Volker: Separate Investment Banking from Commercial Banking

Paul Volker the head of Obama's Economic Advisory Board, has been advocating that commercial banks should be prohibited from trading on Wall Street. The economic crisis was precipitated by large commercial banks taking excessive risks. If these banks were to do their ascribed duties and just lend this crisis may have been averted. By separating investment from commercial banking it could prevent banks from becoming to big to fail. The Obama administration is opposed to this idea with many economists agreeing that if there was this separation our banks would not be able to compete globally with banks in Europe and Asia. Obama has called for more regulation of Wall Street but is having problem making headway in Congress.

Volker's Plan would allow commercial banks to be rescued by the Federal Government if they fail. On the other hand, investment firms will no long have access to federally insured deposits to help finance their trading activities meaning that the government will not rescue them if they fail. This could lead to investment banks to give smaller bonuses and take on less risk. -NYtimes

Another Look at the US' Financial Health and Future Prospects.

Yes its been a long hiatus, sorry for that! I kinda want to apologize for having such a doom and gloom outlook on this blog but we are in a big recession so what do you expect. There is an interesting piece in Der Speigel in regards to Obama's economic policies pretty much rehashing what I may have written in other posts. Over the issue of the expansion of the money supply there has not been an increase in economic output to prevent the expansion from not causing inflationary dangers. Another key point in the article is that it says that Obama's 2010-2020 budget plan doesn't concern itself with entitlement programs like medicare, social security (?). With most of the baby boomers expecting to retire within the next 10 years or so, that alone could cost trillions by itself. According to Medicare Trustees 2009 Report. Medicare is going to be insolvent by 2017. If payroll taxes is the main funding for medicare, then perhaps it could become insolvent sooner; if unemployment continues to rise there will be less people paying towards medicare (and social security).

Another important thing to note from the article is that roughly half of the US 2009 budget is financed by debt. Due to the fact that the dollar ($) is known to be the main reserve currency around the globe, credit flows cheaply to Washington. The US' fiscal policies in part of response to the Great Recession, has been to print more money and borrow more as well. An expansion in the money supply weakens the dollar in foreign exchange markets, so holder of US bonds want to sell them because they are no longer an appealing investment. They buy other bonds in Euros or other currencies. Countries like China are concerned about the weakness in the dollar and do not want to see their portfolio slide have been suggesting that the dollar should be replaced as the reserve currency- Bloomberg. They see a dollar in free fall because the US gov't is continuing to take measures that weakens the dollar. If the Chinese and other countries take moves to go this route its going to end the cheap credit the US has been getting to finance the budget. It would meanhigh taxes to pay off the debt and for future financing and higher interest rates. Stifling any chance for a robust recovery. With the rise of China and the changes in the global financial architecture, policy makers in Washington cannot remain idle and continue to borrow.

UK to raise Taxes on Rich to 50% to Finance Budget.

The Brown government in London announced a plan to increase the top income tax rate by 5 percentage points to make it 50%. The people most affected by this increase are people who earn about $216,750 or more a year. Although , I tend to support a tax for the highest income earners but with the tax rate at 50% is risky. It suprising that in the 1970s , when Labour was in power they had the marginal tax rate for the wealthy at the lofty 90% , which led to the emigration of some of the wealthiest. See and listen to the Stones Exile in Main Street as your historical guide. NYT US tax rate for the top income group is 33-35%. Wiki

China Buying More Copper than Dollars?

China's State Reserves Bureau has been buying excessive amounts of copper in recent months. People interviewed for this article, including a banker and an importer and exporter say that the Chinese are buying more copper instead of purchasing more US Treasury bonds. There is a belief that the Chinese find copper and perhaps other raw materials as a better investment than in treasuries (and a way to keep the Yuan, the Chinese currency weak). China's Central Bank Governor, Zhou Xiaochuan recently called for the creation a new currency system that is based on commodities and not on paper money, specifically the Dollar. The Chinese are concerned that their dollar denominated assets are going to fall in value due to the US' economic plans, which will ultimately make the US dollar very weak in the years ahead. Copper could be a place to start help bring about this system.

As an observer of China I would not be surprised if China is buying more copper for investment purposes. They are very worried about their Dollar assets. At the same time the State Reserves Bureau job is to buy raw materials not dollar denominated assets. The Chinese Metals industry has been sliding and they have vowed to prop it up- ChinaMining

Drop in Oil Prices Now, Spike Later

The drop in oil prices over the past couple months may lead to oil spikes in a few years once the global economy rebounds. Its kinda obvious that the prices are going to go in a few years but as plans to increase the energy supplies are being shelved its going to exacerbate the problem later. A lot of oil companies have slowed down their investments by postponing new projects or canceling them altogether. Which is a good reason to be concerned about oil in the next few years.- NYT

The Slumping Dollar

The dollar has declined almost dramatically against other currencies over the past week or so causing a barrel of oil to rise above $50 for the first time in months. Since the end of last summer that dollar began an appreciation trend and it appears that it is over. The Federal Reserve's policy backed by the Treasury is to make more money. The policy of quanitative easing is also being used in the UK. By increasing the money supply it weakens a country's currency. In these economic times, a weaker currency would lead investors to sell the dollar and US Treasury bonds and that means that the US government would have a harder to find financing for its debt. As I hoped, I have mentioned on this blog or in the other one, that stimulating the economy with more debt, where debt is the reason for this recession could be really dangerous. A depreciating dollar could lead to high inflation and a spike in interest rates crushing any chance of a real recovery.

The Obama Administration is calling for the EU and other nations to work in concert with the US treasury and set more money aside to stimulate their economies. If these countries follow suit than the US dollar shouldn't slump as it has been doing recently. If these countries do not, than the currency may slump even further threaten the stability of our economy and our ways to fight the recession. Check out the NYTimes or Bloomberg

Obama's Economic Plan

In my previous posting I wrote about some of the possible problems with the Obama and the Democrat's strategy. I was reminded in the the Washington Times article in my aforementioned posting that the whole point of the stimulus package is to be quick and implemented quickly. Stimulate the economy sooner the better the later the worse. Spending would "break the cycle." Although I can not say I know the whole argument but it sounds like if there was overwhelming spending now the econmic tailspin won't spiral out of control. I think the assumption is that the unemployment rate shouldn;t reach more than 10% with this plan. It will stop the economic domino effect. Giving people more jobs would lead to more consumer spending sparing more industries while the market reaches the bottom over the next several months. Spending this money later in the year or once we reach the bottom may be to late to save some industries already weakening. If this happens then it would much harder to get back on track. The New Deal and the Japanese plans did not react quick enough make their plans really effective.

Is Large Deficit Spending the Right Approach to the Economy?

There has been a lot of talk over the last month especially in conservative circles that deficit spending is not the best way to stimulate the economy. They argue that when similar actions occurred during the New Deal it was WWII that got us out of the Great Depression. Der Speigel has an interesting piece calling for President Obama not to pull a Roosevelt. The article mentioned that even Roosevelt's Treasury Secretary, Henry Morgenthau said it was a bad policy.

"We are spending more than we have ever spent before, and it does not work ... I say after eight years of this administration, we have just as much unemployment as when we started -- and an enormous debt to boot."

The Stimulus packages that are being proposed in Congress supported by Obama should help stimulate the economy but it will not be the ticket out of the recession and the deficit could actually hamper any type of recovery with increase in interest rates and inflationary concerns. With the global economy slowing, countries like China need to spend more at home and will not keep up purchasing US$ to help finance our debt. They will continue to buy but not in the large quantities that it previously had.

According to the Washington Times. The Congressional Budget Office says that the stimulus package will actually hurt the economy in the long term by "crowding out private investment."

Republicans Offer Stimulus Plan of Their Own

Alas, the Republicans are finally starting to offer stimulus ideas of their own. Its about time that the party in opposition takes a stand and do what their jobs are and that is not to just vote no. The Republican plan calls for cuts in payroll taxes in half and cutting the corporate rate from 35% to 25%. The $445 billion plan also includes $65 billion for repairing roads and bridges and $11 billion to stabilize the housing industry. -Reuters The main theme of this plan is the tax cuts. The democrats plan is a bit more ambitious costing almost $900 billion mostly being spent on infrastructural projects, focusing on green technology and tax cuts. The problem with both plans is the reliance on tax cuts. The last tax cuts that were sent out as rebate check last spring failed. Americans have become more frugal and consumer confidence has been sagging for the past sixt months and will most likely continue. People are saving their money. Prior to this recession, Americans have been spending more than they earn, and are in massive debt. Taking on more debt would be unsustainable and not contribute to real economic growth. People are realizing that they need to pay down their debt and that they can't spend every dollar if they think they may lose their jobs. You can bet my tax refund will be put in savings. I can't live in the parents basement forever. More talk on both packages later.

France's Economic Stimulus Plan.

The French Government plans to stimulate their stagnant economy by increasing spending on infrastucture and corporate investment. The French Prime Minister, François Fillon, said in a speech that they did not want increase the national debt and were more concerned with increasing competiveness. They believe that boosting consumer spending with more debt to stimulate their economy is not the right approach.

It's the Economy, Moron

"It's the Economy, Stupid" is a famous slogan that propelled Bill Clinton to the presidency in 1992. Engineered by campagin strategist James Carville, the phrase was used to remind people that the US was in recession at the time. George H. Bush had many successes as president but the economy was his archilles heel. The economic performance of any country shapes the lifestyles of the citizens within them. It effects everything from environment to health, to war and peace and even love and hate. The Housing bubble led to the Subprime Mortgage Crisis, which was then followed by the fall of Lehman Bros Bank, which stirred the Panic of '08. Banks fearing to become the next Lehman's stopped lending, making it hard for even credit worthy companies, to access loans to invigorate their business. People are being layed off everywhere and consumer confidence is lagging. Mass protests are occurring all over the world due to the ripple effect of the Subprime Mortgage Crisis and has already brought down the government of Iceland.

There are many important events occurring in this great big world, but in the end "it's the economy, stupid." ....This blog will discuss this on going story that is the Great Recession.