Rough Seas ahead

New figure show that even with a small gain in income, Americans are spending less and less, due to the gloomy outlook of the economy. The Commerce Department reported that household in come only had a small 0.2 percent gain, but consumer spending had sharp drop; of 0.3 percent in the month of September. Figures also shows that the U.S economy shrank 0.3 percent during the third quarter. That combined with the current Bush administration hinting to automakers and other industries that they might not be qualified for the government $250 billion stock purchase program. but they could be the benefactor of a separate government purchase program in which the government plans to spend $100billion in purchasing stocks in banks to remove the bad assets on the bank's books, such as bad auto loans.

With consumer confidence dropping fast and hard times ahead, Federal Reserve Chairman Ben Bernanke warned the government that whatever system is set up after the government take over of mortgage giants Fannie Mae and Freddie Mac, that this system much have better safeguards to keep the system functioning in times of stress.

"The boom in subprime mortgage lending was only part of a much broader credit boom characterized by underpricing of risk, excessive leverage and the creation of complex and opaque financial instruments that proved fragile under stress," Bernanke said

With the holiday season coming in stores are bracing for lowest sales. And Economists expects Armenians to further cut spending and it looks like hard times ahead.

India May Actually Benefit in the Long Run

Although high interest rates and resulting higher costs—coupled with high oil prices, decelerating global growth, slowing export markets, depreciation of the rupee and the global financial turmoil—have taken their toll on India's economy the Indian government maintains that the Economy will continue to grow at close to 8%. The Economist Intelligence Unit, is however less optimistic and estimates a growth of close to 6.5% for the next two fiscal years. The article claims that this is not all bad news because although the country’s growth rate will slow down it will still be among the fastest growing economies of the world. Moreover, the article claims that the current global situation is making India’s measured pace of economics reform look “wiser than before.” “At a time when Western countries are frantically nationalizing banking assets, the Indian government's reluctance to sell more than 49% in its state-owned banks—which control some 70% of banking assets—now seems reassuring. In addition, India has not yet introduced full capital-account convertibility, which protects its currency, while its careful control of foreign borrowings by domestic companies limits dependence on the global financial system. Regulators have also periodically introduced curbs to slow the formation of potential asset bubbles, such as higher provisioning and prudential requirements on real-estate lending.” The article claims that once the world moves towards a more stable platform, India is likely to emerge as an attractive destination for investment. Although India has not escaped the global crisis, Indian companies seem to be looking for opportunities in the crisis.

Being from India, I think I somewhat identify with this never say die attitude. Having lived in Mumbai, the commercial capital of India I can well picture how the country is ready to bounce back and make the best of what it has. I think its really interesting that in spite of being caught in the crisis, it is expected that the country may actually benefit in the long run.

Parsing the Google, Yahoo, Microsoft “Global Network Initiative”

The big three U.S. internet giants (Google, Microsoft, Yahoo) have agreed upon a common set of principles to guide their business in nations such as China that restrict free speech and expression.
Members of the Global Network Initiative, which include both companies and well-known human rights organizations such as Human Rights in China, are quick to point out that the initiative isn’t just a set of rules for doing business in China. Unlike the tabled Global Online Freedom Act that would have made it a crime for U.S. companies to turn over personal information to governments in “Internet-restricting countries,” this voluntary initiative applies to doing business everywhere — and works more as a framework to help Internet companies do the due diligence that can help them avoid the ethical lapses for which they’ve been roundly criticized. (In front of Congress last year, Yahoo’s Chief Executive Jerry Yang apologized to the mother of journalist Shi Tao, who was jailed after a unit of the company handed information about him to Chinese authorities in 2004.)

They know that this will not fix all of the situations. However, the key idea behind this is to start thinking about the problems before they start to get worse.

Fed Cuts Rates

In lieu of the current economic downturn, the Fed cut interest rates to 1% along with other countries including China and Norway who are cutting their interest rates as well. According to the article "Lower interest rates are usually a powerful tool to boost economic growth, because they reduce the cost of borrowing for businesses and consumers, giving them an incentive to start new projects or spend money. Lower rates also reduce the cost of funds for banks, which theoretically should make them more willing to lend."
However, the Fed is concerned that cutting the interest rates will not boost the economy as it traditionally does. For example, Japan cut interest rates to 0%. Due to the economic crisis and people gearing towards risk adversity "zero percent interest rates failed to revive the economy earlier this decade"

Dear Mr. President

This article interviews seven Nobel laureates and gathers their advice on how they think the next President should go about fixing the economy. The Nobel lareates range from Paul Krugman, Joseph E. Stiglitz and Edmund Phelps. This is a really long article but is very informative and interesting to read.

Dear Mr. President
Advice from seven Nobel laureates on fixing the economy.
By Katie Paul NEWSWEEK
Published Oct 22, 2008

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.