Bank of Japan Considers Venture-Capital Route to Spark Economy

http://www.businessweek.com/news/2010-04-30/bank-of-japan-considers-venture-capital-route-to-spark-economy.html

"Japan’s central bank may offer venture-capital type funding after cutting interest rates near zero and committing 20 trillion yen ($212 billion) into money markets failed to halt deflation."

These previous actions seem pretty extreme to me. If these did not do as intended, what is it going to take? Is this new plan really going to be effective if these other things did not? How extreme can you go before forcing the issue too much?

Goldman Sucks

Here is an interesting video that describes the power of Goldman Sachs in America. I thought it was particularly relevant considering the recent hearings this week.

Greek aid deal approaches $160 billion, government says

http://money.cnn.com/2010/04/29/news/international/greek_aid_package/index.htm

I was surprised to hear that number, $160 billion. Originally I had heard that it was only going to be somewhere around $30-40 billion. I also found this section interesting:

"Greece will be required to cut civil servants' salaries, freeze their pay increases, reduce their pension payments, change tax rates and increase the value-added tax consumers pay on purchases, according to Ilias Iliopoulos, the general secretary of the public sector union ADEDY."

When the U.S. government bailed out Wall St. and the Big Three, we did not see these types of caveats on our own money. It appears we are more protective of our money overseas. That being said, are you thrilled we are going to be dumping approximately $96 billion (60%, I am guessing that's how much we will contribute since the U.S. has the 60% stake in the IMF) into Greece? Will the Greek people be thrilled with these foreign restrictions? We already have seen how much they do not like any kind of reform.

Greece again

One of my favorite market analysts is John Mauldin.  A few weeks ago he wrote a letter to his kids explaining how Greece might affect them.  I thought the letter was both informative and interesting to read.  Here is the link.

The meat of his letter is here:

Why is Greece important? Because so much of their debt is on the books of European banks. Hundreds of billions of dollars worth. And just a few years ago this seemed like a good thing. The rating agencies made Greek debt AAA, and banks could use massive leverage (almost 40 times in some European banks) and buy these bonds and make good money in the process. (Don’t ask Dad why people still trust rating agencies. Some things just can’t be explained.)
Except, now that Greek debt is risky. Today, it appears there will be some kind of bailout for Greece. But that is just a band-aid on a very serious wound. The crisis will not go away. It will come back, unless the Greeks willingly go into their own Great Depression by slashing their spending and raising taxes to a level that no one in the US could even contemplate. What is being demanded of them is really bad for them, but they did it to themselves.
But those European banks? When that debt goes bad, and it will, they will react to each other just like they did in 2008. Trust will evaporate. Will taxpayers shoulder the burden? Maybe, maybe not. It will be a huge crisis. There are other countries in Europe, like Spain and Portugal, that are almost as bad as Greece. Great Britain is not too far behind.
The European economy is as large as that of the US. We feel it when they go into recessions, for many of our largest companies make a lot of money in Europe. A crisis will also make the euro go down, which reduces corporate profits and makes it harder for us to sell our products into Europe, not to mention compete with European companies for global trade. And that means we all buy less from China, which means they will buy less of our bonds, and on and on go the connections. And it will all make it much harder to start new companies, which are the source of real growth in jobs.

So, watch the news.  Greece is in crisis this week.

Fed set to renew promise of continued low rates

http://news.yahoo.com/s/nm/20100428/bs_nm/us_usa_fed

In class we have pondered the perils of holding interest rates too low for too long. According to this article, "The Federal Reserve on Wednesday resumed a two-day meeting where it is expected to repeat a vow to keep interest rates at rock bottom levels for "an extended period" while acknowledging the U.S. economic recovery is getting stronger."

If the recovery is gaining momentum, do we really need to hold interests so low? The article goes on to cite continued high unemployment and stable inflation as reasons to not yet tighten monetary policy? My questions are, how long can we sustain these low rates? And if signs of strength are not enough to raise rates, what will be the trigger?

Our efficient market game is explained in the Wash :Post

I read this and thought of the many ways that you all earned fees last night.  The story is about the hearings in Washington and describes the cultural divide between Wall Street and Congress.  Here is an excerpt: 

The Fab Four [the first Goldman Sachs representatives at the hearing]  made clear that there was no such thing as a bad deal or a crappy security, only mispriced risks. Nor were there winners and losers, only willing buyers and sellers. Concepts such as fairness, loyalty, shame and greed simply had no meaning on Planet Wall Street.

The whole story is here.

Wall Street reform: How it could impact you

http://money.cnn.com/2010/04/27/news/economy/Wall_Street_Reform_investors/index.htm

I found this article on CNN Money and found it interesting.

The section on investors surprised me a bit, but if reform passes it could be very good for individual investors for these reasons:

"The reform plan would impose a fiduciary duty on brokers when they give investment advice, forcing them to provide a reasonable basis on why their investment advice is the best for their client and disclose any conflicts of interest.

Furthermore, most contracts currently signed with investment advisers or brokers generally strip an investor's right to take a dispute to court, forcing the investor into an industry-run arbitration. The reform bill would give the investor the option of a court proceeding or arbitration."

While I personally was not thrilled with the power the Consumer Financial Protection Agency would have because I thought it would be too overarching, this would be ideal. Avoid those conflict of interests and give some recourse when there are legal misdoings. I was surprised to learn that the only recourse investors had previously was industry-run arbitration, which is silly and gives them no chance.

What other areas of reform do you think are most important to everyday people? This is an interesting topic that we have not dealt with a whole lot. (I think)

Questions for Goldman

In the same vein as those questions for financial reformers, CNN gives us questions for Goldman Sachs. Personally, I don't really like the first two questions. "Is this the work of a single employee?" I'm not sure what that question is supposed to accomplish. I suppose if this was all one person's "fault" we could throw them in jail and swallow the key and all feel better, but I think we already knew the problems are systematic. Pointing fingers at individuals just seems silly to me. "How should Goldman and other banks be regulated to ensure these conflicts of interest are not hurting investors?" Isn't that exactly the problem? Goldman has always had too much in put into how they should be regulated. We should not ask them because they, like all firms, are interested mainly in maximizing their profitability above all else. The second two questions though, "You've spent a big chunk of money on lobbying efforts this year. What are you trying to accomplish?" and "The slogan on your Web site is 'Our work enables growth.' How does a company that generates much of its business from trading help the economy grow?" could be informative, or at least uncomfortable for Goldman to answer (especially under oath). The public would either get a straight answer, a lie (illegal in this instance), or no answer which would only serve to raise suspicions further and make reform easier.

What do you think the regulators should ask Goldman Sachs?

This just in...

Congress is really bad at their jobs (in my very humble opinion)...

"WASHINGTON (CNNMoney.com) -- Senate Democrats failed to muster enough votes Monday to take up Wall Street reform, with a key Democrat voting with Republicans against the push to get the debate started." The senate is so caught up in the trees that we might never gets a bill that regulates the forest (the banking industry in this mixed up metaphor.) I'm not suggesting this bill is good but it should at least make it to the floor for debate so that we, as a country, can move forward.

My prediction is that financial reform will get done but it will be so watered down by industry lobbyists that it will barely be binding. Am I just a Negative Nancy?

This article discusses some of the stumbling blocks between the two parties.

An outside perspective on the IMF meetings

The IMF has just concluded its spring meeting and some are very optimistic for a very bright, but very different future. "One of the greatest achievements of the meetings should be the rise of developing countries in the world economy," an AP article claims as developing nations gained a 3.13% voting share up to 47.19% (never mind that they have well over half the world's population). Perhaps most significant to the West though, the meetings also tackled issues such as financial reform:

"The IMFC said in a communique that problems in the financial sector were at the heart of the recent global crisis, while strengthening financial regulation, supervision, and resilience remains an incomplete task.

The crisis has demonstrated the urgent need to introduce international regulatory oversight of a globalized financial system, which would create less volatile financial flows for innovation, risk taking and investing in employment, manufacturing and development.

To tackle the issue, the IMF members agreed to redouble efforts to forge a collaborative and consistent approach for a stable global financial system that can support the economic recovery."

Personally, I am not at all optimistic that the largest and most influential economies in the world, namely the United States, will go along with what the IMF says. I think reform in the United States will be disappointing to the more liberal countries of Europe but there will be little recourse for them.

In short, while these meetings probably have been productive especially in that the developing world gained some international influence, I doubt they will be very effective without broad cooperation from the United States.

See the article here: http://news.xinhuanet.com/english2010/indepth/2010-04/26/c_13267880.htm

Stimulus No Help Say Some

A CNNMoney.com article claims that, "economists think the government's stimulus package and jobs bill had little to do with the rebound." This was very surprising to see for me as I had thought the economic community was in favor of, and encouraged by, the stimulus bill/plan. I read on, "NABE conducted the study by polling 68 of its members who work in economic roles at private-sector firms. About 73% of those surveyed said employment at their company is neither higher nor lower as a result of the $787 billion Recovery Act." How is that for some misleading journalism? Turns out the people surveyed were not "economists" perse, but only worked in economic jobs and were surveyed only about their own companies. Additionally, that means 27% were aided by the stimulus creating how many jobs? I think it will be a long time before we know the total tally on whether or not the bailouts and stimuluses worked, but this is, in my opinion, some really poor reporting on CNN's part. What are your thoughts?

Not sovereign debt, but safe debt?

Earlier this month Timmothy Geithner (from this Wall Street Journal Blog) suggested that while Fannie Mae and Freddie Mac's debts are not one in the same with America's sovereign debt they are supported (perhaps even guaranteed) by the U.S. Government. "Geithner...said debt from the two government-sponsored enterprises isn’t the same as U.S. Treasury's, but that support for the two firms 'is crucial in helping to stabilize the housing market and the overall economy.'" This is a very similar situation to the current advantageous position of the major financial firms. With the government's backing secured, investors or loaners are confident that Fannie and Freddie are great--almost "risk free"--bets. As a result, the mortgage firms can act in whatever manner maximizes profit without regard for risk or consequences. Even worse, unlike the banks Geithner has said, "'the Administration will take care not to pursue policies or reforms in a way that would threaten to disrupt the function or liquidity of these securities or the ability of the GSEs to honor their obligations.'" In other words, the White House understands the problems with these firms but isn't prepared to do anything about it. To me, that is very very disheartening. According to the Wall Street Journal blog post mortgage reform is a lower priority than financial reform and if that legislation is anything like health care it could be months in coming.

See the article here.

China's Booming Economy

China's economic growth, even in the midst of a broad economic downturn, is literally unbelievable to me. According to Li Daokui, China's economy could grow over 10% this year and exports could grow over 30%.

Story (very short story with little detail) here: http://www.bloomberg.com/apps/news?pid=20601080&sid=aouOLtuT0A.0

But, in reality this is actually a good thing. In This Time is Different we saw that if every one has a recession at the same time then sovereign default becomes much more likely, that China's economy continues to grow is actually good for all of us, right?

Owning A Toxic Asset

NPR Money bought a toxic asset, just to see what it was like. They named it, and are following it through its, probably short, life.

Really fun site to play around on. Check it out: http://www.npr.org/templates/story/story.php?storyId=124587240

Let's lobby the Senate!!

The Dodd financial reform legislation will be voted on by the Senate on Monday.  One proposed amendment would break up the big banks.  You can  petition your senators to allow a vote on the amendment.  I read about it on Simon Johnson's blog.  Go here. 

Trading Places

The Daily Show gives us a humorous take on the reversal of roles in international economics.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Wham-O Moves to America
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

(Warning the end gets a little "salty")

Stimulative Policy Definitely Working in the Short Run

According to an article on marketwatch.com, "boosted by a federal subsidy to buyers, resales of existing homes rose 6.8% in March to a seasonally adjusted annual rate of 5.35 million from a downwardly revised 5.01 million in February...It was the first increase since November, when the previous tax credit expired. Sales in March 2010 were up 16.1% compared with March 2009." The article expresses some disagreement on the impact on housing prices though.

While I think that any movement in the housing market is probably good movement my I'm not sure if I agree with Lawrence Yun who is quoted in the argument as saying, "'The tax credit has done its work.' Given the momentum imparted by the federal tax credit, he said 'the market would be able to stand on its own feet' in the second half of the year." I tend to feel like this stimulus can go one of two ways: it can either trickle down/up/sideways and improve housing prices and encourage future spending in the housing industry and prop up home prices, or it can simply shift demand earlier and create a major lull in market activity when the stimulus goes away. I don't know enough to say definitively one way or the other but I choose guarded optimism. What do you think?

Obama to Speak on Financial Reform

President Obama is scheduled to speak tonight about Wall street reform during the speech "Obama will charge that the financial crisis was 'born of a failure of responsibility -- from Wall Street to Washington -- that brought down many of the world's largest financial firms and nearly dragged our economy into a second Great Depression,'" The article claims that the White House feels as though it is winning the fight for reform and doesn't need to take the bankers "to the wood shed." "The president also will reiterate five key principles he wants to see in Wall Street reform legislation.They include ending the idea of a bank being too big to fail, enacting the Volcker rule -- named for former Federal Reserve Chairman Paul Volcker -- that limits the risks banks can take, making complicated financial trades known as derivatives more transparent, creating a consumer financial protection agency and allowing investors to have more say in the compensation of bank company executives." Do you think these are enough? Do you think this is political rhetoric or does it have a chance for bipartisan support? Personally I'm disappointed they aren't actively saying they want to bring back Glass Steagall. What are your thoughts?

Story Here: http://www.cnn.com/2010/POLITICS/04/22/obama.wall.street/index.html?hpt=T1

List and comparison of recessions

I know it's not "scholarly" but this is a blog and I'm in charge so I get to make the rules (we all should have learned how much I enjoy power in the monopoly game.) This wikipedia entry provides a list and a basic summary of each recession including duration and severity. I find it very interesting and informative to be able to see all of the recessions lined up. I hadn't understood how severe the current recession was until I saw this article. The other interesting thing about this article is that it claims the recession "ended" in July 2009. I doubt that that date will hold up through hindsight, however, it is interesting to think that we are past the worst of it and the current problems are problems of recovery, and not recession. Are you as surprised as me at some of these numbers?

Morgan Stanley's Huge Profit

Apparently not only Goldman is making money now. Morgan Stanley recently reported a $1.8 Billion (yes Billion, with a B) profit for the first quarter of 2010. "Morgan Stanley said it swung to a $1.8 billion profit in the first quarter Wednesday, as strong trading revenues boosted the Wall Street firm's latest results." It seems that all of these banks have returned to business as usual. "All of the nation's top banks have come roaring back in the latest quarter, not only turning a profit, but also blowing analysts' estimates out of the water."

All of this underscores to me how important financial reform remains. Profits these big are not realistic and likely are a result of huge risks. I am not saying banks shouldn't be allowed to make money, only that profits this big continue to endanger the stability of our economy. What are your thoughts?

Mathematical Modeling and Financial Crisis

Many economists, since the rise of computing in modern academia, have trended towards heavily quantitative research in economics. This form of research has led to myriad attempts at "modeling" economic behavior or outcomes. Very often these models are based on equations borrowed from math or physics. One common form of behavioral modeling is known as game theory. In our econ department many classes discuss game theory, but if you have never discussed it, or no know very little about it, check the wikipedia article that provides a lot of valuable insight. In short though, game theory attempts to formulate behavior, in this case economic or policy behavior, into games in order to predict, or model, the outcomes of those decisions.

I know we have discussed Greece at great length but this blog post takes an interesting swing at trying to model the current "to bailout or not to bailout question," into a game. For me, the problems with game theory start at the very beginning. This particular author says "Of course, the following analysis will rest on massive simplifications and lack of formalization but I think, it can still add some valuable insights into the current situation." I tend to disagree though, I feel the simplifications are so vast that the models are of little use.

The article ultimately creates two models, one simple and one even simpler, and attempts to argue that "basically nobody wants to be the first to help Greece," but that a resolution is possible.

Ultimately, we have the benefit of hindsight in having a much clearer picture of what exactly is going to become of the bailout of Greece (although not all of the questions have disappeared). So what do you guys think of the use of game theory for economic modeling?

In light of our monopoly game

I read this on a blog by Barry Ritholtz.  What follows is a direct quote from his blog:

Paul Farrell (at Marketwatch) gets his rant on, raging at the $400 million lobbyist effort Wall Street has put forth to kill financial reforms.
He writes that this “signals a resurgence of unregulated free market Reaganomics capitalism, the conservative ideology that killed Glass-Steagall in 1999 creating too-big-to-fail banks, setting the stage for the 2008 meltdown.”
But its much worse than that. What Wall Street wants is to water down reform so it can, according to Farrell, pursue these 8 goals:

(1) evade securities laws
(2) avoid taxes
(3) minimize capital requirements
(4) increase leverage
(5) hide speculative risks
(6) maximize short-term profits
(7) avoid stockholder disclosures, and
(8) manipulate regulators.

I wish I could say I disagree — but I don’t. Unless we get substantial reform, nothing will change. Why?

“Wall Street needs to continue running the same scam on taxpayers in order to get their mega-bonuses. They have lost their moral compass, sold their soul to the devil, lack a conscience, have no interest in the public.”

Well said . .  .

GM making an early payback

According to several sources, GM is planning to payback its US government bailout money ahead of its previously proposed schedule. The struggling automotive company has already repaid some of its debt and hopes to continue the prompt schedule into the near future.

Here is a link to the article:
http://www.msnbc.msn.com/id/36652465

I feel that this early repayment is a great strategy for raising consumer expectations of the company. If GM is able to live up to its new promise, hopefully other companies will also be encouraged to repay their government loans early.

The Michigan Financial Crisis

I know we tend to focus on the financial crisis on a national or global level but here is an interesting article about the financial situation in Michigan. I think it ties in nicely with the book we have been reading. The State of Michigan is receiving less tax revenue because of high unemployment rates and has less money to fund its projects. I think it interesting to see how the state is dealing with the predicament.

Here is the article:

http://www.mlive.com/news/index.ssf/2010/04/taxes_in_michigan_are_out_of_w.html

Japan: Least Unattractive Person at the Dance

Investors are starting to invest in Japan again. However, this video brings up an interesting point. The investments may not be due to less perceived risk. Instead, they may simply be due to fewer issues than some of the other major powerhouses (e.g., the US and European Union).

Here is the video (it explains the blog's title):

http://video.foxbusiness.com/#/v/4157223/investors-finding-opportunities-in-japan/?playlist_id=87185

And the good news keeps coming

More good news from the economic front this week. Today Citigroup reported $4.4 billion in profit for the first quarter of 2010. This comes after reporting losses during 8 of the last 9 quarters. Even executives at the company were surprised by these profits. Citigroup received two large government bailouts during the financial crisis and the government still has 27% ownership of the firm. The Treasury Department has stated it will begin selling its 7.7 billion shares and allow stockholders to regain control of the company. However, since there are so many outstanding shares of the company it will take a long time for stock prices to rise to their pre-crisis levels.

Citigroup has had to change many of its accounting practices and is still under the government's watchful eye but I think this is a good sign for the company and the economy. Do you think this is encouraging that there may be a light at the end of the tunnel?

The full article is here:
http://www.nytimes.com/2010/04/20/business/20citi.html?pagewanted=1&src=busln

This Bailout Is a Bargain?

Treasury officials are estimating that the price tag of financial bailout should amount to around $89 billion. This number is far below the $250 billion the Congressional Budget Office estimated last year or other analysts that put the all-in number at $1 trillion or more.

Here is the article:
http://www.nytimes.com/2010/04/18/business/economy/18gret.html?ref=business

Why are there so many different estimates and why is $89 billion considered a bargain?

From the Great Recession to "Better Than Normal"

The White House's Chief Economist Christina Romer said that the United States can come out of the "Great Recession" and be "better than normal" as long as we institute the correct policies for economic growth. She is calling for “targeted stimulus” to aid a recovery of the private sector. Romer said the economy needs additional funds to support state and local governments, an extension of unemployment insurance benefits, a $30 billion program to boost small business lending and a program to subsidize energy-efficiency renovations for homes.

Romer also said the country needs to focus on reducing it's budget deficit because a high budget deficit would lead to high interest rates and decrease investment. Rebalancing the economy for a “better normal” would mean “a higher-saving, higher-investment economy than that of recent decades,” Romer said. “Consumer caution, sounder lending practices and pro-saving policies are likely to lead to higher personal saving.”

What do you think? Is Romer correct in believing the United States can come out of this "better than normal" and with these new policies would this time really be different?


You can read the full article here:
http://www.businessweek.com/news/2010-04-18/romer-says-u-s-can-emerge-from-recession-into-better-normal-.html

Undervalued Chinese Currency

For some time there has been tension between the United States and China over Beijing's exchange rate policy. Many U.S. lawmakers want President Obama to formally label China as a currency manipulator and have also threatened to pass legislation that could lead to tariffs on some Chinese goods if Beijing does not quickly raise the value of its currency by a large amount.

However, Chinese President Hu and other Chinese officials have defended China's exchange-rate policy as an "internal affair," and have said they would not bow to external pressure to change it.

Bernanke has publicly stated that, "most economists agreed China's yuan currency is undervalued and t was one of the factors that caused the global recession" and some economists speculate that Beijing will revalue its currency by at least a small amount in the coming months.

Do you think that China will succumb to international pressure to alter its currency value? Or will China maintain its strict control over the country's currency despite its potential to threaten the global economy?

Iceland's Financial Crisis

This week the IMF approved an additional $160 million bailout to help Iceland out of their financial crisis, increasing the cost of the country's bailout to $2.1 billion. The country's financial crisis has stalled its application to join the European Union. Britain and the Netherlands have already spent over 3 billion euros to bail out stakeholders after Icelandic bank Landsbanki collapsed in 2008.

Here is an article about the banking crisis in Iceland and, in many ways, it seems very similar to the situation in the United States. The banks were taking huge risks and when those risks didn't pay off they relied on Britain, the Netherlands and the IMF for help.

http://www.guardian.co.uk/business/2010/apr/12/iceland-truth-commission-damning-report

SEC Charges Goldman Sachs with Fraud

Today, Goldman Sachs was officially charged by the Securities and Exchange Commission with defrauding investors. The SEC alleges that Goldman let a big hedge fund fill a financial product with risky subprime mortgages and then failed to disclose that to the product's buyers.

Do you think this will just be the beginning of charges filtering through the large companies who marketed and sold CDOs to investors?

Additionally, do you think the charges will hold up in court? Goldman desn't seem to think so in the following statement, "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

Any comments on potential ramifications of this and possible future charges?

Also here is a link to an article on the charges:
http://online.wsj.com/article/SB10001424052702303491304575187920845670844.html?mod=WSJ_hpp_LEADNewsCollection

Just Don't Call It a Bailout

Republicans in Congress are arguing that the new financial regulation legislation provides for bailout. The proposed bill would "guarantee perpetual taxpayer bailouts of Wall Street banks". The main point of contention is a $50million provision, paid for by the banks, to help defray the costs of future bank failures. Republicans argue that this reduces bankers risk because there will be money in case of a crises.

http://www.npr.org/templates/story/story.php?storyId=126024295&sc=emaf

Personally, I don't believe that this is a bailout. In my opinion it is simply political semantics to stop the new regulation from being passed. However, I wonder if bankers will be willing to take greater risks since they know this safety net is in place.

What do you think? Is this new legislation promoting bailouts or is it just "political buzzwords"? And is the new regulation a good idea?

Europe's Economy

I know we discussed the future of Europe in class on Tuesday and speculated on the future of Europe and the eurozone. Here is a video that discusses the problem of Europe's economy.

http://online.wsj.com/video/leaders-seek-cure-for-ailing-europe/EE6CBB87-29EA-4CA9-8AE3-2641A79DFD42.html

Who is really bailing out Greece?

Ron Paul asked Ben Bernake this question in the following video clip.  I worry that no one in a position of responsibility is willing to take responsibility for the consequences of any decision.  I'd like to make my own fiat money. 

Greece/ Euro Financial Crisis Timeline

This is a really interesting interactive time-line that clarifies the European Debt crisis (with an emphasis on Greece). It walks the viewer through the lowering of the ratings, the attempts to slow the crisis and even some social ramifications of the crisis.

Here is the link:
http://online.wsj.com/article/SB10001424052702303950104575185400455300466.html?mod=WSJ_hpp_LEFTWhatsNewsCollection#articleTabs%3Dinteractive

The story of intergenerational theft

told by muppet-like creatures.  Enjoy.  

The Shape of Things to Come

The last two weeks we discussed the implications of the financial crisis on our personal futures. Here is an interesting article that ties into this concept. Four economists provided their opinions of where the markets are headed in the future.

http://www.newsweek.com/id/236200

Who do you think is right (if anyone)?

How Soon We Forget

Here is a video from the Colbert Report last night satirizing this weeks cover of Newsweek. It's amazing how much people are willing to celebrate when the economy takes a slight upswing. After the creation of 160,000 jobs and a slight increase in consumer spending, many believe that the worst is over. While things may be getting better, I think its important to truly learn from the current economic crisis or we are destined to repeat the same mistakes.

Here is the link to the video:
http://www.colbertnation.com/the-colbert-report-videos/270724/april-13-2010/dow-hits-11-000

and the original article from Newsweek:
http://www.newsweek.com/id/236190

What do you all think? Is it too early to start celebrating or do you think that the United States is the "Comeback Country"?

Who wants to win Britain's financial problems

In a television contest on March 29, three British leaders (Alistair Darling, George Osborne, and Vince Cable) debated over what they would do to solve the British financial crisis. The debate looks more like a TV game show, but maybe this is a good new way to campaign before their upcoming election?

http://www.economist.com/world/britain/displayStory.cfm?story_id=15833512

Fannie Mae Income Statement 2009

This is the income statement for Fannie Mae for the year of 2009. Scroll down to the bottom and take a look at the losses they acquired. It is pretty amazing to see how much money they were losing as a result of the housing market crash.

http://finapps.forbes.com/finapps/jsp/finance/compinfo/IncomeStatement.jsp?tkr=fnm&period=qtr

America's crisis and what the future holds

http://www.economist.com/specialreports/displayStory.cfm?story_id=15793036

Here is a great summary of what's been going on in the crisis in America with an analysis of what the future will hold for our country. To summarize where this article is going towards: "this was no ordinary recession. The bubbly asset prices, ever easier credit and cheap oil that fuelled America’s age of consumerism are not about to return. Instead, America’s economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places."

I think this is really true. We won't quite go back to the way things were. This recession is slightly different from others in the past in that we'll need an entire macroeconomic change. The article also talks quite a bit about an increase in exports being a major solution for the future. Do you agree with where the author thinks we're headed?

Is this real?

An article written this April depicts a graph trying to relate a country's voters to their fiscal policies. Their findings are that the less people in that country exercise, the less positive their financial outlook. How can they even begin to correlate these two things? It looks like a legitimate article, but I just thought I'd see what your opinions were on the subject...

Click here to see the actual article.

Golden Parachutes: How the Bankers Went Down

This is a pretty interesting pictorial summary of how golden parachutes rewarded some of the top executives during the financial crisis.

"When high-ranking executives are fired from a company, for whatever reason, they don’t go to the back of the unemployment line. Instead, they typically receive compensation in the form of the “golden parachute.” Golden parachutes can include severance pay, cash bonuses, stock options or other benefits. In the case of the financial crisis and the ensuing bank failures, if it seems like these executives are being rewarded for poor performance, you may be right. Here’s a look at what some bankers made on their way down.

" http://www.mint.com/blog/finance-core/golden-parachutes-how-the-bankers-went-down/

A followup on Greece

Just yesterday, this article was posted on The Economist which talks further about the crisis in Greece. New interesting points:

1. "As the largest EU economy, Germany will contribute more than any other country towards a Greek rescue (though German banks also hold large amounts of Greek government debt, and thus would suffer greatly in the event of a default)."

2. There really isn't much of a plan for solving Greece's financial crisis. "EU leaders first pledged in February they would not allow any member of the euro zone to fall victim to a sovereign credit crunch, but failed to explain how they would carry out this promise—as if hoping that their resolve alone would frighten the markets into submission."

3. Greece's loan needs would be extremely high. "Reuters news agency quoted a Greek official as saying the country is likely to need a total €80 billion of loans over three years. If so it will be the largest multilateral rescue of a debt-ridden country yet seen."

Ex-Fannie execs: Greed at heart of housing mess

Recently executives of some of the largest firms linked to the mess of the financial crisis such as Citigroup and Fannie Mae have undergone interviews from the Financial Crisis Inquiry Commission. These hearings have resulted in executives admitting their faults in contributing to the financial crisis and housing market crash. The following article is pretty interesting and quotes former Fannie Mae executives admitting to taking on more risk than necessary to drive their profits for investors.

http://www.sltrib.com/business/ci_14858011

A look at the crisis in Greece

As another followup to the last class, I was interested to see how Greece was doing and where their financial issues lay. An article (click here) talks about how Greece is just starting to see their problems and that many more are to come. The most interesting point that struck me was that Greece will soon be trying to sell new dollar denominated bonds to American investors.

"George Papaconstantinou, the finance minister, plans to lead a roadshow to America in the last ten days of April. He hopes to persuade American investors, including emerging-market funds, to buy $5 billion-10 billion worth of a new dollar-denominated bond. It would be a heavy irony if Greece, a member of the euro club, were temporarily reprieved by loans in dollars. But the fear is that investors will stick to buying the bonds of genuine emerging markets, which have much more solid growth prospects.

It is not yet clear what Greece’s fallback plan will be if American demand is weak. “The roadshow will be decisive. If it doesn’t fly, the alternative is either a wave of T-bill issues at very high interest rates, or a rescue package,” says a senior Greek banker. Mr Papaconstantinou insists that Greece does not plan to fall back on support from the EU and IMF. But he also accepts that the government cannot go on borrowing at such high interest rates."

Japan's crisis

Since we haven't really heard too much about Japan's financial crisis, this article explains more about their current situation. I thought they were doing fine until I heard about it from class, and that's the same picture one would see if you visited there. The standard of living is still high, but with "the largest gross public debt-to-GDP ratio in the world (a whopping 190%)", something needs to change. The article states that the three main reasons for their decline include investing in government bonds, deflation, and relying on foreign demand.

Read the article here

Alan Greenspan: The Financial Crisis Was Not My Fault

This article summarizes the recent meeting that took place between Alan Greenspan and the Financial Crisis Inquiry Commission. Although Greenspan was the head of the Fed at the time of the financial crisis and responsible for keeping interest rates at record lows for a significant period of time, he stands strong in defending his actions and places the blame of the financial crisis on a list of other contributing factors. What do you guys think?

http://www.politicsdaily.com/2010/04/09/alan-greenspan-the-financial-crisis-was-not-my-fault/

4,197,371 jobs lost nationwide since February 2008

This graph displays the nationwide loss of jobs since 2008 and paints a pretty significant picture of how severe the mid-west has been hit the by this financial crisis.

The U.S. and its $12.5 Trillion Dollar Debt

Recently Fed Chairman Ben Bernanke spoke in Dallas on the current U.S. deficit and its future outlook.

(http://www.dallasnews.com/sharedcontent/dws/dn/opinion/editorials/stories/DN-bernanke_08edi.State.Edition1.2bf43e6.html).

He states, "at this rate the national deficit will reach 100% of GDP by 2022". What do you guys think should we start making the repayment of our national debt a larger priority or do you think that our current spending levels are necessary to keep our economy afloat?

Is more consumer spending really a good thing?

A recent article (click here) talks about how consumers have been spending more, upping total sales by 10% compared to the levels this time a year ago. The author, and others, seem very positive about this long awaited push in consumer spending after so many months of careful saving (bringing the personal savings rate up to 5% compared to the 3% normal average, as mentioned in the article).

While it's great that businesses are starting to see profits again, it brings up the question of whether or not an increase in consumer spending is really a good thing.

From the article: “The more money the consumer spends, the worse shape our economy is going to be in,” said Peter D. Schiff, president of Euro Pacific Capital, “because we are spending borrowed money.”

Spending, especially on credit, won't do our country any good if consumers can't afford it. The situation just sounds somewhat similar to the housing crisis we talked about in class. With the amount of debt our country is currently in, shouldn't we be saving (to pay off debts) rather than spending?

Greece is sinking.....

After reading about the hard choices that face Greece (see Baseline Scenario), my main thought is "there is no such thing as a free lunch."  Why don't they just default and be done with it?

The "Great Recession"

Capital: Was the Recession Really That Great? 4/7/2010 5:00:48 PM

Economists disagree on whether the recent recession was really "The Great Recession." But WSJ's David Wessel says given its depth, duration and legacy, it lives up to the name.

Check out short video

http://online.wsj.com/video/capital-was-the-recession-really-that-great/FD33CED3-C232-47DD-A7F0-C9BAA4E17F17.html

I think that it is funny that there is so much debate over this topic but I am interested to see what you guys think. Do you think that the most recent financial crisis deserves to be termed the "Great Recession" with respect to previous financial crashes in our history.

Personally since this is the only financial crisis that I have really experienced I would agree that this is "The Great Recession". Although it may line up empirically to some previous financial recessions, in my opinion the most recent financial crash seemed to challenge the fundamentals in the field more than those of the past. Given the impact on our domestic and foreign markets along with the economic adversity that we have had to witness in Michigan, this is low point in history deserves the term "The Great Recession". What do you guys think ?

Are CEOs overpaid?

For my last post I decided to look at the topic of CEO compensation. Below is a very strongly worded article decrying 'pay for performance'. The section below describes exactly how CEOs are able to get incredible compensation packages:

"How does this happen? How are shareholders hoodwinked so thoroughly? I can describe the legal corporate theft by insiders in 5 simple steps. The scam goes something like this:

Five Steps to Shareholder Wealth Transfer

1. The Board of Directors, usually cronies of the CEO (often hand picked by him) forms a compensation committee. To appear “objective,” the committee hires an outside compensation consultant.

2. The compensation consultants are themselves well paid whores, who rather than turning tricks outside the Holland tunnel, offer up absurdly generous comp package. They deliver what they are paid to: They provide cover for the boards to make an otherwise indefensible giveaway of shareholder monies in the form of cash and stock options. It is typically called “Pay for Performance,” but that is a horrific misnomer, as we see in step #3. The comp committee approves the consultants’ nonsense, forwards it to the Board, who rubber stamps it.

3. Here’s where things get interesting: If the stock price rallies, the exec can exercise and cash out, risk free. If the stock price falls, the exec requests a new round of options — or even easier, asks for a repricing of the old ones.

4. After the options are repriced, the exec simply waits. Whether the market rallies or falls . . . you simply go back to step three. Repeat until stock options are in the money. There is no risk or outlay of cash on the part of execs.

5. True “performance” is not a factor. Stock prices can rally for a vast range of reasons having nothing whatsoever to do with management or CEO performance. The market can rally, a sector can come into favor, or even when the Fed can cut rates.

This is not pay for performance, it is pay for stock price volatility.

Actual performance would look at factors such as peer profitability, sector performance, SPX index gains. Bonus payments and stock option exercise should be for gains OVER AND ABOVE these factors — but sadly, rarely if ever are."

How do you feel about CEO pay? Obviously, there has been a lot of outrage over highly paid CEOs at TARP banks. But what about other businesses?

What about the argument that we need to pay them a lot or they will leave to manage foreign companies? I've heard this one a lot, would love to hear what everyone thinks.

http://www.ritholtz.com/blog/2010/04/american-pastime-overpaying-ceos/

Risks Interconnection Map (RIM) 2010

This website goes really well with our reading:

"The network diagram shows an overview of all risks and their connections. You can roll over a node to see its title and click it to view details on its probability, severity, and interconnected risks."

Try this:

Scroll down to to Domain

Next, >>Choose Risk by Domain

Then click Major fall in the US$

China Vs. USA

A visual representation of China's Economy vs. the US Economy. This is pretty self-explanatory, however it really helps to actually see the actual bar graphs in direct comparison. The website is here. It makes me wonder if the US will fall behind and the world economy and if so, when?

A Little Perspective

Shocking Pictures which show an example of the Zimbabwe financial crisis in 2000. The inflation was at 231 million %! I thought this would go nicely with what we are reading in the book. The website can be found here.

Unemployment Report Show Biggest Gain in Three Years!

Here's an article from Bloomberg about the latest unemployment report. From the article:

"Payrolls rose by 162,000 workers last month, the third gain in the past five months and the most since March 2007, figures from the Labor Department showed yesterday in Washington."

"'I personally put lots of emphasis on employment,' Robert Hall, who heads the National Bureau of Economic Research’s Business Cycle Dating Committee, said in an interview. 'I would say pretty clear is a good description' for whether the economic contraction has ended, he said."

Since the Bloomberg article doesn't have all the data, I've found it elsewhere for your reference. Some highlights:

-Average wages went down .1%
-Unemployment rate stayed at 9.7% because of population growth
-Long-term unemployed (jobless for 27 weeks+) increased by 414,000 to 6.5 million
-Average workweek was up by 0.1 hour to 34.0 hours in March

Do you agree that this increase in employment shows that the recession has ended? Do you see other signs that point to this conclusion? Or have you seen things lately that make you think the recession is not nearly over?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_m4UWCu_Rrg&pos=1

Pretty Funny

This is a funny joke that has been circling the internet:



It's a slow day in some little town........
The sun is hot....the streets are deserted.
Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich tourist from back west is driving thru town.
He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.
The pig farmer takes the $100 and heads off to pay his bill at the feed store.

The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her services on credit.
She, in a flash rushes to the motel and pays off her room bill with the motel owner.
The motel proprietor now places the $100 back on the counter so the rich traveler will not suspect anything.

At that moment the the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money & leaves.

NOW,... no one produced anything...and no one earned anything...however the whole town is out of debt and is looking to the future with much optimism.
And that, ladies and gentlemen is precisely how the U.S. and Canadian Governments are conducting business today!

Obama’s 2010 Federal Budget Explained in Plain English by Rebekah Manning

The Federal Budget can be a big pain to actually sit down and read. Here it is explained in plain english. The graphs, tables and charts in the website really help a lot. Also an excerpt from the website talks about the ambiguity present in the budget:

Overall, Departments like Agriculture show great detail while other departments like that of State use broad language and provide few clues into what programs will actually receive the billions. Unsurprisingly the National Intelligence Agency has no details about either total budget nor allocation. The mandatory spending, which totals an additional $2.184 trillion, allocates $695 billion to social security, $453 billion to Medicare, $290 billion to Medicaid, $11 billion in a potential disaster relief fund, $164 billion to pay off interest on the national debt and the remaining $571 billion to miscellaneous expenses.

$571 billion on miscellaneous is a lot of money!

Peter Eigen: How to expose the corrupt

We have been talking a lot about corruption in the blog and I thought Eigen's views on corruption would fit with some of the issues we've been talking about. Eigen has valuable experience as director of the World Bank Office in Nairobi. The link to the video is here. The video description can be read below:

Some of the world's most baffling social problems, says Peter Eigen, can be traced to systematic, pervasive government corruption, hand-in-glove with global companies. At TEDxBerlin, Eigen describes the thrilling counter-attack led by his organization Transparency International.

Still Believe in Keynesian Economics?

Here's an interactive graphic from NYT (with sound) detailing how our government has responded to previous recessions. The graphic focuses on whether government's response was Keynesian, if it worked, and other factors that may have complicated government's efforts.

http://www.nytimes.com/interactive/2009/01/26/business/economy/20090126-recessions-graphic.html

As seniors at K College, we've certainly had our fair share of Keynesian theory. How is everyone feeling about Keynes's ideas regarding how government should lift the economy out of recession? Is government spening the answer? Or maybe you side with those who are calling for fiscal responsibility through a balanced budget?

Who owns America's debt?

Great graphic showing growth in debt and ownership of it.  See here.  I had not realized how recently China came to owning so much of our government debt nor how much Japan still owned.

How much is a financial capital asset really worth? Fantasy accounting.

Two bloggers today took on this question.  The first, Steve Waldman, built on the Frank Portnoy video piece that we watched last Tuesday and concluded that not only do we not know the answer, we never can price a financial asset with certainty.  See here for Waldman's reasoning.  The second blogger wrote about the suspension of "mark to market" accounting rules which has allowed banks to keep financial assets on their books valued at the purchase price and not the market price thus, making Waldman's concern about the real value of financial assets meaningless for today's banks.  The way it works is this:  suppose I bought a mortgage-backed security in 2007 for $1000.  I keep it on my books as an asset at a value of $1000.  This security would sell for 50 cents in the market today but I don't have to acknowledge that fact anywhere.  See here.

Foreclosures - Good or Bad?

Fairly controversial article here arguing that we need MORE foreclosures. From the article:

"I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than 'extend & pretend' measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks."

He continues by arguing that prices still aren't at 'normal' levels and that as long as we are keeping people in homes they cannot afford to pay-off, we are simply rewarding reckless borrowers and the banks that lent them the money.

What do you think about all the foreclosure prevention measures? Does the author have a point?

What does most for the 'public good'? Should we worry more about keeping families in their homes, or should we seek to 'fix' the real estate market?

http://www.ritholtz.com/blog/2010/03/more-foreclosures-please/

Euro Trashed - Why Germany should leave the EU

Really interesting op-ed from NYT on the whole Eurozone issue. It fits very well with the discussion of default risk in the first chapters of "This Time is Different". The basic thesis of the author is below:

"The Greek crisis is only the first of what could be several tremors resulting from the euro’s original sin. While few are willing to say it yet, the solution is clear: the only way to avoid further harm to the global economy is for Germany to lead its fellow stable states out of the euro and into a new and stronger currency bloc."

As I read this article, I thought about the concept of debt-tolerance from this week's reading. From the op-ed:

"Unlike their northern neighbors, the countries in the zone’s southern half have difficulty placing bonds — issued to finance their national deficits — with international capital investors. Nor are these countries competitive in the global economy, as shown by their high trade deficits."

What do you think about the Euro and the future of the Eurozone?

Do you agree with the 'euro-optimists' who argue that "the introduction of a common currency and the global economic competitiveness it spurred would quickly lead to sweeping economic and societal modernization across the union"?

Does a common currency amongst many countries reduce the default risk of all?


http://www.nytimes.com/2010/03/29/opinion/29Starbatty.html

A truly scary graph

This shows the impact of the Great Recession on job loss and compares the losses to other post-WWII recessions.  The source is the Calculated Risk blog.  Click on the graphic to enlarge it.

Timeline of the crisis - hindsight is 20/20

Below is a link to the St. Louis Fed's timeline of the financial crisis.

http://timeline.stlouisfed.org/index.cfm?p=timeline

One observation I noticed was how obvious some of the early warning signs seem now. From the timeline (some entries removed to make my point clearer):

"April 2, 2007 | SEC Filing

New Century Financial Corporation, a leading subprime mortgage lender, files for Chapter 11 bankruptcy protection.

June 1, 2007 | Congressional Testimony

Standard and Poor’s and Moody’s Investor Services downgrade over 100 bonds backed by second-lien subprime mortgages.

June 7, 2007

Bear Stearns informs investors that it is suspending redemptions from its High-Grade Structured Credit Strategies Enhanced Leverage Fund.

July 11, 2007 | Standard and Poor’s Ratings Direct

Standard and Poor’s places 612 securities backed by subprime residential mortgages on a credit watch.

July 24, 2007 | SEC Filing

Countrywide Financial Corporation warns of “difficult conditions.”

July 31, 2007 | U.S. Bankruptcy Filing

Bear Stearns liquidates two hedge funds that invested in various types of mortgage-backed securities."

Wow! How could we (or more importantly, the people who work in finance / government) have missed this?

Looking at this timeline, I was also surprised by how early it starts (Feb. 2007!). My question for all of you is, when did you realize we were going though a financial crisis? Was there a specific event that in your memory was the beginning of the crisis? For me, the collapse of Bear Stearns was when I really started to be aware of the crisis.

http://timeline.stlouisfed.org/index.cfm?p=timeline

Should we nationalize banks that are 'too big to fail'?

This article discusses the US Government's 3rd bailout of Citigroup about a month ago. It brings up an interesting discussion of nationalization vs. bailouts.

From the article:

"'The government is bending over backwards to not go along the lines of nationalization,' said Bernie Sussman, chief investment officer of Spectrum Asset Management, a unit of Principal Financial Group Inc. that manages about $6.9 billion in assets. 'They had the alternative to completely zero out the common stock.'"

Are bailouts the best way to fix these banks that we cannot allow to fail? The article notes that the government is making a lot of concessions that are in the best interest of the bank. On the other hand, the article notes:

"Wall Street also is worried about 'whether the company will be run in the interest of private shareholders or for the public good,' said John McDonald, a banking analyst at Sanford Bernstein & Co. 'It's a valid question what the priorities will look like.'"

Should Citigroup be run in the interest of the shareholders or the public good? What is best for our economy? Thoughts on nationalization vs. bailouts?

http://online.wsj.com/article/SB123573611480193881.html

A definition of securitization

From Investopedia:

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security.A typical example of securitization is a mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a collection of mortgages. The process works as follows:
First, a regulated and authorized financial institution originates numerous mortgages, which are secured by claims against the various properties the mortgagors purchase. Then, all of the individual mortgages are bundled together into a mortgage pool, which is held in trust as the collateral for an MBS. The MBS can be issued by a third-party financial company, such a large investment banking firm, or by the same bank that originated the mortgages in the first place. Mortgage-backed securities are also issued by aggregators such as Fannie Mae or Freddie Mac. 
Regardless, the result is the same: a new security is created, backed up by the claims against the mortgagors' assets. This security can be sold to participants in the secondary mortgage market. This market is extremely large, providing a significant amount of liquidity to the group of mortgages, which otherwise would have been quite illiquid on their own. (For a one-stop shop on subprime mortgages, the secondary market and the subprime meltdown, check out the Subprime Mortgages Feature.)
Furthermore, at the time the MBS is being created, the issuer will often choose to break the mortgage  pool into a number of different parts, referred to as    tranches. These tranches can be structured in virtually any way the issuer sees fit, allowing the issuer to tailor a single MBS for a variety of risk tolerances. Pension funds will typically invest in high-credit rated mortgage-backed securities, while hedge funds will seek higher returns by investing in those with low credit ratings.

Clear as mud, don't you think????  The underlying assumption is that the illiquid asset has a known risk level (low) and a certain return (passed on the payments for the original asset).

the Volcker rule

A series of articles on the Volcker rule can be read in many different locations. I've compiled a list of websites that deal with the passing of the bill in congress and it's affects. Is this an adequate response in the need of Banking Reform? What are the downsides to this bill?


Check out Paul Volcker's opinion as chairman of Obama's economic advisory panel here. Another article which goes deeper into Volcker's stance can be read here.

Opinion against the Volcker rule can be read here.

Health Care

One of the struggles in health care that directly affects us after graduation is that many entry level positions do not offer health care insurance. Insurance companies will no longer be able to drop young adults from health care after the age of 19 or 23. The age will be extended to 26. To read more about this, there are two websites to check out:

http://money.cnn.com/2010/04/01/news/economy/health_reform_changes_for_uninsured_underinsured/index.htm

and

http://www.statenews.com/index.php/article/2010/03/health_care_bill_to_extend_insurance_age_limits

Does this directly affect anyone?

Jon Stewart, chief economist????

Jon Stewart's explanation of the Wall Street bailouts and bonuses is very funny.  Watch it here.

The Declining Middle Class

The New York Times has been running a good series on the impacts of the crisis on people.  Many people will never recover from this recession in terms of their quality of life, incomes, and wealth.  The Times article called them "The New Poor." Yesterday, one of the regional Fed presidents talked about the same issue. His point was that the fall in construction sector jobs was permanent.  This, coupled with foreclosures, will create many of those New Poor.  He also talked some job creation numbers that will be needed to bring down the unemployment rate.  Sad and sobering, in my opinion.

Financial Crisis Inquiry Commission

Go to http://fcic.gov/ to see information collected by the investigative commission charged with determining the causes of the financial crisis. You can even keep in touch with them on facebook and twitter.