Obama Administration – Performance Assessment

April 29, 2009

It is one hundred days since the new administration under President Obama took office on January 20, 2009.

Precisely, around that time the nation was in a precarious situation specifically with the economy in severe recession heading towards a possible depression. It required urgent policy decisions to avert the serous economic crisis contributing to the crumbling housing market, potential bankruptcies of the auto industry, tremendous job losses, failing financial institutions and volatile stock market.

Even though, the crises are far from over, the administration demonstrated diligence with the legislation of the $787 billion stimulus bill through American Recovery and Reinvestment Act accompanied by various strategies to reform and revive the financial institutions and housing market.

The financial bailouts were justifiably controversial and awaiting the stress test results due on May 4, 2009. Meanwhile, the alternative of inaction would have proven equally detrimental and exacerbated the liquidity crisis in the financial market.

In addition to the measures in stimulating the economy, the administration’s effort to sustain the existing jobs in different sectors particularly the auto industry is noteworthy. Further planning and policy decisions to create new jobs phrased, as ‘green jobs’ through vigorous environmental and energy programs is the right course of action to efficiently deal with the challenging issues of global warming and energy independence.

Other achievements in promoting science and technology such as the stem cell research within the realm of ethical code, proposal to digitalize medical records as one of many innovative solutions in the health care policy, coordinating with the environmental agencies in the protection of threatened and endangered species are impressive. However, the request from the environmental groups to rescind the rule that limits the protection of polar bears from the melting Arctic ice caused by climate change is pending approval.

In social programs, the signing of two major pieces of legislation into law – the Lilly Ledbetter Fair Pay Act, ensuring equal pay for men and women and the State Children’s Health Insurance Program (SCHIP) that guarantees 11 million low-income children affordable health care are significant actions.

World health crisis in the wake of the ‘pandemic swine flu’ appropriately handled by the Obama administration thus far.

Despite the fragile economic conditions, the Obama administration’s response and reaction to most issues has been right on target. The anticipated legislation of the budget focused on education, energy and health care should accelerate the economic growth for rapid recovery from the existing crises.

The administration must strive hard to isolate investment from wasteful spending i.e. earmarks or pork barrel that often finds its way through major budgets and stimulus packages. Likewise, preventing the special interests and lobbyists’ continuous dominance should be part of the administration’s agenda.

With respect to transparency and accountability, the recent scandals involving legislators raises credibility issue for the majority party. It is important to maintain bipartisanship in legislative matters for national interest since future holds no guarantee with the majority rule. Moreover, divisive politics contributes to polarization jeopardizing national unity and ultimately election results.

In foreign policy matter, the recent participation in international summits appears promising with the exception of the boycotting of the Geneva conference on ‘racism.’ Please refer to the article on ‘Racism – The Durban II Geneva Conference’ @ www.padminiarhant.com.

Obviously, the rising tensions in the international arena from Afghanistan, Pakistan, Iran and North Korea are few of the many challenges ahead. Resolving the Israeli-Palestinian conflict in the form of two states solutions is paramount to attain permanent peace in the region. It would create a pathway for others sharing similar aspirations.

Combat troops withdrawal from Iraq and simultaneous deployment in Afghanistan deserve individual criteria and attention. Military operation always yields immense casualties and often precious lives are lost in the process.

President Obama’s initiative with Russia in the reduction of conventional weapons and other arsenal is praiseworthy. Nevertheless, it remains subject to the real statistics and the actual defense spending contraction by the geopolitical powers. The bold and audacious declaration of nuclear disarmament was music to ears, although the reality of it relies on the willingness and commitment by the other nuclear nations.

At the G-20 summit, the United States’ reluctance to support France’s proposal to force international financial institutions unveil the corporations using tax havens for tax evasions was disappointing. The unpopular yet meaningful recommendation contributed to a major disagreement between France and China leading to the mediation by the U.S. President Barack Obama. The international sources attributed China’s objection to the potential ramifications on the foreign investments in that nation.

In conclusion, the result oriented performance reflects President Obama’s admirable leadership skills and the administration’s ambitious goals in education, energy and health care is a step in the right direction.

I wish President Obama and the administration success in all endeavors.

Thank you.

Padmini Arhant

Redistribution of Wealth

October 31, 2008

The latest assault weapon for Senator John McCain and Gov. Sarah Palin against their opponent Senator Barack Obama is the "Socialist/Marxist/Robin Hood" tag on him.

Such rhetoric and false propaganda is to create doubts in the minds of entrepreneurs against Senator Obama.

The distortion of Senator Obama’s policy leading businesses to believe that,

"In Taxing 1% of the population in the 40% tax bracket while shifting the tax burden to the top 10% with 70% of tax exacerbates the entities from active participation in the economic growth."

The reason behind similar branding is the fair tax proposal presented by Senator Obama to alleviate the socioeconomic problems that has currently widened the canyon between rich and poor in our country.

Thus slowly but gradually eliminating the middle class in our society.

Senator Barack Obama’s tax policy is based on relieving all citizens including small and medium sized businesses earning less than or equal to gross income of $250,000 per annum from any tax hikes to offset expenditure.

This strategy creates financial liquidity among households and businesses alike that is desperately required to stimulate the ailing economy.

By exempting the average households from any tax increases, the consumer spending is generated that will benefit the Retail economy which in turn will permeate throughout the economic spectrum.

The strengthening of the Retail economy will boost the manufacturing, service industry… reaching all the way to top of the Corporate growth.

The Corporate growth means investment prospects for both private and public investors resulting in healthier and consistent stock market performance that has been highly volatile recently.

It is simple economics.

Supply and demand forces determine a free market system.

Unless, there is a demand for any particular goods or services the supply chain link cannot remain in force.

Simultaneously, the demand can be a catalyst in the process only through affordable consumer spending.

This is where the small and medium sized businesses come into play with the tax breaks from Senator Obama’s policy.

It is noteworthy that small and medium sized businesses deal with wholesale industries for raw materials and other items ultimately owned by major corporations in a market economy.

There are valid reasons to embrace the market economy worldwide.

A. Induces competition apart from enrichment of ideas

B. Competition enables choices in quality and price

C. Controls inflation or deflation

Therefore, the retail consumers benefit from the market economy that facilitates all small, medium and large players in competing with one another effectively for common good.

All of the above factors directly and indirectly influence the fiscal, monetary and economic policies in a Capital economy.

Briefly, the cash flow offered through tax relief by Senator Obama to a substantial group of taxpayers who are also the consumers trigger consumer spending and exponentially elevate the economic status among the various groups in the society.

It also eventually contributes to the wealth accumulation by the top ten percent in the society whose welfare alone is a major concern for McCain/Palin candidacy.

Ironically, the McCain/Palin candidacy in their zeal to own Capitalism as their trademark, fail to recognize the importance of fundamental growth in the lower and middle income groups vital for the survival of small businesses and retail industries, the structural components of a successful Capital economy.

Senator McCain’s tax policy to freeze tax increases across the board by asserting that the Bush administration’s permanent tax cuts to wealthy individuals and Corporations would somehow miraculously revive the economy is a fantasy beyond reason.

It is worth remembering for McCain/Palin campaign that the current Bush administration, as their supporter will depart shortly leaving the nation with multi-trillion dollar debt, on-going wars in Iraq and Afghanistan requiring constant capital injection, declining dollar and hosts of economic commitments willfully neglected in the past eight years.

The undecided/swing voters in every battleground state must realize that there are no precise solutions from McCain/Palin candidacy to resolve the humongous challenges confronting our nation in the absence of any meaningful tax policy.

Senator McCain’s policy to create new jobs as economic solutions again fails to meet the criteria of capital requirement in the present economy with severe financial liquidity crisis.

In fact, the recent economic strategy to bankroll the corrupt and failed financial institutions with the taxpayers funds, along with the economic stimulus package by the Bush administration fits the profile of the political stigma – "Socialism/Marxism" except,

Here, the beneficiaries are the financial institutions and their wealthiest CEO’s rather than the taxpayers, i.e. the average citizens.

Since, the same political party represents the Bush administration and McCain/Palin candidacy, it would be more appropriate to assign the factoid to the respective contenders.

Fact Check: In a progressive tax structure, Senator Obama’s policy to exempt the vast majority of taxpayers/consumers from tax increase would,

1. Promote economic status as highlighted above…

2. Ultimately, create a fair system of sharing the economic burden by all rather than only by the affluent ones.

Such farsighted and permanent solutions to persisting economic problems is in direct contradiction to the myth and misnomer cast by McCain/Palin doctrine against Senator Barack Obama to win the election.

Socialism, Marxism may well be the nemesis to Capitalism,

Capitalism cannot thrive without consumerism – That is the fact.

Thank you.

Padmini Arhant

Globalization

October 16, 2008

By Padmini Arhant

The twenty first century paved way to a new era in trade and commerce.

In the economic sector, the twentieth century policies such as NAFTA, CAFTA, and MFN… implemented to benefit the trading nations.

The economic model carried out on trial and error basis with deficiencies within yielded the net outcome.

The long-term strategy was to promote mutual economic growth and development.

There are different views and opinions on these trade policies.

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Source: http://news.thomasnet.com/IMT/archives/2004/01/the_pros_and_co_1.html – Thank you.

The Pros and Cons of NAFTA

By Katrina C. Arabe -Thank you.

Here are both sides of this raging debate:

Supporters say:

? The accord has stimulated democratic reform and opened markets in Mexico.

? According to the Bush administration, the agreement has been “improving lives and reducing poverty in Mexico.”

? The administration also claims that NAFTA has led to income gains and tax cuts amounting to about $930 each year for the average U.S. household of four.

? Many of the 20 million new jobs the U.S. generated from 1993 to 2000 can be attributed to the free-trade bloc that NAFTA created, the administration continues.

And negatives such as the escalating U.S. trade deficit and three years of dwindling factory jobs should be pinned on feeble demand abroad and the U.S. recession, certainly not on NAFTA, the administration contends.

? NAFTA brought in a flood of foreign investment and contributed to a 24% rise in Mexico’s per capita income. “NAFTA gave us a big push,” Vicente Fox, President of Mexico, tells Business Week. “It gave us jobs. It gave us knowledge, experience, technological transfer.”

Detractors contend:

? The agreement has taken a toll on both U.S. and Mexican jobs, according to the Institute for Policy Studies (IPS). While real wages for Mexican manufacturing workers declined 13.5%, more than half a million U.S. employees have entered government retraining programs after their companies moved production south or north of the border, says IPS.

? NAFTA has wiped out Canadian social programs, purports IPS.

? The pact has also destroyed Mexico’s small farmers, says IPS, bringing in an influx of subsidized U.S. food imports. In fact, about 1.3 million farm jobs have been lost since 1993, indicates a recent report by the Carnegie Endowment for International Peace. “NAFTA has been a disaster for us,” remarks pig farmer Julian Aguilera to Business Week.

? The Carnegie report also concluded that the pact has generated few new jobs in Mexico and might only be credited for a “very small net gain” in jobs in the U.S.

? The new study also found that NAFTA has been ineffective in stemming the tide of illegal Mexican immigrants entering the U.S. to find jobs. In fact, according to most estimates, the number of Mexicans working illegally in the U.S. surged to 4.8 million in 2000, more than twice the 1990 total.

What’s the Verdict?

So is NAFTA a success or a failure? While its backers and bashers continue to take impassioned positions, many choose the middle ground. In a recent Business Week article, Jeffrey Garten writes,

“When it came to job generation vs. destruction in the U.S., NAFTA’s impact has been pretty much a wash.” And the Carnegie Endowment for International Peace comes to the same conclusion, calling the pact “neither the disaster its opponents predicted nor the savior hailed by supporters.”

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The Pros and Cons of CAFTA –

Source: http://www.allbusiness.com/north-america/united-states-new-york/1057929-1.html
Thank you.

By Cantor, Martin – Thank you.

Publication: Long Island Business News

Now that the Central American Free Trade Agreement-Dominican Republic is law, the question that lingers is whether it benefits Long Islanders.

For certain, CAFTA benefited President George W. Bush and congressional Republicans, who are trying make the GOP the place for the growing and politically influential Hispanic community. This strategy has helped Bush with the regional Hispanic population, who believe that great economic and job growth will result from CAFTA.

There is no doubt that eliminating tariffs and removing trade barriers makes commerce efficient, less costly and more profitable while also bringing hope that the profits would result in better working conditions and higher worker wages. CAFTA will succeed for global businesses, many of which call Long Island home.

But it may not live up to the hype of creating jobs and safer workplaces.

For Hispanics, who are Long Island’s fastest growing minority group, the hope was that the savings generated from eliminating trade barriers would be reinvested in plant and equipment in their countries of birth. The belief was that this reinvestment would expand manufacturing capacity and create a demand for jobs, thus improving living standards for the families and friends left behind.

Supporters of CAFTA say jobs and higher wages would reduce the flow of the undocumented workers because there would be little reason to come to this region in search of better salaries. Additionally, since many of these individuals work on Long Island to send money back home, some of the wages earned on Long Island could now remain here and help the local economy.

However, the reality is that there’s skilled labor at lower costs in the Far East. All of those locations present stiff competition.

With Long Island’s growing Hispanic community becoming an important regional economic segment that desires goods from Central America, one benefit may be that regional Hispanic entrepreneurs can use free trade to import lower cost goods for this expanding consumer market.

This may be the lasting legacy of CAFTA. That the United States, Canada, Central America, Mexico and the Dominican Republic have united in a trading bloc offering Long Island and its Hispanic entrepreneurs an opportunity for new economic growth.

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Source: http://www.fas.org/man/crs/92-094.htm#back – Vladimir N. Pregelj, Economics Division. –

CRS – Issue Brief – Thank you.

Most-Favored-Nation Status of the People’s Republic of China.

On May 31, 1996, President Clinton issued his determination to extend China’s waiver and most-favored-nation (MFN) status for another year; and, on June 21, 1996, he issued a determination renewing the trade agreement with China for another 3-year term (through January 31, 1998).

On June 27, 1996, the House failed to pass H.J.Res. 182, which would have disapproved the extension of China’s waiver and MFN status, thus allowing both to remain in force through July 2, 1997. The House did, however, adopt a resolution (H.Res. 461) calling on various committees to hold hearings and report out appropriate legislation to deal with China on a variety of issues, including trade, weapons proliferation, human rights, and military policy.

Effects of Withdrawing China’s MFN Status —

Termination of China’s MFN status would result in duty increases on about 95% of U.S. imports from China. The cost effect of the increases would vary among the various product groups, but would on the whole be substantial.

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Source: http://www.cyfuture.com/pro-and-cons-of-outsourcing.htm – Thank you.

Pro and Cons of Outsourcing

Outsourcing has many advantages but at the same time it has some disadvantages that cannot be ignored. So let us look at some outsourcing pros and cons.

Pros of Outsourcing

Outsourcing as a trend has come into major scrutiny by the workers and media alike in the developed countries.

But most economists are sure that this condition is just a temporary one and will die down as conditions develop and people start taking a mature outlook towards outsourcing.

The Outsourcing advantage lies in the fact that it helps companies cut costs and stay ahead in the competition.

Outsourcing also benefits the citizens in developed counties as it provides high quality products at a cheaper rate also with better customer service.

Advantages of Outsourcing

• Companies can save up on operational costs. In fact most companies can cut their operating costs to half by outsourcing

• Get access to cheaper and more efficient labor

• Cut up on labor training cost

• Get access to better technologies at a cheaper cost

• Increase productivity

• Concentrate on core competencies

Companies today want to make use of the outsourcing advantage in order to progress and stay abreast of the competition.

This is the reason why more and more companies irrespective of certain failures are entering the race of outsourcing.

Cons of Outsourcing

Outsourcing is seen by companies in developed countries and workers in developing countries as a boon. But is the situation really that green? Let us look at some disadvantage of outsourcing.

Disadvantages of Outsourcing

• The company that outsourcers can get into serious trouble if the service provider refuses to provide business due to bankruptcy, lack of funds, labor etc

• Outsourcing requires the control of the process being outsourced by transferred to the service provider. Thus the company may loose control over its process

• The service provider in developing countries generally services many companies. So there are many chances of partiality owing to more payment by other parties

• The current employees in the company that outsourcers may feel threat due to outsourcing and may not work properly

• The attitude of people in the developed countries against companies that outsource is generally bad

These disadvantages are the reasons why companies should think twice before outsourcing.
Companies should adopt a planned approach towards outsourcing taking into account the interests of employees and customers alike and come up with a balanced advance.

Outsourcing services simply to beat competition or to follow your competitors can lead to problems in the future.
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Source:http://econpapers.repec.org/article/eeejpolmo/v_3A30_3Ay_3A2008_3Ai_3A5_3Ap_3A725-735.htm

GLOBALIZATION AND INCOME INEQUALITY: IMPLICATIONS FOR INTELLECTUAL PROPERTY RIGHTS

Samuel Adams – Thank you.

Journal of Policy Modeling, 2008, vol. 30, issue 5, pages 725-735

Abstract: This paper examines the impact of globalization on income inequality for a cross-section of 62 developing countries over a period of 17 years (1985-2001).

The results of the study indicate that globalization explains only 15% of the variance in income inequality.

More specifically, the results show that (1) strengthening intellectual property rights and openness are positively correlated with income inequality; (2) foreign direct investment is negative and significantly correlated with income inequality but this is not robust to different model specifications; (3) the institutional infrastructure is negatively correlated with income inequality.

The study’s findings and the review of the literature suggest that globalization has both costs and benefits and that the opportunity for economic gains can be best realized within an environment that supports and promotes sound and credible government institutions, education and technological development.
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Review and Analysis: By Padmini Arhant

The current unemployment rate in the United States is 6.1 percent.

All of the above factors combined with the serious financial crises contribute to the decline in the job market.

The current Stock Market volatility is a reaction to the multifaceted problems surrounding the economic infrastructure.

With the interventional policies by the governments and the monetary authorities worldwide, the U.S. and global markets should stabilize slowly but steadily.

Meanwhile, the equity and liquidity markets with cash and lending instruments should facilitate the required rebound in the market.

It was determined that the credit markets’ resistance is from the weak sales projection by the Retail industry, which is related to reduced consumer spending resulting from high unemployment rate.

It is imperative for the business groups to focus on the employment situation now, hurting their operation and survival in the global economy. The depletion of capital resources and credit crunch is one of the factors for the massive layoffs at present.

Restoration of American jobs is paramount to the revival of the U.S economy.

The stabilizing of the U.S. economy will boost market confidence and the performance level.

This would also contribute to the strengthening of the U.S. dollar much required to offset Trade deficits.

The Corporations and the governments must coordinate their efforts to review,

1. Policies like NAFTA, CAFTA, MFN, Outsourcing … with fundamental flaws and reestablish a renewed structure to benefit the American workforce and the international competitive labor.

2. Renegotiate treaties and agreements with WTO members and other agencies…ILO at home and overseas to redesign models with fair trade policies, employment practices and environment laws.

3. Prioritize and protect American jobs and labor laws over shareholders interests and corporate profits. By doing so, the increased productivity would yield the desired stock value for the Corporations.

4. International labor force is equally important in the equation. Appropriate measures … required to curb the exploitation of cheap labor in poorer and under developed nations by the multinational corporations.

5. The developing nations currently benefiting from U.S corporate investments through outsourcing should reciprocate with return investments on U.S. goods and services. The general options are to purchase high-end products and engage U.S. companies for infrastructure projects.

The concern for the loss of American jobs is legitimate. Any frustration and anxiety by the American work force is also normal.

Since, U.S. economy is the foundation of the global economy; idle American work force is counter-productive for Corporations shipping jobs overseas in pursuit of market share of the emerging economies.

The sluggish U.S. economy will not serve well for the global economies dependent on U.S. trade.

On another serious note, the print press and media have an ethical and moral responsibility to portray the global economic environment and the activities in a fair and responsible manner.

Any rhetoric diminishing the economic progress/status and professional talent of other nations such as the one recently cited by the researcher specializing in globalization in San Jose Mercury News article, will hinder the new world order effort — aimed at providing prosperity for all.

Ironically, both the news organization and the consultants fail to identify the real beneficiary i.e. the Corporations in the outsourcing deals and other trade policies.

It would be more appropriate for these individuals to be part of the solutions rather than a problem.

Inevitably, U.S. prosperity is vital for global progress.

Thank you.

Padmini Arhant

Stock Market Stability

October 15, 2008

The Federal Reserve Chairman Ben Bernanke laid out the plans and policies currently adopted as interventional measures to stabilize the stock market.

The comprehensive proposals have the necessary means and strategies to protect the taxpayers’ interests as well as restore investor confidence.

It is important to recognize that the current overhauling of the financial infrastructure that was long overdue, is taking place in complete coordination with monetary authorities and political leadership worldwide.

Although, the necessary steps may not bring immediate recovery to the current crisis, the entire financial system has to collaborate and function both psychologically and physiologically to revive the economy and mobilize the equity and liquidity markets.

It is a consolidated effort and requires all parties concerned to come forward not only in their self-interest but also to ensure long term market security that would promote the economic growth and development.

The Retail industries are projecting sluggish sales around this time of the year due to anticipated reduced consumer spending triggered by high unemployment rate.

This in part is contributing to the lack of enthusiasm from the investors in their active participation in the market.

Again, the domino effect permeates due to resistance from the financial sectors withholding cash and confidence that could otherwise energize the market.

Please stand by for an elaborated version of these circumstances like unemployment and reduced consumer spending with the presentation of expert opinions and solutions to the current crises.

Thank you.

Padmini Arhant

Stock Market Performance

October 14, 2008

The Stock Market came roaring back on October 13, 2008 and was a major cause for celebration across the globe.

The collective and collaborative effort by the “Heads of Government” through G7 and G20 meetings, in coordination with the global monetary authorities like the World Bank and the International Monetary Fund yielded the much-required morale boost in the financial markets. Their immediate action to respond to the crisis is praiseworthy.

Despite the consolidated action to jumpstart the markets, the stock market is struggling to sustain the momentum gained on the previous day. Obviously, the indication is that the measures in the past hours and days to guarantee the smooth functioning of the financial system is not adequate.

A selective opinion highlighting the reasons for the problems currently experienced in the credit markets –

Source – http://www.americaneconomicalert.org – Thank you.

Why Federal Reserve Policy is Failing

Monday, October 06, 2008

Commentary by Thomas I. Paley, Ph.D.

The Federal Reserve and U.S. Treasury continue to fail in their attempts to stabilize the U.S. financial system. That is due to failure to grasp the nature of the problem, which concerns the parallel banking system. Rescue policy remains stuck in the past, focused on the traditional banking system while ignoring the parallel unregulated system that was permitted to develop over the past twenty-five years.

This parallel banking system financed vast amounts of real estate lending and consumer borrowing. The system (which included the likes of Thornburg Mortgage, Bear Stearns and Lehman Brothers) made loans but had no deposit base. Instead, it relied on roll-over funding obtained through money markets. Additionally, it operated with little capital and extremely high leverage ratios, which was critical to its tremendous profitability. Finally, loans were often securitized and traded among financial firms.

This business model has now proven extremely fragile. First, the model created a fundamental maturity mismatch, whereby loans were of a long term nature but funding was short-term. That left firms vulnerable to disruptions of money market funding, as has now occurred.

Second, securitization converted loans into financial instruments that could be priced according to market conditions. That was fine when prices were rising, but when they started falling firms had to take large mark-to-market losses. Given their low capital ratios, those losses quickly wiped out firms’ capital bases, thereby freezing roll-over funding.

In effect, the parallel banking business model completely lacked shock absorbers, and it has now imploded in a vicious cycle. Lack of roll-over financing has compelled asset sales, which has driven down prices. That has further eroded capital, triggering margin calls that have caused more asset sales and even lower prices, making financing impossible for even the best firms.

Though the parallel banking system engaged in riskier lending than the traditional banking system, those differences were a matter of degree. Traditional banks like Washington Mutual, Wachovia, and Citigroup have also all lost huge sums. However, the traditional banking system is more protected for two reasons.

First, traditional banks are significantly funded by customer deposits. Ironically, such deposits can be withdrawn on demand and are in principle even more insecure than short term roll-over funding. However, they stay in place because of federally provided deposit insurance.

Second, traditional banks are significantly shielded from mark-to-market accounting because they hold on to many of their loans. These loans are therefore priced by auditors on a mark-to-realization basis. However, if they were securitized their market value would be significantly lower owing to current disruptive market conditions.

The bottom line is that the banking system is in better shape not because of its virtues, but because of policy. Deposit funding is safe because of deposit insurance. Banks are spared mark-to market losses because of different accounting rules. And the Federal Reserve is providing banks with massive liquidity infusions through its discount window and its various emergency auction facilities.

Policy has therefore ring-fenced traditional banks. But in the meantime it has left the parallel system in the cold, leaving a gaping hole in the policy dyke.

This policy stance reflects the Fed’s continuing attachment to an antiquated view of the system whereby it takes responsibility for traditional banks and nothing else. Such a policy makes no sense and will fail. The Fed encouraged development of the parallel system, and that system undertakes many of the same activities as traditional banks. Meanwhile, failure of the parallel banking system will continue putting downward pressure on asset prices and lender confidence.

The Treasury’s proposed seven hundred billion dollar asset purchase program will help put a needed floor under asset prices. However, it does nothing to tackle the parallel banking system’s roll-over funding crisis that is crimping lending and pushing firms into bankruptcy. That is causing distress to spread far beyond the mortgage market, undermining the ability of any asset purchase program to put a floor under asset prices.

The urgent implication is the Fed (and other central banks) must extend its safety network to include the parallel banking system. Just as the traditional banking system needs liquidity assistance, so too does the parallel system. That assistance can be provided through such vehicles as the discount window and Federal Reserve auction facilities, and it should be allocated to qualified firms able to post appropriate collateral.

A credit based system is a chain, and a chain is only as strong as its weakest link. The Federal Reserve’s antiquated view has it protecting links connected to the traditional banking system while neglecting everything else. That is a recipe for failure.

Dr. Thomas Palley is a widely published economist and was formerly Chief Economist at the US-China Economic and Security Review Commission.
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Analysis: Certainly, the emphasis is on the oversight with effective policies for the entire financial structure to alleviate stagnation in the liquidity markets. The investor confidence overall is marred with concerns and skepticism despite stunning performance on October 13, 2008.

The resistance from the free market system towards proposed measures is one of the factors for the current trend. However, the necessary action could eliminate many underlying problems surrounding the entire financial infrastructure, contributing to the volatility in the markets.

Meanwhile, the investors’ active participation to restore momentum and strengthening market gains across all sectors is important for the common good and benefit in the short and long run.

An optimistic approach to the crisis with an absolute integrity in the implementation of policies will assist the markets to rebound now and in the future.

Thank you.

Padmini Arhant

Stock Market Crisis

October 10, 2008

Courtesy: http://www.godlikeproductions.com – Thank you.

Whats Driving the Stock Market Chaos??

Denninger Speaks… – Thank you.

Quote

What The Media *Didn’t* Cover

So yesterday the “news” was all about the long end of the Treasury curve rocketing higher (yield), which many people believe is about “risk acceptance” and The Fed (along with other central banks) cutting rates by 50 basis points.

Uh huh.

Let’s talk about what’s really going on.

First, our rates. The EFF (Effective Fed Funds) rate has been trading at 1.5% now for a couple of weeks. Two percent schmoo percent; a target rate only in name is no target at all. In reality the 50 bips cut, even though it resulted in an instantaneous 40 handle rocket shot in the /ES futures Wednesday morning, was entirely a CONfidence game (with the emphasis on “Con”!)

The RTS (Russian Market) is down 87% YTD, and is closed until further notice. The Nikkei is trading below the DOW – that’s not good. Indonesia’s stock market was shuttered Wednesday and remains closed after tripping “lock limits” within 90 minutes of the opening bell. As of Thursday morning the RTS was closed again after Putin allegedly strong-armed a whole bunch of Russian wealthy to “stick it in” (to the stock market); this sort of v-fib in a market does horrifyingly bad things to ordinary investors who find themselves out just before the market rockets higher without underlying economic cause.

Iceland has essentially melted down. Their currency went straight into the toilet and two of the three largest banks were nationalized – all in the space of 24 hours. The culprit? Bad loans. Where have we seen this movie before?

Mexico’s peso has fallen some 40% in days against the dollar. Great if you’re traveling there as an American. Sucks severely if you’re a Mexican. That alleged fence on our southern border is going to need reinforcements.

Wednesday morning Britain and the EU zone all announced major bank rescue operations. Same deal – “throw money at it, paper it over.”

Nowhere a mention of forcing balance sheet transparency and truth.

Except in one place – here in the US! Plans to standardize CDS contracts and force them onto an exchange are actually under way. This is a major positive move and fulfills one of the three prongs of my view of how to solve this problem, once implemented. We’ll see how much pushback we get, and whether OTC derivatives are actually banned (as they should be), or whether the big trading houses and banks insist on being able to play “pick pocket” along side the “regulated” world.

The NY Fed announced plans to extend a further $39.6 billion credit line to AIG. The tab is now almost $120 billion dollars. Where did the other $80 billion go? Has it been vaporized trying to raise capital to pay down CDS contracts that have gone the wrong way on them?

Speaking of which, Thursday is D-Day – D standing for either “derivative” or, if things go sideways on people, “detonation.”

See, this is the day that Lehman’s CDS contracts are supposed to be resolved. Since Lehman’s bonds are trading at ~20-30% recovery (horrible, on balance) the writers may have to fork up 60 to 70 cents on the dollar.

The $64,000 question is how many of those contracts net out. The real liability is what’s left once everything is “balanced” (a long and short held by the same guy net to zero, assuming that both contracts are “money good”, leaving the holder with no liability – and no asset)

This has the potential to be a big “nothingburger”, a minor tremor, or a 250′ high tsunami that washes over Lower Manhattan (and the City) tomorrow. There’s no good way to know in advance which outcome will manifest, since nobody (at present) knows what the true netted-out open interest is. This is one of the problems with not having a public exchange; lack of knowledge.

The bright light of reality will shine tomorrow……

The architects of this, by the way, are the folks who took the cuffs off the banks, going back to the Gramm-Leach-Bailey law and the repeal, piece-by-piece prior but finished by GLBA, of Glass-Steagall. GLBA, by the way, was passed in 1999 – just as the Internet bubble was in full force. Coincidence? No. The root cause of this mess? Right there. Thank Congress, and make sure you include those members who have been around for the entire thing, including John McCain.

On the equity market side shorting is once again available, the order having expired. The lack of shorts was a definite factor in the stiff selloff that we’ve seen, and Chris Cox owes investors in America an apology – on the air. This was an objectively stupid decision, as shorts provide necessary liquidity during serious downturns. Without them you get “no bid” circumstances, and they sporadically appeared during the last few days in financials, which certainly exacerbated the selloff.

In the bond markets Treasury refunded some “off the run” bonds and got an ugly surprise – the market didn’t want them. They had to pay a 40 bips “tail” to get them to go, which may be the start of a really troublesome trend. See, Treasury is now throwing over $100 billion a week into the market, and this only works on days when the market is crashing. THEN you can get people to suck up all you puke out, but the rest of the time you’re going to have to pay up, and Treasury has had to do so – dearly.

This may be the start of the “bond market dislocation” that I have long feared. I hope and pray not, but if this trend continues Treasury is going to find that it cannot sell its debt into the market without slamming rates higher, especially on the long end of the curve, which means an instantaneous implosion of what’s left in the housing market.

The ugly is that 3-month LIBOR widened today, as did the TED Spread. Both should have come in. They did not. LIBOR is essentially unsecured lending and the bad news is that a lot of corporate (and some personal) borrowing is indexed off it. If you are, you’re screwed.

Why has LIBOR refused to come in despite these “coordinated” effort? Its simple: the underlying trust issue has not been addressed, and nobody is seriously proposing to do so.

Paulson and Bernanke now are truly caught in the box, as I have been talking about for more than a year. As they introduce and fund these silly programs like the “TARP” each new program produces more foreclosures by depressing home values and thus tightens the spiral.

See, as long rates go up house prices go down, since the value of a home for most people is Dependant on what they can finance, and that is directly related to interest rates. Get out your HP12C and run the principal value change for a fixed payment if interest rates change from 6% to 8% or 10% – that’s the impact on the value of your house from these changes that are occurring in the Treasury marketplace.

This outcome is what I warned of in “Our Mortgage Mess” back in April of this year; a potential ramping of borrowing costs for government debt, which will not only make sustaining government spending (and perhaps government operation) impossible, but in addition destroy private credit by driving costs in the private sector skyward as well.

Simply put, the “TARP” or “EESA” must be repealed here and now.

It is unacceptable to risk Treasury Funding destruction in order to bail out some bankers. And make no mistake – there is and will be no benefit to taxpayers.

We are also now entering into earnings season, and Alcoa was a warning blast. They missed badly. That won’t be the last.

This is the “value trap” problem that many investors fall into. You see the market down 30% and think its a great buying opportunity.

It is a great buying opportunity only if earnings going forward can be sustained. But in this case, they cannot. It is flatly impossible; with Treasury borrowing money like a madman, tacking on more than 20% to the national debt in the space of months, carrying costs will inevitably rise as will taxes. Both of these have a multiplier effect (in the wrong direction) on corporate profits, and in addition the “faux profits” from financial engineering have all disappeared at the same time.

The S&P 500’s profit, in terms of gross dollars, are almost certainly going to come in by 50% from the highs, and that assumes we get a garden-variety recession and not something worse. This of course puts “Fair Value” on the SPX down around 750, or another 25% down from here.

The ugly stick potential is what I discussed yesterday, and that risk is very real. Treasury borrowing cost ramps can produce a 1930s-style dislocation in credit, and if it happens then you will see mass bankruptcies not only in corporate America but among individuals as well as borrowing costs ramp to the point of shutting down the marketplace for credit.

Treasury and Bernanke claimed that “credit markets seized”; this is only half-true. Credit markets always close to those who are lying, because there is no reason to loan someone money if you’re not reasonably sure you will get paid back.

But there is a second form of seizure and this is the frying pan into which we’ve now jumped – that is a credit market that prices beyond what the market can bear at its imputed rate of return. In that market credit is available but it does not matter, as you can’t make enough profit to generate a positive carry on the borrowed money, and consumers in that environment fall into a vortex of interest payments that spiral faster than they can borrow to stay ahead of them.

That rabbit hole is how we got the 1930s, and it is the danger we now face. Congress was in fact conned by Treasury, George W. Bush and the banking industry (including Ben Bernanke), who instead of forcing the malefactors into the open and exposing those who were bankrupt (or just plain corrupt – notice the common stem on both words?) threw them a line – unfortunately, the line is cleated to the entire economy of the United States, and they have enough negative buoyancy to drag us all under the waves.

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Analysis: This is one of many opinions floating around all over the cyberspace regarding the latest downward spiral in the stock market. The consensus is clear; a few operatives with a major stake in the gamut of the financial world are driving the mania for their profiteering with utter disregard for the rest of the population around the world.

It is time for the people of the United States and around the world to rise to the occasion and intervene as the snowballing of losses in market shares is not a natural event. Clearly, this kind of manufactured, well-orchestrated and premeditated mechanism is the result of greed, corruption and cronyism that is rampant and has now come to surface.

Not surprisingly, there is no investigation or reports by the media as the Corporations, the de facto beneficiaries own them. The world must awaken now and deal with the reality to bring all of these entities to justice. It is time to make every one of them accountable for their actions and inaction as well as make them absorb all of the losses generated by their devious “modus operandi”.

The current situation is not an isolated occurrence. The cause and effect factor is evident in the existing stock market turmoil. As suggested earlier, the unethical practices resulting from the lack of accountability and oversight is contributing to the pandemonium in the market worldwide with the infusion of the “survival of the fittest” theory.

The world is shocked and in despair, seeing no end to the plundering of wealth that rightfully belongs to the righteous and not the self-righteous. However, it is presumptuous of those involved in this mass abduction of world treasury that they will not be exposed and brought to spotlight.

Perhaps, Armageddon is the only alternative now to restore morality and world order. The degradation of principles, ethics and democratic values by the ruling power will not escape the judicial verdict.

Therefore, it is in the best interest of all those involved in the conspiracy to come forward and demonstrate figment of integrity by stabilizing the stock market decline or be prepared to deal with the wrath of natural phenomenon.

Further, to those entities responsible for the current economic disaster, “the end justifies the means”.
Any attempt to ignore the warning will be an invitation to their peril.

If the authorities in power fail to exercise diligence, proper management, and immediate interventional policies to stabilize the market, they will share similar destiny as the recently convicted O.J. Simpson.

The judicial mantle seized by the power is in denial and defiance of the existence of force that will deliver justice.

The mortals brought nothing upon their birth hence; take nothing upon death.

Thank you.

Padmini Arhant

Investment Prospects

October 8, 2008

Existing and potential investors should view the current stock market situation as an excellent opportunity for investments in different sectors. They range from blue chips to housing and manufacturing industry. All sectors are bound to get a major boost from innovative technology and major breakthroughs in science this year alone.

With the energy crisis, there is great enthusiasm and capital infusion into manufacturing clean and green energy products. The automotive and energy companies are involved in research and development in deriving energy independent solutions to the global problem.

The recent legislation of the “rescue” plan involving tax credits for solar and wind based manufacturing companies is a window to promote renewable energy products and services. This is one of the best measures by Congress and deserves praise for the action. It must also ensure that the tax credit benefit trickles down to retail consumers as well. More is required in addressing serious environmental issues at both national and global front.

Despite the doom and gloom in the housing sector, all those investors with surplus cash have enormous opportunity to invest in real estate for long-term gains and perhaps contribute to the revival of the housing market. The energy sector is involved in alternative energy programs to combat the global energy crisis. Therefore, there are opportunities in this industry as well.

The technology sector is robust with a wide range of activities throughout the industry. The high tech companies are competing with one another in the innovative technology areas such as high -end microprocessors other hardware and software products challenging the technological pace more than ever.

There is never a dull moment in the biotech industry with major breakthroughs in modern medicine like “sequencing DNA and Human Genome Project”. The stem cell research is another area drawing deserving attention and investments. The pharmaceutical companies’ progress in research and development of new drugs is in synchronization with the biotech advancement.

The finance sector is not going to fall apart as they are the “gateway” to the flourishing of “commercial sectors”. The financial institutions with necessary regulations and stopgap measures are attractive in many ways. It must address the foreclosures effectively and cooperate with the government in expediting the financial liquidity in the housing and commercial sectors.

Investors must get into a buying frenzy and not the other way around, as the prospects are far greater in the near future and an opportunity for people of the United States to own their assets rather than leaving it for foreign venture capital.

The United States as a nation has never failed in its endeavors and will never fail now or in the future. It is important for the people of the United States to restore confidence in their ability to rebuild a great nation that has accepted a great many challenges in the past, emerged successful in all frontiers and shared the progress and prosperity with the rest of the world.

The present time may appear to be tough but this nation has sailed through rough seas and the “Superpower” status is testimony to the resilience and intellectual power of the people.

The United States has every reason to be proud of all its achievements. The future ahead of us is bright, with a remarkable work force prepared to overcome all obstacles in their path to success and glory.

Thank you.

Padmini Arhant

Foreclosures

October 7, 2008

The stock market performance particularly on October 6 and 7, 2008 is a strong indication of the lack of effective measures to address the problems that triggered the financial crisis and subsequently the economic meltdown. The tumbling of the stocks due to aggressive selling day after day is from panic and deep concern among investors across the globe.

The “Treasury” has secured the financial package for the “rescue” plan as an instant relief to the current crisis. However, in preparation to relieve the financial institutions from “bad debts” and “toxic assets”, it has failed to look beyond the “Corporate” horizon. The immediate priority is to lift the nation from the burgeoning “housing market” crisis i.e. “foreclosures” and provide relief to the “homeowners”.

The Congress must act now on bipartisan basis to implement “Moratorium” on the “foreclosures”, and vigorously re-enact the “Bankruptcy provision” to relieve homeowners across the nation. It should not be at the discretion of the financial institutions that are primarily responsible for the mortgage crisis to resolve on their own terms and conditions. As stated earlier, the “foreclosures” are the result of the multi-tiered structures in the financial and real estate industry engaging in unethical practices and reckless conduct with no oversight.

If the “rescue” package does not involve the solutions to the problems of the current economic and stock market turbulence, the entire effort by the Congress is futile. Therefore, it is necessary for government intervention to relieve all homeowners dealing with “foreclosures” and delinquency on their mortgage payments due to the sudden increase in interest rates initially offered as “teaser” rates on the subprime mortgage loans.

The urgent and direct focus on the “housing market” is the only prudent economic strategy available to revive the “housing sector”, one of the structural foundations of the economy. The consistent decline of “home values” is a major factor for the “economic stress” with a ripple effect on the entire financial and commercial sectors.

The “housing” and “energy” industry are fundamental components of the economic infrastructure. Hence, the rescue plan must address the “cause” of the current financial crisis i.e. the “foreclosures” besides facilitating financial liquidity in the commercial sector to stimulate economic growth and development. In terms of the economic stimulus package under consideration, the “energy” subsidies would highly benefit the economy and ease the burden on the “main street” anticipating high “energy” costs in winter.

The impending purchase of the mortgage-backed securities under the “rescue” plan must follow the guidelines to benefit the investor i.e. the taxpayers in both the short and long run. It is important to address effectively any concern by experts such as “The HOPE for Homeowners Act needs to pay less than 36.5 % of the face value of the subprime mortgage backed securities. If more is paid the government loses money in the long run and owners of the securities profit now” and any loopholes that might hamper the deal in the investor i.e. taxpayer’s favor must be eliminated as a safety measure.

The consensus on the legislation of the bill “HOPE” for The Homeowners Act, 2008 is promising and expected to provide relief to an estimated 400,000 families. It is important to follow through the process and ensure transformation of “HOPE” into reality for “homeowners” severely hit in the “housing” market crisis due to massive “foreclosures”.

“Congress” and the financial institutions could reverse the current stock market decline through diligence and prudent economic strategy combined with robust fiscal policy and financial measures to boost investor confidence. Meanwhile, domestic and foreign investors must restrain short selling in the wake of current crisis that is contributing to the pandemonium in the stock market.

The stock market turmoil will cease upon following all of the above measures with no further procrastination to protect the interests of all i.e. the “main street”, the “wall street” and the global market.

Thank you.

Padmini Arhant

Bailout Failure

September 29, 2008

The democratic system has failed to rescue the nation at the hour of crisis. The party bickering and “partisan politics” has taken precedence over “main street” struggles. It is clear from the action of the legislators voting against the “emergency” plan that their concern for the return to power is paramount than the “average citizen’s” livelihood. The explanation for their refusal to cooperate does not resonate with the realities in the “main street”. The nature of global economy is slighted with distracted opinions and determined position in this crucial legislation.

Excerpt of one of the legislators reason to vote against the bailout.

Source : Democracynow.org – Thank you.

According to Democratic Congressman Rep. Dennis Kucinich – “Is this the United States Congress or the Board of Directors of Goldman Sachs?” Rep. Dennis Kucinich Rejects $700 Billion Bailout
The House is set to vote today on a $700 billion emergency bailout plan for the financial industry. The proposed legislation was forged during a marathon negotiating session over the weekend between lawmakers from both parties and Treasury Secretary Henry Paulson. The 110-page bill would authorize Paulson to initiate what is likely to become the biggest government bailout in US history, allowing him to spend up to $700 billion to relieve faltering banks and other firms of bad assets backed by home mortgages, which are falling into foreclosure at record rates.

AMY GOODMAN: Right, but the Democrats are in charge of this.

REP. DENNIS KUCINICH: Right. You know, I’ll tell you something that we were told in our caucus. We were told that our presidential candidate, when the negotiations started at the White House, said that he didn’t want this in this bill. Now, that’s what we were told.

AMY GOODMAN: You were told that Barack Obama did not want this in the bill?

REP. DENNIS KUCINICH: That he didn’t want the bankruptcy provisions in the bill. Now, you know, that’s what we were told. And I don’t understand why he would say that, if he did say that. And I think that there is a—the fact that we didn’t put bankruptcy provisions in, that actually we removed any hope for judges to do any loan modifications or any forbearance. There’s no moratorium on mortgage foreclosures in here. So, who’s getting—who’s really getting helped by this bill? This is a bailout, pure and simple, of Wall Street interests who have been involved in speculation.

AMY GOODMAN: Congressman Kucinich, can you explain how it is that the Democrats are in charge, yet the Democrats back down on their demand to give bankruptcy judges authority to alter the terms of mortgages for homeowners facing foreclosure, that Democrats also failed in their attempt to steer a portion of any government profits from the package to affordable housing programs?

REP. DENNIS KUCINICH: Well, I mean, those are two of the most glaring deficiencies in this bill. And I would maintain there was never any intention to—you know, well, many members of Congress had the intention of helping people who were in foreclosure. You know, this—Wall Street doesn’t want to do that. Wall Street wants to grab whatever change they can and equity that’s left in these properties. So— .”
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Review: There is no disagreement in this context. However, the repercussions of failing to act is far greater than the stakes involved in the initial bailout that is being carried out cautiously and judiciously by the remaining members of the “Congress”. The legislators’ rhetoric does not serve the purpose as the U.S economy is the engine of the global markets and the ripple effect is already felt in Europe and worldwide. Today’s plummeting of the stock market is yet another sign of the “financial catastrophe” at our doorstep.

With respect to the elimination of “bankruptcy provision” as discussed in the above interview, the “Democratic Presidential Candidate”, i.e. Senator Barack Obama’s position is apparent in the “housing market” debacle. It is time for the Democratic Party to be forthcoming to the democratic base as well as others and explain the reason behind such notion to alienate the worst hit population i.e. the “homeowners” in this bailout proposal.

As for the GOP members of Congress, defying the national interest by voting against the bailout proposal, the following questions arise,

1. Where were the legislators when the economic meltdown was happening under their watch?

2. Why did they not alert their own party and the administration that is notorious for reckless
policies and “bankrupting” the economy under their reign of power?

3.Whatever happened to the passion and pessimism about the “Wall Street” performance leading
the world’s economic power on the verge of collapse?

Alas, “Rip Van Winkle” is awakened by the financial “thunderbolt” and causing havoc in the “Capitol Hill” , the heavenly abode of the legislators.

Ironically, the two extreme political factions appear to come in terms with agreement on a single platform , i..e. protests the bailout and attempts to derail the entire economic infrastructure. The spectacular performance is to earn voter confidence and retain power for further economic disasters.

It is time to focus on the dire situation and market reaction in the United States and worldwide that is beckoning to act promptly and effectively by facilitating liquidity in the financial market.

The lawmakers concerned about taxpayers must also realize that taxpayers’ investments are the major casualty in the current political fiasco.

It is the duty of every legislator to put “partisan politics” aside and act diligently by coming forward and resolving the national and world financial crisis in the best interest of the people, responsible for their power.

Thank you.

Padmini Arhant

Economic Security

September 28, 2008

The legislators are currently addressing the financial crisis confronting our nation and it appears that a consensus has been reached to bailout the Corporations from the burden of bad debts. According to the lawmakers, the “bill” is structured to largely benefit the taxpayers and assist with the stabilization of the financial market.

It is important to recognize the fact that the twenty first century economy is a global economy and the investments are tied to one another directly or indirectly and traded in the global markets. Therefore, it is vital for the U.S. economy to remain stable and provide necessary market assurance to both domestic and foreign investors with stakes in U.S. investments.

The other important factor for the unprecedented government intervention in a “free market” environment is to eliminate loopholes to avert such catastrophe in the future. When the actual agreement proposal is presented to the taxpayers, it should reflect the absolute protection of the taxpayer’s funds and profitable return on any investments.

At the same time, politics should not take precedence over “American taxpayers” interest in terms of “Appropriation of funds” for a certain political faction like “ACORN” or for that matter a “private sector” from the “Wall Street” with any misrepresentation to provide insurance on the “mortgage backed” securities with no prospective buyer in sight.

The “bill” must include provisions for full disclosure of the deals regardless of the nature and size of the bailout amount.

Further, it is essential for the “impending bill” to fund the bailout in “installments” rather than a lump sum settlement as it would indicate the initial results on the venture carried out on a “trial and error” basis. This would also allow public opinion to analyze the “pros and cons” of such investment and facilitate the required liquidity in the financial market with a “majority” approval.

The task ahead of our nation is to restore economic security with the revival of the “housing” and “job” market. As stated earlier, the “housing market” crisis is directly related to the “credit crunch” and “subprime mortgage” failure leading to “foreclosures” and that could be resolved by overhauling the lending practices and assisting the “homeowners” with affordable revised mortgage package. The foreclosed homes should be made available for sale to potential investors with verifiable income and credit history.

Commercial lending should resume freely yet carefully to promote and revitalize the small businesses and Corporations relying on credit for the growth and development in the job market. The flow of goods and services without any disruption will contribute to the anticipated growth and help the nation in reducing the multi-trillion dollar debt due to trade and budget deficit which otherwise will be the inevitable burden on the next and future generation.

It is time to focus on this crisis as “national” rather than “individual” and collectively deal with the issue for a better future of all.

Thank you.

Padmini Arhant