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.

McCain and Obama Condemn Job Losses

This article shows two president candidates' will to create jobs and boost economy by the various government policy.

McCain- " I will reverse out-of-control spending,.... get the government budget back to balance. I will reform health care to control costs and better serve American families, open markets around the globe for our products, cut taxes, and expand domestic production of energy to eliminate the ability of international oil markets to hold our economy hostage. .....Unlike Sen. Obama, I do not believe we will create one single American job by increasing taxes, going on a massive spending binge, and closing off markets. Our nation cannot afford Sen. Obama’s higher taxes."

Obama- " Instead of Sen. McCain’s plan to give tax breaks to CEOs and companies that ship jobs overseas, I will rebuild the middle-class and create millions of new jobs by investing in infrastructure and renewable energy that will reduce our dependence on oil from the Middle East. I also call on Congress to pass an immediate rescue plan for our middle-class that will provide tax relief, save 1 million jobs, and save our local communities from harmful budget cuts and painful tax increases."

Investors relieved - but nervous

CNN article: Investors relieved - but nervous
This article by CNN brings up the tensions worldwide arising over how the 700 billion dollar bailout will be implemented. Although there has been an agreement on the bailout, the market will not respond immediately, but rather in strides that could create fluctuations throughout the market over time. There has even been some discussion about lowering interest rates to create some stimulation in the economy to keep it level throughout the process.
If there are indeed further fluctuations in the economy while this policy takes place, what can we infer about future levels of the stock market, financial markets, unemployment and other economic factors during this transition period?

Entrepreneurs struggle to hang on

Many small businesses are seeing hard times get even harder over the last few weeks. With credit markets tightening up, and even failing, small businesses are having an incredibly hard time getting loans to pay for goods, employees, or trying to expand. In August, (before the most recent crisis) 67% of businesses said that they have felt some effects from the credit crunch, up from 55% in February. The article talks to a handful of businesses from across the country reporting on the problems they have been facing as a small business owner.
After reading this article, and relating it to class there could be major negative effects of this. We have talked several times about how important new ideas and innovations are to our economy for continuous growth and efficient. If credit is harder to get for entrepreneurs, the ideas and innovations that someone might have and want to pursue could be difficult to get off the ground. Some of these ideas are the ones that change industries positively and help growth in the economy.