It is funny how demanding the Coliseum Commision appeared recently over the possible moving of USC football games to the Rose Bowl in Pasadena, CA. As a recent post in The Stuge "Home is Where the Heart Is" exemplifies, the Coliseums risks becoming a historic relic should USC choose to change stadiums. The background story is this: "USC who is the only regular user of the Coliseum right now an is in large part the only entity holding the stadium up wants to sign a new lease, since the present expires after the USC versus UCLA football game this weekend. USC is willing to pay for the much needed renovations totaling somewhere around $100 million if the Coliseum is willing to give USC some of the revenue that will come to the Coliseum because of these upgrades. The Coliseum Commission however does not want to give USC control of part of the revenue that will come in. The Coliseum Commission does not have very many other options at this point with the risk of USC leaving. The Commission has already succeeded in driving out UCLA football, both the Rams and Raiders, as well as the Lakers, Clippers, and USC basketball from the Sports Arena which the Commission is also in charge of managing."
It is incredibly ironic that the Coliseum Commission derives well over half its profit and probably close to all of it from USC football. Hopefully, the nine figures behind this junta figure this out sooner rather than later.
Monday, December 10, 2007
Monday, December 3, 2007
Moral Hazard: A Never Ending Problem
As I have continued to watch the fallout from the subprime mortgage fiasco stemming from this summer, I have delved further into the implications and history of such massive loss generating trades on Wall Street.
A recent Wall Street Journal article illustrated the magnitude of the problems resulting from the troubled subprime mortgages and the need for the federal government to intervene. As hedge funds have blown up, senior Wall Street professionals been fired, and wealthy investors lost billions of dollars, the average citizen will most likely endure the greatest hardship of all.
An estimated two million citizens who purchased adjustable rate mortgages expect to see interest rates jump in the distant future. In other words, a significant proportion of homeowners – at least 2 million in fact – will face significantly larger mortgage payments within the next two years. In fact, interest rates on as much as $362 billion in subprime home mortgages are expected to rise in the coming year, according to Banc of America Securities.
To prevent home foreclosures stemming from these increased mortgage payments, the Bush administration is leaning on Congress. Treasury Secretary Henry Paulson is pushing for legislation that would change the financing terms of these troubled subprime mortgages “and support a new White House proposal to use tax-exempt bonds to refinance troubled subprime mortgages” (Phillips). Additionally, Mr. Paulson believes that the administration will be aided by private industry that will place a freeze on adjustable rate mortgages sometime this upcoming week. The thinking goes that both actions when combined should sufficiently respond to the subprime problems aggressively enough and bring stability to the markets.
Imy opinion, the strength of the Fed’s suggested response to the subprime problem remains unclear. Programs already exist that would significantly decrease the cost of loans to a large portion of homeowners with subprime adjustable rate mortgages. The president of the Federal Reserve Bank of Boston actually believes that this option should be available to half of the subprime ARM market according to a recent speech. The need for this option to be exercised is all the more prescient upon repeatedly reading how home owners were “duped” into borrowing at potentially exorbitant costs that they would be unable to meet in the future. For example, “In an interview, Mr. Rosengren said some borrowers with relatively good credit may have been steered into a subprime loan because it was more profitable for the lender. Other borrowers ‘who might have been considered prime based on their credit score’ wound up in subprime loans because they didn't have adequate funds for a down payment, didn't wish to document their income or assets or wanted to buy a home that was more expensive than they could have qualified for” (Phillips).
However, the Treasury is officially calling for a freeze on interest rates in the mortgage industry that would affect lenders and investors in mortgage-backed securities. Hopefully Mr. Paulson’s proposal achieves its most moral goal of preventing further home foreclosures in addition to bringing calm to the markets. However, the notion that such a “bail out” of lenders, borrowers, and investors alike orchestrated by the Fed suggests “moral hazard.” As the Wall Street Journal defined this term recently in August 2007, “moral hazard is an old economic concept with its roots in the insurance business. The idea goes like this: If you protect someone too well against an unwanted outcome, that person may behave recklessly” (Browning).
The recent possibility of moral hazard strongly stirs in my memory the history of Long Term Capital Management, the private investment partnership that was once the envy of Wall Street. This obscure arbitrage fund borrowed nearly $100 billion in assets from Wall Street’s most respected investment banks and institutions throughout the 1990s. The fund participated in trading derivative contracts often intertwined in fact with mortgage securities and making astronomical bets on borrowed money was its jeu de guerre.
However, Long Term Capital Management, just like several recent and highly respected, risk management funds nearly collapsed bringing down with it nearly $1 trillion worth of exposure to a variety of markets (Lowenstein 206 – 210). To prevent LTCM’s default, the Federal Reserve invited the heads of every major Wall Street bank such as Bear Stearns, Merrill Lynch, Morgan Stanley Dean Witter, and Goldman Sachs. They were brought together to stop the panic that led to exuberant and highly irrational selling off all types of securities on the market – even the most historically risk free Treasury bills, for example. While LTCM did not default, the parternship was eventually dissolved and all of the fund’s investments were stripped by its institutional investors – the aforementioned investment banks.
The federal government was instrumental in forcing these companies to cooperate with each other and effectively “bailed out” LTCM to prevent further battering of the markets. Indeed, you can bet that many intelligent individuals cried foul and said the risk of moral hazard was too high to rescue LTCM at the time. However, the Fed believed that the cost of failing to do so would be greater than saving the fund.
I find it so interesting that again the federal government is devising plans to stop another market (this time the subprime mortgage market) from naturally correcting itself. To allow the market to do so would simply be unfettered free market competition, laissez-faire as it should be. Indeed, investors in the future would more carefully scrutinize making such risky bets as they did with subprime mortgages, collateralized debt obligations (cdo’s) and other related instruments. However, as history has proved time and again, the Fed has appeared ready and willing to bail Wall Street out such as during the recent financial crises in Mexico, Thailand, South Korea, and Russia (where a bailout was attempted).
Works Cited
Lowenstein, Roger. "When Genius Failed: The Rise and Fall of Long Term Capital Management." 2000. 21 Nov 2007.
A recent Wall Street Journal article illustrated the magnitude of the problems resulting from the troubled subprime mortgages and the need for the federal government to intervene. As hedge funds have blown up, senior Wall Street professionals been fired, and wealthy investors lost billions of dollars, the average citizen will most likely endure the greatest hardship of all.
An estimated two million citizens who purchased adjustable rate mortgages expect to see interest rates jump in the distant future. In other words, a significant proportion of homeowners – at least 2 million in fact – will face significantly larger mortgage payments within the next two years. In fact, interest rates on as much as $362 billion in subprime home mortgages are expected to rise in the coming year, according to Banc of America Securities.
To prevent home foreclosures stemming from these increased mortgage payments, the Bush administration is leaning on Congress. Treasury Secretary Henry Paulson is pushing for legislation that would change the financing terms of these troubled subprime mortgages “and support a new White House proposal to use tax-exempt bonds to refinance troubled subprime mortgages” (Phillips). Additionally, Mr. Paulson believes that the administration will be aided by private industry that will place a freeze on adjustable rate mortgages sometime this upcoming week. The thinking goes that both actions when combined should sufficiently respond to the subprime problems aggressively enough and bring stability to the markets.
Imy opinion, the strength of the Fed’s suggested response to the subprime problem remains unclear. Programs already exist that would significantly decrease the cost of loans to a large portion of homeowners with subprime adjustable rate mortgages. The president of the Federal Reserve Bank of Boston actually believes that this option should be available to half of the subprime ARM market according to a recent speech. The need for this option to be exercised is all the more prescient upon repeatedly reading how home owners were “duped” into borrowing at potentially exorbitant costs that they would be unable to meet in the future. For example, “In an interview, Mr. Rosengren said some borrowers with relatively good credit may have been steered into a subprime loan because it was more profitable for the lender. Other borrowers ‘who might have been considered prime based on their credit score’ wound up in subprime loans because they didn't have adequate funds for a down payment, didn't wish to document their income or assets or wanted to buy a home that was more expensive than they could have qualified for” (Phillips).
However, the Treasury is officially calling for a freeze on interest rates in the mortgage industry that would affect lenders and investors in mortgage-backed securities. Hopefully Mr. Paulson’s proposal achieves its most moral goal of preventing further home foreclosures in addition to bringing calm to the markets. However, the notion that such a “bail out” of lenders, borrowers, and investors alike orchestrated by the Fed suggests “moral hazard.” As the Wall Street Journal defined this term recently in August 2007, “moral hazard is an old economic concept with its roots in the insurance business. The idea goes like this: If you protect someone too well against an unwanted outcome, that person may behave recklessly” (Browning).
The recent possibility of moral hazard strongly stirs in my memory the history of Long Term Capital Management, the private investment partnership that was once the envy of Wall Street. This obscure arbitrage fund borrowed nearly $100 billion in assets from Wall Street’s most respected investment banks and institutions throughout the 1990s. The fund participated in trading derivative contracts often intertwined in fact with mortgage securities and making astronomical bets on borrowed money was its jeu de guerre.
However, Long Term Capital Management, just like several recent and highly respected, risk management funds nearly collapsed bringing down with it nearly $1 trillion worth of exposure to a variety of markets (Lowenstein 206 – 210). To prevent LTCM’s default, the Federal Reserve invited the heads of every major Wall Street bank such as Bear Stearns, Merrill Lynch, Morgan Stanley Dean Witter, and Goldman Sachs. They were brought together to stop the panic that led to exuberant and highly irrational selling off all types of securities on the market – even the most historically risk free Treasury bills, for example. While LTCM did not default, the parternship was eventually dissolved and all of the fund’s investments were stripped by its institutional investors – the aforementioned investment banks.
The federal government was instrumental in forcing these companies to cooperate with each other and effectively “bailed out” LTCM to prevent further battering of the markets. Indeed, you can bet that many intelligent individuals cried foul and said the risk of moral hazard was too high to rescue LTCM at the time. However, the Fed believed that the cost of failing to do so would be greater than saving the fund.
I find it so interesting that again the federal government is devising plans to stop another market (this time the subprime mortgage market) from naturally correcting itself. To allow the market to do so would simply be unfettered free market competition, laissez-faire as it should be. Indeed, investors in the future would more carefully scrutinize making such risky bets as they did with subprime mortgages, collateralized debt obligations (cdo’s) and other related instruments. However, as history has proved time and again, the Fed has appeared ready and willing to bail Wall Street out such as during the recent financial crises in Mexico, Thailand, South Korea, and Russia (where a bailout was attempted).
Works Cited
Lowenstein, Roger. "When Genius Failed: The Rise and Fall of Long Term Capital Management." 2000. 21 Nov 2007.
Wednesday, November 28, 2007
Expanding Markets for Musicians
Surprisingly, a post titled "Between A Rock and a Hard Place" on Communication Breakdown recently detailed the emerging markets for U.S. musicians outside of the country. Specifically, it detailed the expansion of popular artists such as Avril Lavigne and Linkin Park into countries such as China. This is exemplified by sold out venues and concerts in the country by these artists as well as increased international sales. What is most interesting in this post is the link to the New York Times article "Western Pop Acts in China" which discusses the challanges and frustrations felt by Western music producers attempting to go abroad into countries such as China.
These first hand accounts of doing business in China display the need for increased criticism upon the Chinese government for intellectual property rights. This is a central need for any economy to attract foreign investment and the musicians demonstrate personally just how difficult selling their product in emerging economies still is.
What works in China, however, can sometimes conflict with the larger goals of Western businesses. Linkin Park is among the biggest foreign bands in China, but its label, Warner Brothers, has not released its latest CD there. And despite recent tours by Nine Inch Nails, Sonic Youth and the Yeah Yeah Yeahs, the Chinese division of Universal has not released their records either. The labels say that piracy has made the effort futile. The International Federation of the Phonographic Industry, a trade group, estimates that 85 percent of the CDs sold in China are counterfeit. Leong Mayseey, the federation’s regional director for Asia, says the piracy rate for downloaded songs is close to 100 percent.
These first hand accounts of doing business in China display the need for increased criticism upon the Chinese government for intellectual property rights. This is a central need for any economy to attract foreign investment and the musicians demonstrate personally just how difficult selling their product in emerging economies still is.
Sunday, November 25, 2007
Time For Change?
As the U.S. Federal Reserve lowered interest rates by a quarter percentage point this week, a number of countries in the Middle East followed suit. Specifically, countries such as Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain adhered to the Fed’s decision, because their currencies are pegged to the dollar. This is undoubtedly the case for most of the Persian Gulf nations that are now facing severe inflation. “The combination of soaring oil prices and the tumbling dollar is distorting their economies and fuelling inflation,” according to the latest print edition of the Economist.
These concerns over inflation in all of the oil-rich states suggest that central banks should in fact be raising, not lowering rates. However, “monetary policy in the Persian Gulf states must mirror U.S. moves to avoid pressures from capital drifting to the currency with the most favorable interest rates” (Critchlow) .Consequently, economists believe that with enough pressure the Gulf states may soon break free from the dollar.
In fact, in September Saudi Arabia decided not to lower interest rates in tandem with the U.S. Federal Reserve (Gaffen). One only has to look so far to notice that the entire Gulf region is diversifying away from the dollar. This phenomenon is particularly true, because of the increasing number of oil exports at extraordinary prices. Further, with plenty of money flowing into these states’ coffers, pegging their currency to a depreciating currency is becoming less and less attractive.
Thus, the question arises: Should the region’s economies continue to tie their currency to the greenback? The original purpose for doing so was due to the financial immaturity of these states and lack of monetary experience. Determining the right interest rates to most optimally match a country’s savings with investments is tricky due to a typical central bank’s contrary goals of fighting inflation while creating economic growth.
The fact of the matter is that due to the Gulf Arabs soaring oil revenues, “their real exchange rates ought to rise” (“The dollar | Time to break free”). The peg to the dollar prevents this and as the value of the dollar falls, inflation has become a larger problem. Today, the U.S. inflation rate hovers around 4 to 5 percent on average since the economies two recessions during the 1980s. However, “some smaller Gulf economies now have inflation rates of around 10%” (“The dollar | Time to break free).
In my opinion, there are two ways to respond to the problem. The first is for the Persian Gulf states to abandon their peg to the dollar and instead move to a currency basket as Kuwait has already done. A basket of securities may include the dollar in addition to the euro, yen, and other strong currencies. Thus, the inflationary pressure exerted by the dollar would be alleviated.
A second option is to all together abandon ties to any currency. This is the optimal solution that requires a strong central bank that would allow its exchange rate to float as well developed countries already do so. However, “These countries have no history of independent monetary policy and few institutions to conduct it” (“The dollar | Time to break free).
Nonetheless, the Gulf states currently have their hands tied behind their backs and are effectively linked to the dollar. Should history provide any glimpse into the future, this certainly will not change overnight.
These concerns over inflation in all of the oil-rich states suggest that central banks should in fact be raising, not lowering rates. However, “monetary policy in the Persian Gulf states must mirror U.S. moves to avoid pressures from capital drifting to the currency with the most favorable interest rates” (Critchlow) .Consequently, economists believe that with enough pressure the Gulf states may soon break free from the dollar.
In fact, in September Saudi Arabia decided not to lower interest rates in tandem with the U.S. Federal Reserve (Gaffen). One only has to look so far to notice that the entire Gulf region is diversifying away from the dollar. This phenomenon is particularly true, because of the increasing number of oil exports at extraordinary prices. Further, with plenty of money flowing into these states’ coffers, pegging their currency to a depreciating currency is becoming less and less attractive.
Thus, the question arises: Should the region’s economies continue to tie their currency to the greenback? The original purpose for doing so was due to the financial immaturity of these states and lack of monetary experience. Determining the right interest rates to most optimally match a country’s savings with investments is tricky due to a typical central bank’s contrary goals of fighting inflation while creating economic growth.
The fact of the matter is that due to the Gulf Arabs soaring oil revenues, “their real exchange rates ought to rise” (“The dollar | Time to break free”). The peg to the dollar prevents this and as the value of the dollar falls, inflation has become a larger problem. Today, the U.S. inflation rate hovers around 4 to 5 percent on average since the economies two recessions during the 1980s. However, “some smaller Gulf economies now have inflation rates of around 10%” (“The dollar | Time to break free).
In my opinion, there are two ways to respond to the problem. The first is for the Persian Gulf states to abandon their peg to the dollar and instead move to a currency basket as Kuwait has already done. A basket of securities may include the dollar in addition to the euro, yen, and other strong currencies. Thus, the inflationary pressure exerted by the dollar would be alleviated.
A second option is to all together abandon ties to any currency. This is the optimal solution that requires a strong central bank that would allow its exchange rate to float as well developed countries already do so. However, “These countries have no history of independent monetary policy and few institutions to conduct it” (“The dollar | Time to break free).
Nonetheless, the Gulf states currently have their hands tied behind their backs and are effectively linked to the dollar. Should history provide any glimpse into the future, this certainly will not change overnight.
Tuesday, November 20, 2007
Female Empowerment Good For The Economy?
A very interesting post on The Global Scoop explains how empowering women leads to economic development. According to the author, "the international community has acknowledged the fact that achieving gender equality and empowering women is not only a goal in itself. It is also a condition for advancing development, peace, and security. As set forth by the eight Millennium Development Goals (MDGs), gender equality is one of the main objectives to be achieved by 2015. Nevertheless, as the Deputy Secretary-General claims, “Study after study has shown us that, when women are fully empowered and engaged, all of society benefits. Only in this way can we successfully take on the enormous challenges confronting our world -- from conflict resolution and peace building to fighting AIDS and reaching all the other Millennium Development Goals.” Therefore, it seems that there is much more to do in order accomplish these MDGs. Though the goals sound extraordinary on paper, making real world progress is complicated and complex; financial support as wells societal changes must be coordinated to achieve such goals."
Indeed, this idea is now widely recognized and of the utmost importance for the world's continued advancement. However, what made this post most interesting was that it set forth prerequisites for this development in the gender role of females to continue. Specifically, the following conditions must be met:
Thus, governments, thinktanks, international organizations, and every individual should strive hard to enable these goals being met. This is of the upmost importance not just for female empowerment, but for economic development
Indeed, this idea is now widely recognized and of the utmost importance for the world's continued advancement. However, what made this post most interesting was that it set forth prerequisites for this development in the gender role of females to continue. Specifically, the following conditions must be met:
Ensuring that men take on a greater role in household and family care
Challenging traditions and customs, stereotypes and harmful practices, that stand in the way of women and girls
Ensuring that women have access to education and health care, property and land;
Investing in infrastructure to make it easier for women and girls to go about the daily business of obtaining safe drinking water and food
Integrating gender issues into the follow-up to United Nations resolutions and decisions including the work of recently established bodies such as the Peace Building Commission and the Human Rights Council.
Thus, governments, thinktanks, international organizations, and every individual should strive hard to enable these goals being met. This is of the upmost importance not just for female empowerment, but for economic development
Sunday, November 18, 2007
The Envy of Wall Street
While billions are lost during the ongoing credit crisis, one firm stands alone and continues to make bets that thus far have paid off hugely. This Wall Street investment bank and it's chief financial officer identified the risks associated with packaging and selling mortgage related securities before anyone else. If anyone had to take a guess, I'm sure they would pick Goldman Sachs and they would be right. According to the following New York Times article, their CFO David A. Viniar late last year called a “mortgage risk” meeting in his meticulous 30th-floor office in Lower Manhattan.
I can only imagine the envy every other Wall Street CEO has for Lloyd C. Blankfein, Goldman's chief executive.
I found this article particularly interesting, because it shows the type of individualistic, go it alone attitude that characterizes one of the world's most successful companies. This success has carried on into all walks of life both inside and outside the business world.
In case you didn't hear, last week two Goldman managing directors helped bring Alex Rodriguez back to the Yankees. Also, "John A. Thain, a former Goldman co-president, accepted the top position at Merrill Lynch, while a fellow Goldman alumnus, Duncan L. Niederauer, took Mr. Thain’s job running the New York Stock Exchange. Robert E. Rubin, a former Goldman head, is the new chairman of Citigroup. In Washington, another former chief, Henry M. Paulson Jr., is the Treasury secretary, having been recruited by Joshua B. Bolten, the White House chief of staff and yet another former Goldman executive. The heads of the Canadian and Italian central banks are Goldman alumni. The World Bank president, Robert B. Zoellick, is another. Jon S. Corzine, once a co-chairman, is the governor of New Jersey. And in academia, Robert S. Kaplan, a former vice chairman, has just been picked as the interim head of Harvard University’s $35 billion endowment."
The power of this company throughout the world is simply mind numbing to me.
At that point, the holdings of Goldman’s mortgage desk were down somewhat, but the notoriously nervous Mr. Viniar was worried about bigger problems. After reviewing the full portfolio with other executives, his message was clear: the bank should reduce its stockpile of mortgages and mortgage-related securities and buy expensive insurance as protection against further losses, a person briefed on the meeting said.
With its mix of swagger and contrary thinking, it was just the kind of bet that has long defined Goldman’s hard-nosed, go-it-alone style.
Most of the firm’s competitors, meanwhile, with the exception of the more specialized Lehman Brothers, appeared to barrel headlong into the mortgage markets. They kept packaging and trading complex securities for high fees without protecting themselves against the positions they were buying.
Even Goldman, which saw the problems coming, continued to package risky mortgages to sell to investors. Some of those investors took losses on those securities, while Goldman’s hedges were profitable.
When the credit markets seized up in late July, Goldman was in the enviable position of having offloaded the toxic products that Merrill Lynch, Citigroup, UBS, Bear Stearns and Morgan Stanley, among others, had kept buying.
“If you look at their profitability through a period of intense credit and mortgage market turmoil,” said Guy Moszkowski, an analyst at Merrill Lynch who covers the investment banks, “you’d have to give them an A-plus.”
This contrast in performance has been hard for competitors to swallow. The bank that seems to have a hand in so many deals and products and regions made more money in the boom and, at least so far, has managed to keep making money through the bust.
In turn, Goldman’s stock has significantly outperformed its peers.
I can only imagine the envy every other Wall Street CEO has for Lloyd C. Blankfein, Goldman's chief executive.
I found this article particularly interesting, because it shows the type of individualistic, go it alone attitude that characterizes one of the world's most successful companies. This success has carried on into all walks of life both inside and outside the business world.
In case you didn't hear, last week two Goldman managing directors helped bring Alex Rodriguez back to the Yankees. Also, "John A. Thain, a former Goldman co-president, accepted the top position at Merrill Lynch, while a fellow Goldman alumnus, Duncan L. Niederauer, took Mr. Thain’s job running the New York Stock Exchange. Robert E. Rubin, a former Goldman head, is the new chairman of Citigroup. In Washington, another former chief, Henry M. Paulson Jr., is the Treasury secretary, having been recruited by Joshua B. Bolten, the White House chief of staff and yet another former Goldman executive. The heads of the Canadian and Italian central banks are Goldman alumni. The World Bank president, Robert B. Zoellick, is another. Jon S. Corzine, once a co-chairman, is the governor of New Jersey. And in academia, Robert S. Kaplan, a former vice chairman, has just been picked as the interim head of Harvard University’s $35 billion endowment."
For all its success on Wall Street, it is Goldman’s global reach and political heft that inspire a mix of envy and admiration. In the race for president, Goldman Sachs executives are the top contributors to Barack Obama and Mitt Romney, and the second highest contributor to Hillary Rodham Clinton.
All of which has made Goldman a favorite of conspiracy theorists, columnists and bloggers who see the firm as a Wall Street version of the Trilateral Commission.
“Goldman Sachs has as much influence now that the old J. P. Morgan had between 1895 and 1930,” said Charles R. Geisst, a Wall Street historian at Manhattan College. “But, like Morgan, they could be victimized by their own success.”
The power of this company throughout the world is simply mind numbing to me.
Thursday, November 15, 2007
Globalization and Protectionism
Although the recent free-trade deal with Peru passed by the Democrat-controlled Congress is a step in the right direction, the United States has a lot more work to accomplish. This symbolically important step is supposed to be a sign of fewer barriers to trade in the future. As such, “George Bush's administration hopes other bilateral deals will follow, as a new bipartisan consensus on trade develops” according to a recent article in the Economist (“Economic focus | Buying off the Oposition”).
However, this is unlikely to happen. This is despite the fact that global trade is a confirmation of the time-tested theory by Adam Smith in 1776: “Individuals trading freely with one another following their own self-interest leads to a growing, stable economy” (Greenspan). This model of optimal market efficiency occurs only when its fundamental requirements are at work. Specifically, people must be free to act in their self-interest, unfettered by economic policy. An example of such a mistaken policy includes any government action or regulation that limits international trade.
Unfortunately, America is leaning towards just such a shift in opinion. The Peru negotiation appears to be an irregular, one time event. First of all, the Democratic presidential candidates “want to ‘revisit’ existing trade deals and are against an agreement with South Korea, the biggest negotiated by the Bush team” (“Economic focus | Buying off the Oposition”). A number of economists even believe that the Peru vote will be used as a playing card by Congress to prove their independency from a one sided viewpoint.
Secondly, recent surveys indicate that the American public is also becoming more fearful of globalization and free-trade. According to an opinion poll conducted by the Pew Research Centre, “the share of Americans who believe that trade is good for their country has plunged from 78% in 2002 to 59%, the lowest proportion among the 47 countries included in the survey” (“Economic focus | Buying off the Oposition”). What’s interesting is that this bias towards trade skepticism is equally shared by both Democrats and Republicans, according to the article.
Indeed, the idea that U.S. economic policy is becoming more protectionist is hard to ignore. Barriers to both trade and foreign direct investment are increasing in number. For example, “the chances of congressional renewal of President Bush's trade promotion authority, which is set to expire this summer, are grim. The 109th Congress introduced 27 pieces of anti-China trade legislation; the 110th introduced over a dozen in just its first three months. In late March, the Bush administration levied new tariffs on Chinese exports of high-gloss paper -- reversing a 20-year precedent of not accusing nonmarket economies of illegal export subsidies” (Slaughter).
Additionally, one only needs to read the newspaper occasionally to see the number of thwarted attempts by foreign companies proceeding with mergers or acquisitions of U.S. companies. “In 2005, the Chinese energy company CNOOC tried to purchase U.S.-headquartered Unocal. The subsequent political storm was so intense that CNOOC withdrew its bid. A similar controversy erupted in 2006 over the purchase of operations at six U.S. ports by Dubai-based Dubai Ports World, eventually causing the company to sell the assets” (Slaughter).
Matthew Slaughter, a former member of Mr Bush's Council of Economic Advisers and now a professor at Dartmouth College, believes that this shift in U.S. policy reflects an American public that is becoming more protectionist due to “stagnant or falling incomes” (Slaughter). While globalization may or may not be the cause of this stagnation, people think it is. According to Slaughter, “public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.”
These thoughts are alarming because of the enormous benefits that global trade poses to the U.S. economy. Thus, the following question must be answered: How should U.S. think tanks and public intellectuals respond to the idea that global trade benefits Americans less than their trading partners?
Should the notion that lower income is a result of free trade be believed, incomes must rise to prevent further barriers to trade. Mainstream, well respected economists such as Greenspan in his recent book, The Age of Turbulence, suggest the need for greater investment in education and assistance to shift workers from old industries to new industries as a means to combat this drop income.
However, “significant payoffs from educational investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect” according to Slaughter. I won’t even attempt to conceptualize a solution to this problem. I will merely offer the opinion of someone much more educated than myself. Slaughter believes that the best way to combat the recent rise in protectionism is to redistribute income throughout U.S. society. This may be accomplished in several ways. The tax system may be overhauled as to more heavily levy taxes upon the wealthy and cut taxes for the poor. Slaughter classifies this idea as a “New Deal for globalization,” echoing thoughts of Franklin D. Roosevelt’s series of programs and initiatives that responded to the Great Depression.
Whatever course of action the U.S. embarks upon should undoubtedly be met with strong resistance at the moment. The magnitude of all of these ideas is by no means small and will require a great deal of time to implement. Nonetheless, any solution must strongly explain to the American people the many benefits of a global economy.
Works Cited
Greenspan, Alan. "The Age of Turbulence." New York: Penguin Group, 2007.
However, this is unlikely to happen. This is despite the fact that global trade is a confirmation of the time-tested theory by Adam Smith in 1776: “Individuals trading freely with one another following their own self-interest leads to a growing, stable economy” (Greenspan). This model of optimal market efficiency occurs only when its fundamental requirements are at work. Specifically, people must be free to act in their self-interest, unfettered by economic policy. An example of such a mistaken policy includes any government action or regulation that limits international trade.
Unfortunately, America is leaning towards just such a shift in opinion. The Peru negotiation appears to be an irregular, one time event. First of all, the Democratic presidential candidates “want to ‘revisit’ existing trade deals and are against an agreement with South Korea, the biggest negotiated by the Bush team” (“Economic focus | Buying off the Oposition”). A number of economists even believe that the Peru vote will be used as a playing card by Congress to prove their independency from a one sided viewpoint.
Secondly, recent surveys indicate that the American public is also becoming more fearful of globalization and free-trade. According to an opinion poll conducted by the Pew Research Centre, “the share of Americans who believe that trade is good for their country has plunged from 78% in 2002 to 59%, the lowest proportion among the 47 countries included in the survey” (“Economic focus | Buying off the Oposition”). What’s interesting is that this bias towards trade skepticism is equally shared by both Democrats and Republicans, according to the article.
Indeed, the idea that U.S. economic policy is becoming more protectionist is hard to ignore. Barriers to both trade and foreign direct investment are increasing in number. For example, “the chances of congressional renewal of President Bush's trade promotion authority, which is set to expire this summer, are grim. The 109th Congress introduced 27 pieces of anti-China trade legislation; the 110th introduced over a dozen in just its first three months. In late March, the Bush administration levied new tariffs on Chinese exports of high-gloss paper -- reversing a 20-year precedent of not accusing nonmarket economies of illegal export subsidies” (Slaughter).
Additionally, one only needs to read the newspaper occasionally to see the number of thwarted attempts by foreign companies proceeding with mergers or acquisitions of U.S. companies. “In 2005, the Chinese energy company CNOOC tried to purchase U.S.-headquartered Unocal. The subsequent political storm was so intense that CNOOC withdrew its bid. A similar controversy erupted in 2006 over the purchase of operations at six U.S. ports by Dubai-based Dubai Ports World, eventually causing the company to sell the assets” (Slaughter).
Matthew Slaughter, a former member of Mr Bush's Council of Economic Advisers and now a professor at Dartmouth College, believes that this shift in U.S. policy reflects an American public that is becoming more protectionist due to “stagnant or falling incomes” (Slaughter). While globalization may or may not be the cause of this stagnation, people think it is. According to Slaughter, “public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.”
These thoughts are alarming because of the enormous benefits that global trade poses to the U.S. economy. Thus, the following question must be answered: How should U.S. think tanks and public intellectuals respond to the idea that global trade benefits Americans less than their trading partners?
Should the notion that lower income is a result of free trade be believed, incomes must rise to prevent further barriers to trade. Mainstream, well respected economists such as Greenspan in his recent book, The Age of Turbulence, suggest the need for greater investment in education and assistance to shift workers from old industries to new industries as a means to combat this drop income.
However, “significant payoffs from educational investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect” according to Slaughter. I won’t even attempt to conceptualize a solution to this problem. I will merely offer the opinion of someone much more educated than myself. Slaughter believes that the best way to combat the recent rise in protectionism is to redistribute income throughout U.S. society. This may be accomplished in several ways. The tax system may be overhauled as to more heavily levy taxes upon the wealthy and cut taxes for the poor. Slaughter classifies this idea as a “New Deal for globalization,” echoing thoughts of Franklin D. Roosevelt’s series of programs and initiatives that responded to the Great Depression.
Whatever course of action the U.S. embarks upon should undoubtedly be met with strong resistance at the moment. The magnitude of all of these ideas is by no means small and will require a great deal of time to implement. Nonetheless, any solution must strongly explain to the American people the many benefits of a global economy.
Works Cited
Greenspan, Alan. "The Age of Turbulence." New York: Penguin Group, 2007.
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