A lesson to learn

"Cycle-proof regulation"

This article written by a former IMF economist details his idea of a possible "non-band aid" solution. He basically comes up with an idea to keep banks capable of producing the necessary cash when times are good, so that they can use it when the economy turns bad. The author comments that regulation usually is allowed to progress when times are bad and public sentiment is in the regulators favor. This idea needs to be implemented by more than just banks. The public could use this dose of medicine, too. What's interesting is who will actually put this into practice. My bet is that the financial sector will put on a face for the public to show sorrow and a "real change of heart," and may even make some actual changes here and there. The public on the other hand will make the more significant and long lasting change to prevent a crisis again. I could be wrong. Maybe the banks will actually figure out a way to cash in on public savings.


US foreclosures up 24% in first quarter

I came across this article after responding to a post made about the 4.7% increase in new home sales. I thought it was interesting that in February new home sales rebounded nearly 5%. It's even more interesting that US foreclosures are up 24% now and in February new home sales were up 4.7%. I would have to say that this article about foreclosures show us that the 4.7% increase in new home sales wasn't much of a sign that the economy is recovering. "The faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same time period a year earlier. Wow! That is such a huge jump in just a years time. The article states that while foreclosures were down 13% in the fourth quarter last year they project that it will continue to rise and hopefully taper of in the summer.

Here is a link to the article.

Is China a threat?

Spurred by the time-deadline placed before me, I read an article in the New York Times about China expanding it's influence in Latin America. This article explained that China has negotiated deals with Venezuela, Ecuador, Argentina, and Brazil, giving them large sums of money. This move either shows that China cares, or that they have a lot to gain by doing this. David Rothkopf is quoted in this article as saying, "This is how the balance of power shifts quietly during times of crisis." This comment sort of put me on the edge of my seat thinking that China is secretly taking over the world. Then i thought about it some more and realized that we owe China a lot of money so it's not like we aren't aware just how much influence China already has with us, and in the world in general.

It’s Okay if you lose your Job

I saw an interesting advertisement on TV a few days ago and thought I would share it with those who might have not seen it. Saturn has a new protection plan for their vehicle buyers. They offer to pay up to nine months of your payments if you lose your job. I know they are trying to promote sales, but how is this going to help them? Yes, they might get a few more cars off the lot, but their company just got bailed out and is on the chopping block to be sold. There terms state: “You have to be employed for at least 30 hours per week for 90 days after you buy or lease the vehicle and for 12 consecutive weeks prior to your first day of unemployment. Then, if you lose your job due to economic conditions during the next 21 months you are eligible for benefits. If you lose your job for other reasons, you may not be covered.” How would someone go about proving they lost their job due to “economic conditions”?

Terms and Conditons

G-20 2009

What I would like to know is what changed, this big meeting amongst world leaders, large and small countries, highest security ever assembled, etc. I here very little of Obama coming back from the Summit with new ideas, for that fact I hear nothing about change in other countries due to the summit. I was looking up the agenda for the summit and what was to take place during it. With all of the things being discussed, I would have expected more. We talked about the relevance of each country that attended and what they brought to the table in class. The one thing that I feel is missing is the outcome, there were more stories about the security at the conference than the outcome of it. (Wikipedia: 2009 G-20 London Summit)

China's New Investment

I found an article from the Wall Street Journal Online entitled China's Growth Slowest in Two Decades. Given that we study growth theory, and China is a major player in the world economy, and tonight is the deadline for submitting new posts, I thought I would give it a read. The article is pretty basic and talks about how the numbers don't accurately portray Chinese growth because they only release numbers on a year-to-year basis, unlike our quarterly releases. The main thing that caught my attention was the noted increase in Chinese domestic investments.

The government's stimulus program has been ramping up investment to counteract the weakness in export demand. Fixed-asset investment in urban areas, China's benchmark measure of capital spending, rose 30.3% in March from the year-ago period, picking up from 26.5% growth in the first two months of this year.

I may have this completely wrong, but this seems to be a step in the right direction as far as their policy goes. Reinvesting back into your countries own capital is vital to growth and if the Chinese begin investing some of their billions back into their own country as it becomes more stable and reliable they could experience substantial gains in well-being, I think. Here is a link to the article, http://online.wsj.com/article/SB123984767545423661.html#mod=testMod.

Same Game Different Rules

The Post-Recession Appetite for Risk and Regulation
This article points out the various questions currently being asked in regard to initiating new regulation of banks and the financial sector. It features various economists giving their take on what needs to be done to ensure that a meltdown like the current one doesn't happen again. I'm really not sure what the point of new regulation is. Any regulation on the banking system will have its moment in the sun and be played up as Washington and Obama "getting things done." But the financial system runs on taking risk, and whether they are called hedge funds or something else, they will find a way to get around any new laws and regulations. It has been going on for years with tax evasion, and when this crisis blows over the game will continue and their will be new winners and losers.

Consumer Prices Falling

This article on bloomber.com caught my attention:

Many economist have been warning that as the Fed continues to inject hoards of cash into our struggling economy that inflation will soar, thus effecting the purchasing power of Americans. Such effects are not yet evident as consumer prices actually saw an annual drop for the first time in over 50 years. It was reported that the consumer price index fell .4 percent in March from the previous year. These figures signal deflation and may be due to the global recession keeping prices low. Some would view this as a bigger danger than current manufacturing and production data that is effecting businesses' outlook on the economy. It is not likely however that consumer prices will downspiral. As senior economist Carl Riccadonna stated,“The more slack there is in the system, the longer it will take for inflation to become a concern.” The effect of the Fed's massive spending I would assume will be seen further down the road.

Is Lebron James Overpaid??

I have often heard people talking about the salaries of professional athletes. It's no secret that most professional athletes make more in one year than most of us will ever make in our life times. And I can see how people might think that paying people millions of dollars to run around playing like they were still in kindergarten could seem a little ridiculous. Just as an example, Lebron James plays for the Cleveland Caveliers. He came straight out of high school and is already making the individual salary cap of 20 million per year. That's some serious dough for just playing a game of basketball!! Most people see those kinds of numbers and are just disgusted. I used to think the same thing until I took a class on sports economics. There are certainly cases where players are overpaid for what they actually do in their profession. This is not the case for Lebron James.

It seems logical that a worker in his field should be paid what he is worth. For Example, I work in a factory driving a large fork lift doing very skill based maneuvers. It is not an easy job to do for most people. If I were to apply to work somewhere else, I know that I am at least worth what I am making. If an offer were less than what I am making now, why would I ever accept it? The only problem with most jobs, is that there is no effective way of measuring productivity. It is a very hard thing to do in most cases. In basketball however, productivity is perfectly measured. It is a very simple thing to see what a player contributes to his team. And it would make sense that a player should be payed according to his productivity.

Lebron James is one case where his productivity can be measured very well. In his profession, he would expect to make what he is worth compared to other players in the league, just like any other industry. If we use the stats to determine how much money James should be payed, there is very clear data showing that he is actually underpaid! If he were paid for the amount of money that he alone generates for the Caveliers, he would make a lot more money than he does. He brings in a lot more revenue than he is paid. This is determined by looking at the number of wins that he himself produces and the revenue that is made from the gate, merchandise, and other factors. So despite common belief, some professional players are not being payed what they should.

Don't read if you're a right wing republican

Due to the responses another blog of mine received, I decided to make another blog that goes into further detail of why the Federal Reserve needs to rescue the banks, and letting them fail would be a grave mistake with enormous economical consequences. MSN published an article a few months ago listing the 10 biggest mistakes the Federal Reserve has made thus far in this recession. I realize it's a little early for such hindsight, but bear with me. MSN stated that the #1 worst mistake our country has made was letting Lehman Brothers fail. Once that happened, it sent investors scrambling for the exits as that meant no company is 'too big to fail.' This panic also sent a run on the banks, which is blamed for the bankruptcy of Washington Mutual, as well as the further destruction of Citigroup, Bank of America, and others. This panic spread throughout the economy and news outlets, causing consumer spending to plummet and the Dow Jones to get into the 6000's.

As a moderate Republican, I side with the Republican party on most aspects, but this issue is simply impossible to ignore. In most economies we can allow major companies to fail, as inevitably a replacement will come, replacing the lost jobs. However, we cannot allow every major bank and insurance company in the nation to fail all at once, as this panic and devastation would easily plunge us into a great depression that could take years or decades to recover from. If some major banks fail, this will likely trickle down to all the financial institutions, as they are so tightly correlated, and virtually all of them are in financial trouble. For a long time I've criticized those who compared this recession to the Great Depression because things aren't close to that bad. I believe though that if the government does nothing, and lets the economy repair itself, things could get much, much worse, ultimately dwarfing the Great Depression. Thank goodness that isn't the case, as the Fed is rescuing all the major banks that could cause us to spiral out of control.

Some Republicans believe that the best policy is Pure-Capitalism. I believe that system is just about as bad as Pure-Communism. What we need is a Capitalistic market, with the regulations that are necessary for optimal economic growth, and government intervention when necessary. I hope that doesn't sound too much like Socialism, as I'm certainly not Socialist. No one wants to relive the Great Depression, that's why I'd rather have the government spend billions, knowing that much of it will be wasted. At the very least, this optimism is getting people to spend, in turn causing us to climb out of this awful economy.

I couldn't find that old MSN article, but here's an interesting one: http://www.financialexpress.com/news/letting-lehman-go-was-big-mistake-lagarde/370911/


China isn't stupid

Last time we were in class we discussed the problem of a lot of foreign ownership of U.S. treasury bonds and the risks that we are facing by deflating the value of the dollar on purpose. China currently owns 70% of the $2 trillion of foreign held reserves. China recently asked for a guarantee of safety of their assets, due to rising concerns of U.S. spending. Dallas Federal Reserve President Richard Fisher recently pointed out that China wouldn’t dare do anything to harm U.S. interests, like dumping the treasuries they own, because U.S. and Chinese interests are directly connected. We rely on Chinese investment in our treasuries for revenue, and China’s economy relies on U.S. consumer spending. And despite the continuing economic turmoil, the U.S. dollar is still the preferred currency of the business world. China would be giving itself a huge kick to the crotch if it tried to get rid of the treasuries it’s currently holding. Whether they wish they had bought them or not, they’re stuck with them for the foreseeable future. You can read more about what Mr. Fisher said about the situation here:http://news.yahoo.com/s/nm/20090414/bs_nm/us_fed_fisher;_ylt=AqlZtLX_x97QmqMFhr.BFXXv5rEF

The Future of American Roadway Maintenance Unclear

I came across on article entitled “Oil Industry Braces for Drop in U.S. Thirst for Gasoline” in the April 13 copy of the Wall Street Journal. The article explains that since the introduction of the mass-produced Model T nearly a century ago, U.S. demand for oil has been on the rise until now. The article claims that many of the oil industry’s most prominent members including Exxon Mobil Corp., believe that U.S. gasoline consumption has peaked and will never again attain such levels. The U.S. Energy Information Administration reports that American drivers consumed 371.2 million gallons of petroleum-based gasoline a day in 2007 and that this figure is expected to decline in 2009 to 345.7 million gallons daily. One might say the current recession is to blame for decreased gasoline consumption which is essentially true but Americans have begun to alter their lifestyles as well. Americans have recently made a concentrated effort to decrease commuting distances and driving overall as gasoline prices skyrocketed as recent as last summer. Those deeply involved in the industry believe that even after the economy strengthens, gasoline consumption will never again reach the levels it did in 2007 due to the emergence of biofuels and more energy efficient vehicles such the hybrid. One might additionally argue that certain policies promoted by the Obama administration are fueling the energy revolution and thus will have a decreasing impact on overall gasoline consumption. While this trend is generally regarded positively as a step in the right direction, concern has risen regarding the tax revenue that gasoline consumption supplies. The article notes that federal gasoline-tax revenue fell 3% last year and that the trend must inevitably continue as consumption declines. This reveals a major concern that needs to be addressed. What is the future of America’s highways and roads that are currently funded primarily by gasoline-tax revenue? How will the United States maintain and repair its massive highway system as funds decrease? One suggestion is to tax drivers per mile driven rather than by the gallon to incorporate the use of biofuels and more energy efficient vehicles but how would such a policy be enacted? Would one have to report miles driven annually with your income taxes? In my mind such a policy seems implausible, but I can’t think of any alternatives. Are there any better suggestions? How can America continue to contribute to the Highway Trust Fund as gasoline-tax revenues decline?

Obama Sees...

I read an article from the New York Times called "Obama Sees More Pain Now but Hope Later on Economy." http://www.nytimes.com/2009/04/15/business/economy/15obama.html?_r=1&hp The article discusses a speach given by Obama on the economy, in his speech, Obama states that the near $800 billion stimulus plan was "starting to generate signs of economic progress." I agree that we are starting to see signs of improvement in many of the economic indicators (ie. the stock market). Assuming the economy has turned the corner (which I am in no way stating, only hoping), perhaps it is/was due to the injection of Obama's stimulus plan. But I for one feel it is too early to tell whether or not the turn-around is a direct result of Obama's stimulus. People have been talking about a turn-around since late last year. In my opinion, we were due for a turn-around. The inefficient companies failed (more would have failed had the government not bailed out the entire world) and the stronger companies are left to carry on. I think the reason for the recent upswing in the stock market, and hopefully the economy, is because businesses have reduced waste. They have slashed costs in order to save, and are now position to succeed for the future. I tend to agree with Obama that the worst is over and that rough times are still ahead of us. I'm just not quite ready to bow down and worship Obama because he saved us from economic collapse.


Finally...signs of life

In an article from http://www.economist.com/displayStory.cfm?story_id=13411349 the author states how this recession is likely bottoming, but a full recovery will likely take some time. Over the last month, we've seen more and more positive economic reports, in contrast to three months ago where positive news was nowhere in sight. National home prices are now considered 10% undervalued relative to income, and this is leading buyers back into the market. Auto sales recently saw an 8% jump from February to March, creating a glimmer of hope in a dismal market. Larry Summers recently said that the current annualised vehicle sales of 9 million are well below the 14 million needed for replacement and rising population. Larry continued to say that the current level of the stock market might be the 'sale of the century.' Investors certainly have known how cheap stocks and houses have become, but with the good news we're seeing people are starting to buy once again. Despite all this good news, certain parts of the economy are likely to take longer to recover. Consumer spending in general will continue to be depressed by the 18% drop in household net worth last year. More job losses are inevitable as unemployment is a lagging indicator. These job losses are likely to lead to more defaults on loans, thus causing more problems for an already battered financial system. The Federal Reserve should counter this by continuing to buy the bad assets, as an economic recovery isn't likely without the financial industry on board. It will take macro economists months to call March 2009 the trough, but I think the evidence exists to already label it as such. The lagging indicators will certainly take a while to get better, but the leading indicators (such as the stock market) are pointing to a recovery.


Shifty Savings

In the April 6th edition of the Wall Street Journal, Kelly Evans discusses the United States’ savings rate in, “Frugality Forged in Today’s Recession Has Potential to Outlast It.” He quotes Richard Berner from Morgan Stanley by saying that, “consumer spending will grow at an inflation-adjusted 2% to 2.5% annual rate over the next several years, compared with 3.5% in the decade ended in 2007.” In a previous blog, Professor Tufte explained that people save because they:
Lack insurance
Lack social security
Lack a pension
Lack material possessions
Are more worried about the future than the present.
Based on these incentives, it is no surprise that Americans are saving more. While Social Security hasn’t really changed, the other four incentives have had an effect on the personal savings rate. Many Americans have lost their jobs and with that they have lost benefits such as insurance. Due to the financial crisis, many citizens have lost their entire pensions or have at least lost a good portion of it. During the recession, discretionary incomes are lower; therefore, material possessions are not necessarily in abundance. With countless doom and gloom reports or at least reports that do not look favorably on the near future, expectations of the future are grim. The personal savings rate should be expected to increase during these conditions. Is it not true, however, that the savings was always there it just was not counted? Most Americans previously stored their savings by purchasing homes, which was counted as investment. Due to the financial crisis, investments in homes have decreased. This has resulted in moving our way of saving to a type that is now counted.