Lessons from a crisis

This article relates directly to what we have been studying in class. It discusses the flaws of free-market capitalism and suggests that it is the reason for the crisis here in the US. I found it really interesting that some believe free markets are a mistake.

Lessons from a crisis
Oct 2nd 2008 PARIS
From The Economist print edition

A globalized economy

It is quite clear that the financial crisis that we are currently in the midst of is also a problem that the rest of the world is having, as well, which really shows how we're in a globalized economy-problems in one country affect a great deal of other countries.  What I think is really cool, though, is how countries are working together to help to fix the crisis.  For instance, in the article Asia, Europe reach consensus on financial crisis, it discusses how countries are doing just that.  There was a two-day Asia-Europe Meeting in Beijing that 43 countries attended, and they issued a statement that, among other things, called for the IMF to help "stabilize struggling banks and shore up flagging stock markets," according to the article.  I think that this shows that as the world becomes further globalized, it becomes increasingly important to connect with other countries during problematic times.

OECD- Governments should avoid the "trap" of over-regulating the market

Klaus Schmidt-Hebbel, chief economist of the OECD said that the world has been saved from another “great depression” by massive state intervention although the governments need to be wary of the “trap” of excessive regulation. Excessive regulation, he said, can do damage by inhibiting future financial innovations, market integration and growth. The economic times quotes him as saying the the world requires better regulation and not just more regulation. Schmidth-Hebbel’s interview the OECD’s keenly-awaited Economic Outlook Report which is due next month. The report will examine the impact of the financial crisis on the real economy and ask what lessons can be drawn from it. In that light then, the article raises two interesting questions:

• Should the unprecedented state intervention of the last two weeks to save banks in Europe and the US be seen as a temporary move by governments as lenders of last resort in line with the lessons of the 1930s Depression?
• Or should it be the start of a reversal of the opening up and deregulation of global markets since the 1980s?

I am interested in seeing what everyone else thinks and what your views are on the same. I personally think it is the first option over the second...may be...?

Andrew Lahde who just closed up $300 mil hedge fund and left, w/ his famous farewell letter

I just heard about this guy, Andrew Lahde and found his letter pretty interesting/crazy/extraordinary >_<. Andrew Lahde is a California-based hedge fund manager who in 2007 earned some fame for achieving return rates in the vicinity of 1000% with his Lahde Capital, based in Santa Monica, California. The fund speculated on increases of U.S. subprime mortgage defaults. He earned a bachelor's degree in finance from Michigan State University and an MBA from UCLA. Basically, what happened is that he earned a lot of money ($300 mil), and then decided to close down the fund about 2 weeks ago. Here is part of his letter:
"What I have learned about the hedge fund business is that I hate it.

I was in this game for the money. The low-hanging fruit, the idiots whose parents paid for prep school, Yale and then the Harvard MBA, who were there for the taking.

These people who were (often) truly not worthy of the education they had received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behaviour supporting the aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

I will no longer manage money for other people or institutions. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. I have enough of my own wealth to manage. I will let others try to amass nine, 10 or 11-figure net worths.

Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two-week vacation in January during which they will be glued to their Blackberries or other such devices.

What is the point? They will all be forgotten in 50 years anyway. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life. So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the sub-prime debacle."

You can google his name and will find a lot of articles talking about him now. I have a thought, which I have been pondering for a while now.. It seems to me that the crisis time gives the rich an opportunity to get richer, while the poor will still get poorer. Isn't that sad? I'm talking about guys who have capital to buy all the assets (houses, stocks, etc) when they are at low prices and can actually hold on to it and wait until the economy gets better and the assets gain much higher values to sell them... Anyhow, I hope you'll tell us what you think about Lahde's letter.

US foreclosure filings up 71 percent in 3Q

The number of homeowners trapped in the foreclosure crisis grew by more than 70 percent in the third quarter of this year compared with the same period in 2007, according to data released Thursday. Nationwide, nearly 766,000 homes received at least one foreclosure-related notice from July through September, up 71 percent from a year earlier, said foreclosure listing service RealtyTrac Inc. By the end of the year, RealtyTrac expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.

Six states — California, Florida, Arizona, Ohio, Michigan and Nevada — accounted for more than 60 percent of all foreclosure activity in the quarter, with California alone making up more than a quarter of all U.S. foreclosure filings.

The combination of sinking home values, tighter mortgage lending criteria and an economy that many economists think has already slipped into recession has left hundreds of thousands of homeowners with few options. Many can't find buyers or owe more than their home is worth and can't refinance into an affordable loan, with the global credit crisis making loans far less available.

It remains to be seen how much the government's intervention will stem the housing crisis. Earlier this month, the Federal Housing Administration launched a program that aims to prevent foreclosures by allowing homeowners to swap their mortgages for more affordable loans, but only if their lender agrees to take a loss on the initial loan. The bill is projected to help about 400,000 households.

Reference: Yahoo Financial News

France Public Choice could be used in the US?

The France government have set up public bike rental stands in Lyon France. Though this article is not directly about the economy, but its a public choice that France has made, and I personally think its a very good and clever one. One of the users of this public good is quoted as follow in the article:

“Rates are quite low, more or less around 1€ per hour.”
“The first 30 minutes are free - to encourage small commuting and the rotation of the bikes at the numerous stations.”
“Bikes are really heavy but the ride is pretty smooth, they have two drum brakes, 3 internal gear, lights and a small lock.”

Having public bike rentals can solve many of our current problem, First the current energy problem, a bike could be a lot cheaper than driving and the first 30mins in free. One might consider driving into a city because they could drive from spot to spot, but with rental bikes one could just ride the bus to the city and commute with the bike with out worrying about parking, gas etc... There's a lot of positive externalities to this programs also, with more bikes available people will bike more, promoting a healthier life style and possibly save on health care costs for the government. With more people biking as a way of commuting there's less pollution making for cleaner cities. I think this program could be a great idea and see whether our city could follow France's example and start riding and beside who doesn't like riding a bike?

Current commitments and decisions leaves the next president with his hands tied

As Congress passes the $700 billion bail out, and the military commitment overseas for the United States, Howard Fineman sees limited options for the next president. Neither canadaite will "cut and run" on the Iraq war, and internationally countries like Isreal are looking for the U.S to play larger roles. These commitments all costs and money and ss the U.S is running further into debt and with foriegners holding bear $3 trillion government debt it will become harder and harder for the U.S government to leverage money.
This articles should keep the hopeless optimists in check, letting them know even if they selected the right man for the job, either Obama or McCain, the president might not have the power to turn the economy around, this problem might require a long term fix.

3 Oil Countries Face A Reckoning: Fall in Prices Threatens Big Political Visions

I want to bring here another piece of information from the oil industry. As oil prices drop, 3 oil countries: Venezuela, Iran, and Russia are facing a lot of difficulties pursuing their political ambitions. For all three nations, oil money was a means to an "ideological end":
- Venezuela: Its President Hugo Chávez's goal is to build a socialist-inspired state, and suppress opposition. Venezuela used petrodollars to buy Russian weaponry, to win friends in the hemisphere and elsewhere (nations that are also anti-America in a sense), and to create a wide array of social welfare programs. Problems right now with Venezuela: high inflation rate (36%), while heavy government deficit once oil prices fail. "We're in the same situation of people who have lost a limb but can still feel it," said Ricardo Hausmann, a Venezuelan economist who teaches at Harvard University.
- Iran: Another nation that is very dependent on oil money. It has used them in the past four years as a political and economic weapon to defy and undermine the West while promoting its own agenda (spread its influence in Iraq and then the Middle East, promote itself as the leader of the Islamic world and continue its nuclear program) Almost same problem with Venezuela, the inflation rate in Iran is very high (30%). "It's not expected that economics will force Iran to change its underlying ideology-long-term goals. Still, if prices stay depressed for long, it could mean a greater willingness in Tehran to find a compromise on the nuclear issue, and, perhaps, a political shift that left Mr. Ahmadinejad vulnerable in June's presidential election.
- Russia: Russia was willing to use its vast energy reserves to try to reassert the dominance it lost with the Soviet Union's collapse. As we might remember, two months ago when Russia invaded Georgia, almost no nations really do anything. Europe had become dependent on Russia's gas and couldn't afford to mount a strong challenge. Now that Europeans may no longer be as intimidated because of the drop in oil prices, Russia's goal is being threatened.
Almost every country is in the trial process to see what economic system would work. With the oil prices effects, the systems in Venezuela, Iran and Russia will need to try hard to prove whether it is viable.

Falling oil prices - OPEC's emergency meeting

As consumer confidence falls and aggregate demand drops, so do oil prices. Oil prices have fallen 40% since its peak of $147 per barrel in Mid-July. "The OPEC basket, a blend of OPEC crudes, dropped through the psychologically important $80-per-barrel level, to $77.38, on Oct. 9." OPEC has called for an emergency meeting in Vienna this November on Oct. 9, but now has just moved its emergency meeting even earlier, to Oct 24th. Public is eager to see whether an output cut will happen, and to what extent it will be. OPEC is a so-called cartel, containing the Saudi Arabia and its Gulf allies, Iran and Venezuela. According to "Behind OPEC's November meeting in Vienna" in the BusinessWeek, Venezuela president has just moved to the Saudi Arabia's side. So now the two main players of this meeting will be the Iranians, who want to have a huge cut (they favor a $100-per-barrel floor prices), and the Saudis, who believe that such a cut is absurd and will make the current economy even worse.
If you are interested, here are a few articles that you can have a look at.


The Economist: OPEC's emergency meeting



The BusinessWeek: Behind OPEC's November meeting in Vienna

To Save or Not to Save

My mom made an interesting comment the other day, about how it was too bad Lehman Brothers didn't fall apart later, so that they could benefit from recieving a bailout from the government, like AIG. What was interesting about her comment, is that, yes AIG did recieve a government bailout, however, the repayment terms of the bailout are so steep, that inevitabley the insurance giant will go bankrupt paying it all back. I know this because my dad, who worked for AIG for 20 years up until this time last year, now works for AIG's former CEO Hank Greenberg, who sent out a letter to the employees of his company CV Starr, explaining the details of AIG's bailout, and how it was bring down the company in the long run. He wishes to save AIG, and proposes new terms for repaying the bailout.

So the real question is, is it worth actually bailing out a company, if it only just prolongs the day they have to close, instead of helping to keep them open indefinately? Or is this the price a firm should pay for reckless behavior

Malaysia reveals plan to prevent slow down

Malaysia has unveiled a number of measures to boost its stock market and attract more foreign investment in expectation of slower growth in 2009.
The government will invest 5bn ringgit (£814.4m; $1.4bn) into a state agency that will invest in undervalued stocks.
Malaysia's stock market has plummeted 37% this year.
The government will also speed up market liberalisation and ease rules concerning foreign investors buying industrial land and property.
Despite the action, Malaysian finance minister Najib Rasak has denied the country is in the grip of a financial crisis.Malaysia is expected to reduce its economic growth forecast of 5.4%. The Malaysian Institute of Economic Research has said the growth rate could fall to 3.4% next year.

In Times of Crisis, Buy Stocks.

Warren Buffett wrote an opinion piece in the NYT with advice that seemed contradictory to what I thought people would do during a major economic crisis with an unstable stock market -- buy more stocks. And not stock in foreign companies, where the money might be 'safer', but American stocks, the value of which are changing wildly every second.

Some of his arguments:

• He follows his own rule of: "Be fearful when others are greedy, and be greedy when others are fearful." When the stock market was at its prime, and investors were reaping billions of dollars of returns, he had his personal account put into secure government bonds. Now when everyone is fearful, that's when he is buying.
  
• People should not overlook the long-term prosperity of sound American companies, despite short-term uncertainty.
  
• "Bad news...lets you buy a slice of America's future at a marked-down price."
• After all that's happened to America in the past century (wars, a depression, an epidemic, etc) the stock market has continued to go up.
  
• People are holding cash right now to feel safe, but they shouldn't because it's a "terrible long-term asset". Especially after the potential inflationary effects of the bailout plan. Instead: equities, equities, equities.

I guess this is a form of long-term speculation but it also sounds like common sense. One's first instinct might be to pull money out of the market while they can before the value declines even further, but the better solution might be to wait out the crisis, and even add to that stock because now it's cheaper.

Then again, it may be only a certain number of people that have that much optimism and can afford to buy stock and wait for an unknown time before seeing any returns. Most people have immediate bills and loans to pay off and they need as much cash as they can get now.

In any case, Buffett sounds optimistic about the future (American optimism?), which may instill confidence amongst investors and the American public. (Well, probably the global public because of globalization and all). And I guess when one of the world's richest men tells you what he's doing with his own money at this time of crisis, you'd be silly not to at least consider what he has to say.

Japan's current account surplus halves in August

Asia's largest economy posted a surplus of 988.8 billion yen (9.7 billion dollars) in its current account, the broadest measure of trade in goods and services, down 52.5 percent from a year earlier.
Japan's economy suffered its worst contraction in seven years in the second quarter of this year and there are fears that it is now in a recession.

China's economic growth rate slows down

The country's economic growth rate has fallen for the third quarter in succession. Its current growth rate is 9%, as compared to the previous 10.1% over the previous quarter. The Chinese government has started some measures to prevent the economy from plummeting. These included changing its focus from preventing the overheating of the economy and preventing structural inflation to the "preserving growth" and "controlling" inflation. Inflation is kept under control. The National Bureau of Statistics also announced that consumer price inflation had cooled to a 15-month low of 4.6% in September. In February, the inflation rate had hit a 12-year-peak of 8.7%.

Automakers Hit Hard

Chrysler has reduced construction of vehicles. They are now only producing Jeeps and minivans. The company has already cut over 64,000 jobs. Now the Chrysler CEO is talking to the GM CEO to make a deal.

The marriage of the companies would be beneficial for both sides. Chrysler owner Cerberus Capital Management no longer wants to be in the business. And GM CEO is in desperate need for credit. The GM is facing is keeping enough funds while the market rebounds.

2009 is projected to be an even worse year for automakers and analysts have lowered their prediction to only 13 million vehicles being sold in the US; this is a 3 million vehicle drop from 2007.

Joe the Plumber is Safe

Throughout the debates John McCain has been claiming Obama's tax increase would hinder small businesses. However, according to CNNmoney McCain is using too narrow a definition for small business and does not have his numbers right.

Out of 34.7 million small businesses only 479,000 would have an increase. This number is less than two percent. Also, the term small business is a very broad term. McCain and Obama file as a business because of their book royalties, but neither own a business.

Only the upper two brackets would face a tax increase. Small business owners who bring in an income above 150,000 dollars as a single filer would pay a little less than 2,000 dollars more each year. The bracket would move from 33% to 35%.

Therefore, Joe the Plumber can start his business and sleep easy at night about taxes.

Cities Slash Services

This article goes into detail on why some cities are cutting services. Between the suffering economy and the mortgage crisis, cities are being forced to cut expenses because of lower tax revenues and investment returns lacking. Problems in the economy today are forcing changes some would not expect. In Oakland, California the public library is cutting programs for the elderly and disabled, bookmobile, and literacy programs. Cities in the Midwest can expect more snow on the roads this winter because a spike in road salt prices. In Aspen, Colorado the city is delaying the construction of a $360,000 foam pit for snowboarders practicing tricks in the city gym. In Phoenix, the city will not be able to afford trimming of all palm trees, and will limit trimming only on major roads.
In response to hard times, cities are also trying ways to generate more revenue or saving their money. New Jersey governor, Jon Corzine, is telling cities to start combining some of their services or they will be penalized by a reduction in state aid. In Chicago the city is giving workers 3 more unpaid days off work, which is said to save 20 million. New York is considering selling ads on the sides of garbage trucks and street sweepers to raise money.
I think its too bad that our poor economy is going to affect people in ways they may have not considered. Changes are defiantly being made, and some of them good. It is a good thing that cities are opening their eyes and looking for ways to be more efficient and alternate ways to generate revenue.

China 'can be engine of growth'

The American economic crisis was transmitted to the world through global financial markets, and many economies of different countries has been largely influenced. Resolving this crisis, according to Linda Yueh, will require rebalancing the global economy.

As China has $2 trillion in foreign exchange reserve, it has become a significant source of global savings. Even though the econmic crisis has slowed down China's economic growth, it is definately in a position to help with the credit crunch in the West as well as serve as an engine of growth.

Western goverments must borrow to help with the crisis, as increasing taxes is not advisible in a downturn. Borrowing large funds would mean an increas in future taxes and interest rates (contractionary policy), which could hinder econmic growth. Instead of borrowing from China and other countries, it would be much more helpful if the soverign wealth funds of these countries invest directly in western markets.

Meetings

One of the most important points I find in this article is the question as to how this new "global financial order" is going to affect the consistent demands of less developed countries for a new global financial order. Developing countries have systematically complained through forums such as the UN, the WTO, and various multilateral trade negotiations that they are being systematically discriminated against by the existing economic order as it is imposed by developing countries. It will be interesting to watch as to whether the seemingly inevitable changes made to the economic order will be beneficial to these developing countries or harmful. They could be beneficial because with the failure of the current system, other recommendations could be more willingly heard. However it could also be harmful because developed countries could concentrate solely on shoring up their own prosperity more securely and soundly, a situation that would most likely harm the efforts of those developing countries trying to change the system in their favor.

Great Leap Forward in China

Since we have learned about how plannings theoredically worked in socialist countries in the class, I would like to share what it really looked like in the real world with an example of China's Great Leap Forward.

In China, Mao Zedong started Great Leap Forward, an economic and social plan used from 1958 to 1960 which aimed to use China's vast population to rapidly transform mainland China from a primarily agrarian economy dominated by peasant farmers into a modern, industrialized communist society.

Following is 18 min video about process and result of Great Leap Forward. It's very interesing. ENJOY~ :)

American Optimism

Many times I've been asked what people in other countries think of the United States and I have always struggled with how to really answer that question without having an hour long conversation. Last night on Bill Maher show NY Times columnist Thomas Friedman answered that question in the most eloquent way that I have heard so far:

Faith in market forces--root cause for current economic turmoil?

As the whole world is concerned about the global slowdown and the leaders of various countries work to weather the recent crisis that sent stocks into a steep decline, billionaire investor George Soros blames the turmoil on the faith in market forces. He believes that “the notion that markets are self-correcting is what led to the massive expansion of debt financing that culminated in sub-prime mortgages that epitomized the easy-money mentality at the root of the disaster.” He added that that this whole notion is built on false conceptions. According to Soros, it is this belief that became the dominant creed and this then led to the globalization of markets, the deregulation of markets and the increased use of leverage and all the financial engineering.
I think Soros’ opinion is a very extreme one. I feel like its not so simple to question the whole concept of markets being self-correcting. I would like to believe that the markets are what have the power and that it is the market forces of demand and supply that guide the economy. I wonder what everyone else has to say about Soros’ stand.

the middle market is doing suprisingly well

So i spoke to my old boss today, who owns a small investment banking boutique firm in Philly, and the news wasn't all bad.. 

The credit crunch and all its related problems have surprisingly affected only the top tier of companies, companies that are huge in relative size and are highly leveraged up. This firm just recently closed two deals, and have been able to secure reasonable financing for these mergers/acquisitions. Ofcourse, these companies are smaller in size, with their estimated value ranging from $30 mm to $200 mm. 

So what I took from this conversation with him was that there is a sizable amount of capital in the market. Private equity firms are flush with new capital, cuz investors have removed chunks of capital from the stock market, and are investing it with these private equity firms, which are not publicly traded, hence not affected by SEC disclosure regulations; maintain a healthy investment portfolio with companies that they directly control, and have enough clout in the banking industry to command good financing rates. 

Its amazing. My boss tells me his business is doing better than ever, while the market tells me that business couldn't be worse. 

Contrary to my prior held belief that as big firms have lower risk and greater access to financing, they are a better investment choice, I now am leaning towards the belief that smaller, better managed firms with private equity investors at their helm are a better investment choice. 

At least in this market, atleast for the next 2 years.. 

Can there be too much information?

In class, we discussed indicative planning and how one example of a market failure is imperfect information.  Indicative planning was a way to remove this imperfect information.  So, economists believe that more information is beneficial to the market economy, because it helps people make more informed decisions.  However, the article Too Much News? makes the argument that there can be too much information.  Currently, a lot of people are spending a great deal of their time reading the news and keeping track of the current state of things, due to the economic crisis, and the article claims that this leads to a decrease in productivity.  I think there is some truth to this.  If people are reading about the stock market all the time, they're going to be constantly changing their portfolios in reaction to the news, which is just going to make the stock market more unstable than it already is.  

Federal Reserve Considers Plan to Buy Companies' Unsecured Debt

What is the Fed's next step? What are they thinking? Will it work? I think those questions have been discussed a lot over the past few weeks. Congress approved a $700 billion bailout package last week. Yet the effort seems not enough to raise consumer confidence. "In the United States, consumers appear to be significantly curbing spending; last month, employers cut more jobs than any month in 5 years."
Next step? Under a proposal being discussed with the Treasury Dept., the Fed could buy vast amounts of unsecured short-term debt that companies rely on to finance their day-to-day activities. In another word, the Fed will almost be lending directly to businesses. The Central Bank would buy unsecured commercial paper, "essentially short-term i.o.u.'s issued by banks, businesses and municipalities," which market has almost been shut down last week.
Will this proposal get approved? and the most important question: Will it be strong enough to convince consumers of a better economy?

Fannie Mae and Freddie Mac must go

One month after the gigantic bailout of Fannie and Freddie, the government is looking past that at the stumbling stock market and poor economy. According to this author, "Nationalization of an industry is easy, privatization is hard." This is in response to history where the government tried to privatize Fannie Mae in 1968, but that didn't turn out as well as planned. The provided Fannie and Freddie to have backing from the government and that enabled them to lower both their costs and capital requirements for a loan.

Now after they both are nationalized now, Bernanke wants to privatize those two giants at a slow rate until they are completely under private control. The author of the article also recommends that the United States take advice from the Russian and Chinese governments on how to privatize a previously nationalized industry, but also to take some advice about how to run a healthy system of financial socialism. Really?? Socialism, are we on the verge of a socialist system?

The author concludes the article by saying that one solution is to say goodbye to Fannie and Freddie in order to start the privatization of the secondary mortgage market.

The UK announces Bail out plan

The UK government has announced a package of measures aimed at rescuing the banking system that makes available £400bn ($692bn) of fresh money.
It will initially make extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them.
It is "designed to put the British banking system on a sounder footing", said Prime Minister Gordon Brown.
Some bank shares rose on the news although the main FTSE 100 index fell.

Central Banks cut Interest Rates

Six central banks, including the Bank of England, have cut interest rates by half a percentage point in an effort to steady the faltering global economy. No decision on UK rates had been expected until Thursday - and the move puts the interest rate at 4.5% from 5%. The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank (ECB) trimmed its rate from 4.25% to 3.75%. The unprecedented step failed to cheer world stock markets. The central banks of Canada and Sweden and Switzerland all took similar action in the co-ordinated move. China also cut its rate, but by 0.27 percentage points.

Citigroup and Wells Fargo are fighting over Wachovia

Last week on the news Citigroup was said to be buying Wachovia with the help of the U.S. government. Citigroup had agreed to buy Wachovia's assets for $2.1 billion in a deal which was brokered by the Federal Deposit Insurance Corp. But, then on Friday, Wells Fargo upped the offer by saying they'd buy Wachovia for $15.1 billion and the deal would not require any government support.

This lead Citigroup and Wells Fargo into both state and federal court this weekend in a battle over Wachovia.

Citigroup sued Wachovia, Wells Fargo, and the directors of both companies for interfering with their planned takeover of Wachovia. They're seeking more than $60 billion in damages. The complaint says it's seeking more than $20 billion in compensatory damages and more than $40 billion in punitive damages from Wells Fargo for tortious interference.

Well now new reports are stating that Citigroup, Wachovia, and Wells Fargo have all agreed to a standstill of all formal litigation while a decision is trying to be reached regarding the fate of Wachovia. The standstill agreement will end at noon this Wednesday, unless it gets extended.

Citigroup spokesman Michael Hanrettasaid in a statement, "We are pleased to participate with the Federal Reserve Board in a fair-minded, good faith process to achieve a prompt and successful outcome."

Frederick Cannon, an analyst at Keefe, Bruyette & Woods, said, "If this goes into a protracted legal battle, everybody loses. Wachovia is big enough that it would be a negative for the financial system. Given that situation, we will see a resolution pretty quickly."

For me, I really don't know what to expect from all these buying activities on the market. Does it help the economy or will it lead to the problem of oligopolies?

The Two Faces of Lehman's Fall

The FBI launched a preliminary inquiry into whether Lehman and/or its executives committed fraud by misrepresenting the firm's condition to investors. 

Fed to Pay Interest on Banks' Reserves

German government to the rescue

The financial crisis is now taking major tolls in the European markets. The Wall Street Journal's Market Watch is reporting that the German government found it necessary to step in and provide one of their larger banks, Hypo Real Estate, with a 50 billion euro rescue loan. This seems to be the trend that is happening throughout the world as major banks are seeing their liabilities maturing at a much faster rate then their assets are able to match. With the rescue lines that the governments are supplying, these banks are able to withstand major speculation that investors have. Hypo Real Estate main problem has been a risky investment in their Irish bank, Depfa, a public finance divison. With the major crunch in the credit market, the firm was unable to gain short term loans. It's a major problem throughout the market that firms are not being able to determine the right amount of liquidity needed.

I personally still have mixed feelings on the right way to handle such issues. I understand that if a major bank fails, then it could cause a dominoe effect which has kind of already happened. I just feel that these action are a way of preventing the market from correcting itself.

Should Banks be Allowed to Fail?

This article asks the questions that many people are asking with the economy in the situation it is in: Should the banks be allowed to fail in our economy, and also, what are the reasons for and against bank expansion.
The author analyzes the situation and asks the reader to ponder whether or not the banks should be bailed out in our economic situation. The problem is that the banks have become "too big to fail," because with their failure would come hard-hitting economic consequences for the country. According to the author, the idea is that smaller banks are small for a reason- if they fail a large bank can buy them and take them over. But clearly, there is a serious problem if the bigger banks fail!
This article argues that there are a number of reasons that it is not necessarily desirable to have bigger banks take over smaller banks all the time.

The Future of Reading

According to the NYTimes article (of the same name) more and more kids are turning to video games that allow them to interact with the characters in their books. This kind of idea, parring learning with video games, is one that is going beyond books, "libraries are hosting gaming tournaments, while schools are exploring how to incorporate video games in the classroom".

I think this is a great way to get kids more interested in reading. It seems like everyday more kids are putting down the books, and opting to play video games that teach them only how to "melt off faces" (in guitar hero). By enabling kids to explore the characters in their books through the video game format, I think kids will be more eager to set aside "World of Warcraft" and instead, get read to play “The Maze of Bones", a 10-book mystery series tied to a web-based game, published by the same firm who brought us Harry Potter.

Perhaps this could help increase literacy rates in the US, and create an overall ripple effect on the rest of the economy.

Woman shoots herself, gets home back

A 90 year old woman in Akrom Ohio shot herself in her 101 year old home after being told she was being evicted. Fannie Mae, her morgage company, decided to forgive all her outstanding payments and sign the home over to her outright. She is still in critical from gunshot wounds in the torso. the police note that the company had tried to serve her the eviction notice at least 30 times before the incident (and before the economy crashed), but she was never available or didnt come to the door.

I think its good that they are trying to help an obviously desperate woman by forgiving her debt, but what kind of message does this send to others in a similar situation, that they have to shoot themselves to get their money back? thats a little rediculous, but I think we might see a spike in these kinds of activities as the effects spread.

Lessons for the little guys?

We know what Americans and other industrialized nations have learned from the now global economic crisis, but what about other developing nations that are just trying to escape poverty? what do they learn about the power of markets to completely decimate any progress they have made? As you can imagine, the response is mixed.

"Some countries are already taking the wrong prescriptions from recent events. Honduran President Manuel Zelaya told the U.N. General Assembly last month that the lesson of the crash was "the market's laws were demonic, satisfying only the few." Paraguayan President Fernando Lugo said the "market mechanism" and "immoral speculation" were a mistake. Brazilian President Luiz Inácio Lula da Silva Lula added that speculators have "spawned the anguish of entire peoples" and Brazilians needed "indispensable interventions by state authorities.""

the editorial goes on to say that the study of development economics, which deals with developing economies and how to make them richer, became an area of study after the Great Depression. As such, it has a definite bias towards government intervention, and it may be part of this anti-market reaction. Granted, the market isnt perfect, but this view completely ignores the years of prosperity before and after the New Deal. They just see that governments need to help out sometimes and instead of deciding between "light and heavy regulation", they are choosing between totally free market economics and innovation-stifling state intervention. According to the article, these countries will now start ignoring the entrepreneurs that could help transform their economy in favor of heavy state intervention (which they can't really afford anyway). Another excerpt:

"How much poverty has endured because individual entrepreneurs were shunned in favor of the likes of the $5 billion state-owned Ajaokuta Steel Mill in Nigeria, which never produced a bar of steel? Or because African governments spend their time preparing World Bank-required national Poverty Reduction Strategy Reports instead of freeing space for innovators?

We will never know. But we do know that the free market has a long-run track record of creating prosperity -- even with the occasional crash. The Depression's deceptive intellectual legacy is that development flows from all-knowing states rather than creative individuals. Here's hoping that the backlash to today's crash will not spawn another round of bad economics for the poor."

this isnt the lesson the US wants its less developed allies to learn from our mismanagement.

Germany to save the Country's biggest banks

Germany's finance ministry has agreed a 50bn euro ($70bn; £40bn) plan to save one of the country's biggest banks.The deal, reached with private banks, to save Hypo Real Estate is worth 15m euros more than the first rescue attempt, which fell apart on Saturday.
Germany earlier announced an unlimited guarantee for all private savings, a move followed later by Denmark. Germany's finance ministry said that with the "mutually agreed solution" Hypo Real Estate would be stabilised, and "Germany strengthened as a place to conduct finance in difficult times". Earlier, German Chancellor Angela Merkel moved to reassure German savers that all their deposits would be safe. Similar unilateral guarantees issued by the Irish and Greek governments last week were criticised in Berlin and other European capitals. But after an emergency meeting with the central bank earlier, Ms Merkel said: "We will not allow the distress of one financial institution to distress the entire system. For that reason, we are working hard to secure Hypo Real Estate.

Seoul eager for US$80b fund

The US financial crisis was caused due to the credit crunch resulting from subprime mortgage failure. The shortage in credit created problems in the finacial sector, and this overall has been influencing econmies in other countries. Over the past years, Asia and US are closely connected by trade and investments and as the finacial crisis grows, it has been causing problems in Asia.

Major countries in Asia are planing to speed up a US $80 billion currency swap scheme to minimize the effect of the US financial crisis. In May, East Asian finance ministers agreed to create this Asian monetary fund, and about 80% of the fund will be provided by Japan, China and South Korea. This $80 billion fund would be provided to asian countries with financial emergency.

The curency swap scheme is interesting as it is different from how the economies in Asia choose to handle this situation, instead of increasing money supply. A reason for this might be due to the relatively weak currency in majority of the Asian countries.

Europe Races to Shore Up Banks as Crisis Spreads

Most of Europe is now trying to shore up all of its assets while the financial crisis looms over the international markets. Germany is putting a blanket guarantee over its consumer bank deposits, the guarantee was to shore up public confidence showing that the German government would step up in case the already existing deposit plan weren't able to fully compensate the citizens; they arranged a bailout for their largest property lender; and Belgium and Luxembourg arranged for a French lender to take over the operations of one of its biggest financial institutions. Italy launched an emergency capital increase by its banking giant to combat the crisis.

All of these measures came a day after the four largest countries in Europe met in Paris and pledged to protect their financial system. The governments in these European countries are trying to ensure confidence in their citizens that everything is going to be fine in their economies.

However, unlike the U.S. with the multibillion dollar bailout plan, the European countries have abandoned any proposals for unified rules for coping with the crisis because it would be too hard to govern that type of policy. So instead, France, Italy, Germany, and the U.K. have decided to keep each other informed about their policies and actions with regards to bailouts.

Japan close to recession, fear of suicide rises

This article talks about the prospect of a rise in suicide rate in Japan should a recession occur. In Japan it is estimated that about 1 in every 5 women and men has seriously thought of taking their own lives at some point.

It's also interesting how it comments on the breakdown of Japan's lifetime employment habit. "Going to work for a Japanese company used to be like joining a family. You worked there your whole life. But in today's harsher economic climate, that is no longer the case. One in three workers in Japan is now a part-timer, constantly moving from job to job on part-time contracts..." Because of this, job security is not guaranteed, and suicide seems to be one way to get out of financial difficulties. Also, the article talks about a growing elder population not being sufficiently taken care of by social health care that is also prone to suicide.