My local newspaper, the Milwaukee Journal Sentinel, published an article this week about the global economic impacts on the Milwaukee based mining company, Joy Global. The short-term outlook for the company appears to be rather measly due to globally weak mined comodity prices, slowing Chinese industrial economic activity, and lower U.S. natural gas prices. Equally important, the slower pace of the U.S. economic growth and its fiscal cliff, European debt, and slow growth in China are also adversely impacting the growth prospects of the company. As a result, mining companies will likely decline capital spending from 5% to %10 by cutting capacity and closing some factories in order to prepare for the looming challenge of a difficult business market. A company like Joy Global has a lot at stake when it comes to the global mining, as nearly 100% of its invested capital and and operating profits are in mining, whereas a company like Caterpillar Inc. has less at stake with only half of its capital invested in mining. However, this problem is only cyclical, and Joy Global has a rather positive outlook on the long-term prospects. As the article notes, even though the Chinese economy has slowed recently, China is still is one the world's largest users of coal, and produces nearly half of the world's steel. Back in September, The Wall Street Journal posted an article about the news of the Chinese government passing a $156 billion infrastructure bill as a means for boosting their industrial economic activity. With a huge increase in steel production comes an increased demand for iron ore, which is mined by the heavy machinery manufactued by Joy Global. The Journal Sentinel article also mentions that more developing nations are demanding mined commodities. With that in mind, Joy Global has globally expanded their-service centers and increased manufacturing in emerging markets. The effects of these promising global changes have made their effect locally. P&H Mining Equipment, a Milwaukee based subsidiary of Joy Global employs more than 800 people and is looking to hire even more employees for skilled-labor positions as they increase production of their mining shovels and drilling rigs. If, however, the global economy prospects do not play out as predicted, Joy Global is well-prepared to cut costs by outsourcing these manufacturing jobs to countries with lower labor costs such as China, South Africa, and Poland.
You can read the Milwaukee Journal Sentinel article here:
http://www.jsonline.com/business/economic-slowdown-felt-at-caterpillar-joy-global-787pun0-180936761.html
Sean Gebhard's Blog
Wednesday, November 28, 2012
Sunday, November 25, 2012
Leftovers
For all of you still salivating at the thought of your Thanksgiving feast this past Thursday, I found this graph on the Economist today which depicts the increase in inflation since 2008 in terms of turkey prices:
Anyone else worried about the rising "pecuniary cost" of Thanksgiving dinner?
Anyone else worried about the rising "pecuniary cost" of Thanksgiving dinner?
Credit and Blame
I recently read a Wall Street Journal article from 2007 for my Econ 211 class that offers an interesting scope into the years leading up to the Great Panic of 2008. The article describes how rating firms like Standard and Poor’s, Moody’s
Investors Service, and Fitch Ratings catalyzed the subprime mortgage crisis of
the early 2000s. During this boom in
sub-prime mortgages, as we learned in class a few weeks ago, borrowers with weak credit were able to take a “piggyback”
loan or a secondary loan to help pay for the down payment of the
mortgage. Underwriters then assembled
these extremely risky loans into securities which were sliced into “tranches,”
with the riskiest of tranches having the highest level of return. As we know, during this time, the Fed was keeping
interest rates low; so many investors were in search for these high-risk/high-return
securities. When housing prices finally
fell, and the sub-prime mortgage bubble burst, many were left wondering how the
tranches containing the extremely risky sub-prime mortgage bonds received such good
ratings. The reason lies within the role
of the rating firms in the sub-prime market.
Rating firms receive fees about twice as high when they rate securities
containing a pool of home loans. If
underwriters didn’t receive a good enough rating for their tranches of
securities, they would take their business to a rating company that would give
them a better rating. They called it "best execution" or "maximizing
value," but in reality they were shopping around for a good deal on a fabricated rating. As a result, some of riskiest
tranches were given triple-A ratings, and because many hedge funds and money
managers relied on these ratings, they bought securities in large quantities. Enter a sudden and unexpected rise in housing prices, and you know the drill.
After reading this article, I am a bit more reluctant to point the blame at the Alan Greenspan and the Fed for the monetary policy they enacted during this time. Their policy was merely a groundwork that would provide for honest economic growth, but unfortunately would be taken advantage of by a culture of greed on Wall Street. Shady backdoor deals between underwriters and executives at ratings firms are just one of the many components that caused the Great Panic of 2008. If we experience a promising economic environment again in the future, hopefully the volatile actors of Wall Street won't be overcome by a voracity for personal profit, and realize the risk involved in the decisions they make.
Monday, November 12, 2012
Meltzer Lecture: "Socialism is Dead, but Social Welfare Lives On"
I appreciate Simone's comment regarding German taxpayers paying
for other countries failed welfare systems because it was one of many
topics covered tonight in Professor Allan Meltzer's lecture "Socialism
is Dead, but Social Welfare Lives On." Meltzer, a professor from
Carnegie Mellon's Tepper School of Business, founder of the Shadow Open
Market Committee, and author of A History of the Federal Reserve, a book considered to be one of the most comprehensive histories of the central bank, is an expert on monetary policy and the Federal Reserve.
Before his lecture, I was fortunate enough to attend a Q&A session with Meltzer where I received a copy of his most recent book, Why Capitalism? The context of the Q&A, which focused mainly on the Federal Reserve and monetary policy leading up to the 2008 Great Panic, could not have come at a more opportune time as it supplemented what I had learned from David Wessel's In Fed We Trust. Meltzer would agree with Wessel that Alan Greenspan kept interest rates too low for too long, as he was afraid of deflation. But quoting Immanuel Kant, "out of timber so crooked as that from which man is made, nothing entirely straight can be carved," Meltzer emphasizes that no human is perfect, and admits that the problems of capitalism stem from human weakness, but human weaknesses are not specific to capitalism. Meltzer shifts the blame towards government housing policy. Around 2005, the Housing and Urban Development Agency encouraged the use of "piggyback" mortgages, or mortgages with no initial down payment. Paired with immense political pressure to put people into houses even though they couldn't afford the mortgage, government-sponsored financing agencies like Fannie Mae and Freddie Mac began to buy these subprime loans, thus fueling the housing bubble which inevitably burst in 2008. Meltzer believes that social welfare systems attempting to redistribute wealth in capitalist market economies ultimately fail, and Fannie Mae and Freddie Mac are one of many examples. Meltzer would later delve into the other examples of inefficient welfare programs, such as the Weatherization Assistance Program.
During his lecture in Stackhouse, Meltzer focused primarily on the dysfunctions of social welfare programs and how they must be ameliorated in the face of this global economic crisis. He started off by saying that European countries boasting extensive welfare programs have not surpassed the more market-oriented United States, and are the main cause to the EU crisis. Greece for example has experienced a longer, deeper, and wider crises than the Great Depression due to a society structured around a costly welfare system. Like I posted in our first writing assignment, the struggle for these EU countries lies within the dichotomy between stimulus spending and austerity. Meltzer simplified the concept to "wanting more consumption now vs. receiving more from long run growth." Essentially, the fiscal burden is so deep, that it cannot be paid for in taxes; rather, more can be paid for by cutting spending in the short run and balancing the budget, which will ultimately allow for lower tax rates in the future. Meltzer believes that Greece must face the hard reality that it is hard to find a solution that fits everyone's needs, and a cut in living standards is inevitable. As made apparent by Simone in her blog-post today, Germans do not want to pay for the economic woes of a failed welfare state like Greece. As Meltzer put it, "German's who retire at the age of 65 do not want to want their hard earned money going to Grecian's who retired ten years prior at the age of 55."
At the end of his lecture, Meltzer focused on the home-front. He prefaced his conclusion by proclaiming that no agency should have the power the Fed has given itself. In the near 100 years since its birth, the Fed has never made clear its "lender of last resort" policy. That is why, Meltzer argues, that we have nearly $1.8 trillion worth of excess reserves today. To prevent this from happening in the future, Meltzer believes that the Fed should follow a set-in-stone "lender of last resort" standard. He supported this claim by referencing that the two periods of the most economic growth in the U.S., the Fed was bound by some sort of rule. From 1923-1928, it was the gold standard; and from 1985-2003 it was the Taylor Rule. Looking forward, Meltzer believes we need to separate ourselves from becoming a social welfare state with more regulations, because the social welfare state is prisoner to interest groups, and regulations are set up by lawyers and bureaucrats who know how to circumvent them. It is an unsustainable path, and there will be no way to end the probable inflation due to the $1.8 trillion worth of excess reserves without a temporary rise in unemployment. Therefore, Meltzer concluded, "capitalism works best in a stable environment that permits people to achieve their plans. To achieve the growth and freedom that only capitalism provides, countries must adopt rules that force policymakers to plan for the medium term and prevent inflation."
Before his lecture, I was fortunate enough to attend a Q&A session with Meltzer where I received a copy of his most recent book, Why Capitalism? The context of the Q&A, which focused mainly on the Federal Reserve and monetary policy leading up to the 2008 Great Panic, could not have come at a more opportune time as it supplemented what I had learned from David Wessel's In Fed We Trust. Meltzer would agree with Wessel that Alan Greenspan kept interest rates too low for too long, as he was afraid of deflation. But quoting Immanuel Kant, "out of timber so crooked as that from which man is made, nothing entirely straight can be carved," Meltzer emphasizes that no human is perfect, and admits that the problems of capitalism stem from human weakness, but human weaknesses are not specific to capitalism. Meltzer shifts the blame towards government housing policy. Around 2005, the Housing and Urban Development Agency encouraged the use of "piggyback" mortgages, or mortgages with no initial down payment. Paired with immense political pressure to put people into houses even though they couldn't afford the mortgage, government-sponsored financing agencies like Fannie Mae and Freddie Mac began to buy these subprime loans, thus fueling the housing bubble which inevitably burst in 2008. Meltzer believes that social welfare systems attempting to redistribute wealth in capitalist market economies ultimately fail, and Fannie Mae and Freddie Mac are one of many examples. Meltzer would later delve into the other examples of inefficient welfare programs, such as the Weatherization Assistance Program.
During his lecture in Stackhouse, Meltzer focused primarily on the dysfunctions of social welfare programs and how they must be ameliorated in the face of this global economic crisis. He started off by saying that European countries boasting extensive welfare programs have not surpassed the more market-oriented United States, and are the main cause to the EU crisis. Greece for example has experienced a longer, deeper, and wider crises than the Great Depression due to a society structured around a costly welfare system. Like I posted in our first writing assignment, the struggle for these EU countries lies within the dichotomy between stimulus spending and austerity. Meltzer simplified the concept to "wanting more consumption now vs. receiving more from long run growth." Essentially, the fiscal burden is so deep, that it cannot be paid for in taxes; rather, more can be paid for by cutting spending in the short run and balancing the budget, which will ultimately allow for lower tax rates in the future. Meltzer believes that Greece must face the hard reality that it is hard to find a solution that fits everyone's needs, and a cut in living standards is inevitable. As made apparent by Simone in her blog-post today, Germans do not want to pay for the economic woes of a failed welfare state like Greece. As Meltzer put it, "German's who retire at the age of 65 do not want to want their hard earned money going to Grecian's who retired ten years prior at the age of 55."
At the end of his lecture, Meltzer focused on the home-front. He prefaced his conclusion by proclaiming that no agency should have the power the Fed has given itself. In the near 100 years since its birth, the Fed has never made clear its "lender of last resort" policy. That is why, Meltzer argues, that we have nearly $1.8 trillion worth of excess reserves today. To prevent this from happening in the future, Meltzer believes that the Fed should follow a set-in-stone "lender of last resort" standard. He supported this claim by referencing that the two periods of the most economic growth in the U.S., the Fed was bound by some sort of rule. From 1923-1928, it was the gold standard; and from 1985-2003 it was the Taylor Rule. Looking forward, Meltzer believes we need to separate ourselves from becoming a social welfare state with more regulations, because the social welfare state is prisoner to interest groups, and regulations are set up by lawyers and bureaucrats who know how to circumvent them. It is an unsustainable path, and there will be no way to end the probable inflation due to the $1.8 trillion worth of excess reserves without a temporary rise in unemployment. Therefore, Meltzer concluded, "capitalism works best in a stable environment that permits people to achieve their plans. To achieve the growth and freedom that only capitalism provides, countries must adopt rules that force policymakers to plan for the medium term and prevent inflation."
Monday, November 5, 2012
Book Review: In Fed We Trust
In his 2009 book, In
Fed We Trust: Ben Bernanke’s War on the Great Panic, David Wessel, an
economics editor for the Wall Street Journal, encapsulates one of the most
pivotal times in our country’s history and the history of the global economy. Not only does he offer the reader a
fly-on-the-wall perspective during some of the most frenzied closed-door
meetings between chief economic actors like Ben Bernanke, Timothy Geithner, and
Henry Paulson, he also illuminates the historical context of the Federal
Reserve and its role in the U.S. economy since its inception in 1913. Most importantly however, Wessel intently
focuses on Ben Bernanke’s role as the Chairman of the Federal Reserve during
the Great Panic, and how his expertise on the Great Depression of the 1930s
inspires his “whatever it takes” policy to prevent it from ever happening
again.
Before the Great Panic, the Federal Reserve was considered
to be a “lender of last resort,” which usually entailed lending to sturdy commercial
banks at times of high speculation when customers wanted to pull their money
out. But by 2008, the Federal Reserve
became what Wessel labels “the pawnbroker of last resort,” lending heavily to
investment banks, insurance companies, auto finance companies, etc. that all
went bust. But how could it get this
bad? Why would Ben Bernanke be forced to
extend the Federal Reserve far beyond its traditional role? Wessel partially blames Alan Greenspan, the
Chairman of the Federal Reserve from 1987-2006.
During his term, interest rates were kept too low for too long. With such low interest rates, investors took
greater risks in order to receive higher returns. Yet these risky bets were placed on the
flawed assumption that the economy would be stable in the long run, and in
regards to the housing market, housing prices would never fall. That would eventually prove to be false, and
the housing bubble would burst.
Of course, Bernanke was faced with some tough decisions, but
being an expert on the Great Depression, Bernanke knew what not to do: stand
idly by. According to Bernanke, the
Depression of the 1930s was largely the Fed’s fault, and under his watch, he
would ensure that that would not be the case. He would do “whatever it
takes.” Wessel emphasizes that the Fed
had to exceedingly extend its powers to curb the threat of another full-blown
depression. In March 2008, the Fed saved
Bear Stearns to the tune of $30 billion, the first time the Fed ever directly gave
money to a failing firm. Yet it wouldn’t
do so with Lehman Brothers. The Fed certainly had the power and resources
to bail out Lehman Brothers, but neither Ben Bernanke, nor Secretary of the
Treasury Henry Paulson were content to do so due to the poor image it would portray, seeing they just used $30 billion of tax-payer
money to bail out Bear Stearns. The Fed
however would continue to reach even further, bailing out A.I.G. and welcoming a
Congressional stimulus package of $700 billion.
Though Bernanke’s unheralded response to the Great Panic
prevented the U.S. economy from outright catastrophe, it has certainly
burgeoned undesirable attention to the Federal Reserve’s ability to act as what
some call “the fourth branch of government.”
Much of the derision towards the Feds actions can be attributed to how their policies were delivered. Geithner called this "getting the substance and the theater right." How a policy is framed is just as important as the policy itself, and because Bernanke, Paulson, and Geithner failed to offer a clear explanation of the policies they were enacting, it left people uncertain about the power the Fed held. Rather than critique the amount power and leverage the Fed used to
prevent a repeat of the Great Depression, critics should focus their worries on
the Fed’s shortcomings prior to the Great Panic. The worst loans that created the credit
bubble were subject to little or no federal regulation. Wessel agrees that the Fed’s inability to see
the Great Panic coming is worrisome, but he lauds Bernanke’s response. He ends his book with some food for
thought. What if Ben Bernanke had not
resolved to do “whatever it takes” to prevent a second Great Depression? Would
we be worse off? I myself think we would
be worse off had it not been for the Fed stepping in. What does concern me however is the amount of
excess liquidity due to the bailouts. As
we’ve discussed in previous classes, high inflation spells disaster for an
economy facing a recession.
Wednesday, October 24, 2012
No mention of Latin America in the 3rd Presidential Debate
After watching the debate the other night, I recall Mitt
Romney briefly mentioning the importance of the Latin American economy. Yet
that was all that was mentioned about Latin America. We’ve heard so much rhetoric about “being
tough on China,” but nothing has been said about the optimistic economic
ventures that lie ahead with Latin American countries like Mexico. It’s odd that one of the most vital aspects
of U.S. foreign policy was not even considered a topic of discussion in the
debates. Just to give a ball-park figure
of our trade involvement with Latin America, the U.S. exported more to Mexico
than to Russia, India, and China combined in the past year. Other sources claim that roughly six million
American jobs depend on trade with Mexico.
HSBC has recently reported that by 2018, Mexico will overtake Canada and
China in becoming America’s main source of imports. Looking more in depth into the topic, I came
across an article in The Economist that pairs well with our recent reading about
the Mexican Tequila Crisis in Paul Krugman’s The Return of Depression Economics.
The article, “From Tequila Crisis to Sunrise,” describes how the Mexican
economy has steadily grown in the past few years and how Mexican banks have
become stronger and much more reliable.
This sort of news is a significant departure from their bad reputation
in the early 90s when they lost financial credibility by completely botching
the devaluation of the peso. Today, the
tables have turned. According to the article, “The countries’
changing fortunes are partly due to slowing growth in China, a big buyer of
Brazilian commodities and bitter rival of Mexican manufacturers.” Pairing that with an increase in Chinese
wages, and the rising cost of shipping across the Pacific Ocean, Mexico has become
progressively more attractive to foreign investors. Not only have Mexican banks become profitable
due to the promising economic environment, but they have also become increasingly
stronger and more responsible. For
example, the Mexican government has taken measures to restrict foreign
financial institutions in Mexico, like Spain’s Santander, from transferring
capital out of their Mexican subsidiaries to address problems in their home
countries, according to a recent Fox News Latino article. The banks also have extremely strict
credit-scoring process for interested borrowers. These sorts of measures would certainly be
reassuring for an economist like Krugman who blames the tequila crisis of the
early 90s on Mexican policy errors. Now
that Mexico is attractive again for foreign investment, it seems that this time
around they have their heads on straight, and hopefully we won’t see
another tequila crisis as long as they
keep their currency stable.
The one thing that is holding them
back however is the violence of the drug cartels. According to Jorge Sicilia from BBVA, without
the violence and influence of the drug cartels in the region, the Mexican
economy would have grown at a rate 1% higher than the rates of the past few
years. The cartels are a parasite to the
growing economy, as they extort Mexican businesses and deter tourism to areas
like Acapulco with their public displays of violence. During the debate, had more time been
allotted to the topic of Mexico and the Latin American economy, or had Romney pivoted like he does so well when asked about what loopholes he'll close in his tax plan, I think it
would have been an advantage for Romney. It would have given him the opportunity
to elaborate his “Campaign for Economic Opportunity in Latin America,” and it would
also have provided fodder for criticizing Obama over the disastrous Fast and
Furious gun-walking scandal.
Unfortunately, the only sound byte I heard regarding Latin America was
during a brief tangent from Romney: “The opportunities for us in Latin
America we have just not taken advantage of fully. As a matter of fact, Latin
America's economy is almost as big as the economy of China. We're all focused
on China. Latin America is a huge opportunity for us.”
So what have we learned from these debates? The military has fewer horses and bayonets, Mitt Romney has binders full of women and he also loves teachers, Big Bird, and the economic opportunities in Latin America. Seriously though, If Romney wins he will initiate CEOLA within his first 100 days in office. If that's the case, I’m interested to see how trade relations between the U.S. and Latin America further develop in the years to come.
So what have we learned from these debates? The military has fewer horses and bayonets, Mitt Romney has binders full of women and he also loves teachers, Big Bird, and the economic opportunities in Latin America. Seriously though, If Romney wins he will initiate CEOLA within his first 100 days in office. If that's the case, I’m interested to see how trade relations between the U.S. and Latin America further develop in the years to come.
Monday, October 8, 2012
You reap what you sow...just sow more
I just read an article today on Reuters that directly ties to
Kate’s blog-post about Africa’s resource curse.
The article highlights a recent study by The International Maize and
Wheat Improvement Center that found that countries in Sub-Saharan Africa are
only producing 10-25% of its wheat production potential. As Kate noted, resource-rich African
countries have failed to make a large dent on their poverty levels. But the article I read points to brighter
futures as long as some of these agriculturally rich nations take actions to
increase potential wheat production. It
would be a big step forward towards self-sufficiency as it would help curb
starvation, limit political instability, and avoid the price shocks of global
wheat imports. As the report estimates,
in 2012 African nations will have spent approximately $12 billion on wheat
imports. This is great for American
farmers, considering a significant amount of crops like wheat and corn are
exported to Africa, but this places impoverished nations in a tight spot when
the prices on these imports spike unexpectedly.
Especially this past summer, record level droughts in the Midwest spiked
food prices internationally. I remember
various news sources predicting food riots and political instability in impoverished
nations that rely on the US for food imports, a la the bread riots of years
previous in Mozambique. As the IMWIC suggests, many Sub-Saharan African nations
do not need to subject themselves to these sorts of peril. As Bekele Shiferaw, a lead author of
the study notes, “If Africa does not push for wheat self-sufficiency, it
could face more hunger, instability and even political violence.” Rather than spending the money to import the
crop themselves, countries like Rwanda, Burundi, Ethiopia, Kenya, Madagascar,
Tanzania and Uganda could take the money spent on imports and invest in
fertilizer as their natural resources have the proven biological capacity to
produce high yields of wheat production.
Essentially, why rely imports with unstable prices when you can reap the
benefits of local wheat production? The
study points to 2008 as a perfect example when Zambia and Rwanda were able to
dodge international price shocks because they were able to sufficiently produce
domestic crops.
Though the biological
potential is there, infrastructure is the one thing that stands in the
way. According to Hans-Joachim Braun,
the director of the IMWIC’s wheat program,
“The big issue is the road infrastructure. It doesn't help very much if
the farm is far from the cities.”
As noted by Stiglitz in Making Globalization Work, Africa was
unfortunately bypassed by the Green Revolution of the late 20th
century, due to “widespread corruption, insecurity” and “a lack of
infrastructure” (42). It is within this
issue that Kate’s blog-post comes into context again. If they decide to do so, how will these
nations finance projects to improve their infrastructure? Is their path to agricultural
self-sufficiency contingent upon foreign direct investment in
infrastructure? If
so, there is the possibility of continual inequality and corruption due to
opaque policies and a lack of international governance. In the years to come, it will be interesting
to see how these Sub-Saharan African countries will go about obtaining complete
self-sufficiency in wheat, if they choose to do so.
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