Archive for October, 2009

King of the Black Market

October 28, 2009
Columbian Black Market Dollars

Columbian Black Market Dollars

The Wall Street Journal came out with an interesting article claiming the dollar is still the “King of the Black Market”. Black markets are often not talked about among normal urban population in the U.S. and other Western countries, however, in some countries, the black market is all that is talked about. In countries such as Venezuela where the currency is pegged to the U.S. dollar many people keep extra reserves. This is because often this arbitrary level set by the government does not reflect the true market value of the currency. And, if the currency were to crash, the dollar would still retain its true value.  Black markets are often used for multiple things such as the purchase of illegal entities, purchase of legal but restricted entities, etc. However, all of this “stuff” must be bought by some type of currency. In the past that currency has consistently been the dollar as it was considered the safest currency in the world as well as the known international currency. The black market is heavily dependent on selling their “stuff” for a currency in which they know they can use. So the fact that the dollar has been used in the past shows a great deal of faith in the dollar.

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Valuation of Dollar

There has been speculation recently that the euro is beginning to infringe on the dollar as the safest currency in the world, as the U.S. dollar has been continuously losing value. The euro is currently the second most traded currency in the world. Ports and Richards, scholars from Dartmouth and the London school of business claim, “The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar” . It would only seem safe, right? However, the black market still deems the dollar the “it” currency.  One man claimed to the Wall Street Journal, “Take out a dollar bill in the remotest place in world and people will recognize it”.  This still says something about the dominance the dollar has on the international market.  Alhaji Farouk Suleman the president of the Association of Bureaux de Change Operators of Nigeria, a group for black market traders in Nigeria exclaimed, “The exchange rate might not be good, but you know what you’re dealing with and that you can use the dollar anywhere you go. I don’t see any real shift towards the pound or euro.” Most people in the Western World would not realize what an importance the dollar has to some people in these African countries, yet the dollar is a profound instrument for many people’s livelihoods.

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Who wants to buy $$?

If the dollar continues to dominate the black market, it shows that the people, who depend most on the safety of a currency, still believe in the dollar. With their support and belief in the dollar, rumors that the euro could soon be replacing the dollar as the international currency are really just …mere rumors.

 

 

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President Obama…yet to be determined

October 26, 2009
President Obama

President Obama

President Obama is one of the most famous people in the world right now. Growing up in Hawaii and then preceding onto Colombia and Harvard Law, Obama put himself in an atmosphere made for success. He became a civil rights attorney and taught for the University of Chicago Law School for a few years as well as served on the Senate of Illinois. When he decided to run for President it was a historical moment in that he was the first African-American to ever run. Not only was he the first African-American candidate to run for President he was also the first even African-American President. As the first ever African-American president, Obama will be a party of history forever.           

michelle-obama-dress-300x400President Obama is a very important person within the political community today. By the end of 2008 Bush 43’s ratings were down in the pits, very few in America approved of him, and almost no one in the international community approved of him or his actions. President Obama was embraced by open arms by many people. He represented a dramatic change from the neo-conservative Bush regime. Obama was a youthful man who wanted to see change; he wanted to see an end to the Iraq War, he wanted to open up at least a talking relationship with Iran, and he wanted to start a healthcare reform. Of course, every president makes many claims while running for election and does not follow through with all of them. However, Obama is doing a pretty good job at trying to accomplish goals given what he has been blessed/ cursed with. Obama came into the presidency while the greatest recession since the Great Depression was in full swing and Afghanistan, on top of problems in Iraq, was becoming a full-out war. In the public sphere, President Obama, is often viewed as the suave young President with the wife (Michelle Obama) who is known for her fashy clothes. Yet, what people think of his policies is yet to be determined. While the health care bill is being pushed through Congress, most people do not know how it will and will not affect them. Afghanistan is a mess, but more light is being shed on the military and their tactics, rather than on what President Obama has to say on the subject and Iraq has more focus on the military as well.

It is surprising, however, is that Obama has been able to avoid a great deal of criticism from the public. It seems as if he has stepped back, and he is letting the institutions do their jobs, rather than pushing his way to the front, which was often seen with Bush. Bush was always all over the newspaper talking about his war on terror, calling press conferences, etc. Yet, Obama tends to give more updates on what is happening within the administration. Often, in a time of recession the Presidents ratings often plummet as it is seen as his job to get the economy to prosper. Yet, this has not occurred with Obama. Because of the massive steps taken from the Fed and Treasury, the light has thus been spotlighted at those two institutions, and Obama has been in the background. This is good for him in the long run because people will not resent him in the future for their lost jobs, and lost savings. It will allow him to come partially unscathed out of the recession.

2009-0213-theboss-chrisOn the inside, Obama was a relief to the Democratic majority in the legislature and an unwelcome hairball to the Republican minority. The Democrats have the majority in both the Senate and the House of Representatives making it much easier to pass legislation to their liking. Having a Democratic President and Democratic legislature makes it very hard for the Republicans to start new legislation that could either fail to gain majority support in the House or Senate or be blocked in the end by a Presidential Veto. It will be interesting to see how the 2010 Congressional elections pan out. The biannual elections are often a good indication on how the country is feeling about the President and whether they would like to see him have more or less power in office. It is hard for a President to work with an opposite party majority in Congress because differences clash, however, so far Obama has had it very easy.

2102305636_118c1d0009Obama has also pulled through multiple accouants of critiscims in regard to his personal life. WHen Oprah supported Obama it was claimed that Oprah was going to be the reason he won his election. The awarding of the Nobel Peace Prize to Obama did nothing to help his reputation either. Instaed, mass critiscim of both of these events were given to Obama, yet he had nothing to do with either of them.

President Obama’s legacy is yet to be seen. Many of the things Obama could potentially be remembered for are in the middle of the occurrences with undetermined outcomes.  What hurdles and leaps he will have to make in the future are unknown but he is already a timeless legacy in history, yet how that legacy will be lived out is yet to be determined.

What caused the Great Recession?

October 19, 2009

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Michael Jackson once sang “ Keep on with the force don’t stop, don’t stop till you get enough” and that is exactly what our world has done creating a housing bubble that led to the Great Recession, the worst recession since the Great Depression.  The forces of international and national policy were creating the picturesque American Dream in the United States. Everyone was getting their perfect house with the white picket fence, everyone had their flat screen TV’s,  and it all seemed as if it were so cheap, swipe it or take out a loan with a great interest rate. However, the problem was this is unsustainable. The nature of the housing bubble is a mix of international and domestic policy problems that led to unsustainable prices in the housing market as well as the financing of many people who could not afford these houses. Internationally, the savings glut accrued by China and other countries throughout the late 90’s and early 21st century led to long-term low interest rates which helped create the housing bubble as it led to cheap mortgage interest rates allowing people who should not have been able to afford mortgage afford them; nationally, the U.S. government encouraged a relaxing of regulations on the mortgage market which ultimately led to fierce competition in the subprime mortgage arena ultimately creating a freeze in the short term liquidity markets. Together these created the perfect mixture that enflamed the rest of the havoc of the Great Panic.

For More Great Reads look into these sources….

  • Ashcraft and Schuermann, “Understanding Subprime Securitization,” Federal Reserve Bank of New York Staff Report 318, March 2008.
  • Ashok Bardhan and Dwight Jaffee, “Global Capital Flows, Foreign Financing, and US Interest Rates” Fisher Center Working Paper 303 (2007).
  • Bernanke, Ben (2005), “The Global Saving Glut and the U.S. Current Account Deficit, Systemic Risk and Affordable Housing,” speech of March 10, 2005, available at http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm
  • Bernanke, Ben (2007), “GSE Portfolios, Systemic Risk and Affordable Housing,”  speech of March 6, 2007, available at http://www.federalreserve.gov/boarddocs/ speeches/2007/20070306/.
  • Charles Duhig, “Pressured to Take More Risk, Fannie Reached Tipping Point” New York Times, October 5, 2008.

East African Community or Not?

October 14, 2009
East Africa - to be one or not?

East Africa - to be one or not?

Big ambitions, big question marks is a evaluative article on whether or not the East African Community should become more like the EU and the United States under a single currency as well common law. The criterion on which to evaluative this argument is whether or not this unification will be better or worse economically for these countries. The article shows evidence that the community with a unified currency could in fact be much better for the citizens that live in these countries. With about 28 of Africa’s smallest countries combined it may be big enough to be very attractive to foreign investors that would bring much needed money into the region. Already there are plans to bring roads, railways, as well as pipelines through the entire East Africa. Not only could this bring more foreign investors but it would also be able to negotiate better deals with the rich world than the individual African countries can do now by themselves. This article is making a judgment about the quality of life this unification could bring. It measures the usefulness of this unification on different economic factors mentioned above. It also offers visuals that enhance the idea that shows how all of these small countries all together could produce a rather larger area of economic unification that would amount to much more than how small each country is on its own. This article while evaluating also gives the opposite point of view of those local businessman who are still skeptical that this dream could be “botched by a trade row, tribal violence or strangled at birth with red tape by venal politicians and bureaucrats.

Did China Play a Role?

October 5, 2009

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Many people have wondered whether or not China played a role in causing the Great Recession  because of their great investments in US Securities and Treasuries. China has amassed millions and millions of dollars in US debt. When China bought American consumers debt, they did so by allowing American consumers to live beyond their means. Many ask why China bought all of this debt. Two principle reasons have been deduced by economist:

1.Because of the East Asian Financial Crisis holding all of these securities is a cushion in case something like the 1997 episode happens again

2. Export led growth based on an undervalued foreign exchange rate leads increased income in dollars. When foreign entities export to the US they are paid in dollars. An individual foreign investor can eliminate his/her dollar assets by simply by selling them, but this cannot be true for the foreign sector taken as a whole – as long as the US runs a trade deficit, foreign investors taken as a whole cannot reduces their holdings of US securities.

These two reasons led to China’s accumulation of American debt.  However, as China accumulated more and more American debt this made it so long term interest rates (especially those of the housing market) stayed relatively low. Savings must equal Investment so with the very high savings rate in China there had to be an equal amount of investment. In the global world Americans do not have to have their savings = their investment. Instead we can borrow abroad. This leads China to do all of the savings and Americans to do all of the investment. However, this cannot be sustained and as Greenspan and Bernanke have argues -> this “savings glut” led to the Great Recession. These decreased interest rates were especially low in the housing industry because China was beginning to accumulate more and more mortgage backed securities (MBS). From 2000-2006 China’s share of total securities quadrupled and China held 3% of Agency MBS (agency = sum of bonds and mortgage backed securities issued by the government sponsored agencies such as Ginnie Mae and now Freddie and Fannie Mac). While China held 3% of Agency MBS’s this does not include the many banks that were loaning out MBS’s not sponsored by the government. Many of the MBS that were being lent out included sub-prime mortgages within their pool of mortgages. Well this created a big problem. The MBS were becoming of poorer and poorer quality. In the consumer world, these low interest rates were making it easier for people to refinance their houses as well as buy new houses. This was beginning to occur at an unsustainable rate. As Greenspan argues there was export led growth by China in the 1990’s that led to a decline in long-term interest rates. This led to growth in China and an excess of global intended savings relative to intended capital investment. The increase in savings propelled global long term interest rates to become progressively lower. This led to Real Estate Capitalization Rates decline and convergence across the world. This led to the Global housing bubble which had to pop at some point and when that popped it led to the meltdown of the financial system.

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So did China’s savings and export led growth cause the financial crisis? Yes, it was defiantly a big part, but it was not the sole cause. There were so many factors that led to the Great Recession and when all combined the outcome is the Great Recession. China helped instigate the recession but this is only part of the story. American consumers loved to shop and buy beyond their means. Banks across the world loved to put together mortgage backed securities which made turning a profit much easier. Rating agencies loved getting paid millions to rate securities AAA when before they would never have received such a rating. Throw it all together into a melting pot and you create the Great Recession. China’s savings rate was just one of the ingredients to make it be all that worse.