Upholding Newton’s 3rd Law with UK Bank Bosses

It seems that for many situations among failed banks around the world today, responsibility seems to be avoided by the upper positions of big banks.  As talks of hits on investors for the recent bail-out of Ireland continue, the UK’s Financial Services Authority (FSA) is looking towards the bosses themselves, BBC reports. 

In the report, discussions that bosses of failed banks in the UK could face a “pay claw” of two years due to excessive risks the banks chose to take, one of which was the Royal Bank of Scotland (RBS).  Lord Turner, chairman of the FSA, has stated that this will encourage more appropriate risks established by banks, in hope to avoid any more bank failures.  Also stated is that rulings may also lead to individuals losing privileges to work in the banking sector.

The RBS had to be bailed out two years ago and suffered no consequences at the time being.  FSA officials had stated that there was no support to punish individuals because of the ill-advised risks that the bank ended up taking at the wrong times. 

It seems that there is a common trend in who actually deserves the blame for when banks fail, but it does need to be made clear to many that though high risks can obviously yield high rewards, it is not ideal when the risks can cause the dismantling of the banking system.  Even though pay claws, as stated in the article, are a rule surveyed in the US, the overall responsibility for big banks to bounce back from these risks does not seem to get fully resolved.

Since bank directors are those acting on high risk investments, should they be the ones who take the hit if the bank fails?  What needs to be done to limit high risk banking investments and who should be held responsible for the banks that may fail?  Would it be right to put full blame on these banking directors, or perhaps should investors be more cautious in where they place their money?

Reference: FSA says failed bank bosses could have pay clawed back

(Post by Evan Amano)

Selling Grandma for a Buck.

People all around the world are living longer. It is funny because they are not necessarily living a healthier lifestyle. But with great gains in medical care in recent years we can have our cake and live forever too! Living longer has all sorts of interesting economic implications such as the future of pensions and government funded healthcare, but it also uncovers an interesting investment opportunity for private-equity firms. The increase in the number of old folks has led to an increase in the demand for nursing homes. This demand is limited to primarily rich countries, but nonetheless; in 2009, Americans spent $104 billion on nursing-home care which is a 20% increase from just four years earlier and this percentage is likely to rise. The main goal of any financier is to maximize returns while minimizing risk. The returns are obviously great with enormous amount of money being poured into these facilities coupled with the strong prediction of more to come. However the risk is low too since a great deal of the revenue brought in by nursing homes comes from government reimbursements. This means they do not feel the sting of economic downturns the same way purely private firms do. So, there is the return to risk ratio and therefore private-equity firms are gobbling it up.
Of course there are some unintended consequences (aren't there always?). Another key aspect of any financier is to maximize profit. How do they do that? They trim the proverbial fat. And so while these investment firms may see the benefit of laying off workers at nursing homes in the form of increased profits, old folks may feel the sting of the consequences through diminished quality standards and limited care.
Investment opportunities seem to pop up in the most unlikely of places, especially during economic turmoil. It seems, however, particularly bitter when the ones being exploited are our parents, grandparents, and indeed in due time, ourselves. It will be interesting to see what sort of outcry this may lead to and to what extent the outcry will be heard from country to country.
How much do you think the free market will kick in and help the old folks? Do you think they will really suffer worsened conditions due to layoffs implemented by investment firms? Or do you think the firms will push for increased quality standards to attract more customers?

References: The Economist Volume 397 Number 8710, "Wall Street goes long on grannies" p.73
(This was posted by Trevor Murphy-Mannix)

Germany’s Flourishing Economy...and Where it Could Be Heading

While many nations in the Eurozone are struggling economically, with Ireland officially filing for an 85 billion Euros this past week, Germany is strong and flourishing.  BBC reports from German economic minister Rainer Bruederle saying that Germany is nearing full employment.  The article continues to discuss that though there has been much backlash at the German government for helping bail-out Ireland, domestic spending and faith within the German market has increased tremendously over the past months.  The country’s economic growth from July to September was 0.7%, which was 0.3% higher than the Eurozone average.  The country had come off a record growth of 2.3% in the previous quarter.

With the increasing growth of the German economy, questions may arise as to why it should be involved with the Eurozone.  On Bloomberg Television’s “The Pulse”, a discussion was held on what Germany should do amongst this mess.  While arguments are made that Germany has the opportunity to pull out of the Euro, matters that the benefits of Germany supporting the debtor countries are still crucial for Germany.  A lot of owed debt by Ireland is to Germany, and the benefit to support Ireland is probably ideal.  Both Graham Turner, a chief economist, and George Magnus, a senior economic adviser, believe that there needs to be a focus on credit-debtor relations, and the restructuring of banks are a necessity for the Euro to survive.        

What has to be concerning is the amount of power that Germany has within the Eurozone.  Many fingers point at Chancellor Angela Merkal for stating in October that Ireland will not be able to make it out of their current economic crisis.  This in turn led to investors losing more and more faith within the Irish economy, and can be stated that it has led to the situation that is today.  Perhaps Germany should use this influence to strengthen their ties with the weaker Eurozone countries rather than hurt them.  Magnus believes that the Euro will fall if Germany were to leave the Eurozone, the currency itself would completely collapse.

Where do you think the Eurozone would stand without Germany?  The Eurozone has hindered many countries in different ways.  Should Germany leave the Eurozone, or perhaps is it time for the smaller countries to try to leave the Eurozone?

 

 References:
    "Bloomberg Television": http://www.youtube.com/watch?v=yQ6mJn4C_SY

     BBC News: http://www.bbc.co.uk/news/business-11838365

United Kingdom is Closing Doors on Immigration

It has been reported by Reuters that the amount of non EU immigrants going into the UK will be severely cut over the next years until 2015.  The goal for this is to try and trump the unemployment rate, which is currently at 7.7%.  Also, with spending cuts in the near future, the risk for many public service workers losing their jobs is high.

The Conservative-Liberal Democratic coalition, who has been in control since May, has also released that the cuts will not include personnel who is already earning the equivalence of over 40,000£ in their current occupation with their company.  There is concern still that by limiting the number of immigrants from certain countries could be limiting the potential growth of companies in the UK.  Most businesses have approved of allowing higher income employees to immigrate into the country, but were put off slightly by the idea of limiting new minds into the market.

Some statistics that are stated is that in 2011 there will only be 21,700 workers allowed into the from non EU countries, which is 6,300 less than in 2009.  However, Conservative interior minister Theresa May has stated that the number of workers who have job offers (and with graduate level jobs) will rise from 7,000 to 20,000.  The number of temporary workers will be closely monitored to avoid permanent stay.

I personally have to say that as one who is considering living in the UK in the future, this may create more competition thus making it harder to enter the country.  However, with the level of unemployment and spending cuts, it is probably best to limit the number of lower end immigration, yet still eventually increase the number of educated immigrants into the country.   

What effect do you think this could have on the growth of the UK market?  Will limiting immigrations to only those who have a certain standard of education be a good thing?

Reference: http://uk.reuters.com/article/idUKTRE6AM1AQ20101123

(Post by Evan Amano)

Bernanke calls for larger stimulus

A recent speech by Chairman of the Fed Ben Bernanke calls for an even larger stimulus package to give the U.S. economy a much-needed boost. A CNN Money report details Bernanke's continued support of the planned purchase of $600 billion in treasury bonds by the Federal Reserve. He sticks by his belief of conventional monetary policy despite criticism from outside economies.

At the same time, Bernanke is also calling for other countries to let their currency gain in value to help correct the imbalances of the slowly recovering world economy. He believes part of the problem lies in emerging markets that are preventing currency appreciation. The rate at which emerging markets are recovering is much faster than the rate at which established economies are recovering, leading to an imbalance that is impeding political cooperation between countries. The unity and support that got the global economy through the worst of the economic crisis has diminished and "tensions among nations over economic policies have emerged and intensified," according to Bernanke. Is this true? Or are some countries maybe taking a backseat in the hopes that, following the trends of economics, the developing economies will slow down as the established economies speed up, eventually reaching equilibrium?

Ireland’s Current Economic Standing

                The entire EU is looking and wondering what Ireland is currently considering to get out of their economic troubles.  As stated last week, Ireland is looking unlikely to escape huge debts; however, the Irish Prime Minister Brian Cowen continues to refuse any support from the EU, and believes that Ireland can break through their current economic distress, as stated on BBC News.  The government is supposed to be proposing a four year financial plan next week on how they plan to avoid aid from the EU.

                Financial Times has also reported that England is willing to aid the Irish and help avoid any disastrous problems among the Eurozone.  Though England is not part of the Eurozone, it is a part of the EU.  England is supposed to already loan six billion Euro if Ireland needed to be bailed out due to the European financial stability mechanism, which includes all members of the EU to pool together 60 billion Euros in a state of emergency.  Though they are not obligated to give more, UK chancellor George Osborne seems willing to give more if need be.  England is not part of the EFSF, which has more money on reserve to offer Ireland.  As the EU made clear last week, Ireland would have access to the EFSF, which includes a pot of 440 billion Euros set to aid any Eurozone countries.  Also there is the chance that the IMF to gain extra financial aid if necessary.

                Some background info about the Irish economy over the last few years was mentioned by BBC News, stating that the housing bubble that started in 2008 greatly affected the economy.  Housing prices have fallen 50 to 60 percent, and bad debts have caused near collapse.

                In my opinion, the pride by the Irish government seems to mean well, but unfortunately it may not end up beneficial for the EU.  Greece and Portugal, two other countries who are in severe debt, are watching to see what might occur to them in the future.  It is good that the EU is completely behind Ireland, and the results over the next year should be interesting to see how well financially Ireland can stay afloat.  Prime Minister Cowen had stated that there are enough funds to hold them afloat well into next year. 

               

What do you think Ireland should do?  Is this safety net that lays under Ireland a good thing to jump into, or should they try to figure out their crisis on their own?

References: http://www.ft.com/cms/s/0/54c2f752-f171-11df-8609-00144feab49a.html#axzz15UYliVF8, http://www.bbc.co.uk/news/business-11771574

(Posted by Evan Amano)

Fears Grow Over Woes of Europe’s Periphery

The EU is truly in crisis mode here:

           On Monday, fear has been sparked among the Eurozone.  The balance within the countries currently running under the Euro is looking bleak, as Ireland, Portugal, and Greece all had rising yielding interest rates since the EU summit, raising 84 basis points in Ireland (rates now at 7.75%), 74bp in Portugal (6.67%), and 72bp in Greece (11.27%).  These bonds being traded are similarly high to the recent bail out seen in Greece in May.  This has all come after the Euro was gaining strength up until Monday.          

           Germany discussed at the EU summit, held on October 29, that there is no way the Eurozone could protect these countries, and the countries in question should default if need be.  This would harm investors on these bonds.  A European economist has stated that since the summit it has gotten much worse, and the Germans do not recognize the need for support.       

           The European Financial Stability Facility (EFSF) has been another way that the countries can attempt to turn, specifically Ireland.  Ireland currently has enough money to run until July, so the possibilities that Ireland may be able to stick this one out are still in question, and relying on the EFSF is not completely urgent at the moment.   

           The structure and stability of the Eurozone seem to be at unease, and it should be interesting how this pans out.  Hopefully the countries can hold strong and manage to stop their interest rate growth.  These uncertainties within the EU continue to cause fear of default by investors.  More to be posted upon the situation in Europe.  For more on the economic crisis, follow the link below or at the top of the article. 

Reference: Financial Times: http://www.ft.com/cms/s/0/9260e85a-eb66-11df-b482-00144feab49a.html#axzz14jS0Ypv6

(This post was created by Evan Amano)

How the Great Recession has Changed Our Spending Habits

Opening a Goodwill store in the same ZIP code as hundreds of well-respected retailers such as Macy’s and Lord&Taylor would have been a sure failure just a few years ago. But in the wake of the Great Recession, one such store in a middle-class New York suburb has proved that things are different now. Shoppers no longer think of shopping at secondhand stores as low class – rather it is something to be proud of. The trend has become so popular that some high-end retail stores are even dedicating parts of their stores to secondhand goods as a way to offset decreased sales of their full price merchandise.

Shopping at secondhand stores isn’t the only money saving strategy that has become popular. Shoppers at grocery stores are turning to store brands to save money and are finding that the savings more than make up for the lack name brand. This search for additional value has also led consumers to fast-food restaurants. And it’s not just consumers in lower income brackets. Research from American Express, found that consumers that put at least $7,000 a month on their credit cards have increased their spending on fast-food by 24%. Evening paying for items on layaway has lost its stigma.

After losing popularity with rise of credit cards in the past two decades, paying for big-ticket items on layaway has made a comeback as well. At eLayaway.com, customers can buy things like iPads and tickets to sporting events and pay off their purchases over time. What is surprising is that over 40% of eLayaway.com’s customers have an income above $60,000. This is up from just 8% before the start of the recession.

Have you changed your shopping or spending habits since the recession? Tell us about it in the comments section.
 

To read the original article, click here.

'London Falling'

Ilona Billington wrote an article in the Wall Street Journal today that was about housing prices in the U.K. Apparently they are the lowest they have been since April 2009. This is likely due to the Banks' hesitation to make housing loans. With access to credit being restricted to potential buyers, the demand for housing shifts down and average price falls. However there is an opposing force at work here as well! Sellers are as cautious about buyers as banks are, so they are holding off on posting their properties for sale until the housing market climate clears. With reduced demand on the buyers' side and reduced supply on the sellers' side, transaction activity is predicted to level out for a while.
The article does not address whether or not London is feeling the housing price drop to same extent as the rest of the U.K. which interests me because London has the most expensive realty in the world! Demand for property there is so high, it's amazing. Which brings us to an interesting economic phenomenon of restricted supply.
When a city becomes a desirable location to live, people flock there. Take Chicago for example. If you want to live right next to the office building you work in in downtown Chicago, you will have to pay like crazy for it. Most people would rather live a little farther away and commute to work. When those areas fill up, the price for property goes up there, and people are willing to move slightly farther away and commute a little longer. However, it is still worth the money they save. As demand for property increases farther and farther away from downtown Chicago, the higher prices get in each subsequent section. This is the reason for Chicago's vast expanse of surrounding suburbs.
Back to London; London is surrounded by what is called the "Green Belt." It is a swath of land surrounding London that is protected so as to keep the area from being developed. This means there can be no vast expanse of suburbs like Chicago has. So London's population has a cap at around six million people due to the scarcity of land. And since it is such an epicenter of business, culture, fashion, etc, the demand continues to increase for a fixed amount of land, increasing prices to outrageous proportions. Perhaps London is still subject to the U.K.'s falling property prices, but if so, I would assume it occurs at a lesser rate.

Reference: Tim Harford, "The Undercover Economist" (2005)
(Posted by Trevor Murphy-Mannix)

A Quick Look at the Reduction in Manufacturing Employment in the U.S.

There seems to be some anxiety in the U.S. regarding the reduction in manufacturing employment. People tend to see only one reason for this; Americans have a huge demand for cheap goods, which leads to the exploitation of cheap labor overseas. It is slightly more complex than that. There are four main reasons the U.S. labor market no longer demands manufacturing and unskilled labor like it once did.
First, contrary to popular belief, demand for manufactured goods has fallen in the last sixty years. In 1950, 67% of consumer spending was on manufactured goods. By 2006 that number had fallen to 43%. This is likely due to the rise in real wages coupled with the increase in work force participation of married women. Families need to employ services like childcare, cleaning, and food services that were once done by married women.
Second, U.S. manufacturing companies have moved from labor intensive to capital intensive ways of creating products. So what once took twenty men to make, can now be done by a machine and one human operator (for an arbitrary example).
A third and very important reason stems from the idea of comparative advantage. When a country has a comparative advantage in the production of a particular type of good or goods, then they should pursue that production rather than attempting to create goods that other countries can make more efficiently. Otherwise that country will not be able to effectively compete in the global market. The U.S. has exploited their comparative advantage of capital-intensive goods and skilled labor, while other countries have invested in their comparative advantage of unskilled labor-intensive goods production.
The fourth and final reason covered here is interesting because it points out that the decline is perhaps not as severe as the numbers show. Many manufacturing companies use temporary help agencies to cover short-term changes in demand. That means that the workers employed by the agency ('temps') do not get counted as manufacturing workers, they get counted as service workers. So even though there are many thousands of 'temps' working manufacturing jobs in the U.S., they get counted toward service industry employment.
It is difficult to say what the proper amount of domestic manufacturing is for the United States, but a nation of educated and skilled workers seems more appealing to me than a nation of unskilled manufacturers working at polluting factories. The persistence of global trade where both nations can benefit from their transactions is important.

Reference: Campbell R. McConnell, Stanley L. Bruce, and David A. Macpherson. Contemporary Labor Economics eighth edition, 2009

(This was posted by Trevor-Murphy-Mannix)

A Theoretical View of U.S. Debt

(Note: there are opinions expressed in this post that belong to the author and may not necessarily reflect the view of the Global Economics Team as a whole.)

When I get asked what I am studying in college and I reply economics, the conversation will go one of two ways. Either they say "oh so you want to work on Wall Street, eh?" To which the answer is "no, not at all." The second way the conversation may head is toward the evils of the U.S. government's spending habits. Many people are perturbed by the U.S. and our growing debt. It is true that we are spending more money than we have each year, and as many victims of the housing market crash can attest, this is not sustainable. How can we continue to grow our economy if we keep financing our debt with money foreign countries that we have to pay back with interest? Well, I wish I had answers to people's economics questions more often (maybe I should carry around a bag full of economics text books everywhere I go) but this particular question regarding our outflow of money had me stumped. I do not have all the information on this subject, but can shed light on a few interesting relevant points.

First of all, there is no problem with going into debt if the money borrowed goes to a more productive economy. It is similar to any logical investment; you have to spend money to make money! And if there is a lack of funds flowing in to the U.S. economy, then the interest rate will increase and investment will consequently decrease. Since investment is linked to higher economic growth, which for all intents and purposes can be seen a good thing, then borrowing should occur if the money is directed toward economy enhancing programs. Another problem people have with our debt is the fact that the burden of repaying it rests on the shoulders of future generations. This may seem unfair, but not if you take in to consideration that the money borrowed helped create a higher standard of living for that generation, and they may therefore be better equipped to repay.
Second, it is important to keep in mind that our debt may not be a perpetual spiral that will only get bigger and bigger until we collapse and become a third world country. In the 1980s the U.S. dollar was appreciating and interest rates were coaxing foreign investors over. This created a current account deficit and a capital account surplus. This surplus/deficit tango we found ourselves in has persisted and attributes to our "debtor" status. However, if foreign investors no longer find U.S. financial securities desirable, current account will increase, capital account will decrease and our debt will shrink. We will find ourselves debt free and even lending money to other debtor nations, however we will have weak currency and low economic growth. Which situation is more desirable? That is not for me to say, it is up to our ignorant politicians to decide.

Reference:
Steven Husted and Michael Melvin (2004): International Economics sixth edition.

(This was posted by Trevor Murphy-Mannix)

French Senate Pass Pension Reform Bill

                This weekend started out with controversy in France, as the French senate approved President Sarkozy’s pension plan, BBC news reported.  The plan is to change the minimum retirement age from 60 to 62, and the full state pension age from 65 to 67.  Sarkozy’s plan is said to avoid the collapse of the current pension plan. 

                Though the new bill was just approved by the senate this Friday, the protests and strikes by union workers have been ongoing for weeks.  Unions have stated that it is a hard earned right to be able to retire at the age of 60.  Unef, a union that represents students, are encouraging students to hold a sit-in this upcoming Tuesday, but may be struck by the half term holiday which began Friday and will run until November 4^th.

                With strikes seen amongst the fuel industry, many of filling stations have been left empty, with reports by Prime Minister Francois Fillon stating it may take several days before the fuel supplies rise to normal levels.

                Unions are meant to protect the rights of the employees from unfair laws and orders put in place by their employers; however, it can seem at times when the government or any business are put in tough economic situations, that they may stand in the way of what is best for the people themselves.  When a current pension plan will not be sustainable in the upcoming years, it would seem obvious that change must be put in places where there is room for it to be made. 

                Though at sudden changes unionists may look at it as two years they are being cheated out of retirement to earn their pension, the next generation of employees will be able to fund for those currently retired and onward.  The good of the citizens of France relies on rebuilding a broken system, and to improve the situation, sacrifices will always have to be made for the greater good of the country.  Let’s see if it all ends up working out.  For the full article, follow here.

Currency War?....Probably Not.

There was an article posted to the online version of The Economist earlier today called "How to stop a currency war." Apparently Guido Mantega, Brazil's finance minister declared in late september that an "international currency war" had broken out. There has been a lot of discussion about China's undervalued yuan and the implications it bears on international trade, but there is by no means a "currency war" afoot. Now that being said, precautions do need to be made so that one does not start. The House of Representatives passed a law that allows firms to seek tariff protection against countries with undervalued currencies. However, this law has yet to be signed by the senate or the President. I do not know a lot about it, but it seems to me like the president needs to be careful when implementing regulations like this. Obviously this new law is targeted at China. Even though the law states that firms have tariff protection from ANY country with undervalued currency, they mean China. China is a huge trading partner of ours and we need to keep our relations in high standing. Passing a law like this could be construed as a slap in the face. Of course this does not mean nothing should be done. The undervalued yuan is having a serious affect on our economy. If we take no action, it may send a message to China that says they can abuse our strong trade relationship. I also wonder if it would send the message to other countries to try the same tactics. If other trade partners realize the U.S.' s reluctancy to take action they may undervalue their currency as well in order to strengthen their economy.
One thing that I liked about the article was how they mentioned the effects the weak yuan has on other countries. In most U.S. publications they only mention China and the U.S. while the rest of the world sort of gets swept under the rug as though we are the only country who does business with China.
Interesting stuff to think about though. I think it very important to avoid a currency war and keep a good relationship with China.

I liked how in the article the author referred to quantitative easing as a weapon. I had not thought of it that way before.

The link to the article is here

(This was posted by Trevor Murphy-Mannix)

India's Wage-Gender Gap

There is considerable research and debate addressing the wage-gender gap in America. Men tend to make more than women on average as most people know, and economists have set out to busy themselves with answering the question 'why?' There are many reasons that have been looked at, some more significant than others, but that is beside the point here. What are the income gaps between women and men in other countries? Are there any? How big are the gaps? Are the reasons the same or different from the U.S.?
It is safe to say that the answers to these questions will differ from country to country and it would be illogical to aggregate the world. After all a positive coefficient on a variable in one country may have a negative coefficient in another!(http://en.wikipedia.org/wiki/Linear_regression)
Luckily there are a great deal of studies done on this subject. One such study done by Nidhiya Menon et al. from Brandeis University analyzed the wage gap in India in the face of increased competitive forces resulting from India's trade liberalization. Intuitively, we can assume that as the market becomes more competitive, there will be a decrease in costly exclusion of capable women in the workforce. However, this study shows that as India becomes more willing to trade, the wage gap has actually widened!

The Paper is here:
http://people.brandeis.edu/~nmenon/Menon_Rodgers_India_WDResubmission_091608.pdf

Note: This is an economic research paper and is not exactly a light read. It uses econometric procedures to procure statistics from data. These statistics may have serious implications, but like every economics research paper, can never be perfect.