Who’s specifically to blame for the economic situation we find ourselves in leading up to the $700B Federal bailout bill that is just about to be signed into law?

Assuming you have read my previous post (“U.S. Financial Crisis! What Is Really Happening?”) on this topic posted last week on this blog site, a related and logical question might be who is most to blame for the unfortunate economic situation we find ourselves in?

As you can imagine, there is plenty of blame to go around! Republicans are blaming Democrats and Democrats are blaming Republicans. Many are blaming household decision makers, greedy executives, and bank regulators “asleep at the switch”. In short, everyone is blaming everyone except for themselves. I have yet to see one person blame themselves, their agency, or their companies!

I see the answers to the “who is to blame” question as a 6-point answer. Keep in mind that these 6 reasons are strictly my opinions and many would either disagree or add to the list:

1. Imprecise regulatory law allowed the financial institutions to carry too high a ratio of mortgage-backed securities to collateralized debt.
2. Banking regulators (Banking Committee, FED, Regulators, etc.) should have screamed louder earlier! Although there are many documented attempts from specific people that did warn of this problem it was more a whisper than a scream.
3. Private lenders (and their CEOs) got greedy either lowering or violating their own lending standards in hopes of making more interest income by loaning to people who were very risk bets.
4. New law had been passed several years ago, urging that Fannie Mae and Freddie Mac make more loans to lower income households that carried much more risk.
5. Households borrowed more than they could afford. Citizens that borrowed need to share the blame with lenders, although I place lenders at a higher standard than borrowers.
6. New accounting regulations under Sarbanes Oxley (regulation passed after Enron) are too conservative causing assets like mortgage-related securities to be valued less than their economic value (true worth), which caused the bank debtor run on the bank.

Yes, there is a lot of blame to go around on this one! If there is any good news it is the hope that new regulation and oversight will occur in our “mixed” economy to help prevent this from ever happening again. Of course, there will be many other “next problems” but, hopefully, we will learn from our mistakes!

Discussion questions:

1. Who do you believe is most to blame for the circumstances leading up to this bailout?
2. Have you remained unbiased in learning that this issue is neither solely a Republican nor a Democratic issue?
3. Which presidential candidate gave you the most comfort as to how he explained his views on the bailout?

European governments bail out more lenders – International Herald Tribune

As the US financial system holds its breath to see if the US government’s injection of $700 billion of liquidity actually results in new lending and restored business and consumer confidence, Europe is beginning to see its own government takeovers of European banks.

Regulators in Britain, Belgium and Iceland swooped in Monday to engineer emergency rescues of three banks with heavy exposure to soured mortgages, echoing moves underway in the United States.

In the latest sign of trouble to hit Europe from the global credit crisis, the Belgian, Dutch and Luxembourg governments announced a partial nationalization of the troubled Belgian-Dutch financial conglomerate Fortis, involving a combined injection of €11.2 billion from the three governments, which take a 49 percent stake…

Meanwhile, the British Treasury on Monday confirmed that it had seized the lender Bradford & Bingley – the third British bank to tumble this year – after no private buyers emerged.

Much as in the United States, several European banks have gotten into trouble as their assets tied to real estate have lost value due to the weak European and American real estate markets. As more and more borrowers are unable to pay their mortgages, banks’ assets decline in value and the banks’ willingness and ability to make new loans decreases. This limits the amount of credit available to households and firms, and with it their ability to make investments in consumer goods and capital. Tighter credit markets mean weaker aggregate demand (less consumption and investment), leading to slower or negative economic growth and rising unemployment.

In the past, when one bank got into trouble with bad assets like those tied to the real estate market, other private banks would come along and bail the troubled bank out, swapping cash for the assets, allowing the troubled bank to continue making loans. But when all banks find themselves in the midst of the same financial crisis, the likelihood of finding a private buyer for a struggling bank is low. This is where the government steps in:

The bailout of Fortis (Belgium’s largest commercial bank) orchestrated by the three neighboring countries (Belgium, Luxembourg and the Netherlands) and the ECB (European Central Bank)… was meant to restore confidence in the bank before the reopening of markets on Monday after a tumultuous week of imploding share values at Fortis. The shares gained 4.8 percent to €5.45 Monday.

In Britain, regulators were unable to find buyers to keep Bradford & Bingley afloat. The lender’s shares are down 90 percent from the peak, touching new depths Friday as an already skittish market punished the company, prompting the talks.

When the private sector is unable or unwilling to purchase the assets of a bank that has experienced a write down of its asset value, the government must intervene to make sure such banks have the liquidity (meaning the hard cash) they need to make loans to borrowers, whose spending is needed to keep the economy going.

In the US, the government has agreed to trade $700 billion in hard, loanable and spendable cash, in exchange for financial assets tied to bad mortgages worth something less than $700 billion. If the swap has the effect the government hopes it will, then lending institutions will feel more confidence and be willing to loan cash to each other and to borrowers (households and firms), spending in the economy will increase (consumption and investment) and aggregate demand will rise, meaning more total output, more employment and higher incomes. In addition, more lending will also lead to an increase in the capital stock, effectively pushing the American and European aggregate supply curves outwards, leading to a more stable rate of inflation (a major worry for both economies as oil prices hit record levels this year).

In spite of the recent round of bailouts in both the US and Europe, confidence among European firms and households is low:

Euro-zone economic confidence plunged to its lowest level in seven years in September, the EU said Monday.

A regular survey of European companies and consumers showed the index of confidence in the economy falling to 87.7, close to a 2001 trough, the European Commission said.

The EU executive warned that the survey carried out in the first two weeks of September may not fully reflect growing gloom in the last few weeks as worries over a U.S. and European recession widened on a financial market crisis.

Industry, services and construction were all more pessimistic than a month ago, it said, while consumer confidence was unchanged from a low level. Retailers were slightly more upbeat about their prospects.

It said industry managers’ employment expectations fell – meaning they believe they may have to cut jobs – although services companies were more hopeful.

Consumers thought that unemployment would increase in future months and expect prices to rise.

The 15 nations that share the euro are battling high inflation as oil prices remain high – although below recent record levels – and increasing fears that a financial crisis will freeze or sharply hike the cost of borrowing.

That would slow growth as companies found it harder to get credit and people faced high costs to buy homes. The U.S. government is trying to stave off tighter credit conditions by buying up hundreds of billions of dollars of bad debt from major lenders

As can be seen, falling confidence and tighter credit markets are evil twins. If the Euro zone economy is to avoid recession, the European Central Bank and the governments of the 15 Euro nations should follow closely events in the US over the next few weeks. The $700 billion injection of liquidity, if successful, will act as lubrication in the engine of the US economy.

Think of it this way: lately, the US economic engine has slowed down. Friction in the financial markets has slowed the flow of cash from households to banks to firms and back to households. In IB and AP Economics terms, the circular flow of money and income has slowed to a halt. To get the engine moving again, cash is needed. Banks with liquid cash are more willing to lend to one another and to households and firms. A healthy economy depends on a well lubricated economic engine, which in today’s world means a functioning financial market.

The government bailouts in the US and Europe are intended to do one thing: lubricate that engine and get the economy moving forward once more.

Discussion question:

1. Why does the government need to intervene in financial markets? Shouldn’t those who took risks by making bad loans pay for their mistakes and be allowed to go under?
2. What will it take to turn consumer and investor confidence around in Europe?
3. How might the crisis in the financial markets affect you and me in the real world?

Yesterday in my classroom, I explained to my students the financial crisis that is occurring in the U.S. economy, and the Federal Government bailout bill that both houses of Congress are trying to agree on to save the economy. This is such a national crisis that our key government officials were working on this bill just late last night in hopes of agreeing to a bill this weekend before our economy potentially reaches a new level of recession.

Sooooo: Here is a simplified summary of what is happening in the US economy today relating to the “financial crisis”. I’m going to use simple example US Dollar numbers for you to explain what is happening, but the direction of the numbers is real and the simplicity will really get you to understand the real problem at hand and what the Government is proposing to do to fix it.

Here we go:

Gigantic U.S. financial institutions such as AIG, Fannie Mae, Freddie Mac, Lehman Brothers, & Merrrill Lynch all have the SAME problem: They are holding $100 in a “paper asset” that they invested in called mortgage-related securities. These same financial institutions also have debt of $60 of which the lenders of the $60 all have legal collateral on the $100 of mortage-related securities. Since many U.S. homeowners are not paying or are unable to pay their home mortgage (loan) payments, the Government’s (SEC) accounting rules require that these same financial institutions write their mortgage-related securities down from a value of $100 to a value of $40. This reduction in asset value causes a reported loss of $60 and is frightening the lenders as the shrinking value of their collateral (securities) has fallen below the debt repayment amount causing the lenders, per the legal debt agreement, to demand immediate payment from the financial institutions.

Thus, these large financial institutions do not currently have or carry enough cash or other assets on hand to pay off the lenders since no one will buy the falling securities they hold because other potential buyers do not trust their market value. Thus, these large financial institutions are currently screwed and are said to be in a “liquidity” (cash) crisis, and they certainly have no cash to lend to small businesses or households. The financial institutions are said to be “freezing up” and they are stopping their loans to businesses and households. Thus, it is really difficult for “main street” (you and me) to get a loan today at most banks.

In steps Hank Paulson (U.S. Treasury Secretary) and Ben Bernanke (Chairman of our Nation’s Bank, the “FED”), the President, and the U.S. Congress to try to avert a deep recession or depression, because if the banking system fails, then the economy is thought to quickly fail.

Using the same example numbers above to explain, the Government plan or “Paulson Plan” (backed fully by Bernanke) proposes for the Government to pay an estimated $70 to the financial institutions to purchase the mortgage-related securities from the financial institutions even though the securities have been written down by the accounting rules to a value of $40. It appears, on the surface, that the Government may be overpaying ($70 payment for new value of asset at $40) but most economists and accountants say the accounting rules have resulted in too much of a write down and the real economic value (ie, cash collection of the mortgage security) is probably $70 -$90 out of the $100, which will cause the government to either lose a little on the bailout or perhaps nothing on the deal. Glen Hubbard, a noted and respected economist said on a talk show yesterday that the average American does not understand what is really happening and incorrectly believes that the Government is spending $700B that will be “billed” to the tax payer, but, in reality, the $700B is expected to be recovered by the Government as the Government collects on their newly purchase securities from the financial institutions.

In summary, the Government (Paulson Plan) is proposing that the American tax payer put their money at risk with an “investment” (not an expense) by swapping Government (taxpayer) cash for an asset (mortgage-related securities) that the Government will recoup the cash through collection, freeing up the financial institutions by giving them $70 in cash for an accounting asset worth $40. Many say the original crisis was started by accounting rules, which is only a partial reason. The main reason is lack of regulation on asset-debt ratios and other similar requirements. Increased regulation will result from this improper risk taking by large financial institutions so that it doesn’t happen but that doesn’t help us at the present moment since the damage has already been done.

Of course, only time will tell how much the proposed bailout will really cost the tax payer. Also, it is possible that before the bill is passed, the Paulson Plan may look a lot different than what is explained above. Stay Tuned!!!!!!

“This post was originally published in April, 2008. It has been re-published today for the benefit of my year 2 IB Econ students, who are currently studying barriers to free trade.

Bloomberg.com: Economy – Korea Beef Deal Won’t Yield Trade Vote

Free trade: everyone either loves it or loves to hate it. South Korea and the US have been in negotiations for a landmark free trade agreement for years. Korea, however, has had a “beef” with US beef imports since 2003, when a case of Mad Cow Disease gave Korean officials the jitters and all imports were halted.

Even though Mad Cow has disappeared from American beef, the ban has remained, making it difficult for negotiators to come to any major agreements on the reduction of tariffs and other barriers to trade in other markets in which the US and Korea trade. Just last week, South Korea removed the beef ban, giving some analysts hope that a free trade deal may soon be agreed upon.

President Bush signed the agreement last year but has hesitated to pass it on to Congress; where certain Democratic politicians have refused to approve the agreement until S Korea removed the beef ban. Now that the ban has been lifted, however, it appears that the issues keeping an agreement from being reached may run deeper than the simple beef ban:

In addition, Ford Motor Co., unions and Democrats, including both Hillary Clinton and Barack Obama, all say the accord must be reworked to address what they call South Korea’s barriers to U.S. manufactured goods.

“I understand there are foreign policy considerations, but this is too important for us,” Stephen Biegun, vice president for government affairs at Ford said in an interview earlier this month. “We don’t see any sign that they are ready to change.”

Levin, who represents autoworkers in suburban Detroit, said the accord will need to be changed to address what he calls South Korea’s non-tariff barriers to U.S. manufactured goods, especially autos.

Clinton, in a response to questions from the Pennsylvania Fair Trade Coalition, said the agreement with South Korea “will cost America jobs.”

The S Korea / US Free Trade Agreement should bring a boost in trade between the two countries:

The U.S. is South Korea’s second-largest export market behind China, with shipments totaling $45.8 billion in 2007. Imports from the U.S. last year reached $37.2 billion. The trade agreement would eliminate or reduce tariffs on a wide range of goods including automobiles, vegetables and electronics.

Through free trade there are winners and losers. This is a theme we’ve explored in some depth already during our International Economics unit. The winners, in the case of the S Korea/US FTA will likely be manufacturers in S Korea and service industries in the US. Judging by Ford Motor Company’s response to the FTA, we can assume that American manufacturers will be losers from the accord.

Does this make it bad, however? According to macroeconomic theory, no. The removal of tariffs on imports from S Korea will force American manufacturers to become more competitive and achieve greater efficiency, both which will result in a more efficient allocation of resources in both S Korea and the US. If Ford, for example, sells fewer cars because of in influx of high quality, affordable Korean automobiles, then Ford may be forced to shut down some of its plants in the US. This will lead to the loss of American jobs, just as Hillary Clinton claims it will.

But in the long-run, America as a whole should be better off for it. Manufacturers in the US will focus more on capital intensive goods such as industrial equipment, the manufacture of which requires highly skilled labor, which America has in abundance. In addition to industrial equipment and other high skilled manufactured goods, the US service sector should benefit from freer trade with S Korea.

With beef being resolved, the U.S. banks, insurance companies and other services companies that stand to gain the most from this accord are gearing up their lobbying efforts.

Beef “has been our biggest obstacle in having a meaningful dialogue on the benefits of this agreement,” said Matt Niemeyer, vice president for the business insurer ACE Ltd. and a former U.S. trade official. “It’s now time to work with Congress to find a way to move this important agreement this year.”

As any student of economics knows by now, politics and economics don’t always mix well. The opposition to the S Korea/US FTA among Congressional Democrats is more political than it is economic. Jobs will be lost, that’s true, but overall trade between two technologically advanced, developed countries like the US and S Korea should do more for improvements in efficiency and in resource allocation than it will in harm for a handful of American workers who may find themselves out of work due to greater demand for imported automobiles.

*A tariff on Korean automobiles results in the following outcomes:

• The quantity demanded of automobiles is less than it would be without a tariff (Q4 rather than Q3)
• The quantity supplied by American auto manufacturers is greater than it would be without the tariff (Q2 rather than Q1)
• The difference between Q2 and Q1 represents an overallocation of resources in America towards automobile manufacturing.
• The domestic quantity demanded exceeds the domestic quantity supplied. The difference (Q4 - Q2) is made up for by imports from S Korea.
  
• The government earns revenue equal to the area of the yellow rectangle (amount of tariff x number of cars imported)
• Society experiences a loss of efficiency (deadweight loss) equal to the combined areas of the green triangles Y and X. This is consumer surplus lost, accounted for by the higher price paid by American consumers imposed by the tariff.

In the model above, the removal of a tariff on Korean automobiles will result in a decrease in output by American firms from Q2 to Q1, an increase in imports from Q4 – Q2 to Q3 – Q1, and an increase in consumer surplus, efficiency, and better overall allocation of resources in America.

Discussion questions:

1. How does the graph illustrate the concept of “winners and losers from free trade”?
2. Who gains and who loses from free trade with the US within Korea?
3. Is it possible that a free trade agreement with Korea would actually create jobs in America? Explain…
4. Why do politicians oppose free trade deals that would result in such improvements in efficiency, allocation of resources, and even in the employment opportunities for American workers?

Economists see financial bailout as necessary – Yahoo! News

Economists in the US are calling this week’s bailout of numerous US companies a necessary step in ensuring that no permanent harm is caused to the financial system and that we do not head into a deep recession.

The Treasury Department under the leadership of Henry Paulson is currently asking congress to move quickly on a bill that would provide $700 billion to the Department to buy up much of the bad debt that many financial institutions have incurred over the past years. Where’s this money going to come from? Since it doesnt look like the Bush Administration will be pushing for increased taxes anythime soon, Congress will have to borrow the money. 

Though most economists are agreeing that this is a necessary step in ensuring the integrity of the economy, I believe that it is important to look at how this additional debt may effect our government and economy in the future. So lets start with some numbers. The following statisitics are taken from the above article.

The deficit for this budget year, which ends on Sept. 30, is expected to rise to $407 billion, a figure that is more than double the $161.5 billion imbalance for 2007, reflecting what the economic slowdown and this year’s $168 billion economic stimulus program are already doing to the government’s books.

The Bush administration is estimating that the deficit for the budget year that begins Oct. 1, which will cover the new president’s first year in office, will hit $482 billion, a record in dollar terms.

And that forecast doesn’t include the $200 billion the administration committed to spending two weeks ago when it took over the nation’s two biggest mortgage companies, Fannie Mae and Freddie Mac.

And it doesn’t have any of the $700 billion the administration is seeking to soak up the bad mortgage-backed securities that have been at the heart of the severe credit crisis the country has been struggling with since August 2007.

The legislation the administration is now seeking to authorize the financial system bailout, according to a draft obtained by The Associated Press, would boost that debt limit to $11.3 trillion, up another $700 billion.

It is the rapidly rising debt that is cause for concern. The government is already spending more than $400 billion a year just to pay interest on the national debt. The higher that debt goes, the higher the government’s borrowing costs and the less it has to spend on other programs.

Discussion Questions:

1. What impact does the knoweldge that the government will bailout struggling financial firms have on investors willingness to take risks?
2. Should the government intervene in these finacial markets or leave the “invisble hand” to its own devices?
3. What are the opportunity costs associated with this decision?
4. What are some short term and long term implications of this bailout?

Wow! What a week for the world economy….stocks down by 4% one day and then up by 4% the next day in response to the uncertainty in the global economy!

In class today we talked about the historical week and how our financial systems & banks are “freezing up”, having difficulty making new loans to households and businesses as the banks are focused on paying off their their own creditors (lenders) who are demanding payment from the banks before they might fail.

And …..along comes the Government to the rescue in our “mixed economy”….lending money to the banks and, in several cases essentially buying the companies! The financial markets (stocks) believe generally that the strong government leadership is needed…not to save the companies…but to save the entire economy from a deep recession! Bad news has a tendency to “freeze up” everyone!

Most economists think the US Government’s Federal Reserve Bank (FED) and Treasury Department have done a pretty good job. 

Here’s a report card for the government out of the Wall Street Journal’s blog:  

      Economists Back Government Moves

As the government’s efforts to save the financial system from impending ruin reached a high-water mark Friday, economists took a step back and offered tentative assessments of the Federal Reserve’s conduct through this year-long crisis.

By and large, they say, the central bank, in conjunction with the Treasury Department, has responded appropriately to an unprecedented stream of crises, and has likely warded off a truly monumental meltdown.

Bernanke

To be sure, it is far from clear that the worst has passed, and much uncertainty surrounds the outlook, particularly given the lack of detail in the government’s sweeping rescue plan. Still, economists say there are plenty of reasons to be hopeful.

“The way the financial markets were heading threatened to create the sort of permanent damage to the financial system we saw in the 1930s,” when the Fed reacted passively to failing banks, said Dana Johnson, chief economist with Comerica.

“To head off the potential damage… it was appropriate to do everything in [the Fed’s] power” to avoid a similar outcome, he said. Johnson views the Fed’s historic initiatives as a “magnificent reaction” to what policy makers have confronted.

Industry group the Business Roundtable said in a statement that Friday’s actions were “appropriate and timely,” and it argued for a “comprehensive” review of the nation’s financial regulatory structure.

Tyler Cowen, an economics professor at George Mason University, said Fed Chairman Ben Bernanke and Treasury’s Henry Paulson “have been making good decisions, relative to a very bad starting place.” Given the nature of the troubles, the two officials started in a “very unfortunate position,” so “it’s very hard to second guess particular decisions,” he said.

One Federal Reserve veteran sees the Fed’s response throughout the crisis as entirely appropriate, but less dramatic than others. Indeed, for CarnegieMellon Tepper School of Business economics professor Marvin Goodfriend, a former Richmond Fed top economist, “the central bank has always had at its disposal two broad policies.”

One is very well known and understood. Monetary policy aims to control inflation and influence growth via the control of short term interest rates, he said. Then there’s the less understood and codified credit policy, which has come into play as the Fed’s extended loans to various parts of the financial system. He reckons officials will need to think about and explain more fully this part of their arsenal, and that illuminating this issue will feature prominently in central banking analysis as the crisis is resolved.

Still, not all are happy with the path charted by the Fed and Treasury. Former St. Louis Fed president and current Cato Institute scholar William Poole said in an interview he believes the Fed did the right thing when it bailed out Bear Stearns last spring and granted an emergency loan to AIG this week, and it was correct in letting investment bank Lehman Brothers go into bankruptcy.

But moves to support the money market funds in a fashion similar to what’s afforded bank deposits, along with mechanisms to gather up and dispose of bad securities — that’s a bad thing, Poole said. He reckons the money market fund support will unnecessarily drive risk-taking in a competitive sector of the market, now that fund managers know their investors will be bailed out in the event of bets gone sour.

But the bigger problem is the plan to buy stricken assets from banks. “The euphoric market reaction to this vague idea doesn’t make that much sense to me,” Poole said. The government will have an extremely difficult time finding appropriate prices for the troubled securities and is likely to be saddled with the absolute dregs of the financial system that will prove very expensive to unload, he said.

“I don’t think it’s possible to do it right,” Poole said, and “when the costs become obvious there will be a whole lot of finger pointing.”

Paulson

Poole also argued it’s entirely possible that the resolution mechanism may not even be needed, and that the recent string of bank failures may well be coming to an end.

Others worried about the risks the Fed’s balance sheet may be facing, although some central bank officials have sought to downplay such fears. They can even point to the $29 billion in securities the Fed acquired as part of the Bear Stearns bailout, which thus far have not lost value.

The American Bankers Association was also negative on the most recent Fed and Treasury actions, saying that they “will undermine the role of banks during this credit crisis and [have] the potential to have an extremely negative impact in the future.”

Still, those views do not appear to hold dominate sway among economists. CarnegieMellon’s Goodfriend said the nation has been “quite fortunate” in having Bernanke at the Fed’s helm, with his academic career so heavily based in understanding the lessons of the Great Depression. “No one could have expected him to do better,” Goodfriend said. –Michael S. Derby

FT.com / World – Air fares nosedive amid falling travel demand

Our IB and AP Econ classes here at Zurich International School have just begun our second unit of the year, where the concepts of Demand and Supply are introduced and the effect these have on prices is examined. The first assignment of the new unit was for each student to find an article discussing the demand for a particular good, service or resource, and post it to our Unit 2 wiki page.

If it’s ever unclear whether a change in demand for a good or a service can actually affect the price, the article linked here should make it perfectly clear that demand is a powerful market force. In an industry where it has seemed recently that prices only rise, a recent fall in market demand has driven prices downward, as firms have responded to consumer demand in order to sell their product, which in this case are seats on short and long-haul flights within and from Europe.

Falling demand for business and leisure travel is causing a marked decline in air fares, with UK fares to North America declining by nearly a half, according to American Express.

Air fares peaked earlier this year as a result of rising oil costs. But the slowing global economy has caused that to reverse.

The lowest economy class fares in Europe, the Middle East and Africa fell on average by 12.5 per cent in April to June compared with the first quarter, with long-haul fares down more than a quarter.

But UK fares suffered the sharpest falls, with the lowest economy fares down by an average of 20.2 per cent, including a 49 per cent fall in fares to North America and a 22 per cent decline in fares to Japan, Asia-Pacific and Australia.

Discussion questions:

1. What factors are driving demand for air travel down within, to and from Europe?
2. Why does the price of air travel fall as demand for air travel weakens?
3. Which other industries may have to lower their prices as fewer and fewer people travel between European countries and North America?

How Does the Stock Market Effect The Economy? | Economics Blog

Well, a few things… Generally, the fluctuations of the stock market do not necessarily bode ill for the whole economy. Likewise, global fluctuations of stock markets does not mean there is a recession on the horizon. In fact, an old adage says that “stock markets have predicted ten out of the last three recessions.” In other words, a slump in global markets does not always precipitate a slump in the world’s economy. Here’s some impacts the market crashes of the last few days may have, however, explained nicely by Richard Pettinger, an economics teacher in the UK:

Economic Effects of Stock Market

1. Wealth Effect: The first impact is that people with shares will see a fall in their wealth. If the fall is significant it will affect their financial outlook. If they are losing money on shares they will be more hesitant to spend money; this can contribute to a fall in consumer spending. However, the effect should not be given too much importance. Often people who buy shares are prepared to lose money; their spending patterns are usually independent of share prices, especially for short term losses.

2. Effect on Pensions: Anybody with a private pension or investment trust will be affected by the stock market, at least indirectly. Pension funds invest a significant part of their funds on the stock market. Therefore, if there is a serious fall in share prices, it reduces the value of pension funds. This means that future pension payouts will be lower. If share prices fall too much, pension funds can struggle to meet their promises. The important thing is the long term movements in the share prices. If share prices fall for a long time then it will definitely affect pension funds and future payouts.

3. Confidence: Often share price movements are reflections of what is happening in the economy. E.g. recent falls are based on fears of a US recession and global slowdown. However, the stock market itself can affect consumer confidence. Bad headlines of falling share prices are another factor which discourage people from spending. On its own it may not have much effect, but combined with falling house prices, share prices can be a discouraging factor.

4. Investment: Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are expanding and wish to borrow often do so by issuing more shares – it provides a low cost way of borrowing more money. However, with falling share prices it becomes much more difficult.

CHICAGO, January 7, 2008 – How much money does it take to be considered rich?  It turns out that $1 million just doesn’t cut it, anymore.

In fact, rich today requires at least $5 million, according to a new survey of affluent households, defined as those with investable assets of $500,000 or more.  When asked how much money it takes to be rich, 45% chose $5 million, 25% selected $25 million, and 8% picked $100 million, according to the research by Millionaire Corner (http://www.millionairecorner.com/index.php), a newly launched website powered by Spectrem Group.  Only 22% said $1 million is enough to be rich.

 Achieving such wealth – and holding onto it for generations – is the topic of a new book by Spectrem’s Catherine S. McBreen and George H. Walper, Jr. titled “Get Rich, Stay Rich, Pass It On: The Wealth Accumulation Secrets of America’s Richest Families” (http://getrichstayrich.net/).  Published this month by Portfolio and available in bookstores now, the book is based on years of research in addition to interviews with ordinary individuals who were able to amass enough wealth to pass on to future generations. “All you really need is to know how to use the same wealth-building tools Carnegie and du Pont and all the other progenitors of sustainable fortunes used,” McBreen and Walper write.  “They created the model but they didn’t patent it.  It’s available for your use, and this book is the operating manual.” 

The authors found that the proper mix of entrepreneurial activities and income-producing real estate is the key to achieving building perpetual wealth. “Get Rich, Stay Rich, Pass It On” walks readers through not only the theory but the practice of building sustainable fortunes.  It not only lays out the model, but provides exercises to help readers bring their own finances into focus and determine what they need to do to develop perpetual wealth of their own.

 

* * *

 The data on how much it takes to be rich are based on 253 telephone interviews conducted in December 2007, with a margin of error of plus or minus 6.2 percentage points.  Interviews were conducted with the financial decision-makers in households with $500,000 or more in investable assets. 

• Why Managed Trade Is Not Free Trade| The Foundation for Economic Education: The Freeman, Ideas on Liberty

  Is NAFTA really about free trade? Or “managed trade”?

  “The North American Free Trade Agreement (NAFTA) is the quintessential managed-trade vehicle sold under the rubric of free trade. The first tip-off should be its size. While we earlier saw how 54 words in the U.S. Constitution established free trade among the states of the Union, NAFTA weighs in at over 2,000 pages, 900 of which are tariff rates. (Under true free trade, there is one tariff rate—0 percent.) The agreement does have trade-liberalizing features, to be sure. Consisting of a 10 percent reduction in tariffs to be phased in over 15 years, however, they are all but buried under the profusion of controls NAFTA also establishes.

  In the first place, the benefit from those tariff reductions are jeopardized by the agreement’s snap-back provisions. Those permit pre-NAFTA tariff levels to be restored against imported items which cause or threaten serious injury to domestic industry.[5] In other words, NAFTA supports free trade as long as it does not promote international competition which is too hot for favored domestic firms to handle. In addition, NAFTA’s rules of origin are designed to divert trade from the world’s most efficient suppliers to North America’s most efficient suppliers. This hobbles the international division of labor instead of expanding it, as true free trade does.

  The importance of NAFTA clauses that keep out foreign goods came to light as U.S. clothing manufacturers railed against the import of wool suits from our NAFTA partner Canada. The suits in question were made from third-country wool not covered by NAFTA rules of origin. Since Canadian tariffs on foreign wool were lower than U.S. tariffs (10 percent vs. 34 percent),[6] Canadian suits sold for less and soon claimed a large share of the U.S. market. The fact that the entire discussion of this issue centered on closing this loophole in NAFTA rather than on lowering the injurious U.S. tariff on wool should prove how devoted NAFTA’s supporters are to free trade.

  Free trade does not

  tags: economics, free trade, NAFTA