A recent post in "All the News That's Fit to Post" highlighted the never ending shenanigans of that ominous federal organization, FEMA (Federal Emergency Management Agency). The post highlights the embarassment FEMA recently caused itself due to a conference hosted as a "a pat on the back for aiding evacuees from the recent California wildfires."
According to the blog post, FEMA "gathered a bustling bunch of enterprising “reporter” — a.k.a. FEMA staffers — conference called some presumed gullible journalists — hey, they’d be champing at a bit for a story, right? — and staged a press conference. The specifics were sketchy from the start; the fact that the callers were not actually allowed to ask any questions should have been enough to make any self-respecting reporter question the press conference’s credibility. As anyone with half a brain might have guessed, the “perfect plan” turned out to be the perfect storm for yet another embarrassing setback for the agency."
This conference symbolizes the economic malfunctions of FEMA that became all too apparent since Hurrican Katrina and makes for an interesting read.
Wednesday, November 14, 2007
Friday, November 9, 2007
North Korea Disarmament
A recent post on Ursus Veritas discusses the ongoing disarmament of nuclear weapons in North Korea and the many difficulties that are fraught in such an effort. The central matter of importance in the articles that Ursus Veritas references is what will happen to the stockpile of weapons and existing nuclear fissile material. In a New York Times article the author references, the following comment is suggested:
Personally, I believe that North Korea will continue to milk as much aid money from the international community and South Korea as long as possible while feigning good intentions. If history is any window into the future, there is no reason to become giddy over North Korea's stance on nuclear technology quite yet.
It is an important question to ask, since more than ever before, Bush has spent resources and efforts to pursuing this end. He has dissolved and stepped over the 6+ years of conflict between hard-line conservatives who want to oust Kim Jong Il's regime and those who favor negotiation, and vested responsibility and power in Christopher Hill, a member of the State Department who is the point man for North Korea. North Korea has thus far mostly, and encouragingly has complied, with much aid from America, of course. But with all this progress with the disarming of nuclear centers and factories, it is just as important to consider the fate of the current stockpile of nuclear items that has been sitting, unused.
Personally, I believe that North Korea will continue to milk as much aid money from the international community and South Korea as long as possible while feigning good intentions. If history is any window into the future, there is no reason to become giddy over North Korea's stance on nuclear technology quite yet.
Saturday, November 3, 2007
Recession Alert
There’s trouble brewing in the economy and it’s my duty to make you aware of it.
In The Economist's article American Jobs | Recession Alert posted on Friday, September 7th, the monthly jobs figures for August were analyzed with grave concern and caused me to more seriously question the possibility of a recession in America's near future.
Specifically, I looked at what The Economist claimed was a very strong correlation between the monthly employment figures, the recent turmoil in the financial markets, and the worsening housing market.
Apparently the monthly jobs figures for August were much worse than anyone expected with the U.S. economy losing 4000 jobs last month, "the first monthly loss of jobs since August 2003." In addition to this recent shortfall in jobs during August, revisions were made to the past several months' jobs figures. The updated figures indicated that the economy has been adding far less jobs per month than is needed to keep the unemployment rate from steadily rising.
While this entire article focuses on the labor market from an economist's point of view, I found it very interesting and important reading to anyone.
Since the shutting down and massive double digit losses in value of two multi billion dollar Bear Stearn's hedge funds this summer (Source: Reuters: Bear Stearns hedge funds near shutting down), I have been on the alert for further macroeconomic economy shaping events and news relating to a recession. If you don't know already, these hedge funds invested in securities backed by subprime mortgage loans. Subprime mortgages are loans made to homeowners with poor credit, unlikely to be paid back.
Wall Street created and packaged these loans into securities that investors such as pension funds, endowments, and individual investors could purchase. Additionally, ratings agencies such as Moody's rated these securities with Triple A, outstanding ratings.
However, these securities have recently posted huge losses because subprime borrowers simply cannot pay their mortgages and homes are foreclosing in the U.S. housing market at extremely high rates since the beginning of this summer.
As a result, investors who have literally poured billions of dollars into these investments have posted huge losses on their accounts.
Of greater importance however is that homeowners who were "sucked" into buying these subprime mortgages by companies such as Countrywide are unable to make the mortgage payments required by their loan contracts. Consequently, many homeowners are being evicted from their homes in the U.S. at rates never before seen.
This entire fiasco has caused the credit market to turn into chaos in the last month as it has "reduced the flow of credit to all borrowers while increasing the cost of borrowing for credit-worthy borrowers." In other words, so much credit was extended to purchasers of subprime mortgages for homes they could not afford, U.S. financial institutions no longer are willing to extend credit to even regular businesses and individuals ("credit-worthy borrowers") for their normal financing needs.
The Wall Street Journal in this article, "Recession 2008?" discusses the repercussions of the housing market troubles I have just discussed and supports the claims I have made.
However, John Makin in his article further points out "the fact remains that house prices continue to fall" and the housing market is still in trouble." While I have already discussed the August jobs figures, the housing market and credit markets in detail as possible indications of a recession down the road, further factors support this argument.
As the Wall Street Journal article by Mr. Makin notes "American recessions are unusual because negative consumption growth is, in most cases, a necessary condition for a recession." However, Mr. Makin predicts in the fourth quarter of 2007 exactly that - a sharp drop in U.S. consumption growth "driven by a credit crunch, a persistent and possibly enlarged drag from residential investment, and slower business fixed investment."
These signs are all troubling and obviously more recessions have been predicted than have actually occurred. However, we should certainly be alert and possibly anticipate an economic slowdown in the U.S near future.
Why should we care about an economic slowdown or recession? Because many of us are young women and men soon to enter the workforce who will be looking for jobs that companies may be much less willing to extend us offers for in addition to a myriad of other political, social and global economic reasons that may be discussed in the future.
In The Economist's article American Jobs | Recession Alert posted on Friday, September 7th, the monthly jobs figures for August were analyzed with grave concern and caused me to more seriously question the possibility of a recession in America's near future.
Specifically, I looked at what The Economist claimed was a very strong correlation between the monthly employment figures, the recent turmoil in the financial markets, and the worsening housing market.
Apparently the monthly jobs figures for August were much worse than anyone expected with the U.S. economy losing 4000 jobs last month, "the first monthly loss of jobs since August 2003." In addition to this recent shortfall in jobs during August, revisions were made to the past several months' jobs figures. The updated figures indicated that the economy has been adding far less jobs per month than is needed to keep the unemployment rate from steadily rising.
While this entire article focuses on the labor market from an economist's point of view, I found it very interesting and important reading to anyone.
Since the shutting down and massive double digit losses in value of two multi billion dollar Bear Stearn's hedge funds this summer (Source: Reuters: Bear Stearns hedge funds near shutting down), I have been on the alert for further macroeconomic economy shaping events and news relating to a recession. If you don't know already, these hedge funds invested in securities backed by subprime mortgage loans. Subprime mortgages are loans made to homeowners with poor credit, unlikely to be paid back.
Wall Street created and packaged these loans into securities that investors such as pension funds, endowments, and individual investors could purchase. Additionally, ratings agencies such as Moody's rated these securities with Triple A, outstanding ratings.
However, these securities have recently posted huge losses because subprime borrowers simply cannot pay their mortgages and homes are foreclosing in the U.S. housing market at extremely high rates since the beginning of this summer.
As a result, investors who have literally poured billions of dollars into these investments have posted huge losses on their accounts.
Of greater importance however is that homeowners who were "sucked" into buying these subprime mortgages by companies such as Countrywide are unable to make the mortgage payments required by their loan contracts. Consequently, many homeowners are being evicted from their homes in the U.S. at rates never before seen.
This entire fiasco has caused the credit market to turn into chaos in the last month as it has "reduced the flow of credit to all borrowers while increasing the cost of borrowing for credit-worthy borrowers." In other words, so much credit was extended to purchasers of subprime mortgages for homes they could not afford, U.S. financial institutions no longer are willing to extend credit to even regular businesses and individuals ("credit-worthy borrowers") for their normal financing needs.
The Wall Street Journal in this article, "Recession 2008?" discusses the repercussions of the housing market troubles I have just discussed and supports the claims I have made.
However, John Makin in his article further points out "the fact remains that house prices continue to fall" and the housing market is still in trouble." While I have already discussed the August jobs figures, the housing market and credit markets in detail as possible indications of a recession down the road, further factors support this argument.
As the Wall Street Journal article by Mr. Makin notes "American recessions are unusual because negative consumption growth is, in most cases, a necessary condition for a recession." However, Mr. Makin predicts in the fourth quarter of 2007 exactly that - a sharp drop in U.S. consumption growth "driven by a credit crunch, a persistent and possibly enlarged drag from residential investment, and slower business fixed investment."
These signs are all troubling and obviously more recessions have been predicted than have actually occurred. However, we should certainly be alert and possibly anticipate an economic slowdown in the U.S near future.
Why should we care about an economic slowdown or recession? Because many of us are young women and men soon to enter the workforce who will be looking for jobs that companies may be much less willing to extend us offers for in addition to a myriad of other political, social and global economic reasons that may be discussed in the future.
Pakistan and Musharraf
In a recent post on Exporting Democracy the United State's strategic interest in Pakistan is interestingly demonstrated. While these interests are mainly about security, they extend into economic ties as well. According to the author of the post, "The U.S has a strategic interest in having a friendly government in Pakistan, as it shares a border with Afghanistan and has become the new front line for the war on terror. Sadly, where strategic interests are involved, promoting democracy and respecting sovereignty take a back seat. The government has played to the population’s anti-U.S sentiments by officially denouncing America’s slaughter of the people of Afghanistan, while secretly launching a military offensive against some of its own citizens in the Taliban sympathetic Northwest Frontier of Pakistan, because of U.S demands. These clashes were the result of mounting U.S pressure on Musharraf to deliver on their investment in diplomatic and monetary support. As a result, thousands of Pakistani citizens living in the tribal belt and at least 2000 Pakistani soldiers, by some unofficial estimates, lost their lives while fighting each other in order to satiate U.S demands."
However, as a result of these policies, the indepedence and sanctity of Pakistani institutions is being undermined. In the future, it will be very interesting to see how this policy develops.
However, as a result of these policies, the indepedence and sanctity of Pakistani institutions is being undermined. In the future, it will be very interesting to see how this policy develops.
Sunday, October 28, 2007
San Diego Wildfires
A recent post on The News Delirium discusses the effects of the wildfires throughout San Diego and the many economic repercussions that we face. However, what this post focused on was the news media and how it functioned more as a public service than a business for once. The author of this article makes the argument that "News is a public service, and for all the talk that television news is obsolete, this event proved once again that it is far from that status. From the first spark on Sunday to the relief drives on Friday, those involved with local news stations from the high-level managers to the unpaid interns all had a part in getting the message out, once again proving the necessity of a well organized, intelligent news media." Whatever the case may be, it will be interesting to see how news organizations respond in the future to crises of this kind.
Thursday, October 25, 2007
The Antithesis of Globalization?
Get ready: US economic policy may soon make a complete u-turn and bump into several obstacles along the way. Hopefully it does not, but economic professionals may surprisingly pave the way for such a misguided point of view.
Recent and methodical analysis suggests that the effects of globalization are doing more harm than good for the individual. This is actually the conclusion of the latest report by the International Monetary Fund (IMF), one of if not the most long time celebrated supporters of globalization and its heralded contributions to the progress of mankind.
According to the report, the rapid rise of globalization throughout both rich and poor countries has improved their overall incomes, but at the same time increased income inequality among individuals. However, this larger gap between the earnings of more and less skilled workers represents a good consequence of globalization and not a bad one.
Over the past two decades, this inequality gap is attributed to the faster growth rates of incomes for the more skilled in greater quantities than the less skilled and means that “inequality has risen in all but the low-income country aggregates” (“Income and Inequality”). As countries in Latin America, Asia, and Eastern Europe have liberalized their economies, the level of income between rich and poor has widened. The surprising exception is sub-Saharan Africa where the income gap has diminished, but the IMF does not offer any clues as to why this anomaly occurs.
To understand why this spread in inequality may in fact be benevolent, one must first question what portion of this rise in inequality is in fact due to globalization and how much is due to other factors “such as the spread of technology and domestic constraints on equality of opportunity." The IMF found the effects of greater globalization are best grouped into three factors: “increased trade openness, an increase in foreign direct investment, and increased technological change” that have all increased per capita incomes of developing and developed countries (“Income and Inequality”).
However, the role of technology in increased globalization has most strongly created the inequality gap observed by the IMF. Since technological change favors those with higher skills such as using a computer, modern technology “exacerbates the skills gap” and “adversely affects the distribution of income in both developing and advanced economies by increasing the premium on skills and automating relatively low-skill inputs” (“Income and Inequality”). Further, newer technology favors those with better access to education and reinforces the skills gap.
Foreign direct investment also increases the “rewards for higher-value-added activities” and creates greater demand for the more skilled. On the other hand, increased trade openness has had the opposite effect and reduced income inequality according to the IMF. However, “the main factor driving the recent increase in inequality across countries has been technological progress” (“Income and Inequality”)
Thus, one must determine if these three variables effect upon the widening of the inequality gap is a positive result of globalization. Certainly greater inequality is a bad thing. However, the increased income gap by education “means that the returns on investments in schooling increased” (Becker-Posner). In other words, investment in human capital is paying off more and more as economies become more productive. This is certainly not a bad phenomenon, but it requires better access to education throughout the world.
Additionally, “although foreign direct investment is associated with greater income inequality over the period of this study, it is associated with higher growth overall” (“Income and Inequality”). The IMF thus believes that over a longer period of time, the effects of this factor of globalization would reduce income inequality.
Lastly, the IMF concludes that “trade globalization is not found to have a negative impact on income distribution in either developing or advanced economies” (“Income and Inequality”). Consequently, increased trade has actually diminished income inequality.
The report’s findings are summarized as follows: “Inequality has been rising in countries across all income levels, except those classified as low income” (“Income and Inequality”). Thus, while politicians from countries such as Africa and Latin America may condemn globalization, they misunderstand the problem. Their countries lack the greater access to education required to decrease income inequality.
Without doubt, this statement is of little comfort to the children of third world countries whose schooling systems are rudimentary at best. However, as the IMF report confirms, their problems are not the result of globalization. Instead, such countries must make increased access to education a key point on their policy agenda and not reduce foreign direct investment or suppress technological change. Hopefully the congresswomen and men in Washington agree with this assessment and do not scapegoat globalization as an easy way out of our problems.
Recent and methodical analysis suggests that the effects of globalization are doing more harm than good for the individual. This is actually the conclusion of the latest report by the International Monetary Fund (IMF), one of if not the most long time celebrated supporters of globalization and its heralded contributions to the progress of mankind.
According to the report, the rapid rise of globalization throughout both rich and poor countries has improved their overall incomes, but at the same time increased income inequality among individuals. However, this larger gap between the earnings of more and less skilled workers represents a good consequence of globalization and not a bad one.
Over the past two decades, this inequality gap is attributed to the faster growth rates of incomes for the more skilled in greater quantities than the less skilled and means that “inequality has risen in all but the low-income country aggregates” (“Income and Inequality”). As countries in Latin America, Asia, and Eastern Europe have liberalized their economies, the level of income between rich and poor has widened. The surprising exception is sub-Saharan Africa where the income gap has diminished, but the IMF does not offer any clues as to why this anomaly occurs.
To understand why this spread in inequality may in fact be benevolent, one must first question what portion of this rise in inequality is in fact due to globalization and how much is due to other factors “such as the spread of technology and domestic constraints on equality of opportunity." The IMF found the effects of greater globalization are best grouped into three factors: “increased trade openness, an increase in foreign direct investment, and increased technological change” that have all increased per capita incomes of developing and developed countries (“Income and Inequality”).
However, the role of technology in increased globalization has most strongly created the inequality gap observed by the IMF. Since technological change favors those with higher skills such as using a computer, modern technology “exacerbates the skills gap” and “adversely affects the distribution of income in both developing and advanced economies by increasing the premium on skills and automating relatively low-skill inputs” (“Income and Inequality”). Further, newer technology favors those with better access to education and reinforces the skills gap.
Foreign direct investment also increases the “rewards for higher-value-added activities” and creates greater demand for the more skilled. On the other hand, increased trade openness has had the opposite effect and reduced income inequality according to the IMF. However, “the main factor driving the recent increase in inequality across countries has been technological progress” (“Income and Inequality”)
Thus, one must determine if these three variables effect upon the widening of the inequality gap is a positive result of globalization. Certainly greater inequality is a bad thing. However, the increased income gap by education “means that the returns on investments in schooling increased” (Becker-Posner). In other words, investment in human capital is paying off more and more as economies become more productive. This is certainly not a bad phenomenon, but it requires better access to education throughout the world.
Additionally, “although foreign direct investment is associated with greater income inequality over the period of this study, it is associated with higher growth overall” (“Income and Inequality”). The IMF thus believes that over a longer period of time, the effects of this factor of globalization would reduce income inequality.
Lastly, the IMF concludes that “trade globalization is not found to have a negative impact on income distribution in either developing or advanced economies” (“Income and Inequality”). Consequently, increased trade has actually diminished income inequality.
The report’s findings are summarized as follows: “Inequality has been rising in countries across all income levels, except those classified as low income” (“Income and Inequality”). Thus, while politicians from countries such as Africa and Latin America may condemn globalization, they misunderstand the problem. Their countries lack the greater access to education required to decrease income inequality.
Without doubt, this statement is of little comfort to the children of third world countries whose schooling systems are rudimentary at best. However, as the IMF report confirms, their problems are not the result of globalization. Instead, such countries must make increased access to education a key point on their policy agenda and not reduce foreign direct investment or suppress technological change. Hopefully the congresswomen and men in Washington agree with this assessment and do not scapegoat globalization as an easy way out of our problems.
Friday, October 19, 2007
Credit Ratings Agencies: What Were They Thinking?
Today Standard & Poor’s, the credit ratings agency, downgraded its ratings for several thousand bonds that invested in mortgage related debt in 2007. Of these securities, more than several dozen were even rated of the highest quality triple AAA and thus least likely to default (Source: New York Times).
However, as the recent credit crisis continues to play out and develop in greater and greater significance, one must ask: Why were these bonds rated so highly before? Investment banks are the result of such shoddily rated investments. Merrill Lynch posted a writedown of $7.9 billion in mortgage related securities this month; Citigroup posted a $3 billion writedown; and Morgan Stanley posted a $940 billion writedown also related to subprime mortgages. These record losses are phenomenal compared to past earnings due to trading at financial services firms. This is indeed exemplified by the mass number of layoffs taking place across Wall Street, such as the firing of Merrill Lynch CEO Stan O’Neal.
However, not all the blame rests upon the executives at these investment banks, hedge funds, and private equity funds. Investigation of credit ratings firms such as S&P and Moody’s must take place immediately. These firms rated as extremely safe thousands of securities related to the subprime mortgages whose values have plummeted in a matter of weeks. Nobody knew how to value these investments and now that firms have been forced to sell their investments to raise cash, the values of these debt instruments are literally reaping $0.20 on the dollar.
As the New York Times illustrates today:
Hopefully these companies are held accountable and mistakes of this magnitude occur less frequently in the future.
However, as the recent credit crisis continues to play out and develop in greater and greater significance, one must ask: Why were these bonds rated so highly before? Investment banks are the result of such shoddily rated investments. Merrill Lynch posted a writedown of $7.9 billion in mortgage related securities this month; Citigroup posted a $3 billion writedown; and Morgan Stanley posted a $940 billion writedown also related to subprime mortgages. These record losses are phenomenal compared to past earnings due to trading at financial services firms. This is indeed exemplified by the mass number of layoffs taking place across Wall Street, such as the firing of Merrill Lynch CEO Stan O’Neal.
However, not all the blame rests upon the executives at these investment banks, hedge funds, and private equity funds. Investigation of credit ratings firms such as S&P and Moody’s must take place immediately. These firms rated as extremely safe thousands of securities related to the subprime mortgages whose values have plummeted in a matter of weeks. Nobody knew how to value these investments and now that firms have been forced to sell their investments to raise cash, the values of these debt instruments are literally reaping $0.20 on the dollar.
As the New York Times illustrates today:
"The action provides further evidence that lending standards remained loose even as default rates on home loans made in 2005 and 2006 were raising alarms among investors and regulators this year. A recent investment bank report showed that loans made to borrowers with weak, or subprime, credit this year had higher default rates than similar loans in 2006 did at the same time in their lives.
S.& P. downgraded bonds worth $23.4 billion, or about 6 percent of mortgages classified as subprime and Alt-A that it has rated through June; Alt-A loans are made to borrowers with better credit. The bonds that were downgraded included 39 securities that had been rated AAA, the highest grade awarded by the agency; some of these were downgraded several notches to A. (Bonds rated at BBB and above are considered investment-grade securities.)”
Hopefully these companies are held accountable and mistakes of this magnitude occur less frequently in the future.
Subscribe to:
Posts (Atom)