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Tuesday, September 30, 2008

Any hope for the dollar?

In the news there seems to be nothing possitive about U.S. economics.....

...however a couple days ago Cnn claimed that the U.S. dollar is gaining some ground on the Euro. Not only that but the Euro continues to loose a couple cents a week, while the U.S. dollar has increased a couple cents. I think that this is very possitive because it shows that we are not alone. Alone is the sense that other economies all over the world rely on the U.S.. With a little poking around, Euorpe, Germany, UK, France and Luxembourg. Many of these countries rely and match the Euro against the dollar. But why would the Euro start declining when the US dollar declines? There are many answers, but one of the main factor in global economics is that intense world trade influences prices in markets. It is remarkable to look at the last 4 years of exchange rates vs. the U.S. market fluctuations, and you will see that there is a heavy dependance on U.S. expectations, not only in the U.S. but a dependant look from around the world. But with the current gains of the dollar, and delinces in the Euro, maybe value and trust will return to the U.S. dollar.

Pork Barrel Spending

One of the biggest sources of market failure in the world is the government. Externalities, public goods and monopolies exist, but are often worsened or even caused by the use of governmental coercion. I'd like to consider just one of these cases that is very popular with the members of the Congress of the United States: pork barrel spending.

Pork barrel spending is spending that is tacked onto more legitimate bills. In order to pass the other bills, Congress must pass the extra payouts as well. According to Citizens Against Government Waste, a website that monitors such spending, an expenditure qualifies as pork if it satisfies at least one of the following criteria from http://www.cagw.org/site/PageServer?pagename=reports_pigbook2008#criteria :

Pork has accounted for $17.2 billion from only 12 Appropriations Acts in 2008. These all use the government's force to collect money to spend on things that rarely correct market failure and actually usually cause it. For specifics, there is a database sorted alphabetically and by dollar amount here: http://www.cagw.org/site/PageServer?pagename=reports_pigbook2008 and members of Congress are rated here: http://www.clubforgrowth.org/2007/03/the_clubs_2006_congressional_s_1.php.

If we could abolish the earmark system and put a stop to pork barrel spending, the economy would be lightened of an enormous load, not only in the money directly spent, but in the resources that would be redirected to production instead of lobbying. Also, many projects that cause market failure would not receive funding. I encourage everyone to consider this and look at pork expenditure records before voting for any federal official.

The Blame Game

My initial reaction to news of the $700 billion government bailout was totally apoplectic – I am certain that I would be so much happier if I didn’t have a clue about what is going on in the world. But after allowing all of this to digest for the past two weeks, I have come to the point where I am thoroughly amused by the whole fiasco. It is so entertaining to watch all those morons in Washington running around pointing the finger at everyone else. Do they not realize that we (the lowly peasants whom they “serve”) have access to the world-wide web? History is so well-documented now through newspaper archives and youtube, that anyone can do their own research. So I decided to do a little research of my own.

The New York Times printed an article exactly 9 years ago today titled “Fannie Mae Eases Credit to Aid Mortgage Lending”. The Clinton administration was placing enormous pressure on the nation’s biggest underwriter to expand mortgage lending to low income individuals. The chairman of Fannie Mae at the time, Franklin Raines was very proud of the fact that they had successfully “expanded home ownership for millions of families in the 1990’s by reducing down payment requirements”, yet he was still concerned about borrowers whose credit ratings were a notch below the already loosened credit standards. Another push to include those with less-than-stellar credit in the housing market spawned new credit criteria and made mortgage loans available to subprime borrowers with favorable interest rates.

Most of the politicians are now pointing their fingers at Wall Street, claiming that corporate greed is to blame. Yet, more than a decade ago the Washington elite were sticking their grubby little fingers all over the financial markets, meddling with the mortgage lending requirements and offering to buy up any loans that banks made to subprime borrowers. Of course the banks were willing to make those loans in order to gain greater profits, as the federal government just relieved them of practically all of the risk. The privatization of profits and socialization of losses was bound to create risky behavior in any profit driven enterprise.

The democrats are screaming that the current financial mess is all President Bush’s fault, the republicans are blaming the democrats and they are all pointing the finger at those “capitalist pigs” on Wall Street. Yet you rarely hear any politician flat out say “WE screwed up”. That type of honesty in these trying times would be a breath of fresh air.

Right Wing scare tactics.

On the days I get to spend working in the office, I get a change to listen to a lot of talk radio. Most of the people I work with are Democrats, so we listen to a lot of Republican talk radio since it provides a good laugh throughout the day. Recently, we were listening to Chuck Baker, a controversial DJ for the most part, and he goes off on some rant about the economy. In this rant he stated "it is well documented that the economy is in a recession." Now this is just a plain ridiculous statement. I know we all know what the technical definition is for a recession and whether or not we can see one coming in the future has no bearing on this.

What I think is amazing is how he can make this statement. He is supposed to be a representative for the party that represent the majority in this country. But he is a liar. What is even more amazing is when the few republicans I work with come in stating these exact lies as fact. Chuck Baker is influencing, or brainwashing these people to vote a certain way. And it is appalling that people just blindly believe what he says.

Voting can lead to an increased chance of dying?

A study done by Dr. Donald Redelmeier, a professor of medicine at the University of Toronto and Robert Tibshirani, now at Stanford University found that your risk of dying by car crash goes up by 18% on election days. They've been studying this since 1976 and Jimmy Carter's win. And it's pretty consistent in all the elections since then, on average 24 more people die due to car crashes. I mean I can see how this can happen, everyone is all flustered on who they're going to vote for, where they have to vote and probably how are they going to fit this into their already hectic schedule. To new voters, they probably have no idea where they have to vote and the act of finding the set location and the already congested traffic can easily lead to a car crash. So save a life and mail in your vote!

Presidential Economics

Watching the presidential debate the other day was very interesting from an economical viewpoint. BOth nof the candidates continuosly said how we needed to reduce spending by the government. This is very true but neither of them seemed to know how to do it. They were extremely vague and that does not promote a lot of confidence for the future. We need to have people in the white house who know how the economy works. They both would talk about different taxing policies that the other had and that they were wrong, yet neither of them told us actual reasons of why there way will work and the others will not. With our economy in such a crisis I think it is very important that the candidates to lead this country have a strong grasp on the issues at hand, and unfortunately I dont see that these men do.

Slow Food

The slow food movement,
Advances in technology have created ways for goods to be transported around the world quicker and cheaper than previously thought to be possible. As a result of fast/affordable transportation, our world has become a smaller place. Breakthroughs in transportation have allowed people to exchange goods over vast distances in a short amount of time. The modern day transportation networks have transformed domestic markets into global markets. Everything from fruits and vegetables to steel can be traded from anywhere in the world. The result has been more affordable goods for everybody due to individual countries comparative advantages.
Now the world has entered a new phase, a phase of sustainability. The earth is getting greener which means some things are changing. One thing changing in particular is food. It started with the demand for organics and now is shifting into what is being called the slow food movement.
“Slow Food aims to be everything fast food is not. It's slow — in the making and the eating. It's fresh — not processed. It's from neighborhood farms and stores — not from industrial growers such as Tyson Foods (TSN) or retail goliaths such as Wal-Mart (WMT).”– (Slow Food' movement gathers momentum
By Jim Hopkins, USA TODAY)

The idea of slow food is to eat locally. The goal is to have independent communities that are self sufficient. Advocates of slow food suggest this would lead to healthier communities by supplying them with fresh food as opposed to processed foods. Shipping foods around the world also requires preservatives to extend their shelf life.
Thinking like an Economist, I view the slow food movement as a step backwards. Communities striving to be self sufficient are losing out on the competitive advantages of others. The communities may have fresher tomatoes but they will come at a much higher cost. In addition, most foods grow in specific climates that support a given food. It would be really hard for people in Colorado Springs to locally produce their own pineapples, sugar cane, or citrus fruits. If every community joined the slow food movement we would all be worse off in another way, our exports. If we (Americans) are no longer consuming coffee beans from Colombia, we not only hurt ourselves, but the bean farmers of Colombia who now can only supply their domestic markets. Likewise, Colombians will no longer be importing America’s wheat, and the wheat farmer of America would be worse off.
The slow food movement would not only increase the cost of the food we consume, but would greatly diminish the variety we can consume. In other words, by striving to be self sufficient, we are lowering our own standard of living.

Investment bank and more on bailout

The Federal Reserve announced that it granted permission for Goldman Sachs and Morgan Stanley, the last two major investment banks to become the bank holding companies in order to stay in business. This will help the company avoid the fates of Bear Stearns, Lehman Brothers and Merrill Lynch by giving them broader access to borrow federal money and the ability to build a stable base of deposits. The tighter regulations that will help reshape Wall Street, the two companies will have access to more federal money to shore up their global operations.

Prior to the creation of the Federal Reserve, banks could only lend what they had. In fact that they had limited, such as gold and would only invest so much of it just to keep the risk behavior minimized. The governments are interfering in the free market for a long time and it is been downhill since. The free market is adjusting and would use the opportunity to clean the companies that has less capable out of the industry and leaving the good and solid companies. Investors trusted Goldman to make the right choices and then found that it had make less severe but still terrible investments. Morgan Stanley also are agree to sell 20 percent stake in itself to Japan’s biggest bank for about $8 billion. During the past nine months Morgan Stanley’s profit also fell 41 percent compared with the same period last year. Goldman and Morgan are extremely important participants in the U.S and global financial markets and it is very important for them to remain in the future.

As a college student, I wish that the Fed would step in to make college education free or at least cheaper, using some of that $700 billion for higher education. Many of us college students don’t have to put such a weight of debt after we graduate from college. Better educated students are more likely to engage in professional activities with benefits that are not fully compensated by the market. The positive externalities of higher education are smaller and more elusive. If there are no externalities, people have to accept the idea that the increase in productivity resulting from higher education is reflected in such as wages. We are all affected not only by the level of quality of our own education but also by those around us that can communicated and work more effectively if they are well-educated.


The Bailout's Failure is Bad?

The bailout is apparently bad news for the housing market, or so says The Associated Press. It seems to me that as time goes on, people get more and more into making money, and less into what they are actually doing. While being quite young, at least relative to those I am speaking about, I feel I have the right to say that. I know that people have always been trying to find ways to cut corners and make a little more profit, but is it really worth threatening the economy to crash worth your next vacation? Well I hope it was a good one, because next year’s is going to have to cost a little less for some bankers over on Wall Street. The bailout is still (at least at the time of the articles I read) at a deadlock, and people are complaining. That’s what people do best these days. Many contractors are having trouble finding work so they seem to want the bailout to pass more than anything. I don’t blame them, especially the small ones. They’re going to have the lay off workers, cut wages, etc. just to get by this, which is if they make it. Then when we all become rich economists (ha ha), we’re going to have to deal with big companies when we want to build our mansion houses. In reality, what may be the worst about this crash, is that because the bankers wanted some more money, and made these loans that shouldn’t have been made, now the businesses that depended on them to make those loans are going to suffer. As someone who about to start looking for a house (perfect timing), I am not thrilled. If this bailout passes, unfortunately businesses may get the idea that if they get into trouble as those banks did, no big deal, Uncle Sam to the rescue, then we will really have a problem.
So how do we fix the problem? Ignoring the tugs from all the other businesses that were hurt because of the crash, let the banks deal with it themselves. As parents tell their children, it’s your responsibility. Isn’t that why parents give their children pets? To teach responsibility? Maybe those bankers never had pets as children. Regardless, with my little understanding of the whole thing, I think we should skip the bailout. However, I do believe we should offer a small compensation to the businesses hurt by the banker’s poor decisions; it was not the contractor’s fault that the banker wanted another vacation. This compensation needs to be small, and needs to be for a short period of time, perhaps just enough to keep them all from sinking. I’m afraid of saying externalities because of externality abuse, and it is all within the market, however the banker didn’t intend on hurting the contractor’s business, and the contractor was relying on the banker to make the loan so the buyers could pay him. Which leads to something else, if in the past x number of years all of these loans have been made that shouldn’t have been, then hasn’t that given false demand to the housing available? People would be looking for bigger houses than they would have provided they had gotten the correct loan amount. I don’t believe that the bailout would help that. So shred the bailout, and start from scratch and find a way to help out those hurt by the banker’s poor decisions, possible subsidies with extreme caution, and let the market work itself. As I told my friend who is a political science major, politics are politics, while entertaining to observe from time to time, they only mess things up for the rest of us.

Monday, September 29, 2008

Executive Compensation and the Financial Crisis

When I consider the recent financial crisis, the question that comes to mind is, "who is responsible for all of this?" With that question I mean more than to ask whose fault is it. I am not concerned with placing the blame on certain people or organizations. What I mean is who were the ones who could say I/we are the one(s) responsible for the well being of this company. It makes most sense to me that it is the executives of these companies who are responsible for the company. It is their job. And in a free market economy, if your company fails, then bummer. I am not saying that the government should do nothing in this situation, but what I do mean is that they should be the ones who bear most of the cost of their mistakes instead of making us pay for it.
Rather than creating incentives by rewarding executives with bonuses for making bad, high risk loans, there needs to be more integrity and accountability among these companies. Especially those whose failure is so "catastrophic" for the American people and economy. As Charles Tharpe (from the linked article) said, "You don't want to discourage risk, you just don't want to [give an] incentive [for] excessive risk." And that is exactly what happens when executives recieve all this compensation. In my opinoin I think that the same ones who are responsible for the decision making and well being of these companies, also need to be responsible for paying for their mistakes.

More thoughts on the bailout.

To be fair, I have to say that I haven't followed this bailout that closely. I have been paying attention on the news and looking at a couple of articles online. After today we found out that the bailout was actually declined, which to me seems like a good idea. Like we discussed it in class, these bad loans happened because of the government and the policies that have put into place to help people. From general information, it seems that companies have just gotten lazy, and have expected the government to just back them up. Sadly, companies that are now failing are large and handle a lot of business, which affects a lot of people leading to people losing investments and even their future. But for government to continue raising taxes, continue their borrowing with out regulation will not help. It seems like government wants to take the easy way out by issuing this big bailout and it's true that something needs to be done but with so many smart people running our government it seems like no one can come up with more than one solution. As for the economy in general, it cyclical. Yes this seems like a really bad situation but can it be possible to reach the depths that it did in the Great Depression? I really do think that it will has more to do with the expectations of the public. There will be pay cuts, less available jobs, people wont buy as much. But then again, you are still going to get up and go to work, still going to buy food for your family and you're still going to spend money on gas. I don't believe it's the end of the world, Tuesday will come and I'll still go to class even though the market went down like 700 points. Is there really a need to come up with a huge amount of money to save the economy right now? Or can there be time for more thinking and more options, maybe just breaking up these companies so the risk is spread out, and maybe other companies can buy them out. And I think that the public also realizes that and I'm glad, be it an election year or not, that some of our representatives are listening.


Sunday, September 28, 2008

Nothing to Celebrate

Bob Schaffer said on “Meet the Press” today, "There is nothing to like about the bailout. It is necessary, I think, however, for the Congress to move forward in a way that reacts to the problems that Congress helped create, in fact led the way to creating, but to suggest that there's something to celebrate is exactly wrong."

Nothing to celebrate is right. Don’t we leave is a society built on the backs of the men and women of this country? It’s their blood, sweat and tears that pays the taxes and built this society up as an economic stronghold. We, the people, are the ones stuck holding the bill and for a bailout that is considered very unpopular. News reporters keep saying that members of congress are constantly receiving calls and emails strong opposing government intervention, again. The United States was different and stood apart from the majority of the world as a county that believe in a free market. Without a free market, there is no American Dream. In a free market, businesses fail. It’s all part of the system. But when government gets involved, setting unrealistic goals, pushing things like affordable-housing, we are no longer talking about a free market. We are talking about a twisted government enforced, regulations for the sake of regulations (or for prompting political issues) system. Government perhaps long ago, stopped playing their role in our economy as fixer of market failures and now is a cause of market failure.

Saturday, September 27, 2008

US Crisis and Theories: Do we need more alternatives?

As of September 24th Palin has declared the idea that this economic bailout for banks and the latest AIG insurance company (and perhaps Wachovia and other hopeful small banks that are trying to lobby according to the Gazette) bailout has cornered the economy to a second great depression in an interview with Katie Couric.( http://thecaucus.blogs.nytimes.com/2008/09/24/couric-to-palin-great-depression/?ref=politics)- Really, can our government internal stabilizers be that bad? Have our stabilizers not changed since FDR! Could our would- be vice candidate for the Republican side be that comfortable folding her cards before she went through the next round of metaphorical poker?
Our economy has come up with many ifs and flagrant regard to cry wolf while complaining about what we should have done. Well perhaps the ifs are theories of what we should do rather than throw in the proverbial towel. If the government intervenes through Fannie Mae and Freddie Mac will we, the US, be better off? Or like other state intervention can the government remove itself like it does a protective tariff for a new industry where it reduces risk by a certain percentage and breaks apart the company and sells it? Or according to one of our classmates to let government subsidize or give tax breaks to other domestic or foreign companies to buy these companies?( If I am wrong about the classmate’s response please let me know). Thirdly, could there be a reason for removing the fluctuating rates or variable rates of the current arm loans to replace them with the same fixed rates? Why can’t advisors come in to these individual foreclosures to realize the equity that hasn’t been pulled out by some to help reduce some homeowners payments is it really too late?

Saturday, US treasurer and leading economist , Hank Paulson and Ben Bernake, came together to make a plan they conveniently dubbed the "Paulson Bernake plan. According to the media this plan involves a lot of tax payer money for the government to internalize this bailout utilizing 3 essential steps within this bill.

1) Eight hundred Billion dollars towards a fund that buys "toxic assets"= Fannie Mae and Freddie Mac.

2) Four hundred billion dollars towards insuring money market funds= insure banks with FDIC (and NCUA?) which provides insurance up to 100,000 dollars per depositor per institution?
FDIC does not include however: the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank.( http://www.fdic.gov/deposit/deposits/insuringdeposits/ ).

3) This plan is to be considered similar to the same bill during the savings and loan crisis.

I think that giving more money to the FDIC is very good idea but I’m not sure about the great amounts of tax payer money as free grants to these people that decided on these ARM loans. I think that people that do pay are suffering the consequence of being a good financial citizen. Where are the consequences dished out by the government or free market to those who have made these bad choices? As for those that made the deals should to my belief be tried in court with the court’s appointed lawyer instead of CEO's recieving serverence packages.

Monday, September 15, 2008

Eventful Week

Between Hurricane Ike and activity on Wall Street, this week has not been boring. Once again, the government is being asked to bail out a major financial player. American Insurance Group is begging for emergency funding. This comes just a couple of weeks after the government bailed out mortgage lenders Fannie Mae and Freddie Mac. How many times are we going to repeat this song and dance? In addition to this, Lehman Brothers investment bank declared bankruptcy this morning and Merrill Lynch sold out to Bank of America to the tune of 50 billion.

The only thing we can be happy about is the fact that Hurricane Ike did not take out the refineries on the Gulf, so gas prices plummeted today below $100/barrel. This does not improve the dangerous situation that the banking industry finds itself in as they feel the effects of the bottom falling out of the sub- prime lending sector. When major companies such as the ones mentioned above sink to the point that a government bailout is the only solution, it makes me very nervous about entrusting my money to them or anyone affiliated with them. With the state of credit as it stands and more and more mortgages being defaulted on, I begin to wonder if I may live to see the failure of precautionary measures taken after the Great Depression.

While I don't pretend to have a solution to the mess that these companies find themselves in, I am seriously concerned about the wisdom of allowing the federal government to bail them out. This, to me, completely undermines the entire concept of free enterprise by creating a dependent relationship between the government and the companies facing demise. Sell the company off piece by piece, or to the highest bidder/competitor, but don't sell it to the entity that is supposed to be the only unbiased mediator in fair trade. If these companies are this far gone, I don't really see much hope for them to pay off the additional money they are asking the Fed for which essentially means that sooner or later we may have what amounts to a government owned sector in the banking and insurance industry. Who wants to entrust their money and backup plan to the good old boys in Washington?

Monday, September 08, 2008

Colorado Springs Utilities to Raise Water Rates Due to Revenue Shortfall Caused by Conservation-

Does this make any sense? For several years, Colorado Springs Utilities has been urging everybody to conserve water due to drought conditions. In addition to a public awareness campaign about water conservation, city council actually made it illegal to water wantonly. As an incentive to get people to conserve water, Colorado Springs Utilities not only espoused the environmental benefits, but also they appealed to our monetary values: conserving water will save you money!! The good residents of Colorado Springs did what they should have done - they cut back their water usage.

The watering restrictions have for the most part been lifted now, but people have gotten into the habit of conserving water. Good for them, right? Wrong. Colorado Springs Utilities, in their infinite backwardness, announced they plan to increase water rates due to falling demand. The decrease in water consumption has hurt their budget because they are no longer getting the same water revenue. Here lies the problem of monopoly. Because Colorado Springs Utilities has no competitors, indeed because it is a government-run enterprise and therefore doesn't have to worry about good business practice like a private firm would, it can simply charge more to make up for falling revenues. Never mind changing business practice to meet the challenge of today's world, never mind having the foresight to see this coming. The good people of Colorado Springs did what they were supposed to do, and instead of being rewarded for their good behavior, they see a rate increase. Our residents are being punished for doing the right thing. And what recourse do they have? Can they simply switch to Colorado Springs Utilities' competitor? Can they cut back their water usage even more to make up for the rate increase? We've already seen what happens if we use that tactic. No, the only option for the residents of Colorado Springs is to accept the rate increase or risk having their utilities turned off.

To fix this, I recommend we pay close attention to city council. There are some council members like Jerry Heimlicher and Scott Hente who are vehemently opposed to this increase as well they should be. City council, to their credit, rejected the idea of a rate increase, but they haven't voted it down yet. Instead they told Colorado Springs Utilities to cut their budget in every possible first, them come back and ask for a rate hike. But pay attention. If city council approves this measure, take note of those who voted in favor of it and do not re-elect them!

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