraging job growth by financing infrastructure may be in the long-run interests of taxpayers and the public, but there can be no full recovery without an end to the housing problem.
Thursday, November 13, 2008
Bush defends Free Market
This article talks about how Bush is trying to hold off any talk there may be of a great reform or even revolution of the international market. This crisis has obviously highlighted some of the inadequacies of capitalism but in recent speeches Bush is trying to convince the International community that the answer is gradual reform to fix the problems faced, and that capitalism is still the best option availabe for the International system. Yet the article also highlights how French President Nicolas Sarkozy is talking about the increasing attractiveness of the Euro over the dollar for investors.
One of the points that this article does not discuss that I am keen to hear about is the international backlash from developed countries that were forced to convert to capitalism through a quite dramatic transition in order to receive loans from institutions such as the IMF and World Bank. If I were living in one of these countries that were forced to go through "structural adjustments" I would be watching the bail out of AIG and other instances with a mixture of amazement and resentment.
One of the points that this article does not discuss that I am keen to hear about is the international backlash from developed countries that were forced to convert to capitalism through a quite dramatic transition in order to receive loans from institutions such as the IMF and World Bank. If I were living in one of these countries that were forced to go through "structural adjustments" I would be watching the bail out of AIG and other instances with a mixture of amazement and resentment.
India's inflation falls to single digits.
India's inflation, which had increased to 13-year highs (10.72%), fell unexpectedly to single digits (8.98%), opening the door to more aggressive rate cuts to boost its flagging economy. The prices have been pulled down by decreasing fuel and metal prices.
The drop in the Wholesale Price Index, the most watched cost of living monitor, was far bigger than expected by economists, who had forecast inflation of around 10.3 percent. Inflation was at 13-year highs of nearly 13% in August, but has been declining as commodity prices decreased and consumer demand dropped amid the global financial crisis. It has fallen faster than expected, giving the central bank leeway to more "aggressively" cut rates to spur the stumbling economy. The central bank has cut its key short-term lending rate, the repo, for the second time in two weeks to stimulate the economy. The repo rate is at 7.5 percent, still high by world standards. The rate is still robust compared to Western levels, but economists say India needs to grow by double-digits to alleviate desperate poverty.
The inflation drop came as a big relief for the Congress-led government which has been desperate to tame prices, fearing a voter backlash in national elections due by May 2009. Congress has suffered a string of state poll defeats and inflation, which has hit India's poor masses hardest, has been blamed as a key factor. It faces a new set of state polls starting this weekend seen as a mini performance referendum.
Until recently, India believed it would be relatively unharmed by the global turmoil thanks to its vast domestic market of 1.1 billion people and small trade exposure. But recent data has shown that this is not the case.
The drop in the Wholesale Price Index, the most watched cost of living monitor, was far bigger than expected by economists, who had forecast inflation of around 10.3 percent. Inflation was at 13-year highs of nearly 13% in August, but has been declining as commodity prices decreased and consumer demand dropped amid the global financial crisis. It has fallen faster than expected, giving the central bank leeway to more "aggressively" cut rates to spur the stumbling economy. The central bank has cut its key short-term lending rate, the repo, for the second time in two weeks to stimulate the economy. The repo rate is at 7.5 percent, still high by world standards. The rate is still robust compared to Western levels, but economists say India needs to grow by double-digits to alleviate desperate poverty.
The inflation drop came as a big relief for the Congress-led government which has been desperate to tame prices, fearing a voter backlash in national elections due by May 2009. Congress has suffered a string of state poll defeats and inflation, which has hit India's poor masses hardest, has been blamed as a key factor. It faces a new set of state polls starting this weekend seen as a mini performance referendum.
Until recently, India believed it would be relatively unharmed by the global turmoil thanks to its vast domestic market of 1.1 billion people and small trade exposure. But recent data has shown that this is not the case.
ECB will lend more than 334 billion euros
The European Central Bank would lend more than 334 billion euros (425 billion dollars) during a regular weekly operation which underscored strong demand from eurozone banks. It was estimated that banks needed 222.5 billion euros for the week and the sharply higher amount indicated that banks were maintaining strong cash balances amid uncertainty generated by the international banking crisis.
The funds were lent out by the ECB at the rate of 3.25 percent following a half percentage point interest rate cut.
"Banks are safeguarding their balance sheets to such an extent that they are now very reluctant to lend just when households and enterprises need credit to tidy them oversome rough times," Bank of America senior economist Holger Schmieding noted. The situation appears to be creating some frustration at the ECB, and its president Jean-Claude Trichet has pressed commercial banks to assume their responsibilities as purveyors of credit to the wider economy.
"It's not a normal functioning, clearly that you have a lot of supply of liquidity which at the end of the day is in our deposit window," Trichet acknowledged after the ECB announced its interest rate cuts.
Earlier on Tuesday, the ECB said that more than 209 billion euros were parked in its overnight deposit facility which offers a rate of 3.25 percent, well below the going interbank market rate of 4.15 percent. That was a clear sign banks would rather lend money to the ECB, even at a lower rate of return, than to other banks amid prevailing market mistrust.
The ECB identified a large amount of excess cash in eurozone money markets and moved on Tuesday to mop it up with what it calls a fine-tuning operation. The ECB's forecasts "show that a large positive liquidity imbalance is expected" during which commercial banks must maintain minimum reserves. The central bank held what is called a quick tender to absorb the extra cash, taking in 80 billions euros.
Banks were allowed to offer as much excess cash as they wished. Central banks have injected massive amounts of cash into interbank markets to encourage commercial banks to keep lending to businesses and households. When it identifies a surplus however, it removes the cash to prevent an excessive supply from fueling inflation and to keep market rates close to its own benchmarks.
The funds were lent out by the ECB at the rate of 3.25 percent following a half percentage point interest rate cut.
"Banks are safeguarding their balance sheets to such an extent that they are now very reluctant to lend just when households and enterprises need credit to tidy them oversome rough times," Bank of America senior economist Holger Schmieding noted. The situation appears to be creating some frustration at the ECB, and its president Jean-Claude Trichet has pressed commercial banks to assume their responsibilities as purveyors of credit to the wider economy.
"It's not a normal functioning, clearly that you have a lot of supply of liquidity which at the end of the day is in our deposit window," Trichet acknowledged after the ECB announced its interest rate cuts.
Earlier on Tuesday, the ECB said that more than 209 billion euros were parked in its overnight deposit facility which offers a rate of 3.25 percent, well below the going interbank market rate of 4.15 percent. That was a clear sign banks would rather lend money to the ECB, even at a lower rate of return, than to other banks amid prevailing market mistrust.
The ECB identified a large amount of excess cash in eurozone money markets and moved on Tuesday to mop it up with what it calls a fine-tuning operation. The ECB's forecasts "show that a large positive liquidity imbalance is expected" during which commercial banks must maintain minimum reserves. The central bank held what is called a quick tender to absorb the extra cash, taking in 80 billions euros.
Banks were allowed to offer as much excess cash as they wished. Central banks have injected massive amounts of cash into interbank markets to encourage commercial banks to keep lending to businesses and households. When it identifies a surplus however, it removes the cash to prevent an excessive supply from fueling inflation and to keep market rates close to its own benchmarks.
Tuesday, November 11, 2008
Fears grow in the global airline sector
The risk of failure is huge and the list of failures is growing in the airline sector.
First to succumb were the airlines with innovative new business models, such as Silverjet with its mission to undercut the major airlines in the battle for business passengers. Small operators like Futura, Sterling, Maxjet, Oasis and EOS have also gone. The collapse of XL was a huge shock to the UK charter airline market. Even a flag-carrier, Alitalia, is in administration
Times are even harder in the massive US aviation market. Southwest, the innovative low-cost airline that spawned imitators such as Ryanair, the European airline, has announced its first financial loss in 17 years. Of the other Big Six, American, Continental, Delta and NorthWest were all in the red for the last three months' reported figures. Below them a host of smaller operators have disappeared.
But the US has a system for propping up ailing companies and airlines have made full use of theChapter 11 protection from bankruptcy to enable them to restructure or merge, and secure their futures.
This week aviation industry representatives were saying they thought the worst was over. All this is happening, partly because of the "credit crunch". But the spike in oil prices has been the biggest problem. The rise started in December 2006 and only stopped in June this year when a barrel of oil had topped $140. It has now dropped like a stone to just above $60 a barrel. That won't help many airlines just yet. They are still paying more for their fuel under 'hedging' deals, in which they set a fixed price months into the future. United Airlines, for example, has said it is around $230m out of pocket as a result of its hedging deals.
First to succumb were the airlines with innovative new business models, such as Silverjet with its mission to undercut the major airlines in the battle for business passengers. Small operators like Futura, Sterling, Maxjet, Oasis and EOS have also gone. The collapse of XL was a huge shock to the UK charter airline market. Even a flag-carrier, Alitalia, is in administration
Times are even harder in the massive US aviation market. Southwest, the innovative low-cost airline that spawned imitators such as Ryanair, the European airline, has announced its first financial loss in 17 years. Of the other Big Six, American, Continental, Delta and NorthWest were all in the red for the last three months' reported figures. Below them a host of smaller operators have disappeared.
But the US has a system for propping up ailing companies and airlines have made full use of theChapter 11 protection from bankruptcy to enable them to restructure or merge, and secure their futures.
This week aviation industry representatives were saying they thought the worst was over. All this is happening, partly because of the "credit crunch". But the spike in oil prices has been the biggest problem. The rise started in December 2006 and only stopped in June this year when a barrel of oil had topped $140. It has now dropped like a stone to just above $60 a barrel. That won't help many airlines just yet. They are still paying more for their fuel under 'hedging' deals, in which they set a fixed price months into the future. United Airlines, for example, has said it is around $230m out of pocket as a result of its hedging deals.
Companies in Mexico wouldn't go public because of crimes
Companies in Mexico are scrapping plans to float shares on the stock exchange for fear of raising their profile amid a brutal drug war and a surge in kidnappings, the bourse president said on Tuesday.
Stock exchange President Guillermo Prieto said that aside from market volatility in the past two months due to the global financial crisis, crime was a major issue for firms thinking about initial public offerings (IPOs).
"Obviously, market conditions are very difficult but (crime) has become a factor, so people don't want to put their surnames on a share listing," Prieto told a business forum in the northern city of Monterrey.
"At least six or seven companies have said crime is a reason (for not listing)," he said.
More than 4,300 people, mostly drug smugglers but also police and soldiers, have been killed this year as President Felipe Calderon's army clampdown on drug cartels sparks battles between rival cartels and security forces.
Kidnappings, often carried out by gangs led by corrupt police, have also surged and the public has been shocked by recent cases of abducted children being brutally murdered.
Going public to raise funds for expansion requires far greater company disclosure and a higher public profile for company executives who go on roadshows to attract investors.
Mexican business leaders say operations have not been hurt by the drug war and they mostly support Calderon's deployment of some 40,000 troops and federal police to catch drug gangs.
Many businesses have stepped up security, however, and some company owners in violent northern border cities such as Tijuana are conducting their business from the United States to avoid the risk of being kidnapped. (Reuters)
Stock exchange President Guillermo Prieto said that aside from market volatility in the past two months due to the global financial crisis, crime was a major issue for firms thinking about initial public offerings (IPOs).
"Obviously, market conditions are very difficult but (crime) has become a factor, so people don't want to put their surnames on a share listing," Prieto told a business forum in the northern city of Monterrey.
"At least six or seven companies have said crime is a reason (for not listing)," he said.
More than 4,300 people, mostly drug smugglers but also police and soldiers, have been killed this year as President Felipe Calderon's army clampdown on drug cartels sparks battles between rival cartels and security forces.
Kidnappings, often carried out by gangs led by corrupt police, have also surged and the public has been shocked by recent cases of abducted children being brutally murdered.
Going public to raise funds for expansion requires far greater company disclosure and a higher public profile for company executives who go on roadshows to attract investors.
Mexican business leaders say operations have not been hurt by the drug war and they mostly support Calderon's deployment of some 40,000 troops and federal police to catch drug gangs.
Many businesses have stepped up security, however, and some company owners in violent northern border cities such as Tijuana are conducting their business from the United States to avoid the risk of being kidnapped. (Reuters)
China envoy hails 'successful' trip
As Chinese Senior official Chen Yunlin, the head of the Chinese government's department in charge of Taiwan affairs wraps up his five day tour in Taiwan to meet with officials in Taiwan Chen Declared the visit to be successful and that they have accomplished what was set out to do.
"Chen signed a landmark trade deal expanding aviation and shipping links across the Taiwan Strait, agreed to exchange rare animals with Taiwan and to work on measures designed to boost co-operation on food safety issues."
This was the first of such meeting in the last six decades, due to political differences. Though both sides agree that this was a successful talk, they also know that this is only the beginning of a long and difficult road, for break-throughs between Taiwan- China relations.
This meeting did not go with out resistance, the Taiwanese protesters gathered and shouted pro-Independence slogans with anti-China banners.
"Chen signed a landmark trade deal expanding aviation and shipping links across the Taiwan Strait, agreed to exchange rare animals with Taiwan and to work on measures designed to boost co-operation on food safety issues."
This was the first of such meeting in the last six decades, due to political differences. Though both sides agree that this was a successful talk, they also know that this is only the beginning of a long and difficult road, for break-throughs between Taiwan- China relations.
This meeting did not go with out resistance, the Taiwanese protesters gathered and shouted pro-Independence slogans with anti-China banners.
Monday, November 10, 2008
Agency Predicts a Return of Triple-Digit Oil Prices
By JAD MOUAWAD
Published: November 6, 2008
The global economic slump that has curbed energy demand and pushed oil prices down in recent months may provide only a short-lived respite for consumers, according to the world’s top energy forecaster.
Published: November 6, 2008
The global economic slump that has curbed energy demand and pushed oil prices down in recent months may provide only a short-lived respite for consumers, according to the world’s top energy forecaster.
Demand for a Say on a Way Out of Crisis
By ALEXEI BARRIONUEVO
A gathering of the Group of 20 over the weekend revealed a desire among developing countries to have a greater voice in helping the world navigate its way out of the financial crisis.
A gathering of the Group of 20 over the weekend revealed a desire among developing countries to have a greater voice in helping the world navigate its way out of the financial crisis.
Working Poor and Young Hit Hard in Downturn
By ERIK ECKHOLM
Labor experts say the hardships of the gathering recession will hurt the working poor and younger job seekers most.
Labor experts say the hardships of the gathering recession will hurt the working poor and younger job seekers most.
The Hedonistic Paradox: Is Homo Economicus Happier?
This paper was published in the Journal of Public Economics.
It explores the idea that more altruistic people are happier than people who are greedy. It states that homo economicus -- someone who seeks happiness for him- or herself -- will not find it, but the person who helps others will.
The authors conclude that "The results of this and other studies raise the question of whether greater attention should be paid to the potential benefits (beyond solely the material ones) of policies that promote charitable donations, volunteerism, service education, and, more generally, community involvement, political action, and social institutions that foster psychological well-being."
It explores the idea that more altruistic people are happier than people who are greedy. It states that homo economicus -- someone who seeks happiness for him- or herself -- will not find it, but the person who helps others will.
The authors conclude that "The results of this and other studies raise the question of whether greater attention should be paid to the potential benefits (beyond solely the material ones) of policies that promote charitable donations, volunteerism, service education, and, more generally, community involvement, political action, and social institutions that foster psychological well-being."
A Model for Future Mortgage Finance in the U.S. by Ben Bernanke
The Chairman of the Federal Reserve made this speech at the UC Berkeley Symposium on October 31, 2008.
He discusses the mortgage securtization process, how it has affected the current financial crisis and how can the model be evolved in the future.
The Future of Mortgage Finance in the United States
Chairman Ben S. Bernanke
At the UC Berkeley/UCLA Symposium: The Mortgage Meltdown, the Economy, and Public Policy, Berkeley, California
October 31, 2008
He discusses the mortgage securtization process, how it has affected the current financial crisis and how can the model be evolved in the future.
The Future of Mortgage Finance in the United States
Chairman Ben S. Bernanke
At the UC Berkeley/UCLA Symposium: The Mortgage Meltdown, the Economy, and Public Policy, Berkeley, California
October 31, 2008
Consumer spending continues to slow down after AIG bail-out!
Wall Street heads into another turbulent week with investors set to pore over a government report on retail sales and earnings from Wal-Mart Stores Inc. to get a better reading on the consumer.
There are growing signs that the deepening economic slowdown has caused Americans to cut back on their spending budget. There was fresh evidence of this past week when retailers posted the worst October same-store sales in 35 years -- and analysts believe the upcoming holiday shopping season could be among the slowest in decades.
With consumer spending driving more than two-thirds of the U.S. economy, investors will be paying close attention to earnings outlooks for some of the nation's biggest retailers. Wal-Mart, the nation's biggest retail chain, will post results on Thursday. Kohl's Corp., JCPenney Co., Macy's Inc., and Abercrombie & Fitch Co. are scheduled to release reports as well.
Wall Street had enjoyed its biggest Election Day rally in history last Tuesday, but could not cling to those gains. This was followed by a two-day loss of about 10 percent in the major indexes, including a 929-point drop in the Dow, as investors turned their focus once more to the economy's woes.
Additionally, investors are watching for developments with General Motors Corp., Chrysler and Ford Motor Co. after the automakers met with Congressional leaders last week to secure financial help.
Democratic leaders in Congress asked the Bush administration on Saturday to provide more aid to the struggling auto industry, which is bleeding cash and jobs as sales have dropped to their lowest level in a quarter-century. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid said in a letter to Treasury Secretary Henry Paulson that the administration should consider expanding the $700 billion bailout to include car companies.
It looks like everyone is gonna get bailed out these days. But when will we start seeing its effects on the market?
Is it time to resort to fiscal policies?
The IMF predicts that the global economic growth in 2009 will be 2.2%, which is down 0.8% from its last prediction on October 2008.
Developing economies: growth rate of 5.1%, which is a full point lower than the October prediction. This is due to falling commodity prices. While that has helped ease the inflation burden on rich countries, it is hurting commodity exporters. The IMF lowered its 2009 baseline oil price projection to $68 per barrel from $100, and noted that prices had also fallen for metals and food.
The IMF warned that conditions could get even worse as financial firms reduce their debt, investors brace for rising corporate defaults, and consumers cut back on spending.
IMF chief economist Olivier Blanchard said the IMF's downward growth revisions for most economies was based on a sharper-than-expected fall in demand in advanced countries and worsening credit conditions in emerging market economies. He believes that there is little room left in some counties to further cut interest rates, and that we should resort to employing expansionary fiscal policies (that is, lowering taxes and/or increasing government spending)
But taxes -- necessary as they are -- can distort private decisions, create misallocations of resources and generate dead weight losses. Tax systems can be more or less distortive for two reasons: either because they extract more or less resources from private agents (the tax level), or because they raise a given amount of revenue in more or less distortive ways (the tax structure).
For different countries to consider reforms to their tax systems, identifying the growth implications of different tax instruments is useful for policy design, regardless of whether or not they identify a change to the overall level of taxes. Another reason for focusing on tax structures rather than the overall tax burden is that the overall level of taxes reflects societal choices over the size of the public sector, while the tax structure is the first tool to implement these choices. Governments may consider changes to the structure of taxes in order to minimize the negative consequences for growth, while maintaining the desired level of public goods and services provided.
If a fiscal policy is, infact to be imposed, it will be challenging to figure out how to plan this policy, and what will the effects of its implementation be.
Developing economies: growth rate of 5.1%, which is a full point lower than the October prediction. This is due to falling commodity prices. While that has helped ease the inflation burden on rich countries, it is hurting commodity exporters. The IMF lowered its 2009 baseline oil price projection to $68 per barrel from $100, and noted that prices had also fallen for metals and food.
The IMF warned that conditions could get even worse as financial firms reduce their debt, investors brace for rising corporate defaults, and consumers cut back on spending.
IMF chief economist Olivier Blanchard said the IMF's downward growth revisions for most economies was based on a sharper-than-expected fall in demand in advanced countries and worsening credit conditions in emerging market economies. He believes that there is little room left in some counties to further cut interest rates, and that we should resort to employing expansionary fiscal policies (that is, lowering taxes and/or increasing government spending)
But taxes -- necessary as they are -- can distort private decisions, create misallocations of resources and generate dead weight losses. Tax systems can be more or less distortive for two reasons: either because they extract more or less resources from private agents (the tax level), or because they raise a given amount of revenue in more or less distortive ways (the tax structure).
For different countries to consider reforms to their tax systems, identifying the growth implications of different tax instruments is useful for policy design, regardless of whether or not they identify a change to the overall level of taxes. Another reason for focusing on tax structures rather than the overall tax burden is that the overall level of taxes reflects societal choices over the size of the public sector, while the tax structure is the first tool to implement these choices. Governments may consider changes to the structure of taxes in order to minimize the negative consequences for growth, while maintaining the desired level of public goods and services provided.
If a fiscal policy is, infact to be imposed, it will be challenging to figure out how to plan this policy, and what will the effects of its implementation be.
China's stimulus plan's effects on Asian stock markets
Asian stock markets logged strong gains Monday, cheered by China unveiling a $586 billion stimulus plan over the weekend to counter the effects of a global slowdown on its booming economy.
China announced Sunday a massive stimulus package in hopes of keeping economic growth from falling too fast. Demand from the U.S. and the country's other vital export markets has been waning as the global financial crisis takes an economic toll.
China's economic growth slowed to 9 percent in the third quarter, the lowest level in five years and a sharp decline from 11.9 percent the year before-- perilously low for a government that needs to create jobs for millions of new workers and for other Asian countries that have come to depend heavily on Chinese demand.
"The global economy is in trouble and Chinese authorities understand that they can't wait anymore ... They're aware that exports next year will be terrible given the weakening economies in the U.S. and Europe," said Winson Fong, a Hong Kong-based managing director at SG Asset Management, which oversees about $3 billion in equities in Asia.
"This has been overdue," he said. "Investors in mainland China have been waiting for a complete rescue package since the beginning of the year."
China's announcement came as economic officials from 20 leading nations called Sunday for increased government spending to boost the troubled global economy.
In my opinion, this stimulus package sure does give China some hopes but what this decision can do to their economy is still in the mist. My concern is what if the global demand stay at the same level or even fall lower next year while China is producing more and more goods (because of the stimulus package) ?
Sunday, November 9, 2008
How to Solve the Problem of the Dollar
The value of the dollar has been going down and this article offers an interesting method to remedy this problem. The author suggests creating a substitution account at the International Monetary Fund (IMF) through which unwanted dollars could be converted into special drawing rights (SDR).
Such a system was created in 1978-80 to increase monetary stability in the world. Infact, $34 billion of the money still exists.
According to this system, instead of converting dollars into other currencies through the market, unwanted holdings ed could be depositin a special account at the IMF. They would be credited with a like amount of SDR (or SDR-denominated certificates), which they could use to finance future balance-of-payment deficits and other legitimate needs, redeem at the account itself or transfer to other participants. Hence the asset would be fully liquid.
The fund’s members would authorize it to meet the demand by issuing as many new SDR as needed, which would have no net impact on the global money supply (and hence on world growth or inflation) because the operation would substitute one asset for another. The account would invest the dollar deposits in US securities. If additional backing were deemed necessary, the fund’s gold holdings of $80 billion would more than suffice.
All countries would benefit. Those with dollars that they deem excessive would receive an asset denominated in a basket of currencies (44 percent dollars, 34 percent euros, 11 percent each yen and sterling), achieving in a single stroke the diversification they seek along with market-based yields. They would avoid depressing the dollar excessively, minimizing the loss on their remaining dollar holdings as well as avoiding systemic disruption.
The United States would be spared the risk of higher inflation and potentially much higher interest rates that would stem from an even sharper decline of the dollar. Such consequences would be especially unwelcome today with the prospect of subdued US growth or even recession over the next year or so.
The international financial architecture would be greatly strengthened by a substitution account. In the wake of the dollar crises of the early postwar period, the IMF membership adopted SDR as the centerpiece of a strategy to build an international monetary system that would no longer rely on a single currency.
The move to floating exchange rates by most major countries in the 1970s postponed the need to pursue that strategy to its conclusion but also generated the extreme currency instability that triggered official consideration of an account. The global imbalances and large currency swings in recent years, and the accelerated accumulation of official dollar holdings by countries that have essentially reverted to fixed exchange rates, replicate the conditions that led to both the creation of SDR and the negotiations on an account.
A substitution account would not solve all international monetary problems nor would it suffice to restore a stable global financial system.
The dollar needs to decline further to restore equilibrium in the US external position. China, many other Asian countries, and most oil exporters will have to accept substantial increases in their currencies now and much more flexible exchange rates for the long run. But early adoption of a substitution account would minimize the risks of adjustment of the present imbalances and the inevitable structural shift to a bipolar monetary system based on the euro as well as the dollar.
Such a system was created in 1978-80 to increase monetary stability in the world. Infact, $34 billion of the money still exists.
According to this system, instead of converting dollars into other currencies through the market, unwanted holdings ed could be depositin a special account at the IMF. They would be credited with a like amount of SDR (or SDR-denominated certificates), which they could use to finance future balance-of-payment deficits and other legitimate needs, redeem at the account itself or transfer to other participants. Hence the asset would be fully liquid.
The fund’s members would authorize it to meet the demand by issuing as many new SDR as needed, which would have no net impact on the global money supply (and hence on world growth or inflation) because the operation would substitute one asset for another. The account would invest the dollar deposits in US securities. If additional backing were deemed necessary, the fund’s gold holdings of $80 billion would more than suffice.
All countries would benefit. Those with dollars that they deem excessive would receive an asset denominated in a basket of currencies (44 percent dollars, 34 percent euros, 11 percent each yen and sterling), achieving in a single stroke the diversification they seek along with market-based yields. They would avoid depressing the dollar excessively, minimizing the loss on their remaining dollar holdings as well as avoiding systemic disruption.
The United States would be spared the risk of higher inflation and potentially much higher interest rates that would stem from an even sharper decline of the dollar. Such consequences would be especially unwelcome today with the prospect of subdued US growth or even recession over the next year or so.
The international financial architecture would be greatly strengthened by a substitution account. In the wake of the dollar crises of the early postwar period, the IMF membership adopted SDR as the centerpiece of a strategy to build an international monetary system that would no longer rely on a single currency.
The move to floating exchange rates by most major countries in the 1970s postponed the need to pursue that strategy to its conclusion but also generated the extreme currency instability that triggered official consideration of an account. The global imbalances and large currency swings in recent years, and the accelerated accumulation of official dollar holdings by countries that have essentially reverted to fixed exchange rates, replicate the conditions that led to both the creation of SDR and the negotiations on an account.
A substitution account would not solve all international monetary problems nor would it suffice to restore a stable global financial system.
The dollar needs to decline further to restore equilibrium in the US external position. China, many other Asian countries, and most oil exporters will have to accept substantial increases in their currencies now and much more flexible exchange rates for the long run. But early adoption of a substitution account would minimize the risks of adjustment of the present imbalances and the inevitable structural shift to a bipolar monetary system based on the euro as well as the dollar.
The Human Factor
This NYT article states that the mathematical models used to determine risk on different investments/securities failed to consider how humans would use those models, which contributed to the crisis in a big way. The article goes on to talk about credit-default swaps, securities, and derivatives but (partly because I'm not a big finance person and I wouldn't know a derivative if it bit me) I just found a couple of points in the article interesting:
1. The article says that financial models couldn't keep up with the rapid pace of technological growth and financial innovation. And apparently neither could humans, for as they continued to chase after the potential profits to be found in such innovation, they disregarded or underestimated the possible risk.
2. What the models say and what the analysts say can be very different. A model can predict one thing, but if an analyst says the probability of it is very low, investors may be more inclined to agree with the more optimistic analysts.
3. "Complexity, transparency, liquidity, and leverage" are risks and factors not easily captured in a mathematical model. And it's not like humans can be counted on to adhere to the laws of mathematics in everday life.
4. In regards to financial regulation, it should be like "fire safety rules in building codes. The chances of any building burning down are slight, but ceiling sprinklers, fire extinguishers and fire escapes are mandated by law."
What interested me was the notion that despite people's best efforts to predict risk and map out the financial market, ultimately it all comes down to how humans use the information. Models may assume humans act rationally, but as in this case, it seems like people's use of new financial instruments outpaced the calculated warnings of the model, and the way we acted was not all that rational.
1. The article says that financial models couldn't keep up with the rapid pace of technological growth and financial innovation. And apparently neither could humans, for as they continued to chase after the potential profits to be found in such innovation, they disregarded or underestimated the possible risk.
2. What the models say and what the analysts say can be very different. A model can predict one thing, but if an analyst says the probability of it is very low, investors may be more inclined to agree with the more optimistic analysts.
3. "Complexity, transparency, liquidity, and leverage" are risks and factors not easily captured in a mathematical model. And it's not like humans can be counted on to adhere to the laws of mathematics in everday life.
4. In regards to financial regulation, it should be like "fire safety rules in building codes. The chances of any building burning down are slight, but ceiling sprinklers, fire extinguishers and fire escapes are mandated by law."
What interested me was the notion that despite people's best efforts to predict risk and map out the financial market, ultimately it all comes down to how humans use the information. Models may assume humans act rationally, but as in this case, it seems like people's use of new financial instruments outpaced the calculated warnings of the model, and the way we acted was not all that rational.
Small Businesses in Economic Crisis
I think it's also important to look at how the crisis is affecting not only banks and big companies, but small businesses who face the brunt of the credit crunch and must either downsize or shut down. This article features 7 small businesses that have shut down this year ("Victims of the Crash" as CNN dramatically calls them) and the loss to the community that each one represents. If you look at the reasons why each business faltered, it's interesting to note how everything creates an impact on a smaller, more personal scale. Real-estate prices, dwindling corporate philanthropy, rising costs in food and oil prices, drying up of funds all contributed to these businesses filing for bankruptcy. Of course, there were some non-crisis related factors, like dwindling CD and book sales, but it's the crisis that accelerated these businesses' problems.
Small businesses are a vital part of the American economy. As this article states, they employ half of the non-government labor force, which means that if they are forced to cut jobs, that could increase unemployment drastically. They can help local communities thrive, preserve history and culture (no more circus animal cookies??), and help prevent a few major companies from completely taking over an industry.
While one can argue that in a capitalist economy, a firm that can't operate efficiently can't survive, in this case maybe small businesses should be protected. Is it worth trying to save/protect small businesses directly? If Wall Street and Detroit are being helped, should small businesses be too (which then raises the question of how far should the government go)? Or is the trickle-down effect of the bailout sufficient?
Small businesses are a vital part of the American economy. As this article states, they employ half of the non-government labor force, which means that if they are forced to cut jobs, that could increase unemployment drastically. They can help local communities thrive, preserve history and culture (no more circus animal cookies??), and help prevent a few major companies from completely taking over an industry.
While one can argue that in a capitalist economy, a firm that can't operate efficiently can't survive, in this case maybe small businesses should be protected. Is it worth trying to save/protect small businesses directly? If Wall Street and Detroit are being helped, should small businesses be too (which then raises the question of how far should the government go)? Or is the trickle-down effect of the bailout sufficient?
AIG's new bailout
The troubled insurance company is close to a deal that would have the government supplying them with a third bailout plan to help out their struggling finances. The government is changing their current $123 billion plan and increasing it to a $150 billion plan. This deal could be reached as soon as November 10, because that is when AIG is to announce their third quarter results. With this being the third deal that the government is offering to AIG, is it possible that they will ever recover from their debt? The government with this new deal is exchanging $40 billion for preferred stock to recover some of the funds that they are just giving away. This is good because the government will need a lot of help if they expect to get all of their bailout money back from all of the banks and financial instituions that they have helped out over the past few months.
China's New Stimulus Plan
This article discusses how China is going to implement a stimulus plan to help their economy. It seems like it's a lot like the stimulus plan implemented in the United States; it would pick up the pace on spending on low-cost housing, increase spending on rural infrastructure, and put money into new railways, roads and airports, as well as other things. In addition, it will remove credit limits for commercial banks. The total plan is worth $586 billion. I think that it's interesting that China is introducing a stimulus plan like the United States', but the fact that their stimulus plan includes things such as increased spending on health and education show the difference between China and the U.S., that China is still a communist state and the United States is still a capitalist state.
The Race to Zero
Yes, we are talking about the policy makers' race to bring interest rates to 0%. On Nov 6, the Bank of England just slashed interest rates to their lowest level since 1955. Less than an hour later, the European Central Bank (ECB) cut its key interest rate too, but by only half a percentage point, to 3.25%. Shortly after the Bank of England's big cut, Switzerland's central bank reduced its policy rate by half a percentage point, to 2%. Earlier in the week, the Reserve Bank of Australia reduced its key rate, from 6% to 5.25%. Central banks in India and Vietnam also cut their benchmark interest rates in November.
The trend is pretty obvious. Until the summer, the main concern for most central banks had been whether they could cap inflation. Now the race is on to ease monetary policy in order prevent a prolonged economic slump. The Fed leads the way, and now other banks follow. The question is, whether this expansionary monetary policy will have an effect before interest rates actually drop to zero.
The trend is pretty obvious. Until the summer, the main concern for most central banks had been whether they could cap inflation. Now the race is on to ease monetary policy in order prevent a prolonged economic slump. The Fed leads the way, and now other banks follow. The question is, whether this expansionary monetary policy will have an effect before interest rates actually drop to zero.
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