Sunday, June 27, 2010

FDIC Chairman Sheila Bair talks to WSJ About the Financial Regulatory Legislation

FDIC Chairman Sheila Bair talks to WSJ economics editor David Wessel about the financial-regulatory legislation pending in Congress, the current health of the banking business and what it's like to be the sole woman among a band of powerful men.

Wednesday, June 16, 2010

Government Official Warned on US Economy in 2007

  • Prior to 2007, as Head of the U.S. Government Accountability Office (GAO) David Walker said that the U.S. economy was unsustainable and made some remarkable claims regarding fiscal irresponsibility
  • David Walker runs investigative arm of congress
  • Walker believed that the biggest peril facing the nation was being ignored
  • Walker argued that current standard of living was unsustainable
  • Walker called it the dirty little secret that in Washington everyone knew
  • He concluded that politicians were guilty of fiscal irresponsible
  • After trying to argue his case, he gave up on elected officials and took to the streets to present the facts
  • He embarked on what he called a "Fiscal Wake Up Tour"
  • Walkers compares the fiscal irresponsibility to charging expenditure to a credit card and expecting our grandchildren to pay for it
  • Argues that we are living in fiscal denial
  • The Government has committed itself to massive entitlement programs that we cannot afford
  • 78 million baby boomers reached sixty-two and started retiring in 2008
  • Walkers maintains that the status quo was a tsunami ready to swamp the republic
  • Biggest challenges are social care and Medicare
  • Heath care problem is much more significant than social security
  • When Medicare was expanded in 2005 by including prescription drug coverage, Walker regarded the move as fiscally irresponsibe
  • The new legislation would extend debt to over eight trillion dollars in the near future
  • The country cannot afford the promises that it has made
  • The system is unsustainable
  • Can expect people to disagree, but hardly anyone does except for a small group of economists that say that problem overstated
  • Fed Reserve Chairman Ben Bernanke stated that growth alone is unlikely to solve the country's fiscal challenges
  • Walker calls the behavior fiscally immoral

EU Parliament Approves Controversial Hedge Funds, Private Equity Rules


  • European Parliament committee has approved the European Union’s controversial hedge fund regulations in the form of a new bill
  • European Parliament will seek to impose strict new reporting and custody rules on hedge funds and private equity funds, as well as possible leverage and borrowing limits
  • The bill includes the so-called “passport” that would give foreign hedge funds that meet certain requirements access to all 27 EU countries
  • Members of the British Conservative Party voted against the measure.
  • Hedge funds accused of exacerbating the Greek debt crisis by betting on its default
  • Private-equity firms accused by politicians in Germany of stripping the assets of the firms they bought.
  • Measure could constrain European pension fund returns and bring about retaliatory measures against the EU from other countries

A key European Parliament committee has approved the European Union’s controversial hedge fund regulations, but appears to have have set up a battle with the bloc’s finance ministers at the same time.

The Economic and Monetary Affairs Committee gave its assent to the Alternative Investment Managers Directive, which would impose strict new reporting and custody rules on hedge funds and private equity funds, as well as possible leverage and borrowing limits. But the bill headed to the full Parliament includes the so-called “passport” that would give foreign hedge funds that meet certain requirements access to all 27 EU countries. That provision was not included in the version of the directive approved today by the EU’s finance ministers.

Members of the Parliament are claiming that reception of the proposed bill by the European Parliament does not appear to be free from resistance. Jean-Paul Gauzes, a french member of the Parliament claimed that negotiations will be fast-tracked, “but that doesn’t mean an accord at any price.”

Hedge funds have been accused of exacerbating the Greek debt crisis by betting on its default, while private-equity firms were accused by left-wing politicians in Germany of acting like "locusts," by stripping the assets of the firms they bought.

The committee passed the bill by a vote of 33 to 11. Notably, members of the British Conservative Party, which took power alongside the pro-European and pro-hedge fund regulation Liberal Democratic Party last week, voted against the measure.

“We’ve adopted protectionist, fortress Europe policy,” Syed Kamall, one of the Tory MEPs, said. He warned that the measure would both hurt European pension fund returns and bring about retaliatory measures against the EU from other countries, such as the US.

The move for further regulation follows a decision by European leaders at a summit in Berlin in February 2009. German Chancellor Angela Merkel, has been a strong supporter of increased oversight in the hedge fund industry.

The Future of the Euro

A question that needs to be assessed is whether the Euro currency, which is approximately ten years old, is sustainable.

Futurist conference keynote speaker and author Patrick Dixon shared his view on the future of the Euro at London Stock Exchange UK Trade and Investment - Nordic Business Awards. He asks a fundamental question. Why is it that Greece and Ireland are experiencing severe economic difficulties?

Although there have been many broader issues that have impacted these countries that relate to the global downturn, there is a fundamental truth that needs to be addressed. All these countries that are within the Eurozone, by definition have the same currency, interest rates, and cost of borrowing. The cost of borrowing is set by the European Central bank. The fundamental lever that drive most national economies in terms of driving down demand during periods of inflation, or pumping up demand during a period of recession, has disappeared because it is impossible for an individual country within the Eurozone to increase or decrease its interest rates. When there are needs that are specific to a country that require adjustment using traditional central bank mechanisms, there is very little that can be performed by an individual country, as the needs of that specific country may be very different to other countries within the Eurozone. Consequently, it will always be a victim of the policy that is set by the European Central bank. This represents a huge challenge.

In an attempt to achieve a deeper understanding of the issues that impact the Euro, the following topics need to be addressed:
  • European Union trends
  • Euro crisis in Greece
  • Monetary union constraints in high inflation or deflation
  • Role of European Central Bank in balancing needs of high growth and low growth economies
  • Contrasts between Ireland, Greece, Portugal, Spain, Germany, France, Italy and countries which more recently joined
  • Loss of sovereignty to Brussels
  • Political issues in controlling budget deficits or imposing budget cuts on an unwilling nation
  • Political unrest and threat of strikes or instability
  • Challenges for the future

Monday, June 14, 2010

Global Economic Trends: The Credit Crunch

View from the Street: Impact of the Credit Crunch

The Recession Explained

An Australian Perspective of the Credit Crunch

What is the global credit crunch? Simply explained it emerged when brokers and banks were offering mortgages to borrowers who had little or no income.

These mortgages were called sub-prime mortgages. The mortgages were written and structured as "non-recourse loans". If a borrower defaulted on his mortgage, he could simply return the house key to the bank and walk away. These mortgages were "bundled into packages, and re-sold to investors.

When home owners with sub-prime mortgages couldn't pay their mortgages, banks foreclosed and property prices dropped, in some cases by over fifty percent.

Trying to Understand the Credit Crunch

The Credit Crunch or the Great Recession is the most profound and significant economic event to affect global markets since the Great Depression of the 1930s. While the Great Recession was not a cause for the widespread poverty that marked the Great Depression, its impact significantly affected the wealthy. Literally billions of dollars were wiped off stock exchange boards. Victims of the Credit Crunch included the rich and famous and extended to leading investment banks on Wall Street, two of which collapsed.

The main cause of the Great Recession has been attributed to the unprecedented growth of sub-prime mortgages in U.S. markets. Real estate prices across the globe were affected. A consequence of the housing bubble and its subsequent collapse has been a move by regulators to scrutinize the provision of mortgages by Mortgage Bankers. This has invited increased regulation. The approach to apply greater levels of oversight through regulation is controversial amongst proponents of free market principle, as they argue that it merely increases inefficiency within an economy. Additionally, the role that investment banks play in the economy has also been criticized. This has resulted in several changes in regulation with limitations being placed on the scope of business in which investment banks are permitted to operate.

A consequence to the credit crunch has been a drying up of available credit in financial markets. This significantly impacted money markets, the ability of businesses to meet their commitments and constrained economic growth. The manner in which the Federal Reserve has dealt with the affect of the credit crunch, is very different to the style that their European counterparts adopted. The U.S. has sought to adopt lessons that were concluded from the Great Depression and consequently used a Keynesian approach to address incongruencies within the economy. Keynes believed that the austerity measures of the Great Depression by the Federal Reserve strengthened the negative impact of the depression. The economist concluded that it was only after the government increased spending that the economy was able to revitalize and achieve positive growth. Conversely, European Central Banks have concentrated on adopting the application of stringent austerity measures, reducing government spending and budget deficits. It is unclear and still too early to establish how these two very different approaches are working. Early indications suggest that both methods have achieved some measure of success. In the United States, there has been somewhat of a recovery and Europe is also experiencing a slight resurgence. Early economic indicators reflect improving economies in both Greece and Portugal. These are two countries within the Eurozone that were severely impacted by the credit crunch.

Another question that needs to be assessed is the sustainability of the Euro currency, which is approximately ten years old. The most difficult challenge for those countries within the Eurozone is the disparity between the individual needs of a country countries and that of centralized strategy for fiscal and monetary considerations. This incongruency begs the question, as to whether the continued functionality of the Euro currency is sustainable within its current structure.

With the goal of achieving a deeper and clearer understanding of the Credit Crunch, there are several key questions that need to be addressed:
  1. How did the sub-prime industry contribute to the Credit Crunch?
  2. What were the mechanics within the economy that contributed towards the Credit Crunch and which specific factors caused the housing bubble?
  3. Could the Credit Crunch have been avoided?
  4. Do the lessons of the Credit Crunch warrant increased regulation, as is the current trend?
  5. To what extent did the Federal Reserve contribute to the recession, if at all?
  6. What steps should Central Governments play in reducing the impact of a recession?
  7. What role should derivatives be allowed to play in financial markets?
Readers are invited to comment on the points discussed in these articles, to further enhance debate and discussion.