.:DhalangCitra|thoughts & essays:.

George Soros on The Crisis

Here’s a video of George Soros, the billionare speculator, reflecting on the current economic turmoil. This is an interesting interview because he hints on a new economic paradigm, where regulation will once again be embraced. In this video as well, Soros expresses his distress on the method of the bailout and the failure of the government’s action. Soros concluded the talk by reflecting his socio-economic ideologies

I wonder, how long will this “new” paradigm last until we return to the 20th century ideology of the invisible hand that the world highly praised?



b dj.

October 12, 2008 Posted by | Economics, Videos | , , , , | Leave a comment

Some Facts on the Current Financial Meltdown

The US financial market had hit rock bottom. The current turmoil has not only been at an unprecedented level in Wall Street history, but the complexity of its impact is unknown. Consequently, the financial meltdown raises concerns over how financial markets are structured. But to me, there is an even bigger issue that requires an immediate attention. For years, the ideology of laissez faire, where market clearing occurs without interventions, has been the motivation in US capitalist society. Such paradigm has reduced the role of government in regulating and provisioning esoteric activities in the financial market. If we can learn something from this experience, I hope that lesson is to realize the need to implement better and effective regulations.

Since, much ink has been spilled in the past months about the current economic meltdown, I intend to share some facts that I find rather shocking.

It is surprising that all you need is a small trigger to upset the whole financial system. The crisis began with Sub-prime related mortgages that defaulted last year. These Sub-prime mortgages are packaged into a group of securities and it only accounts about 30% out of the whole package.

The financial breakdown is certainly a structural problem. The breakdown is linked with the failure to regulate the largest and the most complex institutions that are, at the same time, the primary traders of derivatives.

Last year, when the Sub-prime mortgage fired, the media and investors immediately pointed their fingers directly towards rating agencies, such as Moody’s and Fitch Ratings, among the few, who failed to spot loopholes of these financial products. We began to question the models used by these agencies when rating such products. They paid the price, consequently. Their stock value fell tremendously and jobs were lost. The worst damage of course, is the tainted reputation of their business model. One interesting fact is that ratings agencies assess credit risk. They, however, do not put into consideration the liquidity risk that may be caused when financial products fail (in large sums), which may result in a deadlock between buyers and sellers’ confidence to transact openly in the market. This, perhaps, can be the missing variable that could be added in to their model.

After reading some policy recommendations published by the European Parliament on Economic and Monetary Affairs (Kern Alexander, John Eatwell), it became clear on how such a crisis could cause such a devastating shock globally. Mr. Alexander and Lord Eatwell theorized the danger of homogeneity. We know that information is asymmetric. Such imbalance is the primary reason why some reaps more economic gain than others. However, in banking, not all information is asymmetric; large chunks of their information that are used for developing their models are equally shared. Banks all have access information on available liquidity. They use also the same historical data and utilize the same conventional models. Now, during economic booms, such information will work on everyone’s favor, but observe what happens when the market is illiquid or lacking in money stock? Banks and other financial institutions will behave homogenously, that is abruptly selling securities in the market that may lead to a massive unwillingness to lend money on the inter-bank overnight market, especially at a panic financial moments. When there is a panic, everyone follows. A healthy liquid market is when there exists differing business interest where there is a buyer in one end and a seller on the other. Hence, activities in the financial market must be heterogeneous.

The current financial crisis, which has been dubbed frequently as the worst financial crisis after the Great Depression of the 1930s, will scrutinize components of the Basel II agreements. The Basel II consists of 3 pillars, which discussed holding adequate capital guarantee in case there is an adverse financial shock; the second is more banking transparency; and thirdly, a better supervision. These all look like a promising start, except for the consequences of transparency. I don’t deny the importance of lucid information by disclosing how banks manage their daily risk; the problem is how rating agencies would react to such available information. Disclosing banking models allow rating agencies to adjust their ratings in order to satisfy the conventional structure that could already be in danger in the first place.

Aside from the policy changes stated above, there are some recommendations that seriously need to be implemented. One choice that many of the European economists have put forth is the contra-cyclical provision for bank’s reserve requirements. Banks should hold required to hold greater reserve requirement during booming periods and less during illiquid market. Doing so would enable banks to have enough resources to protect themselves when money is most needed; it’s sort of like keeping money in a lock box.

The other alternative is to have a contingency plan, accompanied with a stress test that detects market liquidity. Such a test is already an existence in many parts of the world, but a consistent testing of bank’s stress level in acquiring inter-bank funds can be helpful in anticipating future shocks.

Financial meltdowns are not an alien phenomenon. The US has had a few of such event in their past. You don’t need a complex financial market for a destruction of such magnitude to occur, a simple banking stage where banks are simply intermediaries can already have such a consequence. Citizens need to understand that, yes, regulation is a key component, but they too need to realize that regulation cannot oscillate. The US is obsessed with getting governments off their backs. I think what people should start believing is, getting governments on the right side of your back.

b dj.

October 6, 2008 Posted by | Economics | , , , , , | Leave a comment

America in Despair

Inequality has been a topic of interest for many social scientists. It is generally meant to cover the realms of income distribution, wealth, and other socio-economic opportunities. Today, the scope has broadened to many unexplored areas: health.

As I read a piece from the Harvard Magazine, titled “Unequal America,” I was astonished by how the perpetual growth in inequality can have significant effects on both the psychology and the health of the people. As an economists, this is a reminder that when we analyze factors of inequality, it is rather shallow to be adamant to stick to our conventional indicators (employment, wages, etc.); as much as they are relevant, unquantifiable factors must also be considered into our academic analysis.

America is trapped. In the early twentieth century, the top 1% of Americans earned 18% of total national income. In 1928, this figure rose, with the top 1% of Americans earning close to 22% of total national income. The trend of inequality subsided and was again somehow leveled across the population in the 70’s. Now we are once again in the declining state, with inequality rising even higher. Out of all the developed countries (OECD members), the US scored poorly with a Gini coefficient of 0.45 today from 0.35 in 1965 (a measure of inequality ranging from 0 to 1, with 0 as full equality and 1 being completely unequal), in other words the US income gap is much closer to Iran, Argentina, and Mexico than it is to its counterparts. According to the US Census Bureau, 12.3% or 36 million of Americans lived below the poverty line. What seems to be the problem? And will this trend persist?

There are a few reasons why the problems of unequal distribution of income and opportunity are endemic in our society and it is more than just economic and social per se, it lies fundamentally in its cultural, historical, and the political context of the country.

The first is culture. I shall categorize culture as the umbrella or the focal point in which all other social explanation are derived. The two major cultural characteristics that are dominant in the United States are the individual freedom and competition. These mentalities are already apparent even when one observes how children behave with one another as early as in primary school. And I would assume (from my own experience and observation) that this attitude grows gradually as one aged. The nature of individual freedom and competition are traits that can be traced back from the periods of the founding fathers. The US constitution is filled with phrases of how freedom is innate and that “man” has a full right to reap the fruits of its labor.

With hard work, one can get you anywhere in life. In fact, it is this very mentality that defined the path to wealth and prosperity. In addition, many Americans believe that when one is destitute that is because you are lazy and cannot utilize the opportunity given to you. Thus, people become reluctant to redistribute their wealth. Individuals enjoy the fruits of their labor right do not see the failure of others as the responsibility of one’s own.

What people failed to acknowledge with this argument is that it is assumed the level of playing field is equal. We take granted factors that questioned race, class, and other highly debated issues of social safety nets. The poor are exposed to many hidden living costs. Even after having 2 to 3 jobs, the poor still cannot pay their health bills in full and sustain a timely rent payment (see Nickel and Dimed by Barbara Ehrenreich).

The second factor is consumerism; in which keeping up with the Joneses is important to uphold and is part of our social existence. The economist Lawrence Katz gave an interesting depiction, his analogy of an apartment building. He said, “over the past 25 years, the penthouse has gotten really, really nice. All sorts of new gadgets have been put in. The units just below the penthouse have also improved a lot. The units in the middle have stayed about the same. The basement apartment used to be OK, but now its gotten infested with cockroaches and its been flooding.” This is a nutshell description of class struggle under a capitalist society. Individuals are deprived because it is driven to catch up with others in order to be accepted in society.

The third point of interest is the American political structure. I’ve heard people say that politicians just really don’t give a darn about the wellbeing of the poor. I’ve also heard the contrary argument saying that poor people just fail to participate in the electoral processes; in other words the poor and the uneducated are not voting actively enough, which can then result in electing someone who is not representative of their interest. The problem here is none of the above; it is the setup of the current political system that is hindering the democratic processes. Politicians’ main job is to have a job and work towards getting reelected. And to get reelected, politicians need a substantial amount of funding that will most likely come from the middle and higher income bracket. It is not that politicians don’t want to listen to the demands of the poor; they just can’t afford losing out on donations.

Where do these complexities leave us? How is the rise of social inequality related to health? Social scientists have coined the term “relative deprivation” to illustrate the psychological damage that one had to endure when seeing other people having more than our own propensity to consume. Thus, the psychological challenges create higher stress level that may contribute to health problems such as depression, heart attack, and others. Relative deprivation can also encourage the usage of temporary stress reliever, such as cigarettes and alcohol. The use of these substances undoubtedly contributes to many incurable sicknesses. Obesity may also be included in the list. As the race to the bottom continue, more and more people would only afford cheaper quality food that is less nutritious for the body.

Disparity in the US is real. Especially with the current economic condition, inequality will continue to roam for quite some time. The factors mentioned above I believe are only a part of the general problem. There are other explanations that I must have failed to include.

Despite the social frustration, there is a sliver of hope. There are many ways to mitigate the issue. We can start by revisiting the current political structure of the US. Perhaps an electoral process that offers an equal playing field for all. More awareness and education can also help battle the conventional belief that economic prosperity should not just be an individual right, but can also be a collective effort.

I hope this can spark an interest in you. Feel free to drop your feedback.

b dj.

August 6, 2008 Posted by | Economics | , , , , , | Leave a comment

George Parr’s Last Laugh – The Subprime Mortgage

The Subprime Mortgage crisis that began in the US has affected the stability of the financial world. There are already a lot of ink spilled in trying to explain the causes of the Subprime meltdown, but here is another way of explaining what really happened in a more layman’s terms. George Parr’s views on the Subprime is comical and are unbearably true!

February 23, 2008 Posted by | Economics | 2 Comments