The financial crisis: The new economy approach on the paradox of low interests rates

Keynesian economic theory suggests that a reduction in interest rates operates as a stimulant, if the economy is under-performing. The U.S to combat the financial crisis of 2007, both at a domestic and international level, adopted such an extensive policy. However, a lower interest rates policy generates a capital flight and decreases the demand of investors, especially foreign ones, in yields for assets denominated in U.S. dollars. Albeit, this does not apply in the case of the U.S. economy, as this macroeconomic policy of reduction in interest rates was accompanied with a high demand in U.S. Treasury bonds.

Currently, $5.3 trillion or approximately 48% of the U.S. national debt is owned by foreign investors, mainly China who is the largest owner holding $1.15 trillion of Treasury bonds. Why is it that despite interest rates are as low as 0%and no immediate profits are generated, foreign investors’ demand instead of decreasing is increasing? Is this correlated with the “strength” of the U.S. dollar, which is still considered the only reliable and stable currency in terms of reserve foreign exchange rate? Alas, foreign investors, such as China, accumulate U.S. dollar assets to stabilize exchange rates and hold down the value of their currencies against the dollar. Or is the new economy view correct, and a higher notion of the American exceptionalism and the expectation that the U.S. as the leading hegemonic power, will in the long run overcome this crisis, and the economy’s comeback will be more powerful than ever?

This paper will focus on the impact of the reduction of interest rates in an attempt to boost the U.S. economy, in regards to the reasons behind the increase in inward capital by foreign investors and its controversiality in the maintenance of global economic balances. The first section of the paper, after providing a brief analysis on whether low interest rates have indeed stimulated the economy, will explore the main puzzle of why is it that foreign investors, mainly China, keep investing in the U.S. economy. The second section will review existing view, such as the new economy approach, which in this case will be in support of my argument. Finally, in the third section, using a Marxist approach, I am going to show what the impact of low interest rates has been on the average U.S. tax-payer, in regards of the new economy view.

 

Research Question: Why doesn’t the Dodd-Frank Act eliminate the possibility of another financial crisis in its current form?

The Dodd-Frank Wall Street Reform Act was signed into law by President Obama on July 21st, 2010 as a response to the economic crisis of the late 2000s. It was held up as a savior, a financial superhero of sorts, that was supposed to bring sweeping change to an unruly financial industry. But as it stands, the bill does not appear to have the superhuman strength to prevent another economic crisis. This can be attributed to many factors which will be discussed in this paper.

Since being signed into law, the act has been stagnated with over 60 percent of it not actually in place. Lobbyists from large financial institutions have been working non-stop to roll-back or lessen the regulations within the act. And to be blunt, some of the policies within the bill may just be ineffective by nature. Due to its seeming inefficiency the bill has been subject to much scrutiny. Even Presidential hopeful Mitt Romney proclaimed that he would “repeal and replace” Dodd-Frank if he succeeded in winning the Presidency. But the Dodd-Frank Act is just what is needed to regulate current financial services and it is essential to the financial future of the United States. This paper will defend the strengths of the Act, highlight reasons much of the bill is still inactive and recommend ways the few weaknesses in the bill can be amended.

Firstly, I will highlight some of the important features of the bill and why they are so important to the financial health of the economy. Next, the paper will shine light on the reasons why most of the act is still inactive. Lastly, the paper will discuss measures that can be taken to save the bill, either from its own inherent weaknesses or save it from stagnation and get more or the entire bill active.

Does political autonomy pose a threat for the EU bailout plan’s success?

This paper is concerned with the failing banks of the Euro Zone and the subsequent legislation and policies that have been passed to help vulnerable banks in failing nations like Italy, Spain, and Ireland recapitalize. Although the bloc countries of the EU agree on the shared objective of stabilizing the Euro zone’s economy by bailing out the vulnerable banks, they can’t seem to agree on a consensus especially with regard to creating an ECB supervisor. The nations of the Euro Zone have since agreed on a direct aid fund that requires the presence of a European Central Bank regulatory presence to monitor and enforce budget discipline but the plan has since met some resistance from Germany and Britain. These two nations are particularly wealthy members of the EU that benefit from having political autonomy over their banks.

In particular, I ask the question “Does political autonomy pose a threat for the EU’s bailout plan’s success?.” I argue that  more central regulation and less political autonomy from the states is required to enforce budget discipline especially considering that a select few countries foot the bill for the dwindling economies of these other nations.

The first section of my paper will introduce the large bailout fund and its requirement. The next section will discuss the impediments and obstacles in the way for the legislature. I follow with a discussion of the potential benefits of the plan and lastly with a discussion of how political influence of these macroeconomic decisions has been critical in the past with the trend of financial globalization, and how this analysis may be applied to the current EU crisis.

 

Back to the Future: An Interrogation of the Failures of Banking Regulation Then and Now

As the dust comes to settle and we struggle to recover from the Financial Crisis of 2008, outcry comes from the public for reform and regulation on the banking and investment bodies labeled as the catalysts for the current economic recession. Because of this, financial reform has become a major issue in domestic policy, creating divisions alongside party and economic class lines. But as we still reel from the financial meltdown it’s is becoming increasingly apparent that There seemed to be a brief reprieve in the tumultuous debate with the introduction of the Dodd Frank act which hoped to reign in, which many perceived as, uncontrolled, volatile financial institutions.

In the recent months however, Dodd-Frank has come under fire from critics that say that Dodd-Frank is too lenient  and not strict enough on Wall Street, the least of which is that it doesn’t prosecute or penalize any of the high ranking executive officials of those who perpetrated the crisis. How is it that Dodd-Frank seems to have become defanged? Interestingly enough, to find the answer one only has to look a little more than a decade back at the introduction of the Graham-Bailey Act. The influence of interest groups and lobbyists like former Citi executive John Reed accelerated its passage through Congress. It the role of similarly interested actors that impede the process of current financial reform.

This paper will go in-depth at the issue of financial regulation and reform legislation and the intersection that occurs between the interests of Main Street and Wall Street. An analysis of the political and private intricacies surrounding the passages of Graham-Bailey will reveal how the interwoven influence of financial institutions and those acting on behalf of them helped precipitate this crisis and how it is making it easier for those responsible to keep on business as usual even in its aftermath.

Result of the American Recovery Act

Was the American Recovery Act of 2009 the decision made by President Obama to overcome the current economic crisis? I believe that it was not a good way to overcome the current economic crisis going on in the country. In my essay I will be explaining the arguments made by people as to why it was the right move by the President’s decision to pass the recovery act, and I’m going to present my argument to prove why I believe, even though the American Recovery Act was passed with the intension to help the economy, is actually going to worsen the economy.

Do we need a tweak to Democracy when it comes to economic policy?

Democracy is great for providing transparency and accountability and thus helping to fight corruption and promoting rule of law.  And also private proprietary ownership is well respected and thus helping the stability and growth of market economy.

 However, there are downsides with how democratic political system has effects on economic policy. For example, whenever an executive power incumbent is changed, there is a likelihood of divided or discontinuous economic policy, thus hampering long-term economic planning. Elected governments are often forced to pay more attention to short-term to satisfy the needs and concerns of the voters as soon as possible
 while it might be a sound economic policy in long-term. Partisanship and special interest groups might prevent the government from choosing situation-wise right economic policy over dogma and ideologies.
 Limited government role in market economy can lead to its inability to foresee and prevent market crash. Often economic advisers’ policy might have to be turned down while it might not be politically correct. For those reasons, we have to give a thought how we can mitigate adverse effects of democracy on economic policy.
Citizens in a country choose or design a government not just for economic prosperity but there are also other purposes such as getting their voices heard, freedom and liberty.
Therefore, we still want to keep democracy and its good parts. Then, the question is how we can tweak democratic system to formulate better economic policies, without losing
democratic values most of us cherish and enjoy.

Was it necessary to bailout the banks?

Was it necessary for the federal government to bailout the banks or was it unmoral in a society where free markets and fewer regulations allow these banks to thrive each year? The issue of the government using citizens tax dollars to bailout private companies sparked a huge debate. In a free market economy and capitalist society banks in the United States are able to gain huge profits to increase revenue every year. When the banking crisis occurred, the United States domestic markets and the global market was facing huge burdens and looked to the government for aid to save millions of lives and dollars.

I think the federal government bailing out the banks was a necessary move, but it wasn’t the right thing to do. In a free market economy, less government intervention is always pushed and advocated for by business leaders. With less government regulations, big business and large corporations have the opportunity to exploits markets to seek huge revenue. With the global and domestic market of the United States facing the threat of bankrupt in 2008, the federal government intervened and bailed out the national banks. Many politicians and economist had opposing views on this matter. Some argued for the need of the government to bailout the banks to avoid a global depression. Others argued against because in a free market companies have to face the consequences of irresponsible behaviors.

The first section of my paper will give insight on the causes and effect of the banking crises. The second section of my paper will elaborate on the intervention of government into the market. In the third section of my paper I will review existing views and give light to my thoughts on whether the federal government should have bailed out the banks in a free market economy. Lastly I will conclude with the policies adopted by the federal government and the implications moving forward the restore the economic conditions.

why the African nations should not pay back their debt ?

Mohamed Sokona

Pol 3103

Prof M Kang

 

 

 

The World Bank gives out a lot of loans to third world countries, in order for them to invest in infrastructure, education, or try to alleviate poverty and strengthen human resource development. Every year the World Bank lends huge amount of money to African countries, and all those loans have trapped the African nations into debt. The African nations have been indebted for sixty years and even more, which means that they have been led to compromise their own people for sixty years and more. Whether or not if the African countries pay the debt they will need to borrow more money from the World Bank and be again in an infinite circle. My question is that why the African countries should not pay back the debt?

My argument is that the African nations should not pay back the debt, because those who are lending money to Africa they are the one who colonized it before, therefore they are the one who used to control the African economic system during the colonization. Debt is a new way of controlling Africa by foreign rules. The World Bank system of lending money to the African nations is creating a financial slavery, because those African countries are forced to grow and develop through foreign rules. Many scholars have discussed whether or not the Africans countries should pay back the debt. And I am supporting the ones that are against the payment of the debt.

In order to defend my point of view I will divide my paper into three parts. First of all I will talk in details about the African debt, how the African countries are being trapped into a new form of colonialism. The second part of my paper will explore the existing view while providing my own argument I will support a side in the existing views, and argue against the other one. The third part of my paper will show how the African nations can be economically free if the debt is not paid, and how they can achieve development without taking long-term loans from the World Bank.

Will European Union’s Bailouts Backfire?

This paper will focus on the European Union’s controversial bailout plan for Italy and Spain. Following the recent financial crisis, these countries found themselves buried in high-interest debt. In order to prevent a snowball-effect throughout the continent, European Union leaders have decided that immediate economic intervention is necessary. The resulting proposal: a 600 billion euro (roughly 800 billion USD) bailout package. This raises a critical question: is it prudent for the European Union to bail out struggling member nations at the expense of the more economically successful EU countries? Needless to say, the possible ramifications of the bailout are significant- in both the short and long-term.

I have a feeling that the series of bailouts will backfire on both the indebted countries and the European Union as a whole. Throwing more money into depressed or failed markets is not a formula for economic prosperity. To me, the recent “bailout culture” in Europe may just be one manifestation of a deeper problem: dozens of independent sovereigns relying on the strength of a single currency. Proponents of these stimulus packages may argue that the European Union’s sole purpose is to provide financial stability to all of its members. They believe that if the prosperous countries have to loan money to the economic laggards, it is still better than the alternative of insolvency.

The first section of my paper will highlight the details of the bailout and its implementation. The second section will review existing views, while providing my own argument in contrast with these existing views. The third section will examine historical analysis of previous bailouts in order to further advance my thesis. Lastly, I will conclude with some of the implications of my findings.

Globalization Is Not Americanization

Introduction:

The world today is more dangerous and less orderly than it was expected to be 10 years ago. The fact that globalization has taken effect, has led to more chaos in the world. Globalization is the process of increasing interdependence; the effect of an event in one geographical area or in the economic or ecological dimension can have profound effects in another geographical area. After having said this, the question that comes to our mind is, why does globalization increase job insecurity (or job inequality)?

The fact that America is outsourcing so many jobs makes us think twice about what globalization really is. As some people think of globalization as Americanization, others see globalization as a threat to the economy. But Globalization doesn’t only affect the West, it affects the U.S. as it does other countries. Which is why Globalization is not Americanization but a threat to each countries economy. Globalization increases job inequality not only around the world but also within America. There is labor instability between the various economic classes in the United States.

            In order to prove this, I will use Thomas Friedman’s book, “The World is Flat”. In the first section of this paper explain and inform how globalization has grown rapidly through out the years, thus resulting in the inequality of unemployment. Afterwards I will show the forces of globalization on America and the rest of the world. Finally I will describe how the forces of globalization effected the economy, politics, environment and culture showing that globalization is not Americanization, and that America is affected by it as much as the rest of the world.