The destruction of economic facts

There is a wonderful piece in Businessweek (go here) by Hernando de Soto.  He describes the industrial revolution as a time when a worldwide system was developed to codify economic facts.  He writes, "The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."  He then asserts, "Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts." 

This argument really resonates with me.  I prefer to have data and then to test if theory is relevant to explaining the data.  I get frustrated with theory first.  But that is the world today and De Soto does an amazing job of pointing out the reasons why and the consequences of destroying our common knowledge system.

U.S and the Dollar

Its not my week to post but I thought this article was worthy of discussion. Link

The U.S dollar is continuing to depreciate against a number of currencies particularly the Australian dollar. (Australia's economy is incredibly strong right now and they have high interest rates making the currency a strong candidate for the carry trade).

I wanted to get the discussion going on whether you perceive the weakness in the U.S dollar as good or bad for the economy? Also, do you think this is the start of a long term change for the value of the dollar? If so what are the consequences?

Real events have economic consequences

I see shifting production possibilitires curves (or IS curves or aggregate supply curves) everywhere.  But we live in such a financialized world that we believe monetary policy will solve everything.  But Japan is facing real consequences from the earthquake.  "Only a day after S&P signalled fresh concerns about Japan’s economy, official data on Thursday showed a far sharper plunge in March industrial production than the consensus 10.6 per cent – a whopping 15.3 per cent fall from February – while March household spending slid an annual 8.5 per cent.  Kaoru Yosano, Japan’s economy minister who famously spoke in January of his “dreadful dream” about the national debt burden, was “stunned” by the industrial production figures, according to the Nikkei newspaper. No wonder. Yosano had told the FT just days after the March 11 magnitude 9 earthquake, that the disaster would have little impact on Japan’s economy."  Real factors of production matter and it takes time to reproduce them and reallign them after a major disaster. 

consequences of defautls in Europe

Steve Waldman, a macroeconomist who falls into the new monetary theory school (with a smattering of Post-Keynesian) comments on a piece by Kindred Winecoff that is one of the clearest explanations of default vs inflation I have read recently.  Winecoff begins with "The alternative to an internal devaluation through wage cuts, tax increases, and reduction of social services is external devaluation (exit from euro) and default. Call it the Iceland Alternative (Iceland was never in the euro, but it did devalue/default, which is what we’re talking about). In that scenario, the new drachma and Irish pound will collapse in value and the government will be unable to borrow from international capital markets. This is austerity too."  Read the piece for more understanding of the trade-offs facing some of the European countries. 

Hot Topic!! Campaign Finance

There was some excellent discussion last night on the merits of campaign contributions affecting the outcome of political elections.

This is a good article by Time from the 2008 election cycle that gives a brief history of Campaign Financing, and sheds some light on the use of Federal Funds in Presidential elections. Click Here

"This year's election (2008) will be the most expensive in history — presidential candidates have already raised over $900 million, according to the Center for Responsive Politics. And that's not counting the millions in the coffers of the parties, political action committees and advocacy groups that are just now gearing up their advertising campaigns. A century on, the laws have changed, but the reality hasn't. Running a national election campaign still costs serious amounts of money, and no candidate has ever won a national office on good ideas alone."


Also, this is a link to the FEC (Federal Election Commission - oversight agency for Campaign Finance) that details the maximum allowable donations by Individuals and National Party Committees to individual candidates. Click Here

I want to continue to facilitate discussion on this topic. Why you think donations are good/bad, what kinds of reform you think are appropriate, and maybe someone can detail how other Democratic countries deal with the topic are all some suggested discussion topics. It would be nice if we had some opposing viewpoints here, so if it seems like there is a consensus building, hopefully somebody can argue an alternative viewpoint (even if it is not exactly what you believe).

*Edit* Apparently my blogging week is next week, not this, but I still think the topic is relevant

A one-time, 100% tax

The Sacramento Bee critiques 13 Bankers author, James Kwak's proposal for debt reduction. 

"Here's my solution to our national debt. We have a one-time, 100 percent tax on all wealth (net worth) of all United States residents, with a $10 million per-person exemption. With household wealth at around $60 trillion, that should be plenty to pay off the accumulated debt and shore up Social Security and Medicare for the next century. The government promises never to do it again. Since we only care about future behavior, a one-time wealth tax should have no impact on people's incentives to work, and hence no distorting effect on the economy."

This would affect 5% of the population. It would cost the wealthiest a lot, the article uses a NFL owner as an example, he'd have to sell part of the Rams, yet no one would have enough wealth to buy them from him. The rich would make a minor lifestyle change, but it could help the majority.

Initial reactions?

Kwak was not serious about his proposal, no but it its not a bad idea.

Bubbles???

A great graph on lobbying expenditures in Washington:  here. I think it goes right along with the reading for this week.

How a ponzi scheme works

From the end credits of "The Other Guys", quite a bit of interesting information about the 2008 Ponzi scheme and other aspects of the current financial crisis.

http://www.youtube.com/watch?v=tvuDGyUkzoI

The Necessity of Global Cooperation

Here's an article about the necessity of global cooperation and coordination in order to avoid the next great financial crisis. While I think parts of the article are a little too "love your brother"ish, it does bring up quite a few good points. Other countries have bought our collateral debt, and if we end up defaulting on our debts (which is the direction the US is going), we are effectively screwed over China.

Because this is a global economy..."Our interdependent world means that our problems are no longer just problems we share in common but are global, interwoven between countries, and only concerted action across continents can effectively tackle them." At this point, our problems are too big to be taken care of independently.

What are your opinions on this? Do we need to work globally or focus on fixing our problems by ourselves?

Careful preparation

Hey guys,
Just wanted to share this article with you that I thought was interesting. It goes through the careful preparation that will happen before the Fed's first official press conference.

Isn't it interesting that there is so much power in people's words? And that the outcome to this conference can affect us so much?

S&P vs. Tim Geithner

Here's an article from the Wall Street Journal comparing the differences in opinion over America's potential loss of it's AAA rating. As we already know, Standard and Poor announced there is a 1 in 3 chance of this happening. On the other hand, the Treasury Secretary Tim Geither, announced on air that there is no chance of this happening. The article goes on to point out S&Ps previous inability to properly rate companies such as Enron and Bear Stearns.

What are you thoughts about the article and S&Ps ratings?

US Growth Probably Slowed as Fuel Prices Rise

Bloomberg hypothesizes that first quarter growth slowed due to high fuel prices, which decreased consumer spending.

Gross domestic product rose at a 1.9 percent annual pace after increasing at a 3.1 percent rate in the previous three months, according to the median estimate of 66 economists surveyed by Bloomberg News before an April 28 Commerce Department report.

I was surprised that household purchses account for about 70% of all purchases. How will higher food and energy prices impact economic growth? Housing? Thoughts?

Growth Takes a Knock

An interesting article from The Economist explaining why the GDP estimate, which will be released April 28th, might be dismal. Some of these factors include the disaster in Japan, snowstorms in the U.S., and renewed debt crisis fear in Europe. Analysts have forecast the first quarter growth rate to be anywhere between below 1% to 4.1%. Given these different numbers, it will be interesting to see what the actual first quarter growth rate really is when the figure is released April 28th. It will begin to show us just how hard the environment and other countries economic problems are hitting us at home.

Comments?

Bank of America Makes Easy Profits

"Households are earning so little from their bank accounts that Bank of America, the largest U.S. lender, has pocketed about twice as much cash this year parking money at the Federal Reserve than it has paid to savings-account holders. " Bank of American paid out $32 million in interest while earning $63 million for depositing money at the Federal Bank.

Banks are bigger and people are still depoisiting at normal rates, so it is easy for them to profit.

What do you think of this disparity between too big to fail banks and American savers? Does this make a good argument for credit unions? Or ignoring the loss to inflation and keep your cash "under your mattress"?

www.huffingtonpost.com/2011/04/21/big-banks-book-easy-profi_n_852123.html

Managing Money is as easy as 1,2,3

I've been saving this to post it on the blog, because it is amazing (and I apologize for it being a bit of a fluff post).  This two minute video discusses how Sesame Street teaches kids about the value of money and the importance of saving, sharing, and spending.

It is simple and innovative. We all continue habits we learned when we were younger (think washing hands, brushing teeth) so why wouldn't this work to teach saving and spending habits to avoid a future financial crisis? Teaching kids not to live beyond their means makes sense to me.

Europe at the precipice

http://finance.fortune.cnn.com/2011/04/22/europe-at-the-precipice/

Here is an article about Europe current financial problems in light of Greece's potential restructuring of debt, and building worries that Ireland and Portugal will be following right after. Europe has been feeling the stress as the euro continues to fall, and analysts say it might soon be on par with the dollar, if not below.
"I don't really see a solution in Greece or Ireland or Portugal that doesn't involve haircutting the debt," Minerd says. As that plays out, he adds, "We are looking at a massive credit crunch in Europe over the next 18 to 24 months."
The dollar appears to be rising according to this article as well.

Comments?



On another note, I tried to read an article on WSJ.com about AIG trying to sell securities for death-bets. Does anyone have an account there that could let me know more about that?

Buy yourself a politician or two???

According to the Wall Street Journal,

The industry is working to influence a long list of Dodd-Frank rules, including sweeping ones for the nearly $583 trillion derivatives market and restrictions on the size and activities of the largest banks. Many are also weighing in on mortgage-finance issues as policy makers address problems with foreclosures and how to revamp mortgage-lending giants Fannie Mae and Freddie Mac, which now are under federal control.


The disclosures show that 26 of the financial firms and trade associations that spent the most in 2010 collectively spent $27 million in the three months ending March 31, a 2.7% increase from the $26.3 million spent in the comparable period in 2010.

Comments?

The Slowly Turning Wheels of Justice

Wall Street banks and executives have not gotten into any criminal trouble after in the three the economy collapsed.And that is making a lot of people angry.


Inside Job, the Oscar wining documentary we watched in class, put these leaders in to light. Director, Charles Ferguson on the topic: "I must start by pointing out that three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that's wrong."

Bankers get off easily, but Madoff, and other Ponzi schemers are serving long prison sentences.

Do you think those, whose hand put the country in to a economic down spin, should be prosecuted? Is there a difference between Goldman Sachs and Madoff?

http://www.npr.org/2011/04/20/135575032/after-financial-crisis-wheels-of-justice-turn-slowly

S.S.D.D.

http://finance.fortune.cnn.com/2011/04/21/stingy-megabanks-swimming-in-cash/?hpt=T2

Maybe things could be a little different than the stagnant "recovery" that we are a part of.

I'm curious

In this cycle of Republican rhetoric for less "big government", lower taxes, and the prevailing sentiment that the states should be better able to take care of themselves, am I the only one who thought it ironic that the Governor of Texas is seeking Federal funds to help cover the cost of disaster relief in his state? Maybe I'm wrong and off-base, I just thought I would put it out there.

Everyone Hates the IPAB

Here's an interesting article about opposition to the IPAB. As part of his deficit reduction plan, President Obama appointed a 15 member panel, the Independent Payment Advisory Board, to keep medicare spending under control. Currently, Obama wants to increase the power of this board. Republicans and quite a few Democrats stand against this. They claim that "the president’s proposal punts difficult decisions on health spending to an unelected, unaccountable board of bureaucrats.” This proposal would set stricter goals for medicare spending and, if necessary, the board would be able to step in to enforce more cost-cutting devices.

Many have voiced their concerns about what this will mean for the future of Medicare. Congress claims that it is their "constitutional duty to take responsibility for Medicare". By turning it over, they will not longer be properly able to represent their constituents, especially seniors and disabled citizens.

What are your thoughts on this? Should the President appoint a board to take care of cutting back the costs of this extremely expensive program? Or are “arbitrary spending targets not a good way to make health policy"?

Goldman Sachs is Too Big to Fail

Goldman Sachs has their fingers in many pots, not just the US financial and housing markets but we learned in Greece as well. Simon Johnson, the former IMF chief economist believes that the bank is too big to fail. The bank is worth over $900 billion dollars, it will be bailed out if it crashes.

What are the impacts on the public if the bank were to crash? Is the focus on the giant banks a diversion from more local issues? How does a money making institution have such pull over a government?



http://www.businessinsider.com/simon-johnson-seriously-goldman-sachs-cant-fail-its-too-scary-2011-4

Higher Education Bubble

The great magizine, the Economist, has an intriguing article on higher education. Is higher education experiencing a bubble, and will it burst? Tuition costs and debt loads are high, yet none of us can get jobs. Politicians are trying to expand the supply of higher education, just as they tried to expand the supply of affordable housing. Furthermore, Paul Krugman has pointed out that technological advances decrease the need for highly skilled individuals as well as low-end jobs.

Do you think that the higher education system is experiencing a bubble?  If so, will it burst? Or does education itself has enough intrinsic value?

Interesting piece on the S&P downgrade

Is the US in financial crisis?  Will we default?  The questions have the flavor of meledrama.  Yves Smith posted a short piece today (see here) that picks through the emotion to the first question.  Are we in a more fragile economic position than we were in 2008?  Did S&P make a mistake?

Leader of Big Mortgage Lender Guilty of $2.9 Billion Fraud

Finally some justice!

Here's a link to an article describing a great win for the Justice Department.
This is the first time the Justice Department was successful in bringing charges against executives leading up to the financial crisis. The majority of their cases either end in acquittal or are dismissed due to lack of hard evidence. Taylor, Bean & Whitaker's scheme evidently started in 2002 and has continued until 2009, when the company collapsed.

I was personally quite happy to finally see someone at the top being charged for their fraudulent actions. Unfortunately, as the article pointed out, this is a rarity. In the past, the Justice Department has adopted a softer, more forgiving approach for larger companies in order to limit the economic damage that results from vigorous prosecutions. Do you think this win for the Justice Department will motivate them to bring more charges against guilty Wallstreet executives? Or will they continue to go unpunished?

US stocks sink after S&P issues warning on US debt

Good article, Chris. Here's a response piece. What's the government going to do? This was a big wake up call for them. However some think it was an empty threat and still support the government.
"He said there was “no risk” that the United States would lose its AAA credit rating and that investors were still confident in government bonds, strongly disagreeing with the negative assessment of the nation’s outlook by the Standard & Poor’s ratings agency."

China is skeptical; "China’s foreign ministry said in a statement on its Web site on Tuesday that the United States must take “responsible” measures to protect investors in its debt."

Japan is still supportive of government bonds. Your thoughts?

S&P Warning the Government

http://finance.yahoo.com/news/SampP-warning-Fix-deficit-or-apf-3906974984.html?x=0&sec=topStories&pos=main&asset=&ccode=

I know its not my week but this is an extremely news worthy article that I don't think we should let go to waste.

Standard & Poor's "lowered its long-term outlook for the federal government's fiscal health from "stable" to "negative," and warned of serious consequences if lawmakers fail to reach a deal to control the massive federal deficit." This could have potentially huge implications on the government as we have talked about, the higher your credit rating the cheaper debt financing is. The U.S is regarded as the most secure.

Yet can we consider the S&P as a credible source, I mean not three years ago they were ranking worthless mortgages as AAA?

Hopefully we can discuss this is class tomorrow as I think it goes along very well with the book.

Buying Birth control on Craiglist?

Here's an article I wanted to share with you guys. I was intrigued by this especailly as Planned Parenthood was one of the more controversial things left unfunded by the budget revamp.

Would you ever consider the drastic measures that some of these folks are taking, like buying your pills on craigslist? To me that is very sketchy. I might use ebay but not craiglist or maybe buy it in Canada. Whatever happens I would never not use a method of birth control. I think leaving things to chance is extremely costly both in potential consequences and mental health i.e. worry and anxiety.

What do you think of the discussion of where the cost falls in a relationship? If you were long term with someone would that be something you would split the cost of? I was just floored by how much condoms cost in the city. They said it was about $2 each. Wow.

Doesn't this article drive home the fact that we are lucky to be college students with access to free condoms and lube and other contraceptives like female condoms from the health center.

And you are all aware of that right? You can just walk in any time the clinic is open and grab a couple. They are right next to the non aspirins and the cough drops. :)
Please leave some thoughts.

No more Pecan Pie ?

I just wanted to mention this article from the Wall Street Journal. For me talking about the impact on food really makes economics come alive so this article was really relevant. The pecan growers also seem to be a real close illustration of a free market.

Personally I only like pecan in baked goods, I am not a big fan of them as eating nuts. How does this impact you? Would you ever pay about $7.50 to make a pie? I wouldn't because chances are I would burn it. :) What do you think of China's entrance into the pecan industry? Does it mirror any other industries we can think of?

Euro vs. Invasion of the Zombie Banks

Great article about the financial crisis prospects in Europe. It starts with explaining how people are losing faith in the banks, therefore making less deposits, where as we have learned from the Great Depression that that causes more harm to economic stability. The EU needs to build consumer confidence, and by any means necessary. How do they influence consumer confidence? Suggestions?

Also, this paragraph at the end is my favorite. Really pulls together the problems of the EU and puts an interesting negative tone on it. What are your thoughts?

"ALL of the ways forward look ugly but, sooner or later, some variation of at least one of them is likely. Unfortunately, they all share the property of lowering European bank values, whipsawing currencies, hurting business confidence and possibly ending the European Union as an effective institution for collective decisions. That’s all because the euro, in retrospect, appears to have been a misguided attempt to equalize the values for some very unequal assets, namely the bank deposits of strong countries and those of weak countries."

After the Robber Barons

Ooo great article, read very carefully. This author makes a great analysis of corruption and its effects on the economy.

"One could equally point to other large emerging economies, such as Brazil, Russia or China (with India, the BRICs), which all have experienced this combination of rapid growth, rising inequality and corruption.What is the explanation? In all of these cases, the causal mechanism is the same: Unregulated capitalism generates both rapid growth and burgeoning inequality.In the absence of legal channels for influencing policy, such as the lobbying and campaign contributions in the United States, such attempts manifest themselves as corruption. That was true of the American Gilded Age, and it is true of the BRICs now."

Oo I won't spoil the article with more of his quotes, but I think this is a very well written piece quickly establishing his thoughts on what corruption and unregulated market could do for these economies, using the U.S. as an example. What do you all think? What will the long run effects of corruption and lobbying be? How do we fix this problem before it gets out of hand?

China growth declining?

Well, in response to your comments on the future of China, I found this article (since I love NY times, clearly) talking about China's inflation issues, costs of production, lending, etc. It also mentions some definite problems that China is going to have soon. Check it out. Is there any way for China to avoid inflation successfully? Or to cusp it so that it doesn't get out of hand and cause the government more problems?

I personally feel that China has some really brilliant minds that understand how to mold its economy. The communist regime has more power over how the country runs, so its hard to compare it to the United States and our republic. I think they will be able to maintain their economic prosperity just because of the way their political system runs and its resources are vast. However, like Mark mentioned, it will be tough to continue running a country when its capital runs out of water. They waste so many natural resources, its ridiculous. But they do realize this and have been trying to change. My friend in Beijing mentioned recently how much the weather and pollution has changed for the better in his 4 years living there. They are still a developing country, so overall, I have faith that they will be able to sustain their growth indefinitely. They just have to be careful, definitely. Thoughts?

Oops....

Sorry about the missed posts guys, I honestly had a crazy weekend. But here are a couple updates to hopefully make up for the missed articles...

In case any of you were skeptical about increasing taxes or removing tax breaks, here's a great article describing the flaws of such a system. The author even says that tax breaks "cost the federal government about $1.2 trillion in lost revenue last year. As it happens, the budget deficit was $1.3 trillion." I did not realize it was THAT big of an issue! Read the article, what are your thoughts?
Any other suggestions as to getting money back into consumer's pockets if they cut tax breaks?

Blogging

Sorry to be blunt, but how are we supposed to comment each day, if there aren't posts?

Side note...

I know I'm detracting a bit from my theme from this week, but I think its worth it.
This article perfectly correlates with what we've been talking about in our class. Years after the crisis, top figures (CEOs and what not) that essentially caused the crisis and banked on it have still not been prosecuted. Even "as the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force." Ridiculous.

The (somewhat lengthy) article even sites examples; "Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known."

Check it out and post some thoughts. Think prosecutions will EVER happen? I don't...

Chinese Housing Bubble?

Check out this article from the New York Times about how China has created its own housing bubble. The essence of the article is that men find it hard to date if they don't own property.

What I find incredibly sad is how they mentioned that companies that develop real estate buy old style neighborhoods and cause the dispossessed people to self immolate. That means the older people who just got kicked out of their houses for a fancy new apartment high rise burn themselves to death. !Yikes!

Perhaps we should start importing all the college educated Chinese couples who want property? We could have an awesome marketing campaign aimed at Chinese men. After all we have a lot of houses that are vacant and I think if we could get them they would pay on time as well. :)

After all the Chinese don't even keep their money in the bank because they will lose money due to high inflation and low rates. Which struck me. Wow. When I took Macro economics with Yang Li she had mentioned that Chinese people save all their money under their mattress. And they didn't use banks very often but I didn't know that meant like never.

but then the question is: Is this a bubble? It does seem like properties to people is still in short supply. So is this a housing bubble? What do you think?

Some statustics from Gallup

Here's a link to an article put out by Gallup. It talks about the economy and a lot of the numbers that they received. It allows us to use self reported surveys to understand what the view of average American mindset is. I think that it is interesting.

Paul Ryan's Budget Proposal

Below is a copy of Paul Ryan's budget proposal for 2012. His goal is to pay off our debt over the next decade, so I thought it was pretty relevant to our discussion Tuesday and likely next week as well. Check out the tax cuts and medicare cuts. Opinions?

http://paulryan.house.gov/UploadedFiles/PathToProsperityFY2012.pdf

The Future?

So we seem to be discussing topics and the crises in hindsight... this is what happened, why didn't we see it coming, etc. This week I want to focus on the future of the U.S. Where are we going now in relation to other nations? Is our debt going to be a huge factor in our development? What impact will China have on the global economy? According to the IMF, China's growth this year is at 9.6%, down from 10.3% last year. See the article here. That's still a very good sign for China. (our growth rate is 3.1%, just to give you some perspective). Their government is smartly learning from the examples of past nations and continue to regulate business, moving it from the public to the private sector. This allows them to facilitate and not let anything get too out of hand. Their resources are seemingly endless and attract numerous global customers with cheap costs of production and cheap products in general. In 20 years (or by 2020, I can't remember), it is estimated that they will surpass America as having the strongest economy in the world. What do you guys think? What should the U.S. do about this threat? Maybe this is an old topic, but I am personally worried about the U.S.'s future with all this debt while other nations are able to continuously generate high growth. (Will mention India on another day). Check out this article too on China's economy.

A late April Food's posting (but who is fooled?)

A fairly long and funny satirical piece by Yves Smith on the capture of the economics profession by corporate interests (see here).  A couple of details disturbed me.  First, the notions of proof and truth are interestingly applied throughout the article although in unknowing ways.  What is proof?  Whose truth and how do you know it?  Second, the comments give me chills.  So many people thought this was a "true" story.   

The top 1% according to Stiglitz (or why Chris and Matt shouldn't get it all)

I was fascinated by the monopoly games last night--kudos to Beth and Laura for setting them up and running them.  Everyone tried so hard to win even though the rules kept changing to keep everyone from winning except for those at the top of the income distribution.  Joe Stiglitz has been thinking about the very same issue lately.  He has a short video clip here .  His longer piece is at Vanity Fair (see here)  The monopoly game reminds me of Stiglitz's arguments.  We all knew the games were rigged; yet, everyone played.  It would have been wrong (selfish, non-participatory, childish???) not to have played.  Stiglitz' data is straight from the census and IRS reports--yet we deny that a mass redistribution of wealth and income is taking place.  I have a feeling that psychology is more important in explaining all of this than economics is.

Banks are back, sort of

I've always been fascinated by the intersection of the real and money economies.  Our real economy is still floundering--as judged by the weak growth in employment whle the financial sector, the money economy, is recovering.  (see here for a good overview)  Yet, the financial economy ultimately depends on the real economy.  Which is more important?  Our conversation last night about defaults was, in part, a conversation about the relative importance of real versus nominal economies.  Ultimately, you can't eat money.

Fundamental mistakes mean Europe's debt crisis will only get worse

Here is another article about the European debt crisis.

"In 2007-08, when the financial crisis was still called the "subprime" crisis, Europeans felt superior to the US. European bankers surely knew better than to hand out so-called "NINJA" (no income, no job, no assets) loans. But these days Europeans have little reason to feel smug. Their leaders seem unable to come to grips with the euro zone's debt crisis.

Banks in Ireland and Spain are discovering that their customers are losing their jobs and income as the construction bust hits the national economies. And one could argue that a loan to Greece or Portugal affords little more security than a NINJA loan. Indeed, lending to governments and banks in the European periphery represents the European equivalent of subprime lending in the US."

The article goes on to say that Europeans could learn a lot from our experiences since the crises are very similar in nature. The European banking is very weak and debt problems could lead to a long term crisis beyond the crisis the US faces today.

"Europe is making a fundamental mistake by allowing the two key elements of any resolution of the crisis - debt restructuring and real stress tests for banks - to remain taboo. As long as successive EU summits persist in this mistake, the crisis will fester and spread, eventually threatening the stability of the euro zone's entire financial system."

What do you guys think about the current financial system in Europe? What particular lessons could they learn from the US?

Economists See Growth Accelerating Later in Year

Link to WSJ article that polled 56 economists about the Economic Outlook of the US through the current calendar year. The U.S. economic recovery is expected to gain momentum over the rest of this year. "On average, the 56 economists polled downgraded their estimate of first-quarter growth in gross domestic product to 2.7% at a seasonally adjusted annual rate. That is down from an average first-quarter forecast of 3.6% just two months ago. The economy grew at a 3.1% rate in the fourth quarter." Many of the respondents are weary of the weak housing market, severe weather, declining confidence, and the earthquake in Japan as factors contributing to the pullback growth during the just-finished first quarter.

The improvement in the outlook of the economists was extended to the labor market. "Economists on average see the U.S. adding about 200,000 jobs a month over the next year. Though that number isn't strong enough to bring down the unemployment rate quickly, as the economy struggles to make up ground lost during the recession, the unemployment rate is seen continuing its downward trajectory. " These projections have caused many of the economists to predict that the Federal Reserve will begin to raise interest rates sooner than expected. This article was interesting in that there seemed to be a consensus that the single biggest factor that could inhibit growth is the price of oil sparked by Mideast unrest.

Unrest in Libya and Nigeria produce a great amount of high-quality crude oil a day and are both in the midst of civil unrest. Any reduction in crude exports from those countries could result in lower consumer confidence, and worries about demand represent a sharp turn from the concerns over supply disruptions that have driven oil futures up by nearly 20% this year.

Do you have any opinions on the economic outlook of the future in the US as we try to pull ourselves out of a financial crisis? What do you guys think about the positive outlook amidst the turmoil that is taking place in African countries (oil prices, oil commodities, and etc.)?

Obama's Plan to Reduce the Budget Deficit

Here is a link to a Wall Street Journal article talking about President Obama's proposed efforts to reduce the deficit the country has run up. The article talks about how the President is finally mulling over the nation's long-term financial future. Along with budget cuts, "the White House looks set to aim its firepower on a more divisive topic: taxes." He is going to propose cuts to entitlement programs, including Medicare and Medicaid, and changes to Social Security. He also will call for tax increases for people making over $250,000 a year, a proposal contained in his 2012 budget, and changing parts of the tax code he thinks benefit the wealthy. The proposed cuts would $1 trillion over the next 10 years.

Republicans have argued against the tax hikes saying that it poses potential issues in that tax increases aren't good thing if we want to see job creation. They also argue that "raising top rates would hurt small businesses and cut into cash that might otherwise turn into consumer spending." These tax issues are reigniting the debt ceiling debate.

"The U.S. Treasury issues debt to fund the country's obligations, including interest payments. But Congress sets the limit, or ceiling—currently at $14.294 trillion—and the country has roughly $14.2 trillion in debt outstanding. The Treasury wants the ceiling raised now, believing the country could potentially default on its debt July 8."

Any opinions on Obama's plan to reduce the deficit, implications towards the debt ceiling, or how we can make cuts to entitlement programs without jeopardizing citizens?

More Shutdown thoughts.

http://www.nytimes.com/2011/04/10/us/10sumter.html?_r=1&smid=tw-nytimes&seid=auto

I thought this was an interesting article about the impact of the shutdown that has since been delayed. I agree with the comments on the previous post, that it doesn’t solve the issue of the shutdown though but I bet the delay has brought home the impact that the shutdown will have to the politicians.

I hope that they (the politicians) see finally the seriousness of the situation and hopefully they will get down to business and finish a budget that should have been finished a long time ago. Does it really serve the constituents if the budget, although finally settled on, never gets into place?

And my question is how can government run if there is no budget to figure out how much to spend on what items? How was this possible? I think that this shutdown should have been an earlier problem. This shutdown threat should have happened a lot sooner, after all the year is halfway through.

And I agree about the politicians. I think they are also very self-serving with the approval of their own pay but not essential people (like soldiers or teachers) who actually live paycheck to paycheck. Sometimes I think government is the biggest scam of them all. If Wall Street and all of the financiers just wanted to get ahead by taking what they can now what does that say of our politicians? Sometimes I think that maybe the government is being run into the ground by the people who are taking what they can out of the system… I am starting to see now why the absence of government was so appealing back in the day when they deregulated everything which for me was a hard idea to grasp. I am of the mind that if there are no rules than how do you know what is fair and how to play the game?

Now the shutdown hullabaloo has shown me the merit of deregulation as I am starting to see all the corruption in the system but also the downside to deregulation would be the opening up of the system to more corruption and greed as there are no rules. It is like a Jenga tower. It keeps building on itself but as it increases it gets shakier and shakier.

Here is an interesting article I just read:

http://thecaucus.blogs.nytimes.com/2011/04/08/will-lawmakers-raise-money-during-a-shutdown/

What are your thoughts? Is this ethical? Is it okay?

International Monetary Fund Voices Concerns With U.S. Housing System

In an annual report that will be released next week, IMF says the origins of the global financial crisis can be found in the U.S. housing finance system. According to the International Monetary Fund (IMF), if the American government had better handled the U.S. housing crisis then the world might not now be facing a global financial crisis. The IMF goes on to call the federal involvement in the U.S. housing market “pervasive” but not particularly effective. IMF called for an “overhaul” of the manner in which the federal government deals with the housing market. IMF went on to criticize “a plethora of tax breaks and subsidies…[that] may have promoted the purchase of more and bigger homes…exacerbating leverage and the severity of boom and bust dynamics.” The report also analyzes the impact of a number of housing finance characteristics on mortgage credit and house prices. It goes on to suggest that the governmental participation in housing finance led to deeper swings in property values and amplified the expansion of mortgage credit during the years leading up to the recent crisis in advanced economies like the United States.

IMF then went on to praise the Obama administration’s housing finance reform proposal as a “welcome step” toward repairing the U.S. housing finance system. IMF suggests that reform of the U.S. housing finance system should, "first address current gaps in the regulatory, supervisory, and consumer protection frameworks; provide greater definition and transparency of government involvement in the housing market; reconsider the role of the housing GSEs to create a more level playing field in mortgage, while encouraging 'safe' private-label securitization. "

What are your opinions on how the IMF labeled the US housing sector as a catalyst to the global crisis? Do you think their suggestions of reform are palpable given the current state of affairs?

There Might be hope

Check out this article posted minutes ago.

http://money.cnn.com/2011/04/08/news/economy/budget_deal/index.htm

It goes on to explain that the government has made another short term stop gap measure to last us until next week. It also has a great video halfway down the page entitled Stupid Shutdown Banter. I personally love the golden colored suit woman who says Congress shouldn't be paid. Amen! I believe in that logic. :) The video is also great for its hokey background music.

The Rising Costs of Medicare

The picture above is from this article that talks about the rising costs of Medicare. House Budget Chairman Paul Ryan has brought to light some of the issues with the current Medicare system. Although there has been much debate about this topic, is is sparking a necessary debate. Medicare is "financed through a combination of payroll taxes, premiums and general revenue. The problem is that spending has been growing faster than the economy and is projected to do so indefinitely."

The number of enrollees has to 47 million, and the real cost per enrollee quadrupled, according to data from the Centers for Medicare and Medicaid Services. The plan looks to raise the Medicare eligibility age from 65 to 67 by the 2030s. Much of the concern about Ryan's proposal is that it proposes converting Medicare from a fee-for-service program into a "premium-support" system for everyone under 55 today. Another downside is that most elderly people would end up paying more for their health care than they would under the current Medicare system. Also the proposal, noted concern that his efforts to control Medicare costs are not paired with efforts to control health costs, and adversely affect affordability.

What portion so Ryan's budget cuts do you think we could incorporate to help control rising costs of health care? How can Ryan's budget cuts be adapted to make them more plausible?

When government shuts down

It will be a nightmare.  And it is totally unfair to those who work for the US government in some capacity.  See here for a discussion of what to expect.  Government is just another institutional form through which to produce goods and services.   Ideology is getting in the way of reality.

A nice piece on hyperinflation

Harrison offers a clear explanation of hyperinflation that augments the reading from R&R that we are doing for Tuesday.  I also thought his clear statement of his ideological leanings coupled with his notion that facts and data may lead to different conclusions was both refreshing and worthy of being emulated.

European Debt Crisis Morphs Into New Phase

Here is an article about the tough times European countries hare having in terms of the debt crisis.

link

The article states that Portugal is joining Greece and Ireland in seeking a European Union-led bailout. "Portugal’s need for emergency assistance became inevitable last month once its parliament rejected the government’s plans for yet another round of austerity." The country has been faced with credit-rating downgrades, deterioration in market spreads and access, and in balance-sheet issues in Portugese banks. Those issues have lead Portugal to allow access to emergency funds from other governmental sources to meet its debt obligations and to reduce the probability of a banking crisis. The article states that the European Union, European Central Bank, and the International Monetary Fund are trying to change the way they will help the 3 countries being bailed out if the trend continues to other countries in Europe. The focus, "will shift away from liquidity and on to solvency well before 2013."

On the surface, Portugal's problems mirror Ireland and Greece's. The biggest fear is that Portugal’s bailout is another indication that Europe’s peripheral debt crisis will devastate Italy and Spain next.

So what do you think of the efforts to shift the focus from liquidity to a more durable solvency solution for the continent’s debt crisis? Do agree that the additional the burden to stressed taxpayers and users of public services is a good approach?

Post#2 Exporting to China

I thought that this article about China's growing culture of importing goods was interesting. Do you think that because the Chinese import so many American goods that perhaps there is hope for our economy to slowly switch back to a non service economy, a manufacturing based economy? Even if China imports more than the USA and becomes Number One Importer just to export more products do you think that we have a chance to grow our industries? I think that because we export many intermediate products we have a chance to grow our manufacturing. We really do have a strong technology sector because we have so much research going on here. I think that this strong research background will help us increase our exports and therefore the GDP will increase as well as help us get out of Debt. I believe that even if our consumption levels stay relatively the same we will gain more by exporting to China because the Chinese will then export the finished products to the rest of the world. This article gives me a lot of hope. And I hope one day I actually can buy an American flag made in America. :)

Citizens United and democracy

Last week I posted a commentary on lobbyist influence; this week I'd like to point you to an interesting piece on the perverse short run and long run incentives caused by the Citizens United ruling by the Supreme Court.  Comments?

Europe is heading into its own financial crisis

I thought this short piece by Daniel Gros was interesting, not so much because of what it said but by how it said it.  Europeans look at the the resolution of the American part of the banking crisis and see success--afterall we haven't defaulted yet.  But no one really knows how to stop the impact of the crisis.  Well, that's not true--increase reserve requirements,  and reinstate Glass-Steagell--and we could stop some aspects of it.  And create a set of new unknown problems.  Again, as we talked about on Tuesday night, we have a crisis in search of a theory. 

Turn your house into a billboard, get free mortgage

So in light of yesterday's discussion, I thought it would be a good idea to talk about a more positive outlook by an advertisement company to help current homeowners. This post about an advertisement company's novel attempt to publicize itself by turning homes into billboards. The interesting part is how adzookie plans on compensating the homeowners for the ad space; Adzookie says "it will pay the house owner's mortgage every month for as long as the home stays painted.:

http://money.cnn.com/2011/04/05/technology/adzookie/index.htm?source=cnn_bin&hpt=Sbin

Adzookie started this offer on its website just a few days ago and has received over 1000 applications. CEO Romeo Mendoza has been surprised by the feedback this strategy has already received. "It really blew my mind," Mendoza said. "I knew the economy was tough, but it's sad to see how many homeowners are really struggling." There are conditions the homeowner must meet including having the house remain painted for at least three months, and the agreement may be extended up to one year.

I personally think that its a great way for homeowners beleaguered by mortgage payments to get back on track. What do you guys think of Adzookie's attempt to raise the company's profile by paying for homeowners mortgages?

Blog posting#1 Figuring out a government shutdown.

So yesterday I learned a lot. I am still getting my mind wrapped around how massive this financial crisis is. The movie that was shown Inside Job was very good at bringing that into perspective.

Correction: The Guy who owns the ambassador Bridge in Detroit is Manuel "Matty" Moroun. Not Monahan. That’s the name of a family owned construction company here in Detroit.

Here is my post for the day: 6-Apr-11

Read this Post from the New York Times about what will happen to state budgets if the federal government shuts down due to not agreeing on a budget.

http://www.nytimes.com/2011/04/06/us/06states.html?smid=tw-nytimes&seid=auto

What I am seeing is that halfway through the year we are still arguing about how to trim the budget and that not agreeing could cause a short shut down of the federal government halting a lot of transactions. This shut down impacts a lot of businesses and everyday things like payroll of federal employees, hours kept, businesses able to do business. Thus the shutdown will cost a lot more money than if we just agreed.

What impact do you think will occur? What is your opinion on this potential shutdown? Do you agree that arguing about such a small portion of the budget is worth shutting the government down for some time? Here is a quote from this article:

http://www.nytimes.com/2011/04/06/us/politics/06budget.html?ref=us

“Mr. Obama said he was looking forward to the clash of ideologies over the budget and said part of his mounting frustration regarding the current budget fight was that it dealt with just a fraction of federal spending and was coming when the fiscal year was already half over.”

Here also is an article from The Wall Street Journal that tells us what parts of the government would be shutdown exactly if this happened based on evidence from the 1995 shutdown.

http://blogs.wsj.com/washwire/2011/04/06/government-shutdown-what-to-expect/

I personally think that this is ridiculous and that we should just strike a deal so that things can stay open and people will be employed. I think that a lot of the parts of the government that are getting shutdown are related to everyday tasks but also bring in slight revenues and keep people active and employed.

World's largest banks

Click on the link to see a great bubble chart of the world's largest banks courtesy of creditwritedown.com.  We talk about the US banks as if they were the most important.   I look at the bubbles and the image that comes to mind is that many of those bubbles may be bursting soon.

Sharp Disagreement Among Federal Reserve Members

Eyes on the Fed- NEW YORK (CNNMoney) -- Members of the Federal Reserve are in sharp disagreement about how to address rising prices. The central bank might need to tighten the reins on the economy before the end of the year to stave off inflation, said some members of the central bank's policy-setting body. But others appeared comfortable holding off on taking any action, according to the minutes of the Fed's March 15 meeting, released Tuesday. See link here... In todays discussion some key topics that were brought up include: how to develop economic recovery in the coming years, rising interest rates, and higher inflation. I found this article to be extremely relevant because it addresses all of these topics, and discusses what Fed's are currently talking about. "Once the $600 billion in Treasury purchases planned under QE2 are completed, the Fed will need to decide how and when to raise rates or start unwinding the trillions in purchases already made. But those issues remain in dispute among the Fed's ranks." What are your thoughts on the size of this purchase program? Do you see light in the near future? The video mentions one newly elected Fed member, is this the change that we need to start seeing? Any other comments...